A possible H1N1 flu virus drug, Peramivir, might also be a life saver for its developer, BioCryst Pharmaceuticals. The Birmingham, Ala.-based biotechnology company has been unprofitable since it was founded in 1986 but has not yet had a drug reach the market. The company's stock has risen nearly 30% in the past week.
On Thursday, the federal government ordered, on an emergency basis, 10,000 treatment courses of peramivir for its national stockpile. It is paying $22.5 million, or about $2,250 a patient.
Peramivir is an intravenous drug intended to treat the flu in patients who are hospitalized, and too sick to take an oral treatment. The government has authorized use of peramivir as a treatment for the swine flu, but clinical testing is expected to continue until 2011.
American International Group reported its second consecutive quarter in the black today, as the rallying credit markets boosted the value of assets on its books and the company took full advantage of accounting rules. The nationalized insurer's main problem these days: it's having a hard time selling insurance.
The company pointed out continued declines in its sales and premiums at some of its main insurance businesses and said it will take a $5 billion charge against results for the fourth quarter. The stock fell nearly 10% in trading.
The government saved AIG last year through a series of bailouts -- worth more than $100 billion -- and owns nearly 80% of the company.
Federal authorities announced Thursday they're charging nine more people in the growing Galleon Group insider-trading scandal, bringing to 15 the number charged in the biggest hedge fund-related case in history.
Manhattan US Attorney Preet Bharara said 14 people, "including attorneys and Wall Street professionals" had been charged "for their alleged involvement in insider trading that netted 20 million dollars."
Seven of the people were arrested Thursday morning, including one in Connecticut and one in New Jersey, according to a spokesman for the Federal Bureau of Investigation's New York office. The arrests follow insider trading charges last month against six people, including the Galleon founder Raj Rajaratnam.
This chart shows the change in productivity in nonfarm business from quarter to quarter. (Bureau of Labor Statistics)
By Caitlin Kenney
Productivity in the non-farm business sector grew by 9.5 percent last quarter, the largest gain since 2003. The productivity index is calculated by dividing output by the number of hours worked. Productivity has been on a steady climb this year, according to the Bureau of Labor Statistics, it rose 6.9 percent in the second quarter. While the increase may sound like good news, economist Howard Rosen, with the Peterson Institute, warns there's more to it:
"In the third quarter, productivity in the non-farm business sector grew by 9.5 percent. This was a result of an increase of output by 4 percent (no surprise here since it was already reported last week that GDP grew by 3 1/2 percent in the third quarter) and a decrease in hours worked by 5 percent. In other words, the strong increase in labor productivity is due to a slight recovery in output and a continued hemorrhage in the labor market, providing yet more evidence that the link between the macroeconomy and the labor market has been broken. The bottom line -- the economy is looking better on paper but not for workers."
As expected, the Federal Reserve left interest rates near zero this afternoon, announcing that it is keeping its federal funds rate target between zero to 0.25%.
The Fed repeated that it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," but added economic activity in key areas such as consumers spending and housing is picking up.
Interest rates remain far below historic levels as the effects of the global recession continue to be felt and governments pump unprecendented amounts of money into the financial system. With unemployment still rising and tenuous recent economic growth that isn't likely to change soon.
The risk is governments could be creating hard-to-tame inflation or other financial bubbles if they get their remedies wrong and stimulate the economy too much.
New York Attorney General Andrew Cuomo filed suit Wednesday againt Intel, the world's largest chipmaker, accusing it of scheming to maintain worldwide monopoly power in the market for microprocessors.
Cuomo said Intel violated state and federal antitrust laws by using illegal threats, bullying and coercion to maintain a "stranglehold" on the market for computer chips.
New York's top lawyer, and likley gubernatorial candidate next year, said the company has for several years extracted agreements from large computer makers, including Dell and Hewlett-Packard Co for the exclusive use of its microprocessors, in exchange for "billions of dollars" of payments.
In a conference call, Cuomo said Intel's "my way or the highway" attitude hurt companies and consumers. "We intend to stop them," he said.
Maybe taxpayers will make some of that bailout money back after all. General Motors posted its first sales increase in nearly two years this afternoon, announcing sales increased 4.1 percent in October compared with the same month last year. This is the first time the troubled company has seen a year-over-year sales increase since January 2008.
The news isn't a total surprise. In a sneak peak last week, executives said that October would be the company's third consecutive month of market share gains, proof that consumers were returning to its showrooms
The showing is a big turnaround from last month's 45 percent drop to 156,673 vehicles from 284,300 a year ago. Of course, the troubled automaker still has far to go: its sales incentives remain among the highest in the industry and its car quality still leaves room for improvement.
Yesterday, Ford announced similarly positive steps while laggard Chrysler Group LLC continued to struggle, with October sales falling 30 percent.
Could it be time to call the bottom of the domestic car industry?
The U.K. government is giving Royal Bank of Scotland Group PLC another 25.5 billion pounds in capital to help it stay afloat. The government's total bailout of the bank now equals 45.5 billion pounds or about 74 billion dollars. It has become the costliest bailout of any bank worldwide.
The government now owns a 84.4 percent stake in the bank, which suffered major losses after acquiring the ABN Amro businesses in 2007. The WSJ (subs. req'd) reports:
RBS said over the next four years it will sell off its insurance arm--probably through an initial public offering--and divest its global merchant services unit and its interest in commodities trading joint-venture RBS Sempra Commodities, collectively accounting for GBP 5.7 billion of RBS' GBP 26.9 billion revenue in 2008.
In addition, it will sell branches operating under the RBS brand in England and Wales, its NatWest branches in Scotland, and the accounts of some small and medium business customers across the U.K., totaling about 2 million customers and GBP20 billion in assets.
The U.K. government is aiming to have these bought by a new entrant in U.K. banking, to make the sector more competitive.
Meantime, another large British bank, Lloyds Banking Group, says it plans to tap investors in an effort to keep the government from taking a majority stake. The bank hopes to raise nearly 21 billion pounds, to keep the government's stake at 43 percent.
Many of Wall Street's biggest investment firms are stepping up their political donations, after taking a hiatus while receiving government funds. The Wall Street Journal (sub req'd) reports:
New fund-raising data show that Morgan Stanley's political action committee made a total of $110,000 in political contributions in September. The only other month this year the company made donations was July, when it gave $43,000. About 60% of the September donations went to Republicans, who generally support Wall Street's efforts to block the regulations proposed by Mr. Obama and congressional Democrats, a shift to the minority party from July.
The fund-raising arm of Bank of America donated $30,500 to Republicans in September and $13,500 to Democrats. The company gave a large amount in February, but otherwise has been quiet this year. Goldman Sachs made $37,500 in donations through its PACs in September, after donating $23,000 up until that month.
The Consumer Price Index, or CPI, rose 0.2 percent in September, after a 0.4 percent increase in August. Consumer prices are down 1.3 percent from a year ago. The lack of inflation is good news for central bankers who want to keep interest rates low for as long as it takes for the economy to recover.
Energy prices were up 0.6 percent in September, but food and housing prices both fell. Rent and owners' equivalent rent, which measures how much homeowners think their houses would rent to someone else, both fell by 0.1 percent. It was the first time rent fell since 1992. Rent and rental equivalence are important figures, since they make up 30 percent of the total CPI and nearly 40 percent of the core CPI, which excludes food and energy.
The latest minutes are in from the Federal Reserve's Federal Open Market Committee meeting.
Policymakers at the September gathering disagreed about when the Federal Reserve should pull back from market interventions like buying Treasurys and mortgage bonds. Committee members said they're not at all sure what will happen once the Fed and the administration stop propping up the economy. Key quote from the minutes:
Some of the recent gains in activity probably reflected government policy support, and participants expressed considerable uncertainty about the likely strength of the upturn once those supports were withdrawn or their effects waned. Overall, the economy was projected to expand over the remainder of 2009 and during 2010, but at a pace that was unlikely to reduce the unemployment rate appreciably.
The FDIC has unveiled a plan to shore up its insurance program by essentially borrowing $45 billion from member banks. The idea is to have the banks prepay three years' worth of fees. The FDIC had considered borrowing the money outright from either banks or the Treasury, but each proved politically unpopular. Now the FDIC may have found a way to split the difference.
Officials said that the plan would be less expensive than a direct loan from the banks -- an idea that many banks supported -- because no interest would have to be paid and because the plan would not be voluntary.
In addition, the FDIC plans to raise banks' fees, too, by three cents on each $100 in deposits. You could argue that banks are like ordinary insurance consumers -- paying more for coverage when claims spike. So far in 2009, 95 banks have gone under. The FDIC is on track to lose $100 billion this year and next on failures. Its insurance fund is set to go into deficit this week.
The FDIC's push for early payment could take effect after a 30-day public comment period.
Consumers' assessment of current conditions was less favorable in September. Those claiming business conditions are "bad" increased to 46.3 percent from 44.6 percent, while those claiming conditions are "good" increased to 8.7 percent from 8.5 percent. Consumers' appraisal of the job market was also less favorable. Those claiming jobs are "hard to get" increased to 47.0 percent from 44.3 percent, while those claiming jobs are "plentiful" decreased to 3.4 percent from 4.3 percent.
