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News of the Competition (02/29/2008)

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MADISON, Wis. (3/3/08)
* Insurance giant American International Group Inc. (AIG) reported a $5.3 billion fourth-quarter loss, mainly due to a write-down that exceeded expectations of many analysts. The write-down was the worst in company history, dating back to 1919. It resulted from derivatives partly linked to subprime mortgages that dropped in value by $11.12 billion, pretax, in the fourth quarter, the New York firm said. Also, AIG said it recorded a $2.63 billion capital loss, mostly due to charges in its general investment portfolio, along with $643 million charge linked to investments held by the company’s financial products unit. These losses were due to steep declines in market values of mortgage-backed securities in the quarter, AIG said. An “extraordinary” U.S. housing market will diminish the company’s operating revenue for the year, AIG President/CEO Martin Sullivan said Friday (The Wall Street Journal Feb. 29) … * Losses related to the downturn of the U.S. subprime mortgage market--which marred otherwise robust operational results--led to an 87% drop in fourth-quarter net profit, Swiss Reinsurance Co. reported Friday. The world’s largest reinsurer by premium volume predicted the market will remain tough this year, warning of further subprime-related write-downs for the first quarter of 2008. The company said its net profit for the quarter fell to 170 million Swiss francs ($160.5 million) from 1.3 billion Swiss francs ($1.227 billion) a year earlier. However, the figure still bested analyst forecasts for the company (The Wall Street Journal Feb. 29) … * Several individuals and businesses were charged by the Federal Trade Commission (FTC) Thursday with violating provisions of the FTC Act, the Home Ownership and Equity Protection Act, and the Truth-in-Lending Act. The FTC said Safe Harbour Foundation of Florida Inc., Silverstone Lending LLC, Silverstone Financial LLC, Southeast Advertising Inc., and Keystone Financial LLC breached the home ownership law, according to documents filed in the U.S. District Court for the Northern District of Illinois. The firms allegedly extended credit without considering the borrower’s ability to repay, and provided negatively amortized loans. The Truth-in-Lending charges arise from allegations that lenders understated finance charges and annual percentages rates (American Banker Feb. 29) … * Five cases with financial services firms were settled by the Financial Industry Regulatory Authority (FINRA), the agency reported Thursday. The cases were related to supervisory violations and mutual fund sales. FINRA levied the following fines: Prudential Securities, $1.05 million; UBS AG, $1 million; Merrill Lynch & Co., $250,000; and Pruco Securities, $100,000. Although it violated some supervisory procedures and systems, Wells Fargo & Co. was not fined, because FINRA determined that the company took actions to correct the problems before FINRA began the investigation (chron.com Feb. 28) …

Market News (02/29/2008)

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MADISON, Wis. (3/3/08)
* The turbulence in the credit and mortgage markets likely will result in some bank failures, Federal Reserve Board Chairman Ben S. Bernanke told the Senate Banking Committee Thursday. Bernanke said that some small banks heavily involved in real estate in locales where prices have fallen will be under pressure. He did not say how many banks may go belly up. Although Bernanke said the largest domestic banks are safe, he urged them to increase their capital levels because he was concerned banks "will be pulling back and not making new loans." He noted it is "fair" to say the Fed has had a tougher time responding to the current slowdown than in the recession of 2001 American Banker and Bloomberg.com Feb. 29). Analysts are predicting that Fed Reserve policy makers will slash interest rates a half point at the Federal Market Open Committee's meeting March 18 or before then (CNNMoney.com Feb. 29) … * The index of regional business conditions in the Midwest plunged to 44.5 in February, well below the benchmark point of 50 separating growth from contraction, said the National Association of Purchasing Managers--Chicago (The New York Times and Moody's Economy.com Feb. 29). February's reading was the lowest reading since December 2001 and came after hovering above 50 in recent months. It dropped from 51.5 in January. Almost all components of the index saw considerable declines this month, with only new orders increasing, to 48.8 from 44.7. Production dipped for the first time since December 2001 and employment plunged 14 points--the largest decline in the index's history. Order backlogs declined to 38.3 from 48. The report comes after regional manufacturing reports suggested the onset of recessionary conditions in the factory sector … * U.S. consumer spending increased a more-than-expected 0.4% in January, but when adjusted for inflation, spending remained unchanged, largely due to rising food and energy costs, according to the Commerce Department. It was the third time in the past four months real spending had not changed. The personal consumption expenditure price index--considered a key gauge of inflation and closely monitored by the Fed--rose 2.2% year-over-year, excluding food and energy costs. This was the same as December's core inflation rate but is still above what many perceive as the Fed's comfort zone of 1% to 2% (The New York Times Feb. 29). Personal income increased by 0.3%, largely due to large bonuses, pay raises for government employees. Without either of those, income would have risen 0.2%, said Moody's Economy.com (Feb. 29). During the past year, real spending has risen 1.8%, the slowest growth since April 2003. For the past three months, real spending has grown at 1.4% annual rate. Year-to-year growth has been below 2% for the past three months … * In more negative news, the University of Michigan Consumer Sentiment index dropped 7.6 points in February to 70.8--the index's lowest reading in 16 years and consistent with a recession. The 70.8 reading was adjusted 1.2 points over earlier estimates. Driving the decline was the consumers' assessment of current conditions, which fell by 10.6 points (more than the initially estimated nine points). However, expectations also weakened, falling 5.7 points. Near-term inflationary expectations increased with one-year expectations rising to 3.6%, after three months at 3.4%. Five-year expectations held steady at 3% … * The Federal Reserve Board of Governors announced the Fed will conduct two auctions of 28-day credit through its Term Auction Facility this month and announced some changes in procedures for the auctions. It will offer $30 billion in an auction on Monday, March 10, and another $30 billion on Monday, March 24. Minimum bid rate and other auction details will be announced at 10 a.m. EST on Monday, the auction day, instead of the previous Friday. The bidding period also will be shortened to two hours--from 11 a.m. to 1 p.m. and auction results will be announced the Tuesday following the auction. Final settlement will occur on the Thursday after each auction …

Corporate If Fed cuts rate be proactive in share pricing

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DALLAS (2/29/08)--Federal Reserve Board officials' statements that the Fed will take any action needed to bolster the economy has prompted talks of another rate cut in March. A potential rate cut means that credit unions must be proactive in share pricing, said the Southwest Corporate FCU. The markets are pricing in an 88% chance that the Federal Open Market Committee will again lower the benchmark overnight target rate by 50 basis points to 2.50% at its March 18 meeting, said Brian Turner, manager of advisory services at Southwest Corporate (LoneStar Leaguer Feb. 28). "The FOMC is between a rock and a hard place," Turner said. "What is needed to help provide stimulus to garner economic growth (lower rates) will add fuel to rising consumer prices, which if accelerated too fast, will in turn adversely impact spending and thus restrict future growth." During the past 12 months, wholesale prices rose 7.4%--the most since October 1981, he said, calling the situation a "classic dichotomy." With current and projected market rates and the prevalent yield curve, the cost of liquidity has risen the past few quarters. Another rate drop will increase that cost, said Turner. "As the yield curve stabilizes and should more steepness return, credit unions will be in a position to re-allocate overnight funds into term investments or loans without adversely impacting the liquidity profile," he said. "Dropping the overnight rates will obviously impact overnight investment rates, so re-employing cash flows will be critical," Turner said. Credit unions must also be proactive in share pricing. "Given that most (credit unions) have not raised share draft or regular share rates, there might be a propensity to believe that there's little room to move. Please check anyway," he advised. Many money markets, which have risen significantly the past 12 months, are higher than 3%. Turner recommended reviewing all tiered rates. "As long as there is a rate differential between nonterm and short-term share rates, upward pressure on cost of funds will remain," Turner said.

