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CUNA economist discusses housing on Bloomberg

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WASHINGTON (12/3/07)--Bill Hampel, chief economist for the Credit Union National Association (CUNA), provided his thoughts on the economy and his concerns with the housing market during a Friday interview with Bloomberg TV. Hampel was concerned with the negative wealth effect in the housing market and feared that it could push the economy into a recession, he said. Anything that could be done to take the bottom out of the housing market should be done, he said. He also was questioned about U.S. Treasury Secretary Henry Paulson’s plan to help subprime borrowers. Paulson met with federal regulators and a number of mortgage lenders Thursday to try and solidify a plan, which some expect could be unveiled at a housing conference Monday. Paulson’s plan would divide borrowers into three categories: those who can pay their loans regardless of rates, those who are current on their loans but would struggle when the rates reset, and those who cannot pay their loans. The plan would provide assistance only to the middle category. The plan “looks quite good,” Hampel said, but recognized the difficulty in defining which borrowers belong in each category. CUNA data shows credit union members struggling to pay their debts because of spillover in the subprime mortage market. “It’s spreading,” Hampel said. The economy suggests that the Federeal Reserve should have cut the interest rates sooner and more deeply than it did, but it also must look ahead six to nine months in advance to set rate policies, he said. The Federal Open Market Committee is scheduled to meet Dec. 11 to discuss the rates. “We’ve got a rate cut coming,” Hampel said.

Market News (11/30/2007)

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MADISON, Wis. (12/03/07)
* Consumer income and spending slowed in October, while inflation remained within the Federal Reserve’s comfort zone. Income rose by 0.2%, matching the 0.2% gain in spending, the Commerce Department reported Friday. Both were the smallest increases since April. Consumer prices rose by 0.3% in October, so the spending increase was due to higher prices--not additional buying. The core PCE deflator (excluding food and energy) rose 1.9% over the 12 months ending in October--within the Fed’s comfort zone of 1% to 2%. The slowdown in income and spending, and the tame inflation reading give the central bank room to cut interest rates again on Dec. 11, said Wachovia Senior Economist Mark Vitner (CNNMoney.com Nov. 30) … * The housing slump, tight credit, and high energy costs will probably create some “headwinds for the consumer in the months ahead,” said Federal Reserve Chairman Ben Bernanke. In a speech to the Charlotte Chamber of Commerce on Thursday, Bernanke said the central bank will have to be “exceptionally alert and flexible” in the face of these trends. He said investors have increasingly focused on credit losses at many financial institutions. “The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products (not only those related to housing), and increased short-term funding pressures. These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing and in other credit-sensitive sectors,” said Bernanke. The stock markets rallied Friday as investors bet that Bernanke’s remarks mean the Fed will provide more interest rate cuts (Associated Press via The New York Times and American Banker Nov. 30) … * Spending on construction projects fell 0.8% in October as the housing slump prompted a plunge in private homebuilding, the Commerce Department reported Friday (Reuters Nov. 30). Spending fell to a $1.158 trillion annual rate--the lowest in two years. Private homebuilding tumbled 2% to $503.7 billion--the lowest level in four years. Construction by state and federal government helped offset some of that weakness. The bottom of the housing slump hasn’t yet been reached, said Moody’s Economy.com (Nov. 30). The research firm predicts that private residential construction put in place will plunge by 17% during 2007 and decline by another 8% in 2008 … * Over the past seven years, 10.3 million new immigrants flowed into the U.S.--more than half of them without legal status, according to a study of Census Bureau statistics by the Center for Immigration Studies. A total of 37.9 million people, or one in eight people, are immigrants--the highest level since the 1920s. About 30% of all immigrants and their children have no health insurance. About 31% of all immigrants over 25 years old haven’t completed high school, compared with 8.4% of U.S. citizens. The study also found that about one-third of immigrant families receive some type of public assistance. The states that have received the largest number of new immigrants are California, Florida, Illinois, New Jersey, Texas, Arizona, Georgia, Maryland, Pennsylvania, and Virginia (The New York Times Nov. 29) … * Middle-class households in the U.S. are working harder than ever to maintain their standard of living because of rising costs for health care, housing, and education, according to a study by Demos, an advocacy group for lower- and middle-class Americans. “The way they have stayed secure is by tightening belts,” said Jennifer Wheary, co-author of the report. “People now have to work more hours to be at that same level,” added Wheary. The report defined middle-class households as those whose income is between $40,000 and $129,000, whose head of household is between 25 and 64, and who has less than $500,000 in net financial assets. The report found that 69% of middle-class households are at risk of losing their standard of living over the long term. Just 13% can live off their assets for nine months if their main source of income disappears, even after cutting their basic living expenses by one fourth. And 52% have no net financial assets after debt. The typical middle-class household carries $8,328 in personal debt. Demos estimates that 23% of middle-class households have at least one member without health insurance (CNNMoney.com Nov. 29) … * About two-thirds of U.S. firms will give annual bonuses this year despite the economic slowdown, according to a survey by the outplacement firm Challenger, Gray & Christmas. However, just 3% said they plan to increase bonuses this year. “Yearend bonus recipients can thank a relatively robust economy that lasted through the first three quarters,” said John A. Challenger, chief executive of the Chicago-based company. “Even over the last couple months, the impact of the housing market collapse appears to be contained in the home-building and financial sectors,” added Challenger. However, he predicted that fewer companies will offer bonuses next year, as consumer and business spending slow further, and profit margins weaken (CNNMoney.com Nov. 30) …

News of the Competition (11/30/2007)

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MADISON, Wis. (12/03/07)
* San Diego-based New Vista Asset Management and Fannie Mae are partnering to market foreclosures as affordable housing for minority and low- to moderate-income families. “Our focus is to market and sell these units directly to first-time and minority homebuyers, using a national network of real estate professionals with deep roots in those minority communities as well as initiate consumer-direct outreach efforts to pair up mortgage-ready homebuyers to available REO properties,” said New Vista Chief Executive Jim Park. Minorities make up as much as 50% of the homeowners whose 2 million properties are expected to go into foreclosure, say analysts. “Helping expand the supply of affordable for-sale and rental housing to families across America who need it most is a primary goal for Fannie Mae,” said Jason Allnutt, vice president for credit loss management and quality assurance, single family mortgage business, at Fannie Mae (PRWeb via Yahoo! News Nov. 30) … * Credit-card powerhouse Visa Inc. and forest-products company Weyerhaeuser Co. have come to the aid of Microsoft Corp. in arguing against the extension of restrictive antitrust oversight of the software maker. Visa and Weyerhaeuser, both of which have faced antitrust litigation in the past, say extension of the oversight could prompt needless litigation and overburden the courts. The U.S. District Court for the District of Columbia is considering the possibility of extending a consent decree that has Microsoft reporting on its competitive behavior. Saying Microsoft still unfairly dominates the market, several states have recommended that the court extend the decree to 2012 (Dow Jones Newswires Nov. 29) … * A federal judge has named two New York pension funds as lead plaintiffs for five class-action lawsuits that accuse Countrywide Financial Corp., the nation’s largest mortgage lender, of inflating its earnings and overstating its ability to perform well during the housing slump. U.S. District Judge Mariana Pfaelzer appointed New York State Comptroller Thomas DiNapoli, who heads the New York State Common Retirement Fund, and the New York City Pension Funds as co-lead plaintiffs. The judge said the two pension funds, with a combined loss of more than $100 million, have the biggest stake of any prospective lead plaintiff. Other defendants in the suit include Countrywide Chief Executive Angelo Mozilo, Chief Financial Officer Eric Sieracki, Chief Operating Officer David Sambol, and his predecessor, Stanford Kurland. So far this year, Countrywide’s shares have plunged 78%--wiping out more than $19 billion worth of market value (Reuters Nov. 30) … * Norwegian investment house Terra Securities ASA declared bankruptcy Wednesday after regulators moved to revoke its license for failing to inform townships of the high risk of $82 million in U.S. investments made through Citibank. Four townships had borrowed money against expected future income from municipal hydroelectric plants and invested in complex funds, partly based on risky U.S. subprime mortgages. Terra said it would have no money to offer the townships as a settlement after declaring bankruptcy (Associated Press via The Wall Street Journal Online Nov. 29) … * Canadian Imperial Bank of Commerce may have as much as $10 billion in hedged exposure to the U.S. subprime mortgage sector, The Globe and Mail reported Friday, citing sources familiar with the matter. However, only a small portion of that amount probably will be at risk of a writedown, because the hedges are widely spread among parties. Officials at the bank declined to comment on the report (Reuters Nov. 30) …

News of the Competition (11/29/2007)