Americans' outlook on the labor market is as stagnant as the labor market itself. The Conference Board says the survey results could spell bad news for retailers in the upcoming holiday shopping season.
Rep. Ron Paul (R-Texas, and more) got a boost today in his crusade for a closer look at the Federal Reserve. Rep. Barney Frank (D-Mass., and chair of the House Financial Services Committee) said in a hearing that he backs Paul's proposal to let the Government Accountability Office pursue detailed audits of the Federal Reserve.
"We are serious about some legislation in this regard," Frank said on Capitol Hill today. The LA Times reports that Frank says he wants to curb the Fed's emergency lending powers. Frank says he'd like to include the audit power in legislation for overhauling financial regulation.
Paul has been pressing a measure for Congressional audits of the Fed for 26 years, longer than some people who work on Planet Money have been alive. That bill now counts two-thirds of all House members as co-sponsors.
U.S. paper manufacturers and the United Steelworkers have accused China and Indonesia of dumping tons of coated paper into the United States. The complaint against the two governments is the latest in an escalating trade conflict between the United States and China, which began when President Obama approved tariffs for Chinese tires. It comes on the eve of the G-20 economic summit in Pittsburgh. From the WSJ:
The companies need to prove to the Commerce Department that the governments of China and Indonesia provided subsidies to coated-paper producers, and that imports were sold in the U.S. at prices below the home-market price or the cost of production. The petitioners also need to show the U.S. International Trade Commission that the paper imports caused material injury to the U.S. market or threaten to. "We have very strong evidence on all the factors which are necessary to prove this case," Mr. Kaplan said.
A spokesman for Indonesia's Trade Ministry declined to comment because the government has not yet viewed the antidumping petitions.
America's economy has begun to recover from the economic crisis, the Federal Reserve says. In a statement released this afternoon, its Federal Open Market Committee says that "economic activity has picked up following its severe downturn."
The Fed announced it will hold its benchmark interest rate at the historic low target range of zero to 0.25 percent. That step shows the central bank is more concerned about stimulating the economy than in protecting it from possible inflation. The FOMC says it expects inflation "will remain subdued for some time." Unemployment at 9.7 percent helps account for some of the "substantial resource slack" the Fed notes today.
In general, the Fed today seems to be tiptoeing toward an exit of its recent interventions in the market.
Treasury Secretary Tim Geithner agreed to a reduced mandate for a Consumer Financial Protection Agency today. The CFPA was to have a broad mission of making sure banks and other financial institutions offer "plain vanilla" products like 30-year mortgages at fixed rates. Not surprisingly, banks objected to that idea.
Questioned today by lawmakers, Geithner told the House Financial Services Committee that he was going with Chairman Barney Frank's plan. That plan, as Frank announced Tuesday night, includes a host of exemptions for nonbanks. Frank also announced an end to the "plain vanilla" requirement and the CFPA's power to enforce "reasonableness" standards.
Geithner told lawmakers:
"There has been a lot of concern that if you invest the government with the ability to decide what's appropriate here and there, that will lead to less competition and choice. The chairman's proposals, which I've had a chance to quickly read, provides a better balance of choice and protection."
Geithner's prepared testimony had him sounding a good bit tougher.
From this story in the NYT today about the FDIC may borrow from banks to refill its insurance fund.
"Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help," said Camden R. Fine, president of the Independent Community Bankers. "She'd do just about anything before going there."
I do think the opening to the story, while fun, is a bit misleading.
Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.
True, the FDIC is a government agency, but it always uses bank money to make depositors whole when a bank goes under.
The Census Bureau reports that people in Maryland enjoy the nation's highest median income. People in my native Mississippi have the lowest, and experience a cost of living that's about half what you'd find in Maryland. Five states saw median household income fall last year -- Florida led the race for the bottom with a decline of 3.9 percent.
The Federal Reserve has spiked a request from Treasury Secretary Tim Geithner for a public review of its structure and governance, Bloomberg is reporting. The administration proposed the review in June as part of its plan to overhaul financial regulation.
The results of the inquiry are due Oct. 1, but reportedly no work has been done on the project. Bloomberg says Federal Reserve Governor Elizabeth Duke is conducting an internal study of the directors and their roles. A new proposal by Sen. Chris Dodd (D-Conn.) would merge the Federal Reserve with three other agencies to create a new super-regulator for the financial industry. The back-and-forth in Congress has got the Fed a teensy bit on the spot. From Bloomberg:
"The institution is trying to keep a low profile," said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and the former director of Division of Monetary Affairs at the Fed Board. "To publish a report now invites comment on that report."
The LA Times has found a key to the economic recovery, and it's in your pocket: "Savers need to resume buying habits to aid recovery, experts say." Consumer spending amounts to two thirds of the overall economy, and yet spending is the last thing on many consumers' minds. From the newspaper:
When American Express asked a sampling of 2,032 people late last month what they would do if they found $500, the answers were like a pitcher of ice water in the face of retailers. Survey respondents were offered a list of possible spending choices that included splurging at a restaurant, going on a shopping spree and taking a trip.
But a mere 10% or fewer marked one of those items. Most went down the list and checked off paying regular bills, reducing credit card debt or simply saving the money.
An American Express spokesperson tells the paper we're seeing unprecedented discipline on the part of consumers. And then there's the factor of pure fear.
The Bureau of Labor Statistics is reporting that unemployment levels in 14 states are significantly higher than the national average of 9.7 percent. Michigan tops the list with a rate of 15.2 percent, followed by Nevada with 13.2 percent and Rhode Island with 12.8 percent.
Twenty-seven states reported month over month increases in unemployment in August while 16 states experienced decreases. In states like Ohio and Georgia, where the unemployment rate fell, officials say people giving up on the job search contributed to the drop.
"A decrease in Ohio's labor force was a primary factor in drop of the August unemployment rate," ODJFS Director Douglas Lumpkin said. "The unemployment rate declined as the number of service-providing and goods-producing jobs decreased and fewer Ohioans were actively seeking work."
Ohio's labor force participation rate, which measures the number of people who are either employed or actively seeking work, fell 0.4 percent last month, Georgia's fell by 0.3 percent.
States with a strong manufacturing presence experienced the greatest month over month increases in unemployment. Texas payrolls fell by 62,200, Michigan payrolls by 42,900.
Insurance regulators frustrated by the credit-rating agencies who gave safe ratings to dangerous securities are challenging the current rating system. From the Wall Street Journal:
The regulators' moves are at a preliminary stage, but could change how state regulators gauge the quality of the investments backing insurers' policies. Currently they use the major ratings firms recognized by the Securities and Exchange Commission.
Insurance regulators are considering whether to substitute analysis from other financial firms with expertise in valuing the securities, officials say. The effects of such a change could trickle throughout the world of bond investing, given insurers' outsize role in the bond markets.
"We just need to take stock of this reliance on a system that allows that kind of shock," in the form of swift and severe downgrades, "and frankly evaluate if there are other alternatives," said New York Insurance Department Deputy Superintendent Hampton Finer in an interview. Amid criticism of ratings agencies, he added, "we're under quite a bit of pressure to respond."
Insurers hold trillions of dollars in bonds in their portfolios and rely heavily on ratings to determine the safety of those bonds.
The international group, Organization for Economic Cooperation and Development, warns that the unemployment rate for its 30 member nations could reach a high of 10 percent by 2010. The unemployment rate across the countries in the O.E.C.D. was 8.5 percent for July.
Government spending programs on the labor market -- re-training programs, for example -- do not appear focused enough to bring the unemployment rate down soon, the report said.
"A major risk is that much of this large hike in unemployment becomes structural in nature as many of the unemployed drift into long-term joblessness or drop out of the labor force," said John P. Martin, director at the O.E.C.D. for employment.
That occurred in a number of O.E.C.D. countries during past recessions, "when unemployment remained at a new higher plateau compared with the pre-crisis level even after output returned to potential and it took many years, if ever, to bring it down again to the pre-crisis level."
The report recommends governments focus a significant amount of attention on young people to avoid the risk of a generation of people "losing touch with the job market."
Blackstone CEO Stephen Schwarzman is defending the use of placement agents by private-equity firms. In a letter posted on the SEC website, Schwarzman explains the role they played in helping establish his first private-equity fund. Bloomberg reports:
"Without the assistance of CS First Boston and Bankers Trust, I can assure you that our fundraising efforts for our first private-equity fund would have utterly failed," Schwarzman wrote of the predecessor of Zurich-based Credit Suisse Group AG. "Blackstone would have been a very different firm today and may not even have survived at all."
As we reported earlier this summer, placement agents have come under intense scrutiny by the SEC and New York Attorney General Andrew Cuomo because of their ties to state and local pension funds. The SEC is currently considering a proposal that would ban placement agents from representing clients before state and local pensions.
A federal judge has overturned a $33 million settlement between Bank of America and the SEC over bonuses paid to Merrill Lynch executives. Bank of America acquired Merill late last year -- the bonuses were paid just before the two merged. U.S. District Judge Jed Rakoff called the settlement a "trivial penalty for a false statement that materially infected a multi-billion-dollar merger."