Market News (02/28/2008)

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MADISON, Wis. (2/29/08)
* The nation's gross domestic product (GDP) rose at an unrevised 0.6% annual rate, below predictions, for fourth quarter of 2007, the Commerce Department reported Thursday. Economists had believed the rate would be revised to a 0.8% growth rate (The New York Times Feb. 28). It was the department's second estimate of fourth-quarter GDP. The rate matched the first estimate, made a month ago. The rate compares to third-quarter 2007's gain of 4.9% (The Wall Street Journal Feb. 28). Exports were revised higher and imports were revised lower, but inventories were liquidated more than originally estimated. The sell-off could lead to greater production down the road when businesses decide to stock up on goods again for future demand. Residential fixed investment, which includes spending on housing, plummeted by 25.2% during fourth quarter. That is a larger decline that the 23.9% estimated earlier. Third-quarter spending fell by 20.5%, but fourth-quarter spending by consumers rose 1.9%. Consumer spending accounts for about 70% of the nation's economic activity. GDP measures the value of all goods and services in the U.S. and is considered the best barometer of the nation's economic health … * Initial jobless claims in the U.S. for the week ending Feb. 23 climbed by 19,000 to 373,000, from an upwardly revised 354,000 the previous week, according to the Labor Department Thursday. The level was the second-highest since the aftermath of Hurricane Katrina in 2005 (Bloomberg.com Feb. 28). The four-week moving average for initial jobless claims dropped to 360,500 from 361,750. Continuing claims for the week ending Feb. 16--the most recent statistics available--also rose, by 21,000 to 2.807 million from an upwardly revised reading of 2.786 million the week before (Moody's Economy.com Feb. 28) … * Presidents' Day sales helped chain store sales rise a notch, by 0.5%, for the week ending Feb. 23, according to the International Council of Shopping Centers (ICSC). A report it released on Tuesday indicated year-over-year growth also rose to 2.3%. That is the first week with growth exceeding 2% this year. Year-over-year growth improved, topping 2% after seven weeks below that threshold (Moody's Economy.com Feb. 26). A widespread flu outbreak could have acted as a drag on the sales, said ICSC. It kept its lowered forecast for sales growth through fiscal February at 0.5% to 1%. That would put growth similar to January's 0.5% and December's 0.7% …

News of the Competition (02/28/2008)

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MADISON, Wis. (2/29/08)
* A Massachusetts judge has issued a ruling that has the potential to be a landmark in slowing thousands of state foreclosures and which would pronounce whole categories of subprime mortgages “structurally unfair” under Massachusetts law. Suffolk Superior Court Judge Ralph Gants, in a preliminary injunction against mortgage lender Fremont Investment and Loan, wrote: “It is both imprudent and unfair to approve mortgage loans that the borrowers cannot reasonably be expected to repay if housing prices were to fall.” The ruling was issued in the wake of a lawsuit brought by Massachusetts Attorney General Martha Coakley. Before it initiates foreclosure proceedings, Freemont must work with state officials for up to 90 days to resolve the late-mortgage case, according to Gants’ ruling. Fremont can foreclose on a home if the two sides fail to settle, but it first must prove it took “reasonable steps” to avoid foreclosure. The ruling could potentially cover 3,000 mortgages that Fremont issues or services in Massachusetts (Bostonherald.com Feb. 26) … * An agreement has been signed between AAA--a North American motoring and leisure travel organization--and American Express in which AAA agrees to exclusively endorse American Express Travelers Cheques. The cheques are available at participating AAA and Canadian Automobile Association offices in the U.S. and Canada. Participating AAA clubs’ offices also will offer American Express Gift Cards (Foxbusiness.com Feb. 27) … * Discover Financial Services LLC paid out a compensation package valued at $21.8 million in fiscal 2007 to CEO David W. Nelms, according to a Tuesday regulatory filing. Last year, the credit card lender became a publicly traded company. Investment bank Morgan Stanley spun off Discover last summer, just weeks before skyrocketing mortgage defaults and the credit crunch began to deteriorate the financial sector. Nelms got a base salary of $900,000 and $2.75 million in bonuses in 2007. The CEO’s salary will increase to $1 million in 2007, according to the filing. Nelms also received $18.4 million in stock awards and options in fiscal 2007 (SignOnSanDiego.com Feb. 26) … * Amid a continuing swell in home-mortgage defaults, Freddie Mac reported a $2.45 billion fourth-quarter loss. The loss which works out to $3.97 per share, compares with net income of $101 million, or 73 cents per share, a year earlier. There could be further losses resulting from the defaults this year and next year, Freddie warned, as additional borrowers fall behind in their payments and home prices decline in much of the U.S. However, the government-sponsored mortgage investor doesn’t expect it will need to raise capital again this year unless conditions become “dramatically worse,” said Buddy Pisel, the company’s chief financial officer. In 2007, Freddie raised $6 billion through a sale of preferred stock (The Wall Street Journal Feb. 28) … * Beginning early next month, the Pennsylvania Higher Education Assistance Agency will suspend making federal-guaranteed loans, announced the agency--one of the largest U.S. student loan operations. The move is evidence of how tight credit markets are affecting the industry, some analysts said. Several lenders warn that for the 2008-2009 academic year, it could be more difficult and costly for many students to obtain college loans. Two problems have plagued these loan operations, analysts said. First, Congress has reduced subsidies to the federal-guaranteed student loan program. Second, investors are reducing their purchases of securities backed by student loans--which makes it more expensive for lenders to raise needed capital. This has resulted in some lenders, such as the College Loan Corporation--a large lender that announced it is no longer participating in the federal loan program--curtailing their activities (The New York Times Feb. 28) …

Market News (02/27/2008)