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MADISON, Wis. (11/30/07)
* Three British bankers pleaded guilty Wednesday to one count each of wire fraud after acknowledging that they conspired with Enron Corp.’s Chief Financial Officer Andrew S. Fastow to enrich themselves at the expense of their employer, National Westminster Bank of England. In exchange for their guilty pleas, prosecutors will recommend that Giles Darby, David Bermingham and Gary Mulgrew be given a sentence of 37 months in prison. Their attorneys plan to ask the court to let them serve at least part of that sentence in Britain. The three men admitted to conspiring to advise NatWest to sell its stake in an Enron shell company for less than it was worth, then buying it themselves and selling it for a $7.3 million profit. As part of their plea, they must make a payment of $7.3 million to Royal Bank of Scotland, which acquired NatWest (The New York Times Nov. 29) … * Wachovia Corp. will pay $300,000 to settle allegations that it failed to disclose conflicts of interest in research reports by its analysts, the Financial Industry Regulatory Authority (FINRA) announced Wednesday. FINRA said that from June 2004 to May 2006, Wachovia failed to fully inform clients about business dealings with companies in 40 research reports. In some instances, Wachovia handled public securities sales or provided investment-banking services to the firms. “This case strikes at the heart of FINRA’s research-disclosure program which was put into place in 2002, in part to combat incentives that could lead to biased research,” said Susan Merrill, executive vice president and chief of enforcement at FINRA (Bloomberg News via The New York Times and Philadelphia Business Journal via Yahoo! News Nov. 29) … * Discount brokerage E*Trade Financial Corp. disclosed Thursday that it is receiving a $2.5 billion capital infusion from a group led by Citadel Investment Group. Citadel will acquire the firm’s troubled portfolio of asset-backed securities as part of the deal. E*Trade said the deal will allow it to focus on its core business. E*Trade also announced that Mitchell Caplan has resigned as its chief executive. President and Chief Operating Officer R. Jarrett Lilien will act as CEO while the firm searches for a permanent replacement (Associated Press via The New York Times Nov. 29) ... * Toronto-Dominion Bank, which plans to purchase New Jersey-based Commerce Bancorp early in 2008, reported a 44% surge in profits for the fourth quarter. The strong results reflected gains in the firm’s wealth-management and retail-banking businesses. Toronto-Dominion Bank said its acquisition of Commerce Bancorp will give it “critical mass” in the U.S. by adding to its TD Banknorth operations in New England. That deal is expected to close in February or March (Reuters Nov. 29) …

Expect long slow recovery process Schenk tells IDow JonesI

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WASHINGTON (11/30/07)--Expect a long, slow recovery process in the housing market and economy, Mike Schenk, senior economist for the Credit Union National Association, told Dow Jones Business Journal Wednesday. Schenk was one of several economists interviewed for an article, regarding the availability and sales of homes in the U.S. housing market. Schenk was quoted in regard to declining home sales nationwide, noting that the current home sales pace is a little under the natural-trend level. “We’re going to stabilize,’ Schenk said referring to national home sales. “[Then] limp along. It’ll be a long, slow process [of recovery].” The supply of homes that are up for sale is at the highest level in 22 years, according to a Wednesday report by the National Association of Realtors. More specific statistics on home sales can be found in the Nov. 29 Market News section of News Now.

Market News (11/29/2007)

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MADISON, Wis. (11/30/07)
* Home prices posted the first quarterly decline in 13 years during the third quarter. The OFHEO House Price Index was 0.4% lower in the third quarter than in the second quarter, the weakest showing since 1994. Year-over-year, prices were up 1.8%--the lowest year-over-year gain since 1995. “While select markets still maintain robust rates of appreciation, our newest data show price weakening in a very significant portion of the country,” said OFHEO Director James B. Lockhart. “Indeed, in the third quarter, more than 20 states experienced price declines and, in some cases, those declines are substantial,” added Lockhart. Of the 287 metropolitan areas covered in the OFHEO report, 83 posted year-over-year declines, and price declines occurred in 10 states. Michigan, California, Nevada, Massachusetts, Florida, and Rhode Island are among the worst housing markets. Seventeen of the 20 cities with the most home-price depreciation were in Florida and California, while the other three were in Michigan. The report noted that other home-price indexes by the National Association of Realtors and S&P/Case-Schiller show overall price declines over the past year (ofheo.gov and Economy.com Nov. 29) … * Foreclosure filings in October totaled 224,451 nationwide--up 2% from September and 94% from October 2006, according to data from RealtyTrac. During October, 53,609 homeowners were forced from their homes as banks repossessed them--up from 20,768 a year earlier. The national foreclosure rate for October was one filing for every 555 households. Through the first 10 months of this year, banks repossessed a total 309,557 homes. RealtyTrac said it expects 2 million homes to have entered the foreclosure process for the full year. Even more people could lose their homes in 2008 as more adjustable-rate mortgages reset, and lending standards remain tight, said RealtyTrac Spokesman Daren Blomquist (CNNMoney.com Nov. 29) ... * New-home sales rose 1.7% to an annual pace of 728,000 units in October, the Commerce Department reported Thursday (AFP via Yahoo! News Nov. 29). However, the increase came only after a big downward revision to September data. Over the 12 months ended in October, sales were down 23.5%. The median price of a new home was down 8.6% from September and 13% from a year earlier--the largest year-over-year decline since September 1981. The drivers of housing demand remain weak, with job growth slowing, consumer confidence declining, and energy prices rising, said Moody’s Economy.com (Nov. 29). In addition, lending conditions remain tight, and housing inventories are high … * Fixed-mortgage rates fell to two-year lows this week amid weak housing news, according to a report by Freddie Mac. The average 30-year, fixed-rate mortgage (FRM) fell 10 basis points to 6.1%--the lowest since 6.03% during the week ended Oct.13, 2005. The 15-year FRM dropped 10 basis points to 5.73%, while the one-year, adjustable-rate mortgage (ARM) edged up one basis point to 5.43%. “Interest rates for U.S. treasury securities have been drifting lower this month over market concerns that the housing slump and stress in the credit markets could slow future economic growth,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “As a result, interest rates for fixed-rate mortgages had room to slip lower this week,” added Nothaft. A year ago, the 30-year FRM averaged 6.14%, while the 15-year FRM was at 5.87%, and the one-year ARM stood at 5.46% (MarketWatch Nov. 29) … * The job market is weakening as the housing slump continues, and energy costs rise to record highs. The number of people filing first-time claims for unemployment insurance jumped by 23,000 during the week ended Nov. 24 to 352,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, rose by 5,750 to 335,250. Continuing claims (the number of people still on the benefit rolls after an initial week of aid) increased by 112,000 during the week ended Nov. 17 to 2.665 million--the highest level since December 2005. So far this year, weekly unemployment claims have averaged 320,000--up from 313,000 in 2006 (Bloomberg.com Nov. 29) … * The economy expanded by 4.9% during the third quarter--higher than a 3.9% advance estimate, the Commerce Department reported Thursday. The revision reflected higher inventory investment and exports. Exports surged at an annual 18.9% pace--the largest increase in four years. The falling value of the U.S. dollar has made U.S. goods cheaper to purchase on foreign markets. Businesses boosted inventories by $32.9 billion in the third quarter, up from the $15.7 billion previous estimate and higher than the $5.8 billion gain for the second quarter. The housing market continued to dampen economic growth. Real investment in residential structures declined at an annualized 19.7% rate in the third quarter. Consumer spending rose at a 2.7% pace, up from the anemic 1.4% growth rate in the second quarter. Inflation remained within the Federal Reserve’s comfort zone. The core CPE price index (excluding food and energy) rose an unrevised 1.8% over the past year (Economy.com and Associated Press via Yahoo! News Nov. 29) …

Market News (11/28/2007)

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MADISON, Wis. (11/29/07)
* Economic growth slowed in seven of the 12 U.S. regions during October through mid-November, the Federal Reserve said in its regional business survey, known as the Beige Book. In the previous report, five districts reported slower economic activity. Although the national economy continued to expand, its pace of growth was slower, the Fed said. The report will be used at the Dec. 11 policy meeting. Analysts have taken the report, described as "dovish," and consistent with remarks Wednesday by Fed Vice Chairman Donald Kohn, as a signal that further interest rate cuts by the Fed are imminent to boost the economy (Reuters and Bloomberg.com Nov. 28) … * Federal Reserve Vice Chairman Donald Kohn said Wednesday that market "turbulence" the past two weeks has "partly reversed some of the market functioning over the late part of September and in October." The deteriorating conditions and continued turbulence "would increase the possibility of further tightening in financial conditions for households and businesses," he said. However, the Fed will have to be "nimble" in its monetary policy to address economic risks, he said after a speech in New York. Kohn's remarks are a shift from the more neutral Federal Open Market Committee's statement on Oct. 31, which was repeated by Chairman Ben Bernanke in early November. They said that risks between growth and inflation were roughly balanced. Kohn said uncertainties about the economic outlook are unusually high now, requiring policymakers to be "flexible and pragmatic" in setting policy. Analysts are interpreting Kohn's statements as a green light for reducing interest rates again at the committee's meeting next month (Bloomberg.com, The Wall Street Journal and The New York Times Nov. 28) … * Sales of existing homes in the U.S. fell more than expected in October, with purchases dropping 1.2% to an annual rate of 4.97 million--the lowest sales since the National Association of Realtors (NAR) began tracking sales in 1999, said NAR Wednesday (realtor.org Nov. 28). Economists had forecast sales to fall 0.8% to an annual rate of five million, said Bloomberg.com Nov. 28). October was the eighth consecutive month that sales of existing homes fell (The Wall Street Journal Nov. 28). The sales compare to downwardly revised September sales of 5.03 million units and are 20.7% below the 6.27 million-unit sales for September 2006. Lawrence Yun, NAR chief economist, expected the sluggish performance, citing the lingering impact from the mortgage crisis. Temporary mortgage problems were peaking in August when many of the sales that closed in October were negotiated, he said. Since then, mortgage availability has improved with lower interest rates and Federal Housing Authority endorsements increasing. During October, the median home price was $207,800--down 5.1% from October 2006's median price of $218,900. In September, the median price was $210,400. Inventories of existing homes for sale rose 1.9% to 4.45 million units available--a 10.8-month supply at the current sales pace. At the end of September, the supply was 10.4 months, revised downward from 10.5 months … * Mortgage demand decreased 4.3% to 652.5 on a seasonally and holiday adjusted basis for the week ended Nov. 23, compared with 681.7 the previous week, according to the Mortgage Bankers Association (MBA) Wednesday. That is 9% higher than the mortgage applications level for the same period a year ago (Moody's Economy.com. On an unadjusted basis, the index dropped 25.5% from the previous week, reflecting the Thanksgiving holiday, and was up 24.6% from the same period a year ago. Refinancing applications decreased 15.3%--to 1862.0 from 2199.9 the previous week. The purchase index rose 6.1%--to 450.1 from 424.1 the previous week. The purchase index is 11% higher than a year ago, and the refinance index is 7% above its year-ago level. The four-week moving average, seasonally adjusted, for applications is down 1.1% to 678 from 685.3. Refinances accounted for 45.8% of total applications, down from 50.3% the previous week. Adjustable-rate mortgages accounted for 14.6% of applications, a decrease from 15.8% the week before. Average contract interest rates for 30-year, fixed-rate mortgages dropped to 6.09% from 6.18% while rates for 15-year, fixed-rate mortgages dropped to 5.69% from 5.71%, said MBA … * Weak sales of computers and electronic products affected overall orders for durable goods, which fell 0.4% in October after a 1.4% decrease in September, according to advance statistics from the Census Bureau (Moody's Economy.com Nov. 28). Analysts had expected the orders to increase by about 0.4%. It was the third month of declines in new orders of big-ticket items. The three-month moving average for new orders, annualized, was -25%. Orders for core capital goods dropped 2.3%, compared with a 1.2% increase in orders during September. Shipments of core capital goods dropped 1.2%, the largest decline since January, while total shipments increased 0.6%. The core capital goods figure is an indication of business investment spending on equipment and software. Orders for computers and other electronic products dropped 8.4% during October. Inventories rose 0.2% after increasing in September by 0.3% …