The judge also criticized the S.E.C., which has been trying to step up the profile of its investigations unit. The judge quoted Oscar Wilde's "Lady Windermere's Fan" in the end of his ruling to say that a cynic is someone "who knows the price of everything and the value of nothing."
The proposed settlement, the judge continued, "suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."
The SEC had accused Bank of America of misleading shareholders about bonuses paid to Merrill Lynch employees. Judge Rakoff ordered the two sides to prepare for a trial to begin before February 1.
Listen to President Obama's speech on the economy live on npr.org or on your local NPR station. After the speech, Adam Davidson will be analyzing the president's remarks with Talk of the Nation's Neal Conan, NPR's White House correspondent Scott Horsley and political correspondent Mara Liasson.
The Wall Street Journal has new details about a lawsuit involving investment bank UBS and a Connecticut-based hedge fund, Pursuit Partners. Pursuit has accused UBS of selling it securities the bank knew were about to be downgraded -- putting Pursuit's investment at greater risk.
E-mails that were part of the lawsuit show that UBS employees spoke in frank terms about the securities, collaterized debt obligations -- calling them "crap" and "vomit." From the Journal:
On July 11, 2007, Moody's said it would review for possible downgrade a small percentage of the universe of CDOs, just after it cut ratings on subprime-mortgage bonds -- the building blocks for many CDOs.
[UBS bond salesman Robert Morelli] sent an email on that day telling colleagues to "put today in your calendar." Mr. Morelli later said in the case the day "was essentially the beginning of the end of the CDO business, meaning the bonds were getting downgraded, they were probably going to get downgraded further, and we were going to lose a lot of money," according to a court transcript cited in Judge Blawie's decision.
On July 26, UBS instructed employees to "reduce cdos ... no need to publicly relay this," the decision says. That day, Pursuit started its purchases from UBS.
On Aug. 28, Mr. Morelli said in an email that he had "sold more crap to Pursuit," according to the decision. On Sept. 24, as the October downgrades neared, an unnamed UBS employee emailed a UBS banker and referred to CDO inventory on UBS's books. "OK still have this vomit?" the employee asked.
American Banker is reporting that the FDIC has put the clamp on releasing certain types of information. Specifically, the FDIC has decided that for now it will no longer reveal losing bids for the assets for failed banks. If you're the winner, your bid is still public. If you're one of the losers, it's not.
The FDIC fund for protecting $4.5 trillion in U.S. bank deposits slipped by 20 percent to $10.4 billion at the end of June, the the agency reports. A year ago, the fund held more than $45.2 billion.
So far this year, 81 banks have failed, requiring expensive rescues from the FDIC. The number of banks on the FDIC's "Problem List" rose to 416 at June's end, from 305 in March.
In a press release, the FDIC noted that more than 28 percent of all member banks reported a net loss in the second quarter. The FDIC says that's because more debtors are failing to pay back the money they owe.
A pair of indicators from the U.S. Census Bureau today, both on the upside.
First, sales of new single-family homes rose in June by 9.6 percent over the month before. They're still down from this time in 2008, by 13.4 percent. The U.S. Census Bureau says the average price was $269,200, down from $276,900 in June and $301,900 last year.
Second, new orders for manufactured goods increased 4.9 percent last month over June -- biggest jump in two years. MarketWatch notes that orders for new airplanes doubled. Transportation orders overall grew by 18.4 percent. Even without that bonus, orders were up .8 percent -- it's small, but these days it counts for something.
Consumer confidence has risen more than expected this month, the Conference Board reports. In its index of how you're feeling out there, 90 is the minimum for economic health. In July, the number stood at 47.4. Now, it's at 54.1 Expectations for the future -- when it's all going to get better, right? -- rose to a level not seen since the recession started in December 2007.
So what's going right? Real estate, maybe. AP reports:
The Standard & Poor's/Case-Shiller's U.S. National Home Price Index rose nearly 3 percent in the second quarter from the January-March period, the first quarterly increase in three years. Home prices, while still down almost 15 percent from last year, are at levels last seen in early 2003.
A passing note on consumer confidence: Another index, from the University of Michigan, has beenslipping. In recession like this, where we might have hit bottom but we don't feel very recovery-ish yet, we can expect surveys like this to be a little squishy. Just saying.
Going into debt to pay for school. Click to enlarge.(Sallie Mae/Gallup)
By Caitlin Kenney
Fewer families are borrowing for college than you might think. According to a recently released survey of college-aged students and their parents sponsored by student lender Sallie Mae, just 42 percent of families took on debt to send someone to college in 2008-2009. Last year, 47 percent of families did.
The survey included 800 students and 804 parents. Spending ranged from parental income and savings (for 36 percent of the students) to help from other relatives and friends (6 percent). A quarter of the respondents said they'd gotten grants and scholarships. Another 14 percent took out loans themselves.
Students are starting to show signs of putting off school for now. Fewer students said they would rather borrow than not attend college this year, with 53 percent compared to 67 percent last year. It may also be that budget-conscious students have become more wary of debt and are economizing by choosing cheaper schools. Students who borrowed money spent 30 percent more on tuition than those who did not.
The Bank of Israel raised its benchmark interest rate by a quarter of a point today, becoming the first major central bank to hike the cost of borrowing in this present climate of a cheap money.
The Israeli economy was growing at an annualized rate of 1 percent last quarter. Inflation showed up, too -- consumer prices jumped 1.1 percent from June to July. From Bloomberg:
"[Bank of Israel Governor Stanley Fischer] has to curb inflation and to curb inflation for next year he has to act now," said Shlomo Maoz, chief economist at Excellence Nessuah Investment House Ltd. in Tel Aviv, who predicted a quarter-point increase. "To act alone will be hard, but it will be a mistake for him not to act."
Fischer's walking the same political tightrope as other central bankers, including Federal Reserve Chairman Ben Bernanke. They've got to get their economies back to health, and they've got to watch out for inflation.
With its deposit insurance fund running low, the FDIC is looking for new buyers to take over failed banks. The government agency has shown increasing willingness to work with foreign buyers and participate in loss sharing agreements. Banco Bilbao Vizcaya Argentaria SA recently won the bidding for struggling Guaranty Financial Group, and other foreign banks have shown an interest in taking a stake in the U.S.'s troubled banking industry.
The FDIC is also reportedly trying to entice more private equity funds to the table by softening the rules for private equity takeovers. The proposed rules call for banks acquired by private equity groups to maintain tier one capital ratios of at least 15 percent, three times the level of other banks. The rules also require funds to hold on to the lenders for at least three years. The private equity industry and some of its biggest funders, pension funds, say the rules are too strict and will deter funds from investing in the banks.
So far this year, 77 banks have failed. The FDIC insurance fund has dipped from 35 billion in April down to 13 billion today -- a year ago it was at almost 53 billion.
Transportation Secretary Ray LaHood kicking off the 'Cash for Clunkers' program in July. (Win McNamee / Getty Images)
By Mathew Katz
General Motors says it will begin advancing dealers the cash the government owes them under the Federal Cash for Clunkers Program. GM made the announcement today after a number of dealers said they were dropping out of the program because of delays in being reimbursed. GM said its recent sales have surpassed expectations largely due to the federal program. On Tuesday, they announced plans to ramp up production.
The Greater New York Automobile Dealers Associations said yesterday that their dealers have only been compensated for about two percent of the deals already made under the program. Some dealers say they've been waiting so long, they don't have have enough cash to give out new rebates. Over 200 New York area auto dealers have already left the program because of the delays.
AIG's new CEO Robert Benmosche says he won't be pressured by the government to sell the company's assets before he can get a good price for them. Benmosche's comments come from a recording of a meeting for employees obtained by Bloomberg. Here are some other highlights:
"I'm appalled at how much pressure has been put on all of you to just sell it no matter what, because the Fed wants out, or the Treasury wants out. If they want out in a hurry, they shouldn't have come in in the first place."
"It's time the people in Congress stopped talking about you as the problem, because you're the solution. It's not your fault, it's their fault, it's the regulators' fault."
"My fear is that you'll say, 'I don't know if Treasury wants it, I don't know if the Fed wants it, I don't know if the lawyers want it, I don't know whatever. If you sit there every day not making the right decisions to take us to the next level, we'll miss an opportunity."
Earlier this month, AIG announced that it had its first profitable quarter since 2007. The company said it earned $1.82 billion from April-June. AIG has received a government bailout package worth a total of $182.5 billion, which it says it plans to begin repaying this year.
Switzerland's largest bank, UBS AG, is set to give the U.S. government information on 4,450 accounts suspected of hiding money from the IRS. In June, the U.S. and Swiss governments came to an information-sharing agreement after a six month battle over how much the bank would divulge. The Swiss government says it will fulfill a request for the information within a year.
Back in February, UBS admitted to participating "in a scheme to defraud the U.S.," paid a $780 million fine, and gave the IRS the names of 250 American clients who hid assets. The IRS then sued the bank for information on 52,000 accounts. UBS argued that disclosing more information would violate Switzerland's banking confidentiality laws but eventually agreed to hand over information related to 4,450 accounts that were of "the greatest interest" to the IRS.
Since UBS admitted its part in the scheme, four of its clients have agreed to plead guilty to failing to report their offshore bank accounts. Thousands of other clients have avoided penalties by sharing their accounts with the IRS under a special volunitary program that ends in September.