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MADISON, Wis. (2/28/08)
* Federal Reserve Chairman Ben Bernanke's comments before the House Financial Services Committee Wednesday, coupled with those Tuesday by Fed Vice Chairman Donald Kohn, suggest that the Fed will likely lower the federal funds target rate at its March 18 meeting (The Wall Street Journal Feb. 27. Fed officials "will need to judge whether the policy actions taken thus far are having their intended effects," Bernanke said, adding it would "act in a timely manner as needed" to insure against "downside risks" and keep the economy on track. Although some officials believe that inflation is accelerating, Bernanke indicated that financial market turmoil and slowing growth are the greater threat. He noted that inflation may climb slightly more rapidly than the 2.1%-to-2.4% rate for 2008 that policymakers projected in January. He said the Federal Reserve would continue to closely monitor inflation and inflation expectations. Since September, the Federal Open Market Committee has cut the fed funds rate by 2.25 percentage points, including 1.25 percentage points during an eight-day period in January (The New York Times and Bloomberg.com Feb. 27) … * Mortgage applications for the week ending Feb. 22 totaled 665.1--a 19.2% decrease, seasonally adjusted, from the previous week's 822.8, according to the Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey (mortgagebankers.orgFeb. 27). On an unadjusted basis, the index dropped 25.8% from the previous week but was up 5.1% from one year earlier. Refinances declined 30.4%, to 2458.9 from 3533.8 the previous week, while purchases increased 0.2%, to 358.2 from 357.6, seasonally adjusted. The market index four-week-moving average, seasonally adjusted, declined 9.7% to 909.5 from 1007; the purchase index moving average dipped 0.2% to 383.3 from 382.2; and the refinance index moving average dropped 14.2% to 3987 from 4648.2. Refinances accounted for 52% of mortgage activity, down from 61.7% a week earlier. The average contract interest rate for 30-year, fixed-rate mortgages rose to 6.27% from 6.09%, while the rate for 15-year, fixed-rate mortgages increased to 5.77% from 5.55%. The interest rate for one-year, adjustable-rate mortgages was up to 5.84% from 5.72% … * The number of mass layoffs in the U.S. during January increased by five events--to 1,438 from 1,433 in December--and involved 2,361 more workers, reported the Labor Department (Moody's Economy.com Feb. 27). Mass layoffs involve at least 50 workers from a single employer. January's events laid off 144,111 workers, compared with 141,750 in December. The slowdown in housing starts continued to affect the construction industry, with initial claimants up 9% compared with January 2007. Reduced mortgage originations had secondary effects on the financial services industry. The 10 industries reporting the largest number of layoffs accounted for 30% of the total initial claims. Those hit hard: Temporary help services, followed by school and employee bus transportation, and automobile manufacturing. Manufacturing accounted for 30% of the mass-layoff events and 35% of initial claims. Transportation equipment manufacturing had the largest share of claimants, with 17,920 … * Orders for durable goods were off to a shaky start for the year, with a greater than expected drop of 5.3% during January to $212.80 billion, the Commerce Department said Wednesday (The Wall Street Journal Feb. 27). The figures are seasonally adjusted. That compares with a downwardly revised 4.4% increase in December from 5% estimated earlier. Analysts on Wall Street had expected a drop of 3.5% to 4% for January (Moody's Economy.com Feb. 27). Durable goods are designed to last at least three years. Most of the decline was attributed to civilian and defense aircraft orders and orders excluding transportation. New orders dropped in several manufacturing industries, including machinery and computers and electronics. Shipments of durable goods increased 1.8% after two consecutive declines. Unfilled orders and inventories were up over the month, posting 0.6% gains … * New-home sales dropped an unexpected 2.8% in January--to their slowest pace since February 1995. The seasonally adjusted annual rate of 588,000 was the third consecutive decline, announced the Commerce Department Wednesday (The Wall Street Journal and Moody's Economy.com Feb. 27). Analysts had expected 600,000 in sales for January. In December, sales dropped 4% to 605,000, revised downward from earlier estimated decline of 4.7% to 604,000. November had a 13% sales drop. January's sales were 33.9% lower than those in January 2007. The median price of a new home decreased in January by 15.1%, to $216,000--a 12.1% decrease from a year earlier. The current price is at its lowest level in more than three years. December's median price was $225,600 and the average was $274,700. January's inventories dropped to an estimated 482,000 homes for sale, less than the 493,000 for December. Analysts believe that until the inventory of unsold homes declines more, there will be more price declines in the next few months (The New York Times Feb. 27) …

News of the Competition (02/27/2008)

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MADISON, Wis. (2/28/08)
* The biggest single source for U.S. home loans, Fannie Mae, posted a $3.5 billion fourth-quarter loss this week, saying its financial woes will worsen this year as rising foreclosures result in upward-spiraling credit costs. The net loss was triple what analysts’ estimates had predicted. A filing with the Securities and Exchange Commission revealed that Fannie Mae has recorded a $3.2 billion decline in the value of derivative contracts and $2.9 billion in credit expenses. Fannies Mae’s prediction about further company financial declines has increased concerns that the housing market could drive the U.S. economy into recession, analysts said (Bloomberg.com Feb. 27) … * The Office of Federal Housing Enterprise Oversight (OFHEO) said Wednesday it will remove portfolios growth caps March 1 for Fannie Mae and Freddie Mac--two companies that OFHEO regulates. OFHEO cited the companies’ return to timely financial statements as one reason for the easing the regulation of the caps, which should give Fannie and Freddie more flexibility to invest in the downtrodden U.S. housing market. Both of the government-sponsored enterprises still are being ordered to hold reserves against possible losses--which, in effect, will limit their ability to grow their mortgage holdings in the short term (The New York Times and Feb 27) … * Losses at some small-to-midsize banks across the U.S. are mounting so quickly that perhaps 50 out of the 7,500 nationwide could fail over the next 12 to 18 months, analysts said. As the struggling economy strains finances, some of the other banks likely will shut branches down or seek mergers, analysts add. The exposure of smaller banks to the commercial real estate market, which has begun to decline in some parts of the country, is of particular concern to federal regulators, who are stepping up regular bank examinations and forcing some lenders to enhance their reserves due to concerns about the health of the industry (The New York Times Feb. 27) … * Federal Home Loan banks have seen advances rise to $875 billion last year, a 36.6% increase, said the banks’ Office of Finance Tuesday. The increase is mostly a result of member institutions’ searches for more liquidity as result of the credit crisis. The increase helped push home loan bank profits up 8.2% to $2.8 billion. Investments increased 10.3% to $299 billion. The banks’ major investments were overnight and term federal funds sold, mortgage-backed securities, commercial paper and government-sponsored enterprise securities, according to Office of Finance. Combined capital of the banks rose 19.1% in 2007, reaching $54 billion by year-end (American Banker Feb. 27) … * A Fifth Third Bancorp shareholder has filed a lawsuit aimed at stopping the bank from buying First Charter Corp. of Charlotte for $1.1 billion. The suit seeks an injunction to halt the acquisition of First Charter and an independent valuation of First Charter to determine its worth. It also seeks unspecified compensatory damages--to be paid to Fifth Third by its directors--and costs and attorneys’ fees to the plaintiff. First Charter is reviewing the complaint, the company said (Pittsburgh Business Times Feb. 25) … * The estate of a Florida woman is suing Countrywide Financial Corp., accusing the largest U.S. mortgage lender of charging improper foreclosure fees to its borrowers. Countrywide overcharged for attorney fees linked to foreclosures and charged unjustified interest, escrow and late charges, starting in February 2002, according to the complaint, filed Monday in a Wilmington, Del., federal court (TBO.com Feb. 27) …

News of the Competition (02/26/2008)

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MADISON, Wis. (2/27/08)
* Government-sponsored enterprises Fannie Mae and Freddie Mac would require their mortgage lending partners to conduct independent appraisals of home values, under a deal being negotiated with New York state Attorney General Andrew Cuomo. Assessors who do not have formal ties with a lender or mortgage broker would have to do the home appraisals, according to sources familiar with the negotiations. Lenders wanting to sell their mortgages to the two largest sources of home finance in the U.S. would have to prove that they did not own an appraisal firm or rely on in-house appraisers, according to an outline of the plan drafted by Fannie Mae (Reuters Feb. 26) … * There will be no significant immediate impact on rates offered by government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac from a temporary extension of the conforming limit to $729,750 in some U.S. markets, according to FBR Capital Markets Corp. In the report released last week, analyst Paul Miller wrote that the two GSEs would probably “establish risk-based pricing, depending on the loan characteristics, and raise the guaranty fees on this product beyond that of the agency loans due to exposure to higher credit risk.” The extension is a component of the federal stimulus package signed into law this month. The GSEs will need some time to familiarize themselves with jumbo loans--an area in which they have scant experience, said Miller (American Banker Feb. 26) … * Five former insurance executives were convicted on fraud charges as a result of fraudulent transactions between American International Inc. (AIG) and General RE Corp. Prosecutors say they will seek further indictments. Four of the five executives were employed by General Re, a unit of Berkshire Hathaway Inc. The fifth is a former AIG employee. The five were found guilty of all 16 counts, including conspiracy, securities fraud, mail fraud and making false statements. In the case, the executives were accused of inflating AIG’s reserves in 2000 and 2001 by $500 million through fraudulent reinsurance deals that artificially boosted its stock price (The Wall Street Journal Feb. 26) … * The credit crisis may have affected even Goldman Sachs Group and Lehman Brothers Holdings Inc. through potential losses from so-called variable interest entities (VIEs), which allow financial firms to keep assets such as subprime mortgage securities off their balance sheets. Goldman last month said it could incur as much as $11.1 billion in losses from VIEs, which finance themselves by selling short-term debt backed by securities. Some of the securities are insured against default. Lehman, according to a Jan. 29 filing, guaranteed $7.5 billon of VIE assets as of Nov. 30. Lehman wrote down the value of subprime securities by $1.5 billion (Bloomberg.com Feb. 26) … * Meredith Whitney, Oppenheimer & Co Inc. analyst, has again slashed earnings estimates for Citigroup Inc. Last year, her poor forecast for the world’s biggest bank set off a worldwide financial sector stock sell-off, analysts said. She now is “dramatically reducing” her Citigroup earnings forecast, as the bank faces further writedowns related to the value of highly leveraged loans, consumer borrowing and investments that are tied to subprime mortgages, she wrote in a note. In efforts to improve its balance sheet, Citigroup also will need to sell up to $100 billion in income-generating assets, which will hurt its growth efforts, Whitney added (Nationalpost.com Feb. 25) …