News of the Competition (11/28/2007)

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MADISON, Wis. (11/29/07)
* In the aftermath of a lawsuit filed by New York Attorney General Andrew Cuomo, First American Corp. and its home-appraisal unit have asked a federal judge to dismiss a suit that alleges First American colluded with Washington Mutual Inc. to inflate mortgage appraisals. First American, in a motion filed Monday, requested U.S. District Judge Laura Taylor Swain in Manhattan to dismiss Cuomo’s complaint, arguing that he lacks the authority to take up the case because all federal savings and loan activities are regulated by the U.S. Office of Thrift Supervision. First American gave in to strong-arm tactics by Washington Mutual, eAppraisalIT’s largest client, to use a list of so-called “proven appraisers” who allegedly created inflated appraisal values, Cuomo has alleged (Associated Press Nov. 27) … * Heartland Payment System Inc., a payment processing company, filed an antitrust lawsuit Tuesday against three companies. The suit alleges that the firms caused higher card-processing costs for restaurants and attempted to block competition. Filed in U.S. District Court in New Jersey, the suit seeks a permanent injunction against all illegal tying arrangements between Merchant Link LLC and Micro Systems Inc. The suit alleges that the tying arrangements coerce independent competitors to pay to use Merchant Link’s gateway to force debit and credit card payments on the Micros platform. The suit also alleges that Micros and its dealers are not disclosing to restaurant owners all the costs associated with Merchant Link (Chron.com Nov. 27) … * Largely due to losses on home equity loans, Wells Fargo said Tuesday it will earmark $1.4 billion to shore up loan-loss reserves. The fifth largest U.S. bank said it will substantially scale back the issuing of home equity loans through brokers. Factors in the decision were a need to tighten up lending standards and the declining demand from investors to buy loans. Profit growth at Wells Fargo was 4% in the third quarter, its lowest growth in more than six years, primarily due to rising delinquencies and defaults, analysts said (Reuters Nov. 27 and The Business Journal Nov. 28) … * It is unlikely that the federal government will come to the rescue of lenders going broke because of the mortgage crisis, Charles Gabriel, Capital Alpha political strategist, told listeners at a Tuesday Morgan Stanley conference call. “There are many who think that we will be heading toward a bailout,” Gabriel said during the call. “It is very difficult to construct a bailout with any kind of financial tax forbearance, and nobody even likes that term.” He also noted that such actions could put financial institutions at significant risk, pointing to U.S. Sen. Charles Schumer’s Monday letter that implored regulators to examine Federal Home Loan Bank of Atlanta’s increasing loans to troubled mortgage lender, Countrywide Financial Corp. (CNNMoney.com Nov. 27) … * The U.S. Trustees Office, a division of the Justice Department, has subpoenaed Countrywide Financial, the largest U.S. mortgage lender and loan servicer. The action was taken to determine if Countrywide’s conduct in two southern Florida foreclosures constitute abuses of the bankruptcy system. The subpoenas were issued in late October and seek Countrywide documents. The agency has announced efforts to pursue mortgage servicing companies that file false and inaccurate claims in foreclosure cases, because the rate of foreclosures has gone up nationwide (The New York Times Nov. 28) ... * Bear Stearns Cos. said it will cut 650 jobs or about 10% of the company’s workforce in the fourth quarter, because of losses due to subprime home loans. Bear will keep an eye on staffing needs and align itself with market conditions, said Russell Sherman, a spokesman for the New York-based firm. The company already announced three rounds of cuts this year that affected roughly 900 employees. The firm said it would cut 20 positions in London and make even more cuts at its U.K. Rooftop Mortgage Ltd. unit. Earlier this month, Bear said it would write down the value of subprime assets by $1.2 billion, which will contribute to a fourth-quarter loss (Bloomberg.com Nov. 28) …

CU members jittery about economy CUNA expert tells IReutersI

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NEW YORK (11/28/07)--Consumer confidence in November fell more deeply than expected--to its lowest since after Hurricane Katrina--and Tuesday's index figures mirror credit union members' jitters about the economy, Mike Schenk, senior economist at Credit Union National Association (CUNA), told international wire service Reuters Tuesday. The Conference Board's Index of Consumer Sentiment fell for a fourth consecutive month to 87.3 from a revised 95.2 during October. Economists polled by Reuters had forecast a median reading of 91.6. It was the lowest level since October 2005, when it was 85.2, said the Conference Board. "The reading is approaching the high end of where we would be during a recession," said Schenk during the interview. Lynn Franco, director of the consumer research center at the Conference Board, said the primary factor in the drop a sharp slide in the expectations index, which dropped to the lowest point since the war in Iraq started in March 2003. That index was 68.7 in November, compared with a revised 80 in October. Consumers' apprehension about the short-term outlook is fueled by volatility in the financial markets, rising gasoline prices, and the expected larger heating bills this winter, Franco said. Schenk told Reuters this apprehension is consistent with what "roughly 90 million credit union members are telling us, which is that they are nervous." CUNA economists know this, he said, because members "are saving about as much as they are spending. That behavior is consistent with an economic slowdown, if not recession." He also noted that consumers will spend more this year on holiday gifts than they did last year. "Holiday spending is fueled by emotions and plans that have already been made, so we expect it to be pretty good. But what concerns us is that a lot of this spending is going to be put on credit cards so consumers will come out of this season with a financial hangover." When that happens, paying off the high credit card debt will be job No. 1, and confidence numbers will probably sink even lower," he said.

News of the Competition (11/27/2007)