Wholesale prices paid to producers were down in 0.9 percent in July, according to the Bureau of Labor Statistics. The number comes from a BLS report on the Producer Price Index, which represents prices paid to producers of goods -- like farmers and factories. A major factor in the drop was a 2.4 percent decline in energy prices. The index for July is down 6.8 percent from a year ago -- the biggest year-on-year drop since the government began keeping records in 1947.
The drop is important because it counters some fears of inflation, but it's also another sign of slack in the economy -- between this and today's housing starts numbers, it looks like we're not quite in a recovery yet.
The Federal Reserve and the Treasury Department are extending the TALF program to help support the credit markets. The program provides money to investors to purchase new asset-backed securities as well as commercial real-estate debt. The commercial real-estate industry and a group of lawmakers requested the extension, saying the program needed more time to get going.
Commercial property values have fallen 35 percent since peaking in October 2007, according to Moody's Investors Service. The extension may help firms such as Vornado Realty Trust, which is considering the sale of commercial MBS through the TALF. Almost $165 billion of mortgages for skyscrapers, shopping malls and hotels are due this year.
While financial-market conditions "have improved considerably in recent months," the markets for ABS and CMBS "are still impaired and seem likely to remain so for some time," the Fed and Treasury said.
The Fed says loans for newly issued commercial mortgage backed securities have been extended through June 30, 2010 because "new CMBS deals can take a significant amount of time to arrange." Loans for other asset backed securities and CMBS sold before Jan.1 have been extended three months to March 31.
More good news: manufacturing is up in the New York region for the first time in over a year, according to the Federal Reserve Bank of New York. The bank just released its monthly Empire State Manufacturing Survey for August, and the general business conditions index is up 13 points to 12.1, its highest level since November 2007. Any number higher than zero indicates growth in the manufacturing industry.
The New York numbers come after last week's announcement by the Federal Reserve that overall industrial production across the country is up by 0.5 percent. Today's report also has some interesting details for the unemployed: while increased demand for cars and auto parts fueled part of the index's rise, manufacturers are finally re-starting assembly lines after months of slashing their inventories. With signs pointing toward an end to the recession, companies are trying to re-stock their shelves, hoping that demand will follow.
You folks out don't seem any happier. The Michigan Consumer Sentiment Index skidded this month from 66 to 63.2, whatever that means. High Frequency Economics' Ian Shepherdson says the dip may stem from rising gas prices. "Either way, it is not clear that the confidence numbers are as useful a guide to spending now as in the past," he writes.
Me, I'm still blaming unemployment for the general gloom, especially the rise in people who've been out of work six months or longer. How's anyone supposed to feel confident in a time like that?
Inflation watchers, keep looking. The new Consumer Price Index just came out, and it shows overall prices were absolutely flat in July. In June, prices rose 0.7 percent. Economists had predicted an increase in July of 0.1 percent.
Today's numbers track with the report on retail sales from July, which fell 0.1 percent. Clearly, demand is still very low.
Prices were down in several major categories last month. Food fell by 2 percent, led by critter products at 1.3 percent. Housing dropped 0.2 percent. Energy fell 0.4 percent
The report shows signs of what's in the news. Used vehicles fell 7.9 percent. New vehicles rose 1.2 percent (more cash for non-clunkers?). Medical care rose 0.2 percent.
Economists consider an inflation rate of 2 or 3 percent a year to be healthy, since it wards off deflation. Technically, deflation is when wages and prices are both falling, with wages falling faster. In real terms, deflation is a spiraling disaster. It's much harder to fix than runaway inflation.
No more messages like this. (mileena/Flickr/Creative Commons)
By Caitlin Kenney
California will stop issuing IOUs on Sept. 4, a month earlier than expected. The state started paying private businesses, local governments and individual taxpayers with the registered warrants back in July to help deal with a massive budget shortfall. It has doled out almost $2 billion in warrants since then.
The decision to end the warrants came today after state officials and Governor Schwarzenegger decided the IOUs were no longer needed under the new state budget. The spending plan allows California to borrow the money needed to cover its daily expenses. State Controller John Chiang says it's likely California will need to borrow $10.5 billion in the coming year, with $2 billion of that coming from local governments.
"The State of California owes a debt of gratitude to the thousands of individuals and businesses that were forced to bear the brunt of the state's chronic fiscal mismanagement," Chiang said. "Along with short-term loans that are routinely obtained in the fall, this spending plan should provide sufficient cash to meet all of California's payment obligations through the fiscal year."
California's largest banks stopped accepting the IOUs last month, leaving thousands of creditors looking for other banks to honor them.
Investors stand to make less off bonds they buy in a heated auction, yet they bought them anyway. If you pay more for a bond -- say, $97 for a $100 bond instead of $96 -- then your yield when the bond matures is $3, not $4.
Before today, yields had begun to climb again as investors became more willing to take on the risk (and potential reward) of buying stocks. The news about falling retail sales and rising job loss was particularly nervous-making, since consumer spending accounts for nearly 70 percent of the economy.
So who was taking the deal on Treasuries today? Bloomberg reports that indirect bidders, which includes foreign central banks, bought 48.1 percent of them.
Wal-Mart's reporting it beat expectations for the second quarter by managing shrinking its inventory (a theme of the day) and by selling cheap food and flat-screen TVs.
The chain also attracted more customers, helped by price reductions on its Sam's Choice Black Angus beef patties, baked beans and flat- panel televisions to lure consumers grappling with shrinking paychecks and the worst unemployment since the Great Depression.
Wal-Mart pulled in a profit of $3.44 billion last quarter. A retail consultant, Craig Johnson of Customer Growth Partners, told Bloomberg TV, "They are providing great value to the consumer, but the consumer is very stressed these days." You can say that again.
Federal Reserve Chairman Ben Bernanke sees the economy stabilizing. (Chip Somodevilla / Getty Images)
By Laura Conaway
The Federal Reserve today announced that it will wind up its planned $300 billion program for buying government debt from financial institutions by the end of October, since the economy is "leveling out." The Fed has bought $253 billion worth of U.S. Treasury bonds from banks in an effort to get more money moving through the economy. If banks are holding cash instead of Treasurys, the thinking goes, they'll be more likely to lend to people and businesses.
The Fed also announced it will not be raising its key interest rate, the federal funds rate. This target rate is the amount the Federal Reserve hopes banks will charge for overnight loans to other banks. The decisions come after a two-day meeting by the Federal Open Market Committee, which sets monetary policy and works to carry it out.
American workers increased nonfarm productivity an annualized rate of 6.4 percent in the second quarter of this year, the Bureau of Labor Statistics reports. That's well more than the 5. 5 percent increase many economists had expected. Workers saw their overall compensation grow by .2 percent, while companies enjoyed a drop in labor unit costs of 5.8 percent.
This official number helps make sense of a few developments in the economy. First, many large corporations reported that revenue was down but profits were up last quarter. That's because they'd cut labor costs by laying off workers and squeezing more productivity out of the people who remained. Second, workers who say they're being asked to do more with less are just plain right.
The numbers also seem to show that inflation is not an immediate threat. The slight rise in hourly compensation is stronger than the negative 2.4 percent from the first quarter, but it's a shadow of the 1.3 percent gain from a year ago and the 4.2 percent gain overall in 2007.
The BLS reports that the jump in productivity is the result of "hours falling faster than output" -- and how. Output was falling last quarter at a yearly clip of 1.7 percent. Meanwhile, hours worked fell for the sixth straight quarter, at an annualized pace of negative 7.6 percent compared to negative 9 percent from the first quarter. If not for the last two miserable quarters, this quarter's drop in hours would be the steepest in the BLS data -- back to 1947.
This RV plant in Elkhart, Ind., has laid off a third of its workers. (Scott Olson / Getty Images)
By Laura Conaway
President Obama has announced $2.4 billion in grants to companies and universities that develop electric vehicles, parts for electric vehicles and the batteries that run them. The money will come the American Recovery and Reinvestment Act, the $787 billion stimulus package.
Obama detailed the grants today in Elkhart County, Ind., scene of the worst unemployment rate in the U.S at 16.8 percent. The president has made four trips there in the last 15 months. Elkhart is a manufacturing center for R.V.s, or was until the industry collapsed. One of those plants, Navistar International, will get a $39 million grant to develop manufacturing of electric trucks. Indiana stands to get seven grants totaling $400 million.
Vice President Biden, who's in Michigan, scene of the worst state unemployment rate at 15.2 percent, announced $1 billion in grants there for developing fuel cells. The administration made a full-court press of the announcement, with visits by officials to North Carolina, Florida, Pennsylvania and Missouri.
Goldman Sachs has told its clients it doesn't engage in "flash trading," in which high-frequency traders get a quick peek at competitors' stock orders before they're completed. The news came first from Zero Hedge, which got hold of a letter sent today by Goldman. Money quote:
"The most significant challenge ahead is for the regulatory framework to keep current with the rapid pace of innovation in the marketplace."
SEC Chairwoman Mary Schapiro said today that she has asked her staff to explore "an approach that can be quickly implemented to eliminate the inequity that results from flash orders." Schapiro wrote that she's concerned about "dark pools" where traders buy and sell large numbers of shares anonymously.