Market News (02/26/2008)

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MADISON, Wis. (Feb. 27)
* U.S. consumer confidence fell to 75 in February--the lowest reading in 15 years except for 2003 during the Iraq War, according to Conference Board (The Wall Street Journal Feb. 26). Its index of consumer confidence reading for February was below the 81 expected by analysts and was less than a revised-downward reading of 87.3 in January. That compares with a 90.6 reading for December. Consumers were more negative about today's business conditions and job market than they were a year ago. And they expect further deterioration in business conditions and employment the next few months. The expectations index plunged to a 17-year low--to 57.9 from a downwardly revised January index of 69.3. The current situation index, in which consumers assess current economic conditions, rose to 100.6 from a revised January index of 114.3. Consumers are becoming increasingly concerned about the outlook for their incomes, which does not bode well for spending, said Moody's Economy.com (Feb. 26) … * The average 30-year, fixed-rate mortgage rose half a percentage point to 6.04% the past four weeks, said Freddie Mac. That increase occurred after the Fed lowered its benchmark rate by 0.75% Jan. 22 and cut the rate another half-point eight days later. When he testifies before Congress today and Thursday, Federal Reserve Board Chairman Ben Bernanke likely will be asked why long-term bond yields are moving in the opposite direction to the Fed funds rate, says Neal Soss, chief economist with Credit Suisse Group. The Fed is walking a line between growth and inflation, and any inflation threats will influence mortgage-bond investors, who set the fixed rates, said Diane Swonk, chief economist, Mesirow Financial Inc., Chicago. The Fed has no direct control over mortgage rates, says Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Mass. (Bloomberg.com Feb. 26) … * Repossessions of U.S. homes during January rose 90% to 45,327--nearly double the repossessions from January 2007, reported RealtyTrac Inc., which monitors more than one million properties (Bloomberg.com Feb. 26). Total foreclosure filings, which include default and auction notices plus seizures by banks, increased 57%. Key factors were the defaults by subprime borrowers and those unable to pay new rates on their reset adjustable-rate loans. January's foreclosures filed were the highest since August and the second highest in three years, when RealtyTrac began recording the data. More than 233,000 properties were in some stage of default during last month. Total filings rose 8% in January from December. Nevada, California and Florida continued to record the highest foreclosure rates … * Home prices dropped 8.9% during fourth quarter 2007 from a year earlier, according to the S&P/Case-Shiller home price indexes, based on 10-city and 20-city composites. It was the largest decline in the index's 20-year history. The 10-city index fell 9.8% in 2007, while the 20-city index dropped 9.1%. The 10-city index fell 2.3% in December from November, following a 2.2% drop in November; The 20-city composite fell 2.2% in December from November, after a 2.1% drop in November. Prices fell in all 20 areas of the index, with the largest at 3.5% in Phoenix, 3.4% in San Diego, 3.2% in San Francisco, and 3.1% in Los Angeles. Robert J. Shiller, Yale University professor and chief economist at MacroMarkets LLC termed the results "bleak." In terms of annual decline, Miami posted the largest decline: 19% (The Wall Street Journal and Moody's Economy.com Feb. 26) … * During fourth-quarter 2007, home prices in the U.S. fell 0.3% from the same period the year before and dropped 1.3% from third-quarter 2007, according to the Office of Federal Housing Enterprise Oversight (OFHEO). The decline was higher than the 0.3% decline from second to third quarter. "The year 2007 showed the first four-quarter decline in the purchase-only index since its earliest data in 1991," said OFHEO Director James B. Lockhart. However, OFHEO's data show "relatively greater house price stability than do other nationwide house price indexes," he said. In December, prices fell an average 0.2% across the U.S., the sixth consecutive decline. Prices have fallen 2.4% from their peak in April 2007 (The Wall Street Journal Feb. 26). OFHEO relies on data collected by two government-sponsored enterprises it regulates: Fannie Mae and Freddie Mac. It excludes loans exceeding $417,000 and subprime loans … * Inflation among finished producer goods continued accelerating in January, with prices of food, energy, and core producer products growing at a faster clip than expected, according to the Labor Department Tuesday. The Producer Price Index (PPI) for finished goods in January rose 1% (seasonally adjusted) after decreasing 0.3% in December. Originally, December prices were estimated downward 0.1%. The core PPI, which excludes food and energy items, rose 0.4%, compared with a 0.2% increase the previous month. Economists expected a 0.4% increase in the overall PPI and a 0.2% in the core index. During the past 12 months, producer prices rose 7.4% (unadjusted)--the most since October 1981 recorded a 7.5% increase. Energy prices for the wholesale sector rose 1.5% in January, gasoline increased 2.9% and residential natural gas was up 0.7%. Food prices were up 1.7% and the price of autos increased 0.3% (Moody's Economy.com, Bloomberg.com and The Wall Street Journal Feb. 26) … * Crude oil rose to more than $100 a barrel for a record close Tuesday on the New York Mercantile Exchange (Bloomberg.com (Feb. 26). Crude oil set for delivery in April increased $1.65--or 1.7%--to settle at $100.68 a barrel. Earlier prices were up to $101.06 a barrel. Crude oil supplied by the Organization of Petroleum Exporting Countries (OPEC) will decline by 200,000 barrels a day, or 0.6%, to 32.45 million barrels a day this month, said PetroLogistics Ltd. In January, OPEC supplied 32.65 million barrels a day. Analysts say that OPEC is cutting production. Ministers from the 13 OPEC nations are to meet next week to discuss oil quotes … * The U.S. dollar fell to an all-time low against the euro Tuesday (Bloomberg.com Feb. 26). During the past 12 months the dollar has declined against 14 of the world's 16 largest currencies. The only currencies it hasn't declined against are the South African rand and the Korean won …

Market News (02/25/2008)