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MADISON, Wis. (11/28/07)
* The world’s largest banks’ losses on collateralized debt obligations (CDOs) may increase two-fold to $77 billion, predict analysts at JPMorgan & Co. Market-wide losses on CDOs linked to U.S. mortgages could reach $260 billion, the analysts said in a report. Citigroup Inc., Merrill Lynch and Co. and other banks that underwrote the structured finance CDOs already have sustained losses of at least $42.7 billion--a total that also includes other holdings beside CDOs. Structured finance CDOs are created by repackaging asset-backed debt--including subprime mortgage bonds and other CDOs--into new securities that have varying degrees of risk. Several of the big CDO sellers, including Citigroup, Merrill, Deutsche Bank and UBS AG, are experiencing losses on the “super-senior” or safest pieces of the CDOs, JPMorgan analysts said, adding that the writedowns on that specific debt should fall between 20% and 80%. Because of weak demand from other investors when underwriting deals in 2006 and 2007, banks were forced to retain about two-thirds of the securities, which is why they were left holding so many super-senior classes of CDOs, the analysts wrote (Bloomberg.com Nov. 27) … * Employee gift cards will be the holiday gift of choice this year for employees nationwide, according to the new American Express business gifting survey. The survey, conducted with companies and employees, revealed that gift cards will be given more than any other category of gift this year. About 92% of companies surveyed said they intended to give year-end gifts to employees. Only 64% of employees surveyed said they expect to receive a gift from their employer. Of companies who said they intend to give employees year-end gifts, the top category is gift cards (42%), then cash bonuses (37%), company products (35%), food/food baskets (26%), merchandise (25%) and time off (24%). From the employee perspective, year-end gifts desired, in order of importance, are: cash (44%), time off (17%), and gift cards (15%). The survey was conducted Oct. 10 through Oct. 24, with 501 human resource managers for companies with 100 or more employees. A second telephone survey was conducted with 511 employees working for companies with 100 or more employees (Bizjournals.com Nov. 26) ... * To improve its balance sheet, Citigroup announced Monday that it is selling a $7.5 billion stake to a Middle Eastern sovereign fund--the Abu Dhabi Investment Authority. The Abu Dhabi fund has agreed to purchase a 4.9% equity stake in the complicated transaction that has the approval of U.S. regulators. However, the fund will have no management or governance role at Citigroup, nor will it have any presence on Citigroup’s board. With its stake, Abu Dhabi will become the single largest shareholder of Citigroup, supplanting Prince Walid bin Talal of Saudi Arabia. The investment highlights Citigroup’s tenuous capital position along with the growing oil-related wealth of Mideast countries, which are buying increasing amounts of assets and grabbing stakes in several U.S. companies. Citigroup’s move is expected to ease pressure on its dividends, as well as reinforce its capital base, which has eroded to particularly low levels, after a rash of acquisitions and the current credit turmoil in the market (The New York Times Nov. 27) … * As it prepares for large fourth-quarter credit-related losses, Citigroup Inc. is searching for ways to lower costs--which could result in further job cuts at the largest U.S. bank. Earlier this year, Citigroup cut its work force by 17,000 before the credit crisis, and now has roughly 320,000 employees. Subprime mortgages and its exposure to financial instruments linked to those mortgages resulted in Citi’s third-quarter loss of roughly $6.5 billion. The bank still is searching for a new chairman after Charles Prince stepped down as chairman and chief executive Nov. 4--the same day that Citi announced it likely would write down another $8 billion to $11 billion off its portfolio in the fourth quarter (Associated Press Nov. 26) … * Wells Fargo & Company announced Tuesday that its Small Business Administration (SBA) total dollar volume moved up 6% over the last federal fiscal year, to more than $613 million for the fiscal year ending Sept. 30, 2007, from $578 million in 2006. Wells Fargo maintained its ranking as the No. 1 SBA bank lender in dollar volume. Also, on national basis, Wells Fargo ranked sixth by originating 4,306 SBA 7a loans in fiscal 2007. SBA and other commercial loans that are less than $100,000 are included in the Community Reinvestment Act (CRA) data, a measurement of small business lending, based on government data (PRNewswire Nov. 27) … * Due to a failure to timely file its Form 10-Q for the third quarter 2007 with the Securities and Exchange Commission, Franklin Credit Management Corp. reported Tuesday that it received a letter from Nasdaq indicating that the company was not in compliance with NASDAQ requirements for continued listing. In accordance with the Marketplace Rule 4800 Series, Franklin Credit Management will request a hearing to stay any delisting of the company’s securities, pending a decision by a Nasdaq Listing Qualifications Panel. The company said it expects to file its Form 10-Q for the third quarter before Dec. 31 (PRNewswire Nov. 27) … * Rapid advancements in technology are primed to reshape the insurance industry landscape over the next five to 10 years, indicated new TowerGroup Research. The potential impact of innovations on the insurance industry extends beyond the use of faster computers and a browser-based customer experience, the firm said in a press release. TowerGroup says six principles will drive the insurance industry toward innovation over the next decade: changing the user interface, capturing contextual data, using technology from adjacent industries, collaborating with users, making infrastructure agile and managing risk. As an example, event recorder technology used by manufacturers to improve the performance of air bags will see increased use by claims organizations to correctly assign fault in accidents and prevent fraud. By 2012, global positioning system technology will provide volumes of data that insurers can use to improve pricing accuracy, making way for possibly creating prices that vary with location risk, TowerGroup said …

Market News (11/27/2007)

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MADISON, Wis. (11/28/07)
* U.S. home prices dropped 4.5% during third quarter from the same period in 2006--the biggest drop since Standard & Poor's began its nationwide Case-Shiller housing index, which tracks prices of existing single-family homes. The index was established 21 years ago (PRNewswire Nov. 27). Standard & Poor's said Tuesday that prices also fell 1.7% from second quarter, the largest consecutive quarterly decline in the index's history. "There is no real positive news in today's data," said Robert J. Shiller, chief economist at MacroMarkets LLC. All 20 metro areas were in decline during September over August, with Tampa marking the largest decline, at 11.1%, followed by Miami, Detroit and San Diego. Even the five metro areas that still have positive annual growth rates--Atlanta, Charlotte, Dallas, Portland and Seattle--showed continued deceleration in returns, said Shiller … * The mortgage crisis will have a widespread and deep economic impact on U.S. cities by reducing the property value of U.S. homes by $1.2 trillion, says a new study from the U.S. Conference of Mayors and the Council for the New American City. The study by Global Insight was released Tuesday. It forecasts "at least" 1.4 million homeowners will lose their homes in foreclosures during 2008. "This issue is now the No. 1 economic challenge of many major American cities," said Detroit Mayor Kwame Kilpatrick, who hosted a meeting of mayors, mortgage industry representatives and community advocacy groups in Detroit (PRNewswire Nov. 27). The study said the economy in 2008 will grow at a 1.9% rate--a percentage point lower than the rate would have been without the mortgage crisis. In 10 states across the U.S., the aggregate loss in tax revenue will equal $6.6 billion. Home prices will decline an average 7.8% but will range as high as 16% in former-boom states such as California … * Several of the nation's largest public pension funds are unloading U.S. stocks--and others are expected to follow suit (The Wall Street Journal Nov. 27). Funds such as the New York State Teachers' Retirement System, the New York State Common Retirement Fund, the Teacher Retirement System of Texas and the Florida Retirement System Pension Plan already have sold billions of dollars in U.S. stocks. Combined, they control more than $500 billion in assets. The largest public pension fund in the U.S., California Public Employees' Retirement System (Calpers), may join them. Russell Read, Calpers' chief investment officer, indicated in a board meeting last week that the system may move assets to foreign stocks. The actions are not related to market jitters, although recent market troubles may be accelerating the sales … * Holiday shopping traffic at retailers' websites kicked off on "Cyber Monday" with 37% more traffic than Cyber Monday 2006, according to Akamai Technologies (USA Today Nov. 27). The National Retail Federation's cybermonday.com had three times the traffic as Cyber Monday 2006. A BizRate Research survey of retailers found more than 70% of them planned to offer Cyber Monday promotions this year, up from 43% last year. No major outages were reported from the increased web traffic. CompUSA said online orders Monday were up 48% from the same time last year. Toys "R" Us reported better-than-expected traffic. Cyber Monday isn't the biggest online shopping day of the season, but is meant to kick off the holiday online buying. Last year Dec. 13 was the busiest online shopping day. In 2005, the busiest day was Dec. 12 … * Chain store sales declined 0.1% during the week ending Nov. 24, with the holiday shopping season starting off to mixed reviews, says the International Council of Shopping Centers (ICSC). The decline compares with an 0.8% increase the previous week. However, last week's sales were better than sales a year ago. Year-to-year growth increased 2.5%, compared with 2.2% year-to-year growth the previous week. The results include Black Friday and Saturday's sales (Moody's Economy.com Nov. 27). Colder weather supported demand for non-gift apparel, while consumer electronics saw the strongest sales on Black Friday. Customer traffic was "relatively healthy" during the weekend. ICSC projected November sales growth will accelerate to about 2.5%. If that's the case, November sales growth would be the strongest since August. Sales grew 1.6% in October and 1.7% in September … * Small business owners' confidence in the economy during November dropped to 93.2, compared with 96.8 in October, according to Riverwoods, Ill.-based credit card company Discover Financial Services LLC. The November index was the fourth consecutive monthly drop (American Banker Nov. 27). A year ago, the index was 114. Of those surveyed, 68% said that U.S. conditions are worsening. That compares with 59% who said conditions were worsening in October. In November, fewer small businesses--38% or a six percentage point drop from the previous month--are having cash flow issues. More small businesses also are watching their spending: 29% said they plan to increase spending on advertising and inventory, compared to 33% in October. Two-thirds of the small business respondents had no website. The survey also polled 4,000 consumers. Of those, 51% go online to research products, businesses and services before buying, and 49% said they were more likely to use a business or service if it had a website …

News of the Competition (11/26/2007)