Schapiro's statement came after Sen. Charles Schumer (D-NY), told the world she had promised him a ban on flash trading.
Vice President Joe Biden defended the American Recovery and Reinvestment Act today, saying the $787 billion stimulus has helped slow the shrinking of the U.S. economy. Biden said the spending plan has been misunderstood.
It's got three parts, the vice president said: rescue, recovery and reinvestment. Here's how Biden said we'll know when we reach recovery:
"Less bad" is not the same as "good." We know that growth in GDP is necessary but not sufficient. It's not a sufficient marker of recovery. For one thing, it's not going to occur until there are jobs. My grandpop used to have the expression, he said, when the guy up the line is out of work, it's an economic slowdown; when your brother-in-law is out of work, it's a recession; when you're out of work, it's a depression. Well, it's still a serious problem for millions of unemployed Americans. Too many people are out of work. Too many families are in pain. And when that's no longer the case, that's when we will have recovery.
I'll drop the full transcript of his remarks after the jump.
The Obama administration released the first official stats on its $75 billion mortgage modification program this morning. According to the report, 235,250 home loans, or about nine percent of delinquent borrowers, have been put into trial modifications by loan servicing firms participating in the program. Those institutions offered extended modifications to 406,540 delinquent borrowers -- about 15 percent of the total.
According to the Center for Responsible Lending, there are about 3.5 million mortgages in serious delinquency right now, and that same report warned that new foreclosure starts and delinquencies are outpacing the modification program, which was announced in February.
We linked to that report last week, along with a New York Times story about mortgage servicers not wanting to alter loans so they could profit off of late fees. As you can see from the above chart, a lot of the lag is coming from the banks -- most of which haven't modified even 10 percent of their delinquent mortgages.
But the Obama administration says that they're going to speed up the program's implementation and put more pressure on lenders to modify bad loans -- the goal is to modify 500,000 loans by November, and up to four million over the next three years.
Personal income decreased $159.8 billion, or 1.3 percent . . . in June.
Personal spending rose from May to June by $41.4 billion, or 0.4 percent. The bureau's price index shows a .5 percent increase in June, versus .1 percent in May. If you exclude the volatile costs of food and energy, prices increased .2 percent versus .1 percent in May. "This should help temper any near-term inflation fears," writes Marc Chandler of Brown Brothers Harriman.
The BEA pins the monthly fall in income on the American Recovery and Reinvestment Act, otherwise known as the $787 billion stimulus, which called for a one-time $250 check to Social Security recipients in May.
Wages and salaries, as a category, notched a tenth straight monthly decline, falling by .4 percent in June.
Hey, they may not be pretty, but these clunkers seem to be helping the auto industry. (ThreadedThoughts / Flickr)
By Mathew Katz
U.S. car makers cited the Cash for Clunkers program today as they released their latest sales figures today.
Ford's July sales release shows a 2 percent sales increase from the year ago -- the first month without a decline since November 2007. The automaker gives direct credit to the government's trade-in program, which has proved so popular that it has almost plowed through its original $1 billion in its first few days. The program's goal of getting Americans into more fuel-efficient vehicles also seemed to work: Ford also saw a 323 percent increase in hybrid sales.
On the other hand, Chrysler's still smarting from bankruptcy and showed gloomier numbers -- sales were down 9 percent from last year. Still, there is a silver lining -- that's a smaller year-on-year drop than Chrysler's had over the past few months. Plus, sales jumped 30 percent from last month. Chrysler also said today that it's going to halt its offer to double the cash incentive from the Cash for Clunkers program, saying that the program worked too well: they simply don't have the inventory to keep it up.
GM finished off at the bottom of the U.S. pack, reporting a 19.4 percent drop in sales from last year, but it managed to see an eight percent increase in sales from June. In the release, vice president Mark LaNeve put it bluntly: the company expects to continue positive momentum in August if the Cash for Clunkers program sticks around.
Bank of America has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its employees.
In seeking approval to buy Merrill, Bank of America told its shareholders that Merrill agreed not to pay year-end bonuses without Bank of America's consent. But the Securities and Exchange Commission says Bank of America had authorized New York-based Merrill to pay $5.8 billion in bonuses.
Bank of America paid $50 billion for Merrill Lynch. The Merrill bonuses amount to nearly 12 percent of that amount. Under the settlement agreement, Bank of America neither admits nor denies the allegations.
The Special Inspector General for the Troubled Asset Relief Program -- or SIGTARP -- has confirmed that it carried out two search warrants today in Florida. "Due to the nature of the on-going investigation we cannot provide any further information," SIGTARP said in a prepared statement.
A report from Orlando says agents with the FBI raided the Colonial Bank building there and another Colonial office in Ocala.
Wall Street banks are making serious money by trading with the Federal Reserve, the Financial Times reports. The Fed has become one of the biggest buyers of securities since the financial crisis hit, since doing so helps to stabilize markets and keep interest rates low. Unlike private buyers, however, the Fed announces specific securities purchases in advance in the interest of transparency. The second an announcement is made, traders can stockpile them for sale to the Fed at a jacked-up price. This gives the upper hand to Wall Street, according to one investment firm executive:
You can make big money trading with the government. The government is a huge buyer and seller and Wall Street has all the pricing power.
On the one hand, this is just another way for the Fed to provide even more support for banks. On the other hand, considering it's spending taxpayer money, former U.S. Treasury officials tell the paper the Fed could drive a harder bargain.
President Obama just now commented on the new GDP numbers (at annualized rate of -1 percent, the economy is still shrinking but less quickly). Obama called the report "better than expected." And who deserves credit for that? Obama said it was "directly attributable to the Recovery Act."
The Bureau of Economic Affairs, which calculates GDP, agrees the $787 billion stimulus played a role.
That's what you get for spending a lot of money. The Congressional Budget Office writes this month:
"Stimulus legislation and efforts to stabilize the financial markets will push primary spending up to 26 percent of GDP this fiscal year, the highest level since World War II;"
There's still debate over how much effect the stimulus spending has had so far -- much of the money has yet to be parceled out -- and whether another round will be needed. A chunk of the stimulus is in tax relief, which workers see in their regular paychecks. Another $158 billion has been set aside for direct spending around the nation, of which a third has been spent.
Fun time-waster: Recovery.gov, which shows state-by-state projections for jobs saved and money spent, but makes it hard to see how much has been spent overall.
In its report today about the shrinking American economy, the Bureau of Economic Analysis notes that people are spending less money -- which of course means they're saving more. From the BEA:
Personal saving -- disposable personal income less personal outlays -- was $566.0 billion in the second quarter, compared with $426.9 billion in the first. The personal saving rate -- saving as a percentage of disposable personal income -- was 5.2 percent in the second quarter, compared with 4.0 percent in the first.
The U.S. personal saving rate has been trending downward for decades, even dipping into the negative as people piled up credit card balances and other types of debt. During this recession, Americans have started to hoard cash again, and you can see that in today's report.
After recent talks with China, U.S. Treasury Secretary Tim Geithner announced a general agreement to spur shopping among Chinese customers and encourage saving among American ones. Looks like he'll have the wind at his back on this one.
The American economy shrank at an annualized rate of 1 percent in the second quarter of 2009, the Bureau of Economic Analysis reports today. Put another way, the growth rate of -1 percent in gross domestic product means the situation is still getting worse, but the plunge is not nearly so steep as it had been.
The economy had been going through an annualized contraction of 6.4 percent in the first quarter of 2009. That contraction of 6.4 percent is the final number for the quarter, released today as a revision upward to a revision downward. Before today's final accounting, the BEA pinned the first quarter number as a contraction of 5.5; shrinking at 6.4 is a fair bit worse.
Today's -1 percent rate is also subject to being revised up or down.
The BEA cites a 5.6 percent rate of increase in federal, state and local spending (stimulus, anyone?) and much smaller decreases in private investment. Consumer spending, which amounts to two-thirds of the economy, fell at rate of 1.2 percent.
Economists in a Bloomberg survey predict the economy will grow by 1.5 percent from July to December.
Goldman Sachs, Deutsche Bank, and Washington Mutual were issued subpoenas by a Senate panel investigating evidence of fraud in the subprime mortgage crisis, the Wall Street Journal reports this morning (subs. req'd). Washington Mutual is now largely owned by JPMorgan Chase, so their subpoena also drags Wall Street's other titan into the mix.
Citing officials familiar with the subpoenas, the Journal said the Senate Permanent Subcommittee on Investigations is trying to find out whether internal memos show that bank executives doubted the financial soundness of the mortgage-backed securities their institutions put together.
The subpoenas will force the banks to hand over hundreds of company e-mails -- even if they don't find show evidence of fraud, they'll provide an interesting snapshot of what executives at the time really knew about those delightful subprime mortgages.
Our investigative reporter friends over at ProPublica are reporting that a number of small and midsize banks that got bailout money have stopped paying quarterly dividends to the government in order to save capital. At least 18 banks have either decided to stop the payments, or have been ordered to by regulators.
What's concerning is that back in March, the Obama administration declared each of these banks "healthy." If these banks are having trouble now, post-bailout, it brings into question whether they could have survived without TARP.