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MADISON, Wis. (2/26/08)
* Sales of existing homes declined for the sixth consecutive month during January, slipping 0.4% to an annual rate of 4.89 million, reported the National Association of Realtors (NAR) Monday (realtor.org Feb. 25). That compares with December's revised 4.91 million annual pace, revised upward from 4.89 million originally estimated. Wall Street analysts had expected January's figures to be lower, at 4.81 million in sales. Although the decline is less than expected, the sales pace is the slowest since NAR's survey began nearly 10 years ago. It would take 10.3 months at the current sales rate to sell off the current inventory of unsold homes, which one analyst terms "enormous." Joshua Shapiro, economist at MRF, a research firm, said the inventory is double the normal amount and above one year ago (The New York Times Feb. 25). Inventories of homes rose 5.5% at the end of January to 4.19 million (The Wall Street Journal Feb. 25) … * The median home price for existing homes fell 4.6% in January--to $201,100 from $210,900 in January 2007, said the National Association of Realtors in Monday's report (realtor.org Feb. 25). That compares with $207,000, the median price for December. Weak demand is placing more pressure on home sellers to lower their price, which in turn would stretch out the housing industry's slump. The median price of a U.S. single-family home fell in 2007 for the first time in at least four decades. Sales of those homes dipped 13% last year, the biggest annual decline in 25 years, said The New York Times Feb. 25). "Inventories are high, so it's not surprising prices are declining," NAR economist Lawrence Yun said. The average 30-year mortgage rate was 5.76% in January, down from December's rate of 6.10%, said Freddie Mac … * The Chicago Fed National Activity Index rose during January but remained in the negative range, according to the Chicago Federal Reserve. January's index was -0.58, compared with -0.69 in December. The three-month moving average has remained at about -0.6 or below since the beginning of fourth quarter. This indicates growth is well below the trend. It was the 17th consecutive month of below-average growth. According to Moody's Economy.com (Feb. 25), the readings suggest little inflationary pressure in the near term and indicate the economy is already in or very close to recession. Employment-related indicators were less burden on the overall growth, with 0.25 in January compared with -0.31 in December. Consumption and housing also contributed less: -0.23 for January compared with -0.28 in December less to the average. Production-related indicators made a -0.08 contribution compared with December's readings … * Standard & Poor's Corp. says it downgraded finance company GMAC LLC Friday, to B+/C from BB+/B. S&P said GMAC is having difficulty funding its loans, and the housing slump, tightened credit and reduced likelihood of support from its owners--Cerberus Capital Management LP and General Motors Corp.--would make it harder to return to profitability. S&P also cut the rating on GMAC's Residential Capital LLC mortgage lending unit to B/C from BB+/B. On Feb. 20, GMAC announced it would shut three-fourths of its auto financing offices this year in North America and lay off 930 workers. It made the announcement after reporting a $2.3 billion loss last year (Bloomberg News Feb. 25) … * The downturn in the U.S. housing market may take its toll on some of the largest publicly traded home builders, said two industry analysts, Vicki Bryan, senior high-yield debt analyst based in Friendswood, Texas, for Gimme Credit LLC of New York, and Paul Puryear, managing director of St. Petersburg, Fla.-based Raymond James & Associates. They listed these companies as having serious problems if the housing slump doesn't improve: Beazer Homes USA Inc., Standard Pacific Corp., Hovnanian Enterprises Inc. and possibly WCI Communities Inc. (Bloomberg News Feb. 25) …

Hampel Economy wont snap back quickly

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WASHINGTON (2/26/08)--Those who are expecting the economy to snap back quickly next year will be disappointed, Bill Hampel, chief economist at the Credit Union National Association, told Bloomberg TV yesterday. “We’re in for a very slow slog for the next couple of years,” he said. With the U.S. economy in the early stages of a recession, Hampel predicted that the third quarter of this year would be surprisingly stronger than the slower first two quarters because of tax rebates. The fourth quarter will “settle in” for a slow haul to recovery, he said. Savings rates remain at zero, and job growth remains slow, forcing households to spend from their assets. They will “have to save the old-fashioned way,” Hampel said. Consumers are more worried about keeping their jobs than about prices, except for high energy prices, he said. Though some of the recession could spread overseas, Europe, India and Asian countries will have enough internal strength to purchase goods from the U.S. “The strength of exports will keep us going,” Hampel said.

News of the Competition (02/25/2008)

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MADISON, Wis. (2/26/08)
* Saying Providence Equity Partners officials changed the terms of a financing accord without its consent, Wachovia Corp. has sued Providence to get out of the agreement--which is a $1.1 billion Providence purchase of television stations from Clear Channel Communications Inc. The bank “is no longer obliged to provide any financing contemplated” for the acquisitions, Wachovia’s lawyers wrote in a 15-page complaint against Providence and its Newport Television LLC unit (Bloomberg.com Feb. 25) … * In what would be the largest U.S. initial public offering ever, Visa Inc. said Monday it may raise as much as $18.8 billion, amid worries that the global credit crunch could diminish card volumes. The world’s largest credit card network filed with the Securities and Exchange Commission to sell 406 million Class A shares at a price of $37 to $42 apiece, which would result in proceeds of $15 billion to $17.1 billion. Visa said it also might sell an additional 40.6 million shares to meet demand, growing the potential size of the IPO to $18.8 billion. The timing of Visa’s IPO is risky, analysts said, pointing to fears that the U.S. economy might be entering a recession--which has cooled off investor demand for stocks and IPOs (The New York Times Feb. 25) … * Five months after the global credit crisis brought down Britain’s fifth-largest mortgage lender and prompted the first bank run in the nation in more than 150 years, Northern Rock PLC was officially brought under state ownership Friday. A government-appointed committee will begin a strategic review of the bank and determine if and how shareholders will get any returns on their previously deemed safe investments in a bank with roots that reach back to 1850. The government is expected to recommend little or no return on investments, analysts said. Northern Rock shareholders are threatening legal action over the nationalization (Associated Press Feb. 22) … * Countrywide Financial has canceled a ski junket for bankers from smaller mortgage banks at the the Ritz-Carlton Bachelor Gulch Ski Resort in Avon, Colo. The financially strapped mortgage lender was going to pay for 30 invited guests’ hotel room tabs, meals, skiing fees, and tips. The company said in a statement that it decided to cancel all gatherings with business clients and partners for the rest of 2008 “in light of recent events.” Countrywide had been criticized for planning the lavish event and moved quickly in response, analysts said (The New York Times Feb. 25) … * Small banks are having a tough time raising capital, even as large-cap banks have raised billions in recent months, analysts said. Although it isn’t the best time to raise capital in the market, some smaller banks may not have a choice, according to Dennis T. Ward, CEO of Federal Trust Corp, Sanford, Fla. With its risk-based capital falling to 9.57%--below the 10% that regulators require for designation in the ”well-capitalized” category--Federal Trust reported a fourth-quarter loss. If bad loans continue to pile up and the economy continues to cool, demand for capital will only increase, analysts said. However, the long-term expectation is that smaller financial institutions will survive the current turmoil and generate share prices above current levels over the long term, according to Adrian van der Knaap, co-head of debt markets for the Americas at UBS AG (American Banker Feb. 25) … * After 2007 failed to meet expectations, Bank of America Corp. did not distribute company-based performance bonuses to employees under its Rewarding Success program--for the first time since the program began three years ago. The $1.7 trillion asset, Charlotte, N.C.-based BofA started the program to focus its work force on earnings and stock targets. At the time of its inception, analysts lauded the broad-based incentive program as a breakthrough for large banking companies, because it extended performance bonuses to rank-and file employees (American Banker Feb 25) …

Jobs data signals recession CUNA tells ICNN.MoneyI

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MADISON, Wis. (2/25/08)--Jobs data are “at levels that are consistent with a recession,” Mike Schenk, CUNA senior economist, told CNN.Money Thursday. The number of people filing for jobless benefits grew to 2.78 million for the week ended Feb. 9--the highest number since October 2005. Most analysts forecast a weak economic uptick in the second half of the year, as the effects of the credit crunch and housing slump diminish, and the Federal Reserve Board’s rate cuts and fiscal stimulus start to bolster the economy, the article said. Other analysts, such as Schenk, believe the downturn could have a longer duration, while consumers pay down debt and increase savings--not spending, said the article. “It’s going to get uglier before it gets better,” Schenk said. “We’re headed for a fairly long period of slow growth.”