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MADISON, Wis. (11/27/07)
* Bank of America Corp. is spearheading an effort to help finance an $80 billion bailout of short-term debt markets. The second biggest U.S. bank will take the leadership role in efforts by Citigroup Inc. and JPMorgan Chase & Co. to persuade smaller competitors to help finance the bailout. The “Super SIV” fund, which has the support of Henry Paulson, U.S. Treasury secretary, is designed to purchase assets from so-called structured investment vehicles (SIVs) that contain $300 billion of holdings, including corporate and mortgage debt that is in danger of defaulting. The proposal has been criticized by some analysts, such as Punk Ziegel & Co.’s Richard Bove. He maintains that the SuperSIV Fund may burden new participants with losses created by larger rivals. BoA, Citigroup and PJMorgan--the nation’s three largest banks--said they want the SuperSIV ready to run by year-end, because some SIVs have not been able to trade, according to sources familiar with the fund (Bloomberg.com Nov. 26) … * In efforts to avoid a large sell-off of bond holdings, Europe’s largest bank--HSBC Holdings Plc--will take on $45 billion worth of assets as it attempts to bail out two structured investment vehicles (SIVs). The London-based bank said in a statement Monday that investors in Asscher Finance Ltd. and Cullinan Finance Ltd. will be permitted to exchange their holdings for debt issued by a new company backed by loans from HSBC. There shouldn’t be any material impact on capital strength or its earnings, HSBC said. The company is attempting to reassure investors and create a long-term solution by using its balance-sheet strength and scale, according to Antony Broadbent, London-based analyst at Sanford C. Bernstein & Co. As customer defaults grow at the company’s U.S. subprime lender--Household International Inc.--HSBC may need to put aside $12 billion more to repay bad debts, wrote a group of analysts in a note dated Nov. 24 (Bloomberg.com Nov. 26) … * After garnering the support of the Treasury and Bank of England, The Virgin Group broke through Monday as the apparent frontrunner to buy troubled British mortgage lender Northern Rock. The Bank of England is attempting to recover emergency loans, totaling billions of pounds, which have been made the past two months. In a statement, Northern Rock said that under the proposal, the Virgin bidding group would immediately repay 11 billion pounds, or $23 billion, of the more than 20 billion pounds, or roughly $41 billion dollars, that Northern Rock owes the central bank. Northern Rock said this was part of “a clear path toward repayment in full.” Led by Richard Branson, Virgin also would put 1.3 billion pounds, or almost $2.7 billion, into the bank, half of which would be financed by offering new shares to existing shareholders (The New York Times Nov. 26) … * The major factor in the potential sale of E*Trade Financial Corp. may be the value of its declining mortgage portfolio. Including home-equity lines and home loans, the company’s mortgage portfolio as of Sept. 30 was valued at $29.3 billion. E*Trade also owns mortgage-backed securities valued at $12.4 billion. The company, primarily known for it discount brokerage business, made a substantial move into home mortgages, lines of credit and mortgage securities in the last few years. E*Trade has been forced to obtain additional capital or else seek a buyer because of the tumbling value of mortgage securities, due to the decline in the housing market. The company has announced $197 million in pretax write-downs on its securities portfolio and has set aside loan-loss provisions to the tune of $237.8 million to date (The Wall Street Journal Nov. 26) ... * Financial analysts will pay close attention this week to Zions Bancorp for any guidance related to its credit exposure--in particular the Southwest’s declining commercial real estate market. At a Nov. 15 conference, Zions said it expects the credit issues to remain for the foreseeable future. However, credit deterioration has become an unpredictable moving target for Zions, several analysts said. Moody’s Investor Services put the ratings of Zions and its affiliates up for a possible downgrade last week, pending a review. The $50 billion asset company in the third quarter took a $55.4 million loan-loss provision--a figure which is 211% higher than the second-quarter provision and 285% higher than a year earlier. The Salt Lake-based Zions explained the numbers by pointing to residential construction and development sectors in Southern California, Nevada and Arizona (American Banker Nov. 26) …

Market News (11/26/2007)

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MADISON, Wis. (11/27/07)
* Holiday shoppers delivered stronger than expected sales Friday, but retailers, worried about predictions for a soft holiday sales season, went into deep-discount mode to keep that momentum. On Friday alone, sales rose 8.3% from last year--the largest increase in three years, according to ShopperTrak, a research firm that tracks total sales at more than 5,000 U.S. retailers. Retail sales for Friday and Saturday combined rose 7.2% to $16.4 billion from the same period a year ago. However, the average expenditure per shopper was less this year--an estimated $348 compared with $360 last year, said the National Retail Federation (NRF). One possible reason: this year's most heavily discounted products, such as digital photo frames and mixers, are significantly less expensive than products such as flat-screen televisions promoted last year. Thanksgiving weekend sales are closely watched because the weekend accounts for up to 8%--about $40 billion--of all holiday sales. Sales are expected to reach $475 billion this year, said NRF. Shoppers went for the rock-bottom discount stores, at the expense of more upscale chains, a reversal from previous years when shoppers traded up to luxury outlets. Another trend: 32% of people shopped online, an increase from last year's 23%, said the federation (The New York Times and The Wall Street Journal Nov. 26) … * The Federal Reserve Monday said it will conduct a series of term repurchase agreements into 2008 in response to greater pressure in money markets and to provide greater liquidity going into the new year (The New York Times and The Wall Street Journal Nov. 26). The first operation, at nearly $8 billion, is scheduled for Nov. 28 and will mature Jan. 10, 2008. The timing and the amounts of subsequent term operations toward year end will depend on developments in the market and reserves, the Fed said in a statement Monday. The Fed's open market trading desk will provide sufficient reserves to resist upward pressures on the fed funds rate above the Federal Open Market Committee's target rate for year-end. The Fed's last such operation occurred on Dec. 8, 2005, when it made a 28-day repurchase worth $5 billion. It also made a 52-day repurchase agreement totaling $4 billion on Nov. 15, 2004 … * The UBS Index of Investor Optimism plummeted 26 points to 44 in November, reversing October's slight increase and dropping 59 points since January. This is the lowest the index has been since September 2005, when Hurricane Katrina hit the Gulf Coast (Moody's Economy.com Nov. 26). Excluding that event, optimism is at its lowest since May 2003. Tighter credit concerns, increased volatility in equity markets, higher energy prices and the slumping housing market are contributing factors. The Federal Reserve's decision to cut interest rates the past two months is doing little to repair investor sentiment, said Moody's. Most of the decline was due to the economic component, which dropped 20 points to -12 during November. The personal index dropped six points to 56. Of investors surveyed, 79% said the U.S. economy is in a slowdown or recession, compared with 68% saying so in October. Concerns about their portfolio performance prompted 30% to say they would spend less this holiday season than last, up from 27% who said so in October … * Business confidence fell notably during Thanksgiving week, indicating the economy's current fragility, according to Moody's Economy.com Survey of Business Confidence (Nov. 26). However, the weak reading may be influenced by a smaller number of responses during a holiday week. Business sentiment has been weak consistently since the subprime financial shock this summer. U.S. confidence is "notably dour, falling last week to a level consistent with recession," said the survey report. Real estate firms are the most pessimistic, with financial and business service firms also jittery. Manufacturers, who previously have been optimistic, are less so, while high tech firms are the most optimistic. Assessments of present conditions are sharply negative and expectations about the six month outlook have never been more negative, said Moody's … * The Chicago Fed National Activity Index for October dropped to -0.73 from an upwardly revised -0.30, reflecting a weaker economy (Moody's Economy.com Nov. 26). The largest burdens on the reading were related to the weaker job market and production-related activity. The three-month moving average continued downward to -0.56 during October from -0.25 during September, making October the 14th consecutive month of below-zero readings in the three-month index. The reading suggests inflationary pressures are easing and below-trend economic growth, said Moody's. Employment indicators contributed -0.20 to the October index, more than in September while consumption indicators contributed -0.14 to the index, similar to September. Housing permits declined while starts were up by 3%. But sales, orders, and inventories contributed 0.01, the only positive. Production components say a more pronounced drag in October, contributing -0.39 to the headline index … * The Oct. 31 dismissal of 14 foreclosure claims by a federal judge in Ohio on grounds that investors could not demonstrate satisfactorily that they owned the mortgages could create a delaying tactic for borrowers facing foreclosure. However, that won't inhibit the ability of creditors to seize collateral, say industry lawyers (American Banker Nov. 26). In the ruling, Judge Christopher A. Boyko of the U.S. District Court of Cleveland, found that the Deutsche Bank AG subsidiary in whose name the foreclosures were sought did not have standing in the case because promissory notes and mortgage deeds bore the name of the original lender and expressed only an intent to convey the rights, title and interest to the bank. The decision creates extra burden and effort by trustees and servicers as well as logistical issues to make sure laws and regulations are followed, according to Tom Deutsch, deputy executive director at the American Securitization Forum, a bond trade group. However, he said, it does not endanger the right, title, or interest of the trust in the collateral … * British Prime Minister Gordon Brown apologized and announced an investigation into how personal data records, held by Britain's government, of more than 25 million people went missing in one of the biggest data breaches in Britain's history (American Banker Nov. 26). Two computer disks disappeared while being sent by one government department to another. Among the data missing were names, addresses, birth dates, national insurance numbers and financial information for nearly half the country's population. The disks were password protected but the information on them was not encrypted (The New York Times Nov. 21) …

Market News (11/21/2007)