There's another implication to this: not paying your dividends has consequences. After six quarters of not paying, the Treasury has the right to appoint two members to the bank's board of directors.
Today, the Federal Reserve released the Beige Book, a regular summary of what each of the different Federal Reserve banks are seeing in their local economic scene. Overall, the Beige Book says the recession has begun to taper off. But toward the bottom of the summary, there's one big, scary money quote:
Boston, Cleveland, Richmond, Chicago, Dallas, and San Francisco cited a range of methods firms are using to limit compensation, including cutting or freezing wages or benefit contributions, deferral of future salary increases, trimming bonuses and travel allowances, reducing hours, temporary shutdowns, periodic furloughs, and unpaid vacations.
No matter how you spin it, companies are trying to pay employees less money. As we've talked about before, falling wages are a key ingredient in deflation. Still, we haven't seen the other factor in deflation: falling prices.
The House Financial Services Committee just approved legislation that would allow regulators to ban incentive pay at banks, and allow shareholders to vote on bonuses. The legislation comes after similar measures have been introduced in the U.K. and the European Union. The goal of all of this anti-bonus legislation is to discourage the sort of bonuses that led bankers to take the excessive risks that led to the financial crisis itself. The bill was approved by a 40-28 vote, with most Republicans on the panel voting against it.
Naturally, the legislation wasn't taken too well by the U.S. Chamber of Commerce, the nation's largest business lobby. Its executive director, Tom Quaadman, had this to say:
This legislation would create a command and control regulatory scheme. Employee compensation should be a decision made by appropriate levels of management or the board of directors and based on a variety of factors, including merit and promotion. It moves the government into the role of setting compensation policies for virtually every employee of all financial firms.
Daniel Gross sees the signs. In a Newsweek article titled "The Recession Is Over," he reels off a list of positive-ish numbers from the economy, then adds:
[T]he data point that means the most to our psychological well-being--unemployment--is likely to keep climbing. The loss of 6.5 million jobs since December 2007 has spurred the sharpest rise in the unemployment rate since the 1930s. As manufacturing jobs move overseas and companies struggle to further reduce costs, unemployment--which stands at 9.5 percent--is likely to rise above 10 percent.
Thanks to our national debt and growing workforce, Gross writes, the U.S. economy needs to grow at 1.5 percent a year just to keep up. Notable pessimist Nouriel Roubini tells Gross we're looking at 1 percent growth for a while -- that would take us out of the recession but not out of the woods. Gross:
To a large degree, the U.S. economy must now cope with an era of lower expectations. Road building isn't a recipe for full employment, green technology won't displace fossil fuels in this decade, the benefits of universal broadband may be overblown, and the dysfunctional health-care system won't shift overnight from a headwind to a tailwind. The recession may be over, but there's likely to be plenty of tough slogging ahead.
Anyone want me to file this one under Green Shoots? Just asking.
CIT is trying to convince its investors to cash in their bonds early and for less money. The tender offer is part of a last-ditch effort to keep the company from collapsing. Investors who cash out will get $775 plus a $50 early delivery payment for every $1,000 of securities. The deadline's July 31.
A group of the CIT's bondholders offered the lender an emergency $3 billion loan last week, but the terms of that loan don't allow it be used to repay this debt. The company needs to get 90 percent participation from investors in order to stay afloat. Maybe it's time to appeal to a higher power for help -- Santa, are you listening?
(Thanks to listener Derrick Bostrom who found the above document and others in his grandfather's old scrapbook.)
My current hometown, Hoboken, N.J., has been dealing with the recession much like the rest of the country. I've watched small stores and major chains alike close up shop and disappear. A few months ago there were so many empty spaces on our unofficial main street, Washington, that the city's mayoral candidates set up their offices there.
The two leading mayoral candidates, Dawn Zimmer and Peter Cammarano, both promised to reduce the "crushing tax burden," and the talk of the town was how they would do that. The election was so tight it was decided by just 161 votes.
Maybe Cammarano would come through on his pledge to lower taxes, balance the budget, create a "glove-box guide" for small businesses and push to "hold developers accountable, ensuring that they are delivering what is promised."
This morning the headlines told a very different story: "Cammarano Arrested." Hoboken's freshly inaugurated mayor has been accused of taking $25,000 in bribes in return for promises to speed up the zoning approval for a proposed development. Mayor Cammarano was arrested along with the mayors of Seacaucus and Ridgefield, the Jersey City deptuy mayor, council president, two state assemblymen other public figures and five rabbis as part of a federal corruption and money laundering probe.
Goldman Sachs, which received $10 billion in government assistance under TARP, is now officially standing on its own again. It paid back the $10 billion with interest, and has now bought back the stock warrants the government had been holding.
The Congressional Oversight Panel had raised concerns the government was selling those warrants too cheaply, which could cost taxpayers $2.7 billion if things didn't change.
Elizabeth Warren, who chairs the panel says that this time, the price was fair.
Linus Wilson, a finance professor at the University of Louisiana, wrote us with his own numbers:
Just got this email from Eswar Prasad at Cornell and the Brookings Institution:
On the subject we talked about a couple of weeks ago, IMF just approved allocation of $250 billion worth of SDRs to give the global economy a shot in the arm. Quite interesting to have a global institution create money out of thin air !
SDR's are "Special Drawing Rights" issued by the International Monetary Fund. A country can exchange its SDR's for currency, dollars or whatever it needs. Since SDR's are backed by the world's governments and their central banks, new SDR's effectively expand the global money supply.
At least I think that's how it works.
Here's the IMF press release, and our story about whether SDR's might one dayunseat the dollar as the world's reserve currency.
Fed Chairman Ben Bernanke testified before the House Financial Services committee this morning -- his semiannual report on the economy. Bernanke's testimony was cautiously optimistic as he described "better conditions in financial markets" and "some improvement in economic prospects."
During his testimony, he also spoke in detail about the Fed's plans for combating inflation. He said:
Perhaps the most important such tool is the authority that the Congress granted the Federal Reserve last fall to pay interest on balances held at the Fed by depository institutions. Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve.
Many of the banks that received TARP aid used it improperly, according to a report released today by the special inspector general charged with overseeing the program. In the report, special inspector general, Neil Barosky, found that 110 banks used the money not only to lend, but also to repay debts, make investments and even buy other buy other banks.
The report also blasted the Treasury Department for not providing taxpayers with more transparency and reiterated its call for the the department to require detailed reports about the use of TARP funds. From the report:
Treasury's reasons for refusing to adopt this recommendation have been squarely refuted by SIGTARP's audit results and are belied by Treasury own inclusion of use of funds provisions in its agreements with AIG, Bank of America and Citigroup. Further, the claim that the information provided by banks is "unreliable" is contradicted both by the threat of criminal penalty should a bank be untruthful to Treasury, and Treasury's reliance on self-reporting throughout its compliance regime. Imposition of a condition designed to foster basic transparency should not be used as a punitive measure required only of those institutions that are compelled to seek extraordinary assistance, but rather should be an integral feature of TARP as a whole.
Earlier this week, Adam Davidson told us the earnings reports to watch this week would come from weaker financial institutions like Bank of America and Citibank. Now that these numbers have been released, we're left wondering what to make of them.
While it's clear that some banks are moving out of danger zone, overall the banking system as a whole is still struggling. Yes, banks are posting profits, but their numbers are nowhere near 2008 levels. Bank of America CEO Ken Lewis acknowledged these difficulties when he announced his bank's latest figures: "Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010."
The big news this morning is JP Morgan's higher-than-expected profits. But discount broker Charles Schwab also released its earnings today, and they're a bit more sobering: the bank posted profits of $205 million, down 31 percent from last year's $295 million.
The news comes as the troubled firm has entered restructuring, citing low interest rates and stock prices amid the recession. The company also turned down TARP funding.
Charles Schwab is known for offering brokerage services with lower commissions and fees -- meaning it makes it easier for the little guy to access the market, largely via telephone or the web. Juggernauts like Goldman and JP Morgan may be posting large profits, but it could mean more to average Americans to see more accessible institutions -- the ones they deal with every day-- recover.
Officials at the Federal Reserve think that unemployment could hit 10 percent later this year. The forecast comes out of the the Fed's June 24th meeting. Minutes from that meeting were just released today. From the minutes:
The large number of people working part time for economic reasons and the prevalence of permanent job reductions rather than temporary layoffs suggested that labor market conditions were even more difficult than indicated by the unemployment rate.
Members of the Federal Reserve predict an unemployment rate of 9.8 to 10.1 percent for 2009. In April, those same officials predicted a 9.2 to 9.6 unemployment rate for the year. According the Bureau of Labor Statistics, the unemployment currently stands at 9.5 percent.
On a more positive note, the Fed did predict that unemployment is likely to decline next year. They also raised their prediction for GDP growth, saying the U.S. economy would grow up to 3.3 percent in 2010, and 4.6 percent in 2011.
Last week, we told you about a House bill that will force GM and Chrysler to bring back over 2,000 dealerships that were scheduled to close or have been closed. Well, yesterday dozens of dealers went to Capitol Hill to lobby Congress to support the bill. The dealers said that many of the dealerships were closed down for arbitrary reasons -- and some even claim that they were targeted.