News of the Competition (02/22/2008)

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MADISON, Wis. (2/25/08)
* Chief executives of investment banks and mortgage firms will testify to a congressional committee this week that is investigating the relationship between the mortgage crisis and executive compensation. Among those expected to testify are Countrywide Financial founder and Chief Executive Angelo Mozilo, former Citigroup CEO Charles Prince, and former Merrill Lynch Chairman and CEO Stanley O’Neal. The men made headlines when they were granted huge pay packages, even as the housing market was unraveling. Prince left Citigroup with a compensation package of $68 million. O’Neal collected $161 million upon his departure. Mozilo said he would give up part of his reportedly $115 million compensation package after facing intense criticism from lawmakers. The chairmen of the compensation committees at Countrywide and Merrill Lynch also are expected to testify (CNNMoney.com Feb. 22) … * Investors continue to exit the asset-backed commercial paper (ABCP) market, shot-term debt that is backed by assets such as mortgages and auto loans. U.S. ABCP declined $11.7 billion last week, to a seasonally-adjusted $784.3 billion, according to the Federal Reserve. It was the fourth consecutive weekly decline and the largest in four months. The market has plunged from a peak of $1,200 billion outstanding in July as the credit crunch began. The decline is a huge problem for the bank-operated, off-balance-sheet investment vehicles that depend on the market for funding. Analysts say the market will continue to contract as the structured investment vehicles that are supported by banks redeem their paper (FT.com via Yahoo! News and Bloomberg.com Feb. 22) … * Banks boosted their borrowing from the Federal Reserve’s discount window last week. Borrowing totaled $1.371 billion as of Feb. 20--up sharply from $39 million the previous week and the largest total since mid-January. Lending via the primary credit facility last week as $1.368 billion, while seasonal credit was $3 million. Discount window borrowing had declined in recent weeks after the Fed launched its new Term Auction Facility, which lets banks borrow funds at interest rates that are lower than the discount window (Dow Jones Newswires and Thomson Financial via Yahoo! News Feb. 22) … * The first-quarter profit estimates of Goldman Sachs, Lehman Brothers, and Bear Stearns were slashed more than 40% by Sanford C. Bernstein last week. Investment-banking revenue will fall an average 35% for the companies, said Analyst Brad Hintz. “The high margin businesses of equity underwriting and M&A had their weakest quarters since 2005,” he said. Banks and securities firms have disclosed more than $146 billion worth of writedowns and credit losses (Bloomberg.com Feb. 22) … * Three British bankers were each sentenced Friday to 37 months in prison for their roles in a secret financial scheme with former Enron Chief Financial Officer Andrew Fastow. Former Greenwich NatWest bankers David Bermingham, Giles Darby, and Gary Mulgrew each pleaded guilty to one count of wire fraud in November. They had previously denied colluding with Fastow. The three also agreed to pay NatWest more than $13 million. Fastow is serving a sentence of six years. Enron filed for bankruptcy in 2001 after years of disguising its debt. Thousand of employees lost their jobs after the firm’s failure. The collapse of the energy-trading firm also resulted in the loss of $2 billion in pension plans and $60 billion in market value for investors (Associated Press via The New York Times Feb. 22) …

New CU forecast Softer loan faster savings growth

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MADISON, Wis. (2/25/08)--Credit unions are likely to see much softer loan growth and substantially faster savings growth throughout the forecast horizon, according to the Year-End 2007 U.S. Credit Union Profile, now posted on the Credit Union National Association's (CUNA) website. "The result will be falling loan-to-savings ratios and some mix-related interest margin pressure. Asset quality is likely to deteriorate further, which also will put a drag on earnings and cause net worth ratios to decline somewhat," says CUNA senior economist Mike Schenk, vice president of CUNA economics and statistics. The profile report contains a summary of recently released 2007 data from the National Credit Union Administration (NCUA) and an updated economic and credit union forecast (use the link). The profile's summary of NCUA data reveals that in 2007, credit union savings balances increased by 5% and loan balances increased 6.5%. The movement's aggregate loan-to-share ratio finished the year at 83.4%--its highest year-end reading since the 1970s. "The fallout from recent housing market turmoil caused credit union asset quality to deteriorate somewhat in 2007, though both delinquencies and net chargeoffs remained near long-run averages," said Schenk. Full-year credit union earnings declined. Return on assets (net income as a percent of average assets) was 0.66% in 2007 versus 0.82% in 2006. Credit union capital remained at near-record highs, with the net capital-to-asset ratio ending the year at 11.4%. "The profile's recently updated CUNA economic and credit union forecast suggests that the U.S. entered a mild recession in 2008," said Schenk. "Aggressive fiscal and monetary stimulus is expected to improve results in the second half of 2008, but below-average growth is expected through 2009." CUNA's baseline forecast reflects a steeper yield curve: the Federal Reserve is likely to cut its benchmark Federal Funds interest rate target by 50 basis points in March and by a similar magnitude in April. At the same time, longer-term rates are expected to increase marginally. That leads to the forecasts for softer loan growth, faster savings falling loan-to-savings ratios, mix-related interest margin pressure, and deteriorating asset quality.

Market News (02/22/2008)

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MADISON, Wis. (2/25/08)
* U.S. stocks declined Friday for a second day amid concerns about the weak economy and a drop in financial shares (Bloomberg.com Feb. 22). The Dow Jones Industrial Average fell 92.38, or 0.8%, to 12,191.82 by mid-afternoon. About three stocks fell for each one that increased on the New York Stock Exchange. Financial shares in the S&P 500 lost 1.5%, pushing their decline over the last year to 31%--the weakest showing among 10 industries. A sell-off Thursday left the Dow down more than 140 points (Associated Press via Yahoo! News Feb. 22). Weak economic data in recent weeks has prompted concern that the Federal Reserve’s rate cuts won’t be enough to help the economy avoid recession. Analysts also are worried that the nation may be facing stagflation--a period of slowing growth and higher inflation--for the first time since the 1970s … * The U.S. economy probably will see only slower economic growth this year--not a “prolonged” slump, said Federal Reserve Bank of Dallas President Richard W. Fisher (Bloomberg.com Feb. 22). He said the slowdown probably will last for a “couple” of quarters. He also noted the Fed’s concern about inflation. “We have to be wary of the fact that we are navigating through an extremely narrow passageway here: with on the one side of us inflationary shoals and on the other the risk of weaker economic growth,” said Fisher. Other analysts are predicting an outright recession this year. Moody’s Economy.com (Feb. 22) now forecasts a recession during the first half of the year. The research firm said companies are beginning to lay off workers, not just trim hiring plans … * Wholesale inflation was tamer at year-end 2007 than previously reported, according to revised Labor Department data. The department reported Friday that the Producer Price Index (PPI) fell by 0.3% in December instead of the 0.1% decline previously reported. The November increase in wholesale prices was revised to 2.6% from 3.2%. Even with the revisions, the PPI jumped 6.3% in 2007--the largest gain since a 7.1% increase in 1981. Energy prices surged 18.4% last year. Gasoline prices soared 37.1% (Reuters via Yahoo! News Feb. 22) … * Gasoline prices jumped Friday to the highest level since June. Prices surged 2.9 cents to a national average of $3.115 a gallon, according to AAA and the Oil Price Information Service. Pump prices are 83 cents higher than a year ago. Some analysts predict that gasoline prices will soar during the spring, to new record-highs of $3.75 to $4 a gallon, as oil prices continue to increase. Jim Ritterbusch, president of energy consultant Ritterbusch and Associates, disagrees. He predicts that “a major supply cushion” and an eventual drop in oil prices will help dampen gasoline prices this year, unless an unforeseen disruption occurs (Associated Press via CNNMoney.com Feb. 22) … * The U.S. auto industry is in recession, even if the overall economy isn’t, said Nissan Motor Co. Chief Executive Carlos Ghosn. He said soaring costs for raw materials will continue to weigh on automakers. Noting that the U.S. auto market has been stagnant for years, he said automakers should focus on emerging markets, including Russia, Brazil, China and India. Ghosn predicts that Russia will overcome Germany within two years to become Europe’s largest auto market. U.S. vehicle sales fell to 16.1 million last year--from 16.6 million in 2006 and the weakest pace since 1998, according to statistics from Autodata Corp. Declining home values and rising gasoline prices are expected to keep the market weak this year (Associated Press via Yahoo! News Feb. 22) …