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MADISON, Wis. (11/26/07)
* The Federal Reserve’s decision to lower the target for the fed funds rate in October to battle the housing downturn and credit crunch was a “close call,” according to minutes of the Fed meeting made public Tuesday. Federal Reserve Bank of Kansas City President Thomas Hoenig was the only dissenter. He preferred to leave the rate at 4.75%. The other policymakers voted to lower the rate by 25 basis points to 4.50%. “Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” said the minutes. “Many members noted that this policy decision was a close call.” Fed members were concerned that rising energy prices would ignite inflation. They also said the dollar’s recent “significant” decline is an inflation risk. A statement announcing the rate decision said officials viewed growth and inflation risks as roughly balanced--suggesting the Fed won’t see a need to cut rates again in December (Associated Press via Yahoo! News and The Wall Street Journal Online Nov. 20) … * In its first quarterly update under a new policy by Federal Reserve Chairman Ben Bernanke, the Federal Open Market Committee (FOMC) lowered its forecast for economic growth because of the credit crunch and housing slump. Previously, the Fed only released forecasts twice a year. The central bank now predicts that the economy will expand by 1.8% to 2.5% in 2008--down from a range of 2.5% to 2.75% in its summer report. “These revisions to the 2008 outlook since June stemmed from a number of factors, including the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices,” said the Fed. The FOMC also slightly lowered its forecast for core (excluding food and energy) inflation--to 1.7% to 1.9%, from 1.75% to 2%. For the first time, the Fed also made a forecast for overall inflation (including food and energy). It projects headline inflation at 1.8% to 2.1%. In addition, the latest report includes growth forecasts through 2010--pegging economic growth at 2.3% to 2.7% for 2009, and at 2.5% to 2.6% in 2010. The Fed forecasts are presented as a “central tendency,” with the highest three and the lowest three of the FOMC members’ forecasts excluded (AFP via Yahoo! News and The Wall Street Journal Online Nov. 20) … * Home prices declined in one-third of the nation’s cities in the third quarter as tighter lending standards prompted a 14% plunge in sales nationwide, the National Association of Realtors (NAR) reported Wednesday. Prices fell in 54 of 150 metropolitan areas. Nationwide, the median home price was $220,800 in the third quarter--down 2% from a year earlier. However, NAR noted that 93 of 150 metro areas saw increases in home prices from a year earlier. “Some metro areas are hot while others are experiencing localized problems,” said NAR Chief Economist Lawrence Yun. The largest home-price gain was in Bismarck, N.D., where the median price of $161,600 was up 15.1% from a year earlier. The biggest price decline was in the Palm Bay area of Florida, where the median price of $182,400 was down 12.4% from a year ago (Bloomberg.com and realtor.org Nov. 21) … * Consumer sentiment declined to a two-year low in November amid worries about rising job losses and higher prices for basic goods and services (Reuters Nov. 21). The Reuters/ University of Michigan Surveys of Consumers said its final reading for the consumer sentiment index was 76.1--down from 80.9 in October. In November, 90% of consumers said the major reason for their pessimism was “unfavorable economic developments.” The survey said consumer spending probably will decline 4% in the holiday period to the lowest level in five years. The housing slump, rising energy costs, high debt burdens, and slower job growth remain significant weights on consumer confidence, noted Moody’s Economy.com (Nov. 21). Lower interest rates are one of the few supports for optimism … * New claims for unemployment insurance fell by 11,000 during the week ended Nov. 17 to 330,000, the Labor Department reported Wednesday. However, the reading is up from 322,000 a year ago. And continuing claims (the number of people still on the benefit rolls after an initial week of aid) rose by 7,000 during the week ended Nov. 10 to 2.57 million. That’s up from 2.43 million a year earlier. In its new quarterly report, the Federal Reserve predicted that the nation’s unemployment rate will edge up to between 4.8% and 4.9% next year, from the current 4.7% rate. The rate is expected to stabilize in 2009 and then fall slightly in 2010 (Associated Press via The New York Times Nov. 21) … * The Conference Board’s index of leading economic indicators, which is designed to predict economic activity three to six months ahead, declined by 0.5% in October following a small 0.1% gain the previous month. Most of the leading indicators contributed negatively to the October index--led by a plunge in building permits, higher unemployment claims, and lower consumer confidence. “The data are pointing to a continued slow economy,” said Board Labor Economist Ken Goldstein. He also noted that companies have “unrelenting concerns about price increases not keeping up with wage pressures,” while consumers remain worried that wages aren’t keeping up with rising prices (UPI and NASDAQ via Yahoo! News Nov. 21) … * Mortgage demand contracted last week even as long-term mortgage rates continued to decline, according to the latest survey by the Mortgage Bankers Association. The Market Composite Index fell 3.6% during the week ended Nov. 16 to 681.7, as both purchase and refinancing applications declined. The average 30-year, fixed-rate mortgage (FRM) edged down 1 basis point to 6.18%, while the 15-year FRM fell 6 basis points to 5.71%. The one-year, adjustable-rate mortgage (ARM) was unchanged at 5.98% (mbaa.org Nov. 21) …

News of the Competition (11/21/2007)

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MADISON, Wis. (11/26/07)
* The U.S. mortgage crisis could prompt $300 billion in losses, the Organization for Economic Cooperation and Development (OECD) said Wednesday. The OECD also noted that the credit crunch could still hit the stock markets harder. “Thus far, equity investors seem to have shrugged off the negative sentiment that prevailed over the summer, but it may be too soon to draw firm conclusions,” said the report. The Paris-based group predicted that the housing downturn will continue. The delinquency rate on adjustable rate, subprime mortgages already is running at 16%, but most of the interest-rate resets are still to come, said the report. A hypothetical 14% loss rate on the $890 billion of subprime mortgages being reset in 2008 could result in $125 billion in losses. Losses on alt-A mortgages, which are between prime and subprime, could bring the total to as much as $300 billion. The report said the super fund being set up by Citigroup, Bank of America, and JPMorgan Chase to pool the securities of special investment vehicles was a useful way to address part of the problem (Reuters and Sharewatch via Yahoo! News Nov. 21) … * Citigroup, Bank of America, and JPMorgan Chase have asked money manager BlackRock Inc. to act as the head asset manager for the $75 billion fund they are creating to buoy the asset-backed securities market, said a source familiar with the matter. An announcement could come this week. Critics of the fund say it’s just a bailout for financial institutions that made bad bets when setting up structured investment vehicles. Supporters of the fund say it’s important to keep the credit crunch from worsening (Reuters Nov. 21) … * Chase Paymentech, a leading processor of online payment transactions, has launched a new version of its Pulse Index, which will track online shopping during this year’s holiday season. The index will track current activity and present year-over-year trends. “As online shopping becomes more commonplace and more competitive, merchants need every possible tool to create an advantage,” said Chase Paymentech President/CEO Mike Duffy. During the 2006 holiday season, net online sales for tracked retailers rose by more than 15%--matching a prediction by Forrester Research. For the 2007 holiday season, Forrester predicts a 21% increase in online sales (PRNewswire/ Nov. 19) … * Target Corp. probably won’t sell its credit-card portfolio any time soon despite calls for a sale by a hedge-fund activist, say analysts. The retailer hired Goldman Sachs to “review ownership alternatives” two months ago. But Merrill Lynch Analyst Virginia Genereux said such a sale is unlikely because buyers would have problems finding the cash to purchase the portfolio. Other analysts agree, noting that the credit crunch makes such a sale problematic. “Personally, I don’t see a compelling reason for them to sell it,” said Portales Partners Analyst William Ryan. “And at this point in the credit cycle, I don’t think they’ll see as good a price as they would hope to get,” added Ryan. Other big retailers in recent years have sold their card portfolios to avoid credit losses. Target’s writeoffs jumped to 6.52% of total credit-card receivables this year, from 5.88% a year ago (Star Tribune via Yahoo! News Nov. 21) ... * The Chicago and Dallas Federal Home Loan banks could merge by early next year, said sources familiar with their discussions. The merger negotiations heated up after the Federal Housing Finance Board issued a cease-and-desist order on the Chicago bank that called for capital requirements and restrictions on dividends. The Chicago bank’s profit tumbled 45% in the third quarter, compared with a year earlier. The Chicago bank and other Home Loan banks continue to face large membership losses as the banking industry consolidates (American Banker Nov. 21) …

Market News (11/20/2007)