So far their efforts seem to be working -- over 240 House members have signed onto the bill, according to supporters.
The automakers of course hate the bill. They say the main reason they have cut down the number of dealerships is to improve profits. General Motors says it could save $2.5 billion annually by cutting dealers. The company says it spends that money on sales incentives, advertising and other programs that support dealers.
The new inflation numbers are out. Labor Department says the consumer price index rose 0.7% in June. The BLS says the increase was mostly due to rising gasoline prices.
General Mills, the Minneapolis-based maker of Cheerios and Hamburger Helper, raised prices in fiscal 2009 by 8 percent to counter higher commodity expenses, Chief Financial Officer Don Mulligan said in a telephone interview.
Some economists are still worried about deflation, which can be harder to stop than inflation. They'd like to see a healthy 2 or 3% increase in prices.
Yesterday's news that Goldman Sachs made an impressive $2.72 billion profit last quarter raises some awkward questions for the government. Goldman took $10 billion in TARP money from the government. Goldman benefited from the bailout of AIG. And now, you say, it looks like it's going to pay huge bonuses to its already handsomely paid employees?
SEC Chairman Mary Schapiro says her agency is taking steps to strengthen "the integrity of the credit ratings process." In testimony before the House Financial Services subcommittee today, Schapiro said she has designated a special group of staff to "conduct routine, special and cause examinations of the ratings agencies to review their activities and NRSRO compliance."
Schapiro also said she is considering possible new regulations to prevent debt issuers from "shopping" for the best credit rating. One approach could be requiring companies that issue debt to release preliminary ratings before a firm is hired to give a final ranking.
Credit ratings agencies like Standard and Poors, Moody's and Fitch have been criticized for assigning mortgage backed securities and other derivatives their top triple-A ratings. To hear more about what went wrong with these rating agencies, listen to this story from David Kestenbaum and Alex Blumberg.
Just read through the details of the latest report of the Congressional Oversight Panel, chaired by Elizabeth Warren and charged with overseeing the TARP program.
The Panel concludes that tax-payers could lose out on $2.7 billion if the Treasury Department doesn't change how it values those warrants it got when it bailed out the banks.
The warrants were a way to let taxpayers share in the gains if the bank's stock price improves. The banks, however, are now eager to get out of TARP so Treasury has been selling the warrants back to them.
By the panel's calculations, the Treasury has been undercharging for them by as much as 66 percent.
The Wall Street Journal (sub req'd) is reporting that U.S. officials are in "advanced talks" about providing government aid for CIT Group, a lender to small and midsize businesses. The Obama administration is reportedly concerned about how a possible bankruptcy would further damage businesses who are struggling to get credit.
Simon Johnson of Baseline Scenario says a possible bailout has implications for the future of "too big to fail." Johnson writes:
At the end of 2008, CIT had total assets around $80bn, which was about 1/10th the size of Goldman (and about 1/25th the size of Citigroup) and puts it just outside the top 20 publicly traded financial services company. Presumably, it just missed the cut for inclusion in the government's recent "stress tests".
I just met with a staffer from the Japanese Embassy to talk about climate change. Japan, despite being the location for the historic Kyoto accord, has had a hard time making good on the pledge it signed there.
Under the accord, Japan agreed to cut emissions to 6 percent below 1990 levels. Emissions instead are up 8.7 percent.
To be fair, Japan already has pretty low emissions per GDP. Cars and houses tend to be small there, and about a third of the country's power comes from nuclear. So reducing emissions will be challenging.
General Motors has cranked its way through bankruptcy in 40 days (sounds kind of Biblical, right?).
In a statement today (the Two-Way's liveblogging the press conference), CEO Fritz Henderson said GM is "working on new ways to make car buying more convenient for our customers, including an innovative new partnership with eBay in California to revolutionize how people buy vehicles online. Customers will be able to bid on actual vehicles just like they do in an eBay auction, including the option of choosing a predetermined 'buy it now' price."
Henderson says they'll work with dealers on testing the "new" idea.
Watchers of GM might remember that the company launched something like this back in February 2008, when it announced a plan to sell used cars on eBay. That one involved 3,900 dealers.
The U.S. Treasury is working on "Plan C" for saving the U.S. economy, reports the Washington Post:
Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.
Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.
Officials tell the post this is a sign of the government moving into a new phase of the recovery, one in which it acts preemptively.
The House of Representatives is considering a bill to reverse the closings of Chrysler dealerships and block GM from closing over 2,000 more. The bill, known as The Automobile Dealer Economic Rights Restoration Act of 2009, has already cleared the House Appropriations Committee. From Bloomberg:
"I don't think Chrysler or GM has been able to demonstrate there is savings associated with fewer dealerships, since the dealers themselves bear the cost of operating their dealerships with little help from the manufacturers," said Representative Steve LaTourette, an Ohio Republican who sponsored the amendment. "It's the most un-American thing for the government to help force you out of business."
GM spokesman Greg Martin said the amendment would "nullify" bankruptcy court-approved plans to pare the company's dealer network and "put our long-term viability at risk." He said GM intends to close about 2400 dealerships in October 2010, leaving the company with between 3500 and 3800 outlets.
General Motors is expected to exit from bankruptcy proceedings as early as tomorrow. The entire House will likely take up the bill next week. It will then move on to the Senate.
In Greater Chicago, hot items. Apripom via Planet Money Flickr pool
Climbing unemployment and unseasonably cool weather are being blamed for low sales numbers at the nation's retailers. Worried about keeping their jobs, people aren't rushing out for shorts and swimsuits that suddenly don't seem so crucial.
According to the Goldman Sachs Retail Composite Index, industry sales fell 6.7 percent in June. Luxury stores were hit particularly hard -- Neiman Marcus reported a 20.8 percent drop and Nordstrom sales fell 10 percent. But even discount stores weren't spared a hit. Sales at Costco fell 6 percent, Target 6.2 percent and Kohl's 5.6 percent.
One area of the retail sector that is seeing growth -- sales of piggy banks and other coin saving gadgets. David Mauer, CEO of EB brands, says his company is having trouble keeping its digital coin counting jar on shelves. The product sold out in the fourth quarter of 2008, and Mauer says he hasn't seen a slow down yet. The company sells different models of the jar, but Mauer says the $10 to $15 models are most popular.
High-ups at the European Union are looking to put an end to economic busts by making sure banks are liquid enough to stand a crisis. The proposal seems to make a lot of logical sense: banks will have to build up much larger capital reserves during good times, so they'll have the huge savings needed to ride out a crisis.
Right now, European banks can shed reserves when the economy is doing well, forcing them to restrict lending to build up reserves during economic contractions like the current recession. Germany is hoping to loosen capital reserve rules until the recession is over, so banks can lend more without having to worry as much about having to save up assets.
The U.S. government has encouraged American banks to take up similar saving measures, but that's still optional.
The U.S. Securities and Exchange Commission's enforcement divison is reportedly undergoing its biggest reorganization in nearly three decades. Bloomberg reports:
The overhaul unveiled this week dissolves the division's lowest and largest tier of supervisors, the branch managers who oversee small teams of attorneys, the people said. Some may become front-line investigators; others may be elevated to assistant directors. Assistants, who currently supervise about 18 people each, would instead oversee only six.
A plan to create specialist teams, using a similar management structure, is still being refined, the people said.
The SEC hired former federal prosecutor, Robert Khuzami, in March to overhaul the enforcement division after it was criticized for failing to identify Bernie Madoff's Ponzi scheme.
They're remembering the King of Pop today in Los Angeles, at the Staples Center. Organizers gave out 17,500 free tickets for Michael Jackson's memorial service, but the city expects as many as a million extra visitors this week.
Economists debate the impacts of giant events, from Super Bowls to celebrity passings. In this case, the Los Angeles County Economic Development Corporation says the local tourism industry could get a $4 million boost. The group's chief economist, Jack Kyser, tells the LA Times:
"It's definitely going to help downtown hotels who now have an average of 56% occupancy. This is going to be good news for them."
In the short run, it's perhaps less welcome news for the public coffers. LA Citycouncilwoman Jan Perry has said she'd like to see the Jackson family help cover the cost to the city, which could include as much as $1 million in police overtime. The city's wrestling with a $530 million budget gap.
Bloomberg reports that the agency liquidating Bernie Madoff's company has committed $231 million to pay 543 claims by his victims. Depending on how much money can be recovered from Madoff's assets, claimants may be able to receive up to $2.74 billion later on. Thousands more claims are waiting to be evaluated, and the deadline to file one is tomorrow -- so if you happen to be one of his victims, you can still hand-deliver it to AlixPartners LLB by midnight tomorrow.
It's a far cry from how much money was actually lost, but hey -- at least it's something.
How much does your bank account cost you? An article by Nancy Trejos and Jonathan Starkey in the Washington Post this weekend looked at how banks have been increasing fees for overdrafts and ATM usage. It's full of statistics designed to irritate: "the average ATM surcharge in 2008 was up more than 10 percent," and "Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10," and "overdraft revenue will reach $38.5 billion this year."
Are these fees a new necessity, part of what Anne Pace, a spokeswoman for Bank of America, calls "a landscape that has changed"? I asked John Hall, from the American Bankers Association, whether the increase in fees would really make them a big part of bank profits.