Market News (02/21/2008)

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MADISON, Wis. (2/22/08)
* Fixed-rate mortgages (FRMs) rose this week even as adjustable-rate mortgages (ARMs) declined, a trend that could make ARMs more popular, according to a Freddie Mac report. The average 30-year FRM increased 32 basis points to 6.04%, while the 15-year FRM jumped 39 basis points 5.64%. The one-year ARM edged down 2 basis points to 4.98%. “After trending up in the past two weeks, long-term fixed mortgage rates are back up to nearly where they were at the beginning of the year,” said Freddie Mac Vice President and Chief Economist Frank Nothaft in a statement. “In contrast, average rates on adjustable-rate mortgages are about 0.5 percentage points below levels of the first week of this year.” Nothaft said ARMs may become more popular as the spread between ARMs and FRMs continues to widen (CNNMoney.com Feb. 21). For CUNA's Daily Financial Rates, use the link. … * Community banks aren’t experiencing the high foreclosure and loan-delinquency rates that larger banks have seen because most community banks offer less risky, fixed-rate mortgages (FRMs), according to a survey by the American Bankers Association (ABA). According to community bankers polled by the group, the average delinquency rate declined to 1.1% in 2007, from 1.4% the previous year, while the foreclosure rate rose only slightly, to 0.4% from 0.3%. FRMs accounted for 76.2% of the mortgages offered by community banks last year--up sharply from 64.7% in a 2006 poll. Adjustable-rate mortgages made up just 24% of all new mortgages originated in 2007--down from 35.3% in 2006. The survey also found that 39% of community banks expect their single-family mortgage lending to rise this year. That’s the same percentage as last year and reflects the fact that community banks generally have avoided the risky loans that are causing problems,” said ABA Executive Vice President Robert Davis (Dow Jones Newswires Feb. 21) … * The credit crunch and consumer-spending slowdown have prompted a jump in company bankruptcy filings this year. Upscale retailer Sharper Image and Lillian Vernon Corp., which sells low-cost gifts, both filed for bankruptcy this week. Moody’s Investors Services says 41 firms are at risk of violating the terms of their loan agreements this year. That’s up from 25 at the end of June. Companies at risk include not just homebuilders and mortgage firms, but restaurant chains and retailers as the credit crunch spills over to the broader economy. Companies may default on more than $220 billion of high-yield corporate bonds, leveraged loans, and other non-bank debt in 2008 and 2009, estimates Edward Altman, an expert on bankruptcy and corporate default. Bank losses on corporate defaults will be in addition to the more than $100 billion in writedowns they’re already taken on their subprime holdings. Tighter credit also is making it tougher for companies such as auto-supplier Delphi Corp to emerge from bankruptcy (The Wall Street Journal Online Feb. 21) … * While jobless claims retreated last week, the monthly average jumped to the highest level since Hurricane Katrina. First-time claims for unemployment insurance edged down by 9,000 during the week ending Feb. 16 to 349,000, the Labor Department reported Thursday. However, analysts noted that claims probably were skewed downward because California was closed one day last week for a state holiday. The four-week moving average. which smoothes out weekly volatility, jumped by 10,750 to 360,500--the highest level since October 2005 in the wake of Hurricane Katrina. In another weak sign for the job market, continuing claims (the number of people still on the benefit rolls after an initial week of aid) increased by 48,000 during the week ended Feb. 9 to 2.784 million. The increase suggests workers are having a tough time finding new employment in the soft economy (Associated Press via CNNMoney.com and Economy.com Feb. 21) … * The Conference Board’s index of leading economic indicators declined for a fourth-consecutive month in January, suggesting a weak economy over the next three to six months (Associated Press via Yahoo! News Feb. 21). The index fell 0.1% last month and has declined 2% over the past six months--its largest decline since early 2001. The index’s decline for four consecutive months is consistent with a mild recession, said Moody’s Economy.com (Feb. 21). Stock prices were the largest negative for the index in January, while increases in the money supply and a modest gain in consumer expectations were the largest positives. However, the research firm noted that consumer confidence has declined this month …

News of the Competition (02/21/2008)

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MADISON, Wis. (2/22/08)
* Ninety-one community groups in California sent a letter to Bank of America CEO Kenneth Lewis asking that the bank cease mortgage foreclosures in portfolios of BofA and Countrywide Financial Corp., which BofA has agreed to acquire. The letter, which was drafted by the California Reinvestment Coalition, calls for a moratorium on foreclosures, and for loan modifications for borrowers in danger of foreclosure, by switching their loans to a 30-year fixed-rate loan at a rate of no more than 6%. The groups also want BofA to keep Countrywide’s headquarters in Calabasas, Calif., and its loan-servicing center in Simi Valley, Calif., and to retain jobs in those locations. “We’ve been in ongoing negotiations with a number of groups and those discussions will continue, as we all seek solutions to help borrowers in the current environment,” said a BofA spokesman (BizJournals via Yahoo! News Feb. 21) … * New York-based Israel Discount Bank (IDB) has filed a lawsuit against insurers MetLife Inc. and BlackRock Inc. over the losses it incurred on subprime investments. The suit alleges that the firms were in breach of contract and fiduciary duty because they invested a separate account of the bank in subprime mortgage-backed securities that have fallen in value. The suit claims the firms also failed to transfer money out of the account after IDB repeatedly requested transfers. MetLife and BlackRock dispute the claims (The Wall Street Journal Online Feb. 21) … * Dresdner Bank AG, Germany’s third-largest bank, is struggling with the subprime-credit crisis. The bank said it plans to provide a credit line to the $18.8 billion structured investment vehicle (SIV) that it manages in order to avoid forced asset sales. Dresdner’s “K2” SIV has declined in value from $31.2 billion. Other banks, including Citigroup and HSBC Holdings, also have announced plans to support their SIVs. Investors are distrustful of SIVs because mortgage-backed securities account for about one-third of many SIV portfolios (Associated Press via The New York Times Feb. 21) … * Banco do Brasil, Brazil’s biggest retail bank, said it will set up operations as a retail bank in the U.S. so it can serve Brazilians living in the U.S. The Brazilian state-controlled bank said it plans to create two companies in the U.S. BB Money Transfers will handle remittances between the U.S. and Brazil. A retail bank will provide basic banking services including deposits, loans, and investments. Banco do Brasil, which is considering listing its shares on the New York Stock Exchange, plans to invest about $44 million to expand into the U.S. The firm already has branches in Japan, another country with a large Brazilian immigrant population (Dow Jones Newswires and Reuters via Yahoo! News Feb. 21) … * Hyundai Capital Services plans to begin offering auto loans in the U.S. Hyundai, which is 43% owned by General Electric, hopes the financing effort will help boost auto sales in the U.S., its biggest foreign market. General Electric already offers financing for Kia customers in Austria, Germany, Hungary, Poland, Slovakia, and Spain, said Hyundai Capital Senior Vice President Choi Jin Hwan. GE Money receives about 75% of its net income from foreign markets (Bloomberg News via American Banker Feb. 21) …

Market News (02/20/2008)