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MADISON, Wis. (11/21/07)
* Credit Union National Association (CUNA) Senior Economist Mike Schenk appeared live on CNBC Television yesterday to discuss the economy and predicted a “decent” holiday season from a consumer and retailer perspective. He said tremendous headwinds are blowing in housing markets, equity markets, oil and gas prices, but he still expected a decent holiday season. Schenk’s appearance followed Bill Hampel’s live discussion Monday with CNBC host Maria Bartiromo. The appearance follow much media interest in CUNA/Consumer Federation of America eighth annual holiday spending survey results, released Monday… * Housing construction rebounded last month, but the gain reflected a surge in multifamily projects while single-family starts continued to slump. Housing starts rose 3% to an annual pace of 1.229 million units in October following an 11.4% plunge in September, the Commerce Department reported Tuesday. The rebound was led by a 44% jump in multifamily construction, while construction of single-family homes tumbled 7.3% to the lowest level since October 1991. In another down sign, building permits fell 6.6% last month--the fifth consecutive decline. Total permits were down 24.5% from a year earlier. And the National Association of Home Builders (NAHB) /Wells Fargo Housing Market Index was unchanged at 19 in November--its lowest point since the series started in January 1985. NAHB said builders continue to struggle with mortgage problems, a large inventory overhang, and concerns about the impact of negative media coverage. NAHB President Brian Catalde said some strong housing markets have been negatively affected by the media portraying all housing markets as weak (Bloomberg.com and nahb.org Nov. 20) … * Home prices declined in 17 states over the 12 months ending in September but rose in Wyoming, Utah, and North Carolina, according to a study of 956 metropolitan areas by First American LoanPerformance, a unit of First American Corp. “Year-over-year rates of decline in residential property values vary significantly across the country,” noted Damien Weldon, vice president of collateral and prepayment analytics for First American LoanPerformance. “For example, Las Vegas is enduring its 12th straight month of decline, while New York has been in decline for just the past two months,” said Weldon. The largest declines were in the Riverside-San Bernardino-Ontario area of California, which posted a 13.59% drop, and in the Cape Coral-Fort Myers area of Florida (11.49%) and the Las Vegas-Paradise area of Nevada (9.8%). Areas with the largest increases included Honolulu (14.79%); Salt Lake City (6.06%); and the Raleigh-Cary area of North Carolina (5.55%) (PRNewswire-FirstCall/ and American Banker Nov. 20) … * D. R. Horton, the nation’s biggest homebuilder, reported a loss of $50.1 million for its fiscal fourth quarter--compared with a profit of $277.7 million a year earlier. Chairman Donald Horton said the market continued to deteriorate as inventories of both new and existing homes remained high and pricing was very competitive. Last month, Horton said net orders for new homes plunged 39%, while the average price per home fell 15.4%. Prospective buyers canceled orders at a rate of 48%. “We also experienced reduced mortgage availability due to tighter lending standards, and buyers continued to approach the home buying decision cautiously,” said Horton. “We expect the housing environment to remain challenging,” added Horton (Reuters via Yahoo! News Nov. 20) … * The mortgage rout could be spreading to credit cards, say some industry analysts. “We’re starting to see signs within the industry that credit quality is dropping,” said IndexCreditCards.com Research Director Justin McHenry. “That’s causing major credit card companies to at least consider taking out larger reserves to protect themselves against more people defaulting in the future.” Two major credit-card issuers have revised their earnings expectations. Capital One said it expects charge-off rates to rise to about 5.25% in the fourth quarter. Peter Schnall, the firm’s chief risk officer, said he anticipates 2008 charge-offs of about $4.9 billion. Discover Financial said it expects 2008 charge-offs of between 4.25% and 4.75%. That would result in charge-offs of about $2 billion, said Sandler O’Neill & Partners Analyst Mike Taiano. But he noted that those charge-off rates are still low historically. From 2001 through 2002, several big credit-card firms reported 7% rates (MarketWatch Nov. 20) … * Many U.S. companies are seeing their sales surge abroad even as their domestic sales slump. During the first six months of this year, profits earned at home by U.S. firms were stagnant compared with a year earlier, while their foreign profits jumped 22%, according to a study by Moody’s Economy.com. The global economy has been expanding at a pace that’s almost two times stronger than in the U.S.--boosted by the development of China, India and Russia. However, some analysts are concerned that slower economic growth in the U.S. could, in turn, weaken growth in developing nations, which then would dampen U.S. export growth. “The United States is the ultimate engine of growth in the world, still,” said Kenneth S. Rogoff, a Brookings Institution fellow and former chief economist at the International Monetary Fund. But for now, strong overseas markets are boosting U.S. companies’ bottom lines. Large U.S. firms that disclosed their foreign sales sold about 44% of their products abroad last year--compared with only about 33% six years earlier, according to a study by Standard & Poor’s Senior Index Analyst Howard Silverblatt (The New York Times Nov. 20) …

News of the Competition (11/20/2007)

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MADISON, Wis. (11/21/07)
* JPMorgan Chase’s Chase Card Services unit announced Monday that beginning in March it will no longer use credit scores to boost customers’ interest rates. “We think it’s a better business model,” said Company Spokesman Paul Hartwick. Analysts noted that many card companies are changing their consumer practices to avoid potential regulation. “They don’t want the government to step in and tell them what to do,” said Ellen Cannon, managing editor and credit card expert at Bankrate.com. “Chase has taken away something that should never have been there in the first place,” said Justin McHenry, research director at IndexCreditCards.com (The News Journal via Yahoo! News Nov. 20) … * Online payment provider PayPal is partnering with sometimes rival MasterCard Inc. to launch a new service. Secure Card will let PayPal’s 164 million account holders make payments on websites that take MasterCard but haven’t yet agreed to accept PayPal. A software download will create single-use MasterCard numbers consumers can use for payments. PayPal hopes to become less dependent on eBay for business, as its customers can use their accounts at other places on the Web. However, Javelin Strategy & Research Analyst Bruce Cundiff said the partnership could eliminate any incentive for online retailers to accept PayPal. And the company will share some of its revenue with MasterCard. According to a recent Javelin report, credit and debit cards account for about 86% of all online transactions, while PayPal accounts for only 5% (Dow Jones Newswires Nov. 20) … * Person-to-person payment provider Obopay Inc. is partnering with prepaid card provider Green Dot Corp. to target the underbanked. While Obopay’s first strategy was to target college students, it noticed that about one-fourth of its users had few or no banking relationships. Obopay now lets customers reload their accounts via Green Dot’s MoneyPak funding product. Users can manage their accounts and send funds to each other via mobile phones. They also can use a linked MasterCard debit card to make purchases. “As you think about the underserved market, there’s massive penetration of cell phones,” said Mark Troughton, president of cards and network for Green Dot. “The idea of running payment services off a cell phone is compelling for this segment,” said Troughton (American Banker Nov. 20) … * Tax-preparer H&R Block announced Tuesday that Mark Ernst has resigned as chairman, president, and chief executive. Former Securities and Exchange boss Richard Breeden, who led a dissident shareholder group at H&R Block, will replace Ernst. Breeden has criticized the firm’s entry into mortgage lending, investment advising, and banking. H&R Block’s results have been harmed by soaring loan defaults at its Option One Mortgage subprime unit. With its shares falling, the company is trying to renegotiate a sale of the unit to private-equity firm Cerberus Capital Management. Breeden may sell off other units as well, including the H&R Block Bank (Associated Press via The New York Times Nov. 20) … * A planned $4 billion sale of loans by Chrysler LLC following its takeover by Cerberus Capital Management probably will be postponed because of the weak credit markets and bad news from the auto sector, a number of sources told Reuters (The New York Times Nov. 20). Chrysler sales were down nearly 4% during the first 10 months of this year. And analysts expect industry wide auto sales to contract this year and next year as the economy weakens …

News of the Competition (11/19/2007)

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MADISON, Wis. (11/20/07)
* Wall Street’s five largest securities firms will pay record bonuses of almost $38 billion this year even though they’ve seen their worst year since 2002--losing $74 billion of their equity, according to an analysis by Bloomberg.com (Nov. 19). That’s up from $36 billion in bonuses last year. The larger bonus pool reflects a record $9 billion in fees from arranging acquisitions and $5 billion for underwriting sales of junk bonds and initial public offerings. The last time bonuses fell was in 2002. This year’s average bonus of $201,500 per employee is more than four times last year’s median household income of $48,201 … * Citigroup was downgraded to “sell” from “neutral” yesterday by Goldman Sachs, which predicts the bank will have to write off $15 billion during the next two quarters as mortgage losses erode profits. “With deteriorating consumer and housing metrics, Citigroup is facing mounting pressure across many businesses,” wrote Goldman Analyst William Tanona. Citigroup’s shares plunged as much as 5.4% following the downgrade. Tanona lowered Citigroup’s price target to $33 from $48, and said the firm may have to cut its quarterly dividend. He also lowered his price targets for Bear Stearns, E*Trade Financial, JPMorgan Chase, Lehman Brothers Holdings, Merrill Lynch, and Morgan Stanley. So far, banks have announced more than $50 billion of writedowns tied to the housing downturn (Reuters via Yahoo! News Nov. 19) … * Swiss Reinsurance Co., the largest reinsurer in the world, announced an $878 million after-tax loss for the third quarter on Monday due to its exposure to the subprime mortgage crisis. The company said the loss mostly reflects credit-default swaps, which typically are purchased by bond investors seeking insurance against potential losses in the bond market. The company said it has written down subprime securities to 62% of their original value. However, Swiss Re said it still expects to post a net profit for the full year (Associated Press via Yahoo! News Nov. 19) … * More school districts are accepting online debit and credit payments for children’s lunches. The trend has boosted district revenue because parents using plastic typically place more funds in the accounts. According to a School Nutrition Association poll, 62.1% of districts now use some type of electronic point-of-sale system in cafeterias. The percentage accepting credit and debit payments was 35.8%, more than twice the percentage in a 2005 poll. Some online systems allow parents to view their child’s lunch purchases and indicate whether students can purchase snacks. The payments also make lunch lines move faster (ATM&Debit News via American Banker Nov. 19) …

Market News (11/19/2007)