While Congress gets ready to talk financial regulation reform, the regulators continue to push and shove behind the scenes. There are so many regulators and none of them want to lose any power in the deal.
The Supreme Court ruling yesterday handed the states a victory in this ongoing battle. It said a state attorney general can demand information from federally regulated banks. This may seem like a small victory but it is vindication for state regulators. National regulators say it's a big mistake.
The Times reports that Bernie Madoff has been sentenced to 150 years in prison for being the mastermind behind a giant Ponzi scheme. Federal Judge Denny Chin called his crimes "extraordinarily evil." Our math genius David Kestenbaum says the sentence is about one day in prison for every $1.2 million of fraud in the $65 billion scheme.
Bernie Madoff, the villain in the nation's largest Ponzi scheme, faces his fate today as he learns his sentence. Federal Judge Denny Chin could sentence the 71-year-old Madoff to as many as 150 years. Last week, Madoff's lawyer told Chin that a prison term of twelve years would be a fitting punishment for the crime, but many of Madoff's victims say they'd like to see him behind bars for the rest of his life.
The Congressional Budget Office has put out its latest calculation of the loss taxpayers will take on the TARP bailout.
CBO estimates that the subsidy cost of the transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the businesses and the market value of those transactions, including repurchases of preferred stock) amounts to $159 billion.
The automobile bailouts look particularly grim. Of the $55 billion that went out the door, CBO expects $40 billion will never be returned. Table 1 has a full breakdown.
These numbers obviously have some caveats. No one knows what will happen to GM in bankruptcy. And other loss estimates depend on the market value of mortgage-backed-bonds. Those could go up. Or down.
The CBO doesn't expect any of the bailout efforts to make money for the taxpayer, despite the fact that Treasury has sometimes called them "investments."
China and Hummer may not get along so well, after all. AaverageJoe/flickr
Tengzhong, the Chinese road equipment company buy Hummer, may face some unexpected challenges in its bid to acquire Hummer from GM. The AP reports that China's planning agency, the National Development and Reform Commission, is likely to reject the deal partially because Hummers pollute too much and guzzle too much gas. China's state radio reported that the agency feels that Hummers conflict with Beijing's conservation goals.
You know the brand is in trouble when China -- the world's biggest carbon polluter -- doesn't want to touch it.
General Motors continued its dash through bankruptcy court today with a hearing that granted the company $33 billion of debtor-in-possession financing in just 15 minutes. The bulk of the money, $30.1 billion comes from the U.S. Treasury, the rest from the Canadian government.
Debate over one potential conflict, the fees the automaker is paying its investment adviser, has been postponed until July 2. G.M.'s next big hearing, for final approval of its asset sale, is scheduled for June 30. If all goes well, the automaker could be out of bankruptcy by mid-July.
Amir Sufi and Atif Milan of the University of Chicago Booth School of Business argue in today's Wall Street Journal that the recent decrease in consumer spending has been directly fueled by a drop in housing prices. The article is a response to a piece last week by Charles Calomiris and several other economists which suggested the relationship between the two has been overstated. From Sufi and Mian:
...We find striking results: from 2002 to 2006, homeowners borrowed $0.25 to $0.30 for every $1 increase in their home equity. Our microeconomic estimates suggest a large macroeconomic impact: withdrawals of home equity by households accounted for 2.3% of GDP each year from 2002 to 2006.
Two bits of economic data from the government today: the Bureau of Economic Analysis released the Gross Domestic Product numbers for the first quarter of 2009, and the Department of Labor released new unemployment insurance claims for the week ending June 20.
The first-quarter GDP decreased at a rate of 5.5 percent from the fourth quarter of 2008. Not great news, but an improvement over the previous quarter's 6.3 percent drop. Also on the plus side: the first-quarter shrinkage is lower than the 5.7 percent rate initially expected.
The bad news? Unemployment numbers are up. The number of new claims rose last week by 15,000 to 627,000. The total number of people collecting unemployment also rose, by 29,000, to 6.74 million.
Looks like it might take a while to recover from this economic crisis. But you knew that.
The Federal Reserve announced today that it will keep interest rates "exceptionally low...for an extended period," in a continued effort to stimulate an economy that it views as "weak" but "improved." That key interest rate, the federal funds rate, will stay within a target range of 0 to 0.25 percent.
The Fed has been working hard to lower mortgage rates, but some on Wall Street still have concerns. The New York Times reports:
The central bank's caution and the new data highlighted the difficult balancing act that policy makers increasingly face. On the one hand, the economy remains so weak that many policy makers want to keep revving up activity by printing money. On the other, they are under pressure from bond investors, who have signaled growing worry that the Fed's efforts will eventually drive up inflation.
Bloomberg is reporting that Citigroup has temporarily halted mortgage applications in a major unit due to missing property appraisals and income-verification documents. From Bloomberg:
According to the June 22 letter, the review identified "valuation concerns" where "appraisal documentation is missing or incomplete," or where property-assessment methods were "insufficient/lacking."
Other missing information included employment confirmations, phone numbers, credit reports and rent verification, the letter said. The review also found "income calculation errors."
The division which buys loans from banks and independent mortgage firms originated half of the company's mortgages last year. It will not be allowed to accept new loans until July 6.
President Obama says he is not satisfied by the progress his administration has made in dealing with economy. In a press conference this afternoon, the president acknowledged that his administration missed the mark in terms of estimating unemployment.
I think it is pretty clear now that unemployment will end up going over 10 percent if you just look at the pattern. Because of the fact that even after employers and business start investing again and start hiring again, typically it takes awhile for that employment number to catch up with economic recovery, and we are still not at actual recovery yet so I anticipate this is going to be a difficult, difficult year, a difficult period.
President Obama cited his mortgage program as an example of moderate sucess, saying it has helped to modify mortgages for many people, but noting that is has not kept pace with foreclosures. (A frustration many of you have expressed to Planet Money.)
After the jump, watch Obama take questions on the economy.
The Bureau of Labor Statistics just released what could possibly be its most depressing study: the Mass Layoffs Summary. According to the study, the number of mass layoffs by American employers jumped back up to record high set in March. In May, 2,933 employers had mass layoffs, resulting in 312,880 workers losing their jobs. A mass layoff is defined by the BLS as one that involves at least 50 people. The above chart tracks individual workers who lost their job in a mass layoff, sorted by the hardest-hit industries.
Ryan Bubb and Alex Kaufman, two Harvard economics doctoral candidates, have a great article in today's New York Times explaining how a new generations of credit cards could look in the wake of new credit card regulation legislation. They write:
We have performed a study that compared credit cards issued by investor-owned banks to those issued by customer-owned credit unions. We found that credit unions are less likely to charge the fees and penalties that the new act hopes to eliminate -- and when they do, they charge less than other issuers.
Meanwhile, Moody's Investors Service re-affirmed today that the U.S. government has a "solid triple-A" credit rating. The rating agency warned, however, that if American debt continues to increase over the next two years, that high rating could be at risk.
The Financial Times (sub. req'd) is reporting that despite the year's economic upheaval many investment bankers are still commanding top salaries. From the FT:
Partly driven by a need to hold on to good staff -- and partly to offset the threat of bonus taxes or caps in the US -- UBS, Merrill and Morgan Stanley have all increased their basic pay substantially. Citi now plans to do the same.
According to insiders and rivals, market salary rates for managing directors have jumped from about $250,000 only a few months ago, to closer to $400,000.
Meantime, the Guardian reports that Goldman Sachs employees are set to receive the biggest bonuses the firm has ever given out.
Switzerland, known for its banks that can keep a secret, just agreed to increase the amount of tax information it shares with the United States. The Treasury Department says this will help them crack down on offshore tax evasion.
Switzerland's banks manage about $2 trillion of foreign wealth, and much of that is untaxed by foreign nations. The Swiss government has been under pressure since March to relax its policies of bank secrecy, which are a big draw for foreign customers. Swiss banks have also been hit hard by the crisis, and are still at risk to do even worse.
From my home state paper, the Hartford Courant comes news that New Haven ranks in the Brookings Institution's Top 20 metro areas in overall economic performance. The ranking is based on employment, unemployment rate, wages, metro gross domestic product, housing prices and foreclosure rates.
Unemployment in New Haven increased just 2.5 percent from the first quarter of 2008 to the first quarter of 2009. In Riverside, California, unemployment increased by 5.9 percent. The report suggests New Haven's concentration of jobs in "eds and meds" may have shielded it from the type of dramatic job losses experienced in other parts of the country.
Read the full report to see how your city measures up.
Treasury Secretary Timothy Geithner defended the Obama administration's overhaul of financial regulations on Capitol Hill this morning. Speaking before the Senate Banking Committee, Geithner faced intense questioning on one key element of the plan -- giving the Federal Reserve greater regulatory powers over large financial institutions.
Both Committee Chairman Christopher Dodd and the committee's top Republican, Sen. Richard Selby, both told Geithner they didn't like the idea of giving the Fed more regulatory control, largely because of its failure to see the financial crisis coming.
Dodd quoted one critic's view that giving the Fed more power was like giving a kid a "bigger, faster car right after he crashed the family station wagon."