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MADISON, Wis. (11/20/07)
* The housing slump and credit crunch have increased the risk of a recession, according to forecasters polled by the National Association for Business Economics. NABE expects the economy to expand at only a 1.5% pace in the fourth quarter--down sharply from the brisk 3.9% rate of growth during the third quarter. For all of 2007, the forecasters expect economic growth of just 2.1%--the weakest reading since 1.6% growth in 2002. Still, most don’t expect an outright recession. About three-fifths of respondents say the odds of a recession occurring within the next year is less than one in three. “Spillovers from housing weakness to broader consumer spending, along with credit-market tightening, are seen as the most likely recession triggers,” said the report. Respondents expect the consumer price index to increase 2.8% this year and 2.5% in 2008. They predict that oil prices will ease. And the nation’s unemployment rate is expected to increase to 4.9% next year, from an average 4.6% this year (Associated Press via washingtonpost.com Nov. 19) … * The Federal Reserve will have to cut interest rates at least three-fourths of a percentage point to avert recession, according to fed funds futures traders. They see a 78% chance the Fed will lower the target for the fed funds rate by 25 basis points to 4.25% in December. There’s a 58% chance of another 25-basis-point cut in January, and 31% odds of a 25-basis-point cut in March. That would be the largest Fed easing since 2001. Many financial analysts have become downbeat in recent months. Joseph Stiglitz, a Nobel-prize winning economist at Columbia University, puts the odds of a recession at 50% (Bloomberg.com Nov. 19) … * Global business confidence, which plunged at the height of the subprime financial rout in August, remains quite weak, according to Moody’s Economy.com Survey of Business Confidence. U.S. companies are especially downbeat. They are liquidating inventories and becoming much more cautious about renting office space. Higher oil prices also are eroding profit margins and prompting some firms to raise prices. The odds of a recession in the U.S. remain high … * A weak U.S. dollar doesn’t boost inflation the way it did in the past. That’s largely because foreign exporters lower their prices to maintain U.S. market share when the dollar weakens. Today only about one-fourth to one-tenth of a currency depreciation is passed along as higher prices for imports--compared with about 50% from the mid-1970s through the 1990s, according to recent studies. This trend makes the job of the U.S. Federal Reserve easier since the Fed can cut interest rates, a move that typically lowers the value of the dollar, without being as concerned about inflation. Still, price increases for raw materials typically pass through at much higher rates, so rising oil and steel prices could boost inflation as firms decide they need to focus on profits (The Wall Street Journal Online Nov. 19) … * The credit crunch is beginning to depress the value of commercial real estate, according to a report by Moody’s Investors Service. The value of commercial property fell 1.2% in September--with apartments in the West and office property in most states except California particularly hit hard. Declining values could prompt higher default rates on commercial real-estate loans and on commercial mortgage-backed securities--trends that could further weaken the overall economy. Even slight declines in values could make it hard for property owners to refinance (The Wall Street Journal Online Nov. 19) … * Auto sales will weaken sharply next year, say industry analysts. U.S. light auto sales may edge down to 15.5 million or less in 2008--from about 16 million this year and the weakest tally since 1998, predicts Jerry York, chief financial officer of Chrysler Corp. Thomas Stallkamp, a former Chrysler president and currently a partner at private equity firm Ripplewood Holdings, predicts sales will plunge to 14.5 million next year--the weakest since 1993. “You’re going to see some continued retrenchment in construction and the building trades that will hit the Big Three particularly,” said Stallkamp (Reuters via The New York Times Nov. 19) …

Fed not constrained by inflation says CUNAs Hampel

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WASHINGTON (11/19/07)--The Federal Reserve Bank will not have to worry about inflation if the nation’s growth outlook significantly erodes, Bill Hampel, chief economist at the Credit Union National Association told The Wall Street Journal Thursday. “Core inflation is well-enough behaved that the fed isn’t going to feel constrained [in lowering rates] by concerns about inflation,” Hampel said. In the article, which discussed how subdued housing and auto costs are offsetting energy price spikes, the point is made that this data, plus the weak U.S. dollar, are not leading to higher underlying inflation. The U.S. Labor Department issued a separate report that indicated that the average weekly earning of U.S. workers, when adjusted for inflation dropped 0.2% in October, as wages did not keep up with inflation (The Wall Street Journal Nov. 16). In new procedural move, the Fed will start publishing forecasts for overall inflation, as well as core inflation, Fed Chairman Ben Bernanke announced earlier this week.

Market News

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MADISON, Wis. (11/19/07)
* The U.S. is facing at least a 50% chance of an economic recession in 2008, and the factory sector is almost certain to enter recession, according to the Manufacturers Alliance/MAPI’s new quarterly economic outlook. The economy is facing a “confluence of challenges,” said the report--including the housing slump, rising energy prices, weaker job growth, and falling consumer confidence. “This is the grimmest outlook we’ve had for the economy since the last recession,” said Daniel Meckstroth, economist for the public policy group. The report predicts that manufacturing production will decline during the next three quarters. “So in that sense, the manufacturing sector is already facing recession,” said Meckstroth (The Wall Street Journal Online Nov. 16) … * Industrial production fell by 0.5% in October--following a 0.2% gain in September and the largest decline since January, the Federal Reserve reported Friday. The capacity use-rate dropped to 81.7% from 82.2%. Output at factories, which make up about four-fifths of industrial production, declined by 0.4% last month, while utility production fell 1.6%, and mining output dropped 0.6%. “The combination of the housing meltdown, consumers pulling back, and a desire to keep inventories as lean as possible is overwhelming exports,” said Joshua Shapiro, Chief U.S. Economist at New York-based Maria Fiorini Ramirez. The Fed also reported that auto production declined by 1% in October following a 3% drop the previous month. Excluding autos, production fell 0.3% after a 0.4% gain (Bloomberg.com Nov. 16) … * Foreign buying of U.S. financial assets rebounded modestly in September after record selling the previous month, the Treasury Department said Friday. Total holdings of stocks, notes, and bonds increased a net $26.4 billion following sales of $70.6 billion in August. Including short-term securities and non-market trades, foreigners sold a net $14.7 billion in September after a $150.7 billion outflow the previous month. Many economists say the difference between the U.S. trade deficit and securities bought by foreigners indicates how smoothly the U.S. can finance its external obligations. The Treasury report noted that Japan remained the biggest holder of U.S. Treasury securities in September, at $582.2 billion. China was the 2nd-largest holder, with $396.7 billion (Bloomberg.com and The Wall Street Journal Online Nov. 16) … * Soaring gasoline prices are hitting lower-income Americans hard, according to a new study by the Oil Price Information Service (OPIS), an energy research firm. Lower-income people in the U.S spend eight times more of their disposable income on gasoline that do wealthier Americans. Residents in Alabama, Mississippi, and Kentucky are the hardest hit--paying more than 11% of their income to fuel their car. In Hunterdon, County, N.J., where the median household income in 2004 was $87,701, residents spend just 1.52% of their disposable income on gasoline. In Wilcox, Ala, with a median household of just $19,682, residents pay 12.72% of their income to fuel one vehicle. “It’s tough out there for a lot of people,” said OPIS Retail Pricing Director Fred Rozell. He also noted that gasoline prices vary by region, and that people drive less in areas with good public transportation. According to the study, gas prices nationwide have tripled since 2002. Nationwide, Americans now spend 3.8% of their income fueling one vehicle--almost twice the 1.9% average in 2002 (CNNMoney.com Nov. 15) … * A federal appeals court in San Francisco last week rejected the Bush administration’s fuel-economy standards for light trucks and sport-utility vehicles, saying they weren’t strong enough because regulators failed to adequately address the economic impact of vehicle emissions that contribute to climate change. The court told the Transportation Department to create new rules that would account for the value of lowering greenhouse gas emissions. Siding with 13 states and cities, and four environmental groups, the court also asked the department to explain why it still treats light trucks less stringently than autos. “Climate change has ushered in a whole new era of judicial review,” said Patrick A. Parenteau, an environmental law professor at Vermont Law School (The New York Times Nov. 16) …

News of the Competition

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MADISON, Wis. (11/19/07)
* The mortgage rout could prompt a $2 trillion cutback in bank lending--slowing the economy significantly, according to Goldman Sachs Economist Jan Hatzius. He said the housing downturn will cost banks, hedge funds, and other lenders $400 billion as mortgage defaults increase. Hatzius noted that a bank wanting to keep a 10% capital ratio would need to shrink its balance sheet by $10 for each $1 in credit losses. “Even if this occurs gradually, and even if there are some offsets from reduced credit demand and increased lending by other sectors, the drag on economic activity could be substantial,” said Hatzius (CNNMoney.com Nov. 16) … * Banks lowered their borrowing at the Federal Reserve discount window last week. Borrowings totaled $60 million as of Nov. 14--down from $1.34 billion the previous week. Lending via the primary credit facility was $11 million last week, while seasonal credit was $49 million. The Fed has tried to help ease the credit crunch by cutting the discount rate, at which banks borrow directly from the Fed, by 125 basis points since August (Dow Jones Newswires Nov. 15) … * The Community Financial Services Association of America, a trade group that represents 60% of payday lenders, announced last week that it will require all members to display their fees and annual percentage rates for at least five different loan amounts on large posters in all stores and on company websites. “Consumers have a right to know all of the fees associated with a financial product so they can make informed financial decisions,” said Association President Darrin Andersen. He said payday lenders’ annual interest rates average $17 for each $100 borrowed and are needed to cover high default rates and other costs. “Our borrowers have a one-time fee for a two-week loan, and that’s how they look at it,” said Andersen. Many consumer groups and state regulators have criticized the industry for its high fees (BizJournals via Yahoo! News and American Banker Nov. 16) … * A bill introduced by District of Columbia City Councilman Jack Evans could boost the amount of the District’s general funds deposited in small banks by tens of million of dollars. Under current law, up to 1% of the District’s general funds can be deposited in D.C. financial institutions with less than $350 million in assets, unless the banks are subjected to competitive bidding. Evans’ proposal would boost that allowance to 10% and increase the maximum bank size to $500 million in assets. The bill is designed “to get funds in local banks so they invest in the community,” said Evans (Washington Business Journal and American Banker Nov. 16) …