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MADISON, Wis. (2/21/08)
* Consumer inflation accelerated in January despite the economic slowdown. The Consumer Price Index (CPI) rose 0.4% last month and was up 4.3% over the 12 months ending in January, compared with a 4.1% year-over-year gain in December, the Labor Department reported Wednesday. Food prices and energy prices each advanced 0.7% in January. Excluding the volatile food and energy categories, the core CPI rose 0.3% last month following gains of 0.2% in each of the previous nine months. The core CPI was up 2.5% year-over year, compared with a 2.4% increase for December and still far above the top of the Federal Reserve’s comfort zone of 1% to 2%. The January increase in the core rate reflected gains in prices for apparel, medical care, recreation, education and communication, and for other goods and services. The recent surge in oil prices to more than $100 a barrel could accelerate the overall CPI inflation rate in coming months, noted Moody’s Economy.com (Feb. 20). And while the economic downturn may slow inflation a bit, the price of medical care and other services continues to post large gains. Medical-care costs jumped 4.9% over the 12 months ended in January … * The Federal Reserve on Wednesday cut its forecast for economic growth and said its expects higher inflation and unemployment this year. The Fed now forecasts that the economy will expand by 1.3% to 2% in 2008--down from its previous forecast of 1.8% to 2.5% growth. The central bank cited the deepening housing slump and credit crunch as reasons for the lower forecast. The Fed also boosted its inflation forecast due to rising oil prices. It now expects consumer inflation of 2.1% to 2.4% this year--up from the previous 1.8% to 2.1% forecast. Core (excluding food and energy) inflation is expected to range between 2% and 2.2%, up from the 1.7% to 1.9% range previously forecast. The nation’s unemployment rate is expected to increase to 5.2% to 5.3% this year, up from the 4.9% previous prediction. The combination of slower economic growth and rising inflation will complicate the central bank’s efforts to keep the economy on track while subduing inflation expectations (Associated Press via Yahoo! News and The Wall Street Journal Online Feb. 20) … * Workers’ wages aren’t keeping up with inflation, a trend that could dampen consumer spending. Real (inflation-adjusted) weekly earnings declined by 0.5% in January, the Labor Department reported Wednesday. A 0.3% decline in average weekly hours and a 0.4% increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers were partly offset by a 0.2% gain in average hourly earnings. Over the 12 months ended in January, real weekly earnings declined by 1.4% … * Housing starts edged up 0.8% to a seasonally-adjusted annual rate of 1.012 million in January, the Commerce Department said Wednesday. Starts were down 27.9% from a year earlier. The small January gain followed a 14.8% plunge in December. Single-family housing starts declined 5.2% to 743,000 last month. Building permits fell 3% to a 1.048 million rate in January and were down 33.1% from January 2007. A rising glut of unsold homes on the market will keep construction activity weak this year … * Mortgage activity plunged last week, as long-term interest rates soared. The Mortgage Bankers Association’s Market Composite Index tumbled 22.6% during the week ending Feb. 15 to 822.8 (mbaa.org Feb. 20). The Purchase Index dropped 11.5% to 357.6, while the Refinance Index plunged 27.9% to 3533.8. The refinance share of mortgage activity fell to 61.7% from 67.4% the previous week. The average 30-year, fixed-rate mortgage (FRM) jumped 37 basis points to 6.09% last week, while the 15-year FRM surged 37 basis points to 5.55%. The one-year, adjustable-rate mortgage (ARM) remained at 5.72%. The Federal Reserve’s huge rate cuts last month haven’t yet translated into the mortgage market, as tighter credit and falling confidence prompted big increases in FRMs last week, noted Moody’s Economy.com (Feb. 20). The Fed may not be able to help ease the mortgage crisis much … * Just 15 counties in the nation have a median-home price high enough to qualify for the temporary increase in the maximum conforming loan limit that the economic stimulus package calls for, suggesting that the package may not give the boost to the housing market that many expected. The National Association of Home Builders (NAHB) had hoped that 29 metropolitan areas would qualify for the $729,725 limit. However, less than 10 probably will qualify, said a NAHB staff member at the trade group’s convention in Orlando last week. Analysts also are concerned that the Office of Federal Housing Enterprise Oversight will delay approval of the temporary increase (MarketWatch Feb. 20) …

News of the Competition (02/20/2008)

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MADISON, Wis. (2/21/08)
* The housing slump prompted a record loss of $5.24 billion for the thrift industry in the fourth quarter, as institutions took writedowns and set aside record levels for anticipated loan losses, the Office of Thrift Supervision (OTS) reported Wednesday. OTS said the $5.24 billion loss topped the previous record quarterly loss of $4.01 billion set during the second quarter of 1988 during the savings and loan crisis. This year will be “very difficult” for thrifts, said OTS Director John Reich. He noted that the credit problems that began with subprime mortgages are quickly spreading to commercial real estate, consumer and small business lending, and credit cards. About $4 billion of the overall loss for thrifts last quarter resulted from writedowns by a few thrifts in goodwill, needed to recognize the lower value of acquired assets. Another $2.2 billion loss reflected a restructuring charge by one institution. During the fourth quarter, thrifts set aside $5.1 billion in loan-loss provisions--or 1.35% of average assets, up from 0.45% a year earlier. Troubled assets were 1.65% of assets, up from 0.70% a year earlier. For all of 2007, net income for thrifts was $2.87 billion--down sharply from $15.85 billion in 2006 (ots.treas.gov and Dow Jones Newswires Feb. 20) … * GMAC LLC, the captive auto lender for General Motors Corp., said it plans to shut down most of its auto-financing offices in the U.S. and Canada this year and cut 930 jobs, or 15% of its workforce, as it faces declining profits, higher borrowing costs, and the credit crunch. GMAC posted a $2.3 billion loss in 2007 related to losses in its ResCap mortgage unit, which was hit by an overexposure to subprime mortgages. GMAC posted a $2.13 billion profit for 2006. GMAC will cut its auto-financing offices from 20 to five by year end. The auto unit has tightened underwriting standards, mostly at the lowest tier of subprime. Cerberus Capital Management purchased 51% of GMAC in 2006 (The Wall Street Journal Online and Reuters via Yahoo! News Feb. 20) … * Citigroup is selling or shutting down some retail branches and consumer-finance operations in Europe, Asia, and Latin America as part of its strategy to focus on businesses with higher profit prospects. The company, which saw more than $20 billion in writedowns last year, hopes to refocus its capital to regions with high-growth potential such as Russia and the Middle East. Citigroup already has cut the number of its consumer-finance units in Japan to 51, from 324 at the middle of 2007. It also is seeking to reduce its exposure in Mexico, a main source of credit deterioration. The company plans to sell about 50 branches in the U.K. Still, the cutbacks are a small part of the 2,200 consumer-finance branches and the 3,300 bank branches Citigroup has worldwide (The Wall Street Journal Online Feb. 20) … * Bank examiners’ consideration of commercial real-estate loans has become more intense over the past year amid concerns about the housing slump, say community bankers. In a survey released at the American Bankers Association’s National Conference for Community Bankers in Orlando this week, 38.7% of respondents said commercial restate estate was the main focus in their recent bank exams. That’s up from 26.8% last year. The Federal Deposit Insurance Corp. is especially concerned about construction and development loans because they can be riskier, said Steve Fritts, associate director of the agency’s division of supervision and consumer protection (American Banker Feb. 20) … * Bank of Montreal parent BMO Financial Group announced Wednesday that it will take charges of $486.4 million for the fiscal first quarter related to the credit crunch. The bank also said it plans to provide funds for two of its troubled structured investment vehicles, Links Finance Corp. and Parkland Finance Corp. Bank of Montreal is one of the Canadian banks that are most exposed to the U.S. credit crisis (The Wall Street Journal Online Feb. 20) …

News of the Competition (02/19/2008)

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MADISON, Wis. (2/20/08)
* Ambac Financial Corp., the second-largest bond insurer in the world, is discussing a plan to raise at least $2 billion in capital to help retain its AAA credit rating, said people familiar with the situation. Moody’s and Standard & Poor’s have put Ambac on review for a possible downgrade. The firm would raise the funds by selling shares to existing investors at a discount. The move probably would be a prelude to a bigger move of splitting itself into two businesses. About 54% of the debt Ambac backs is municipal debt and public finance, while 33% involves structured finance. A spilt would threaten the bets by banks and hedge funds that the bond insurers will fail. “A lot of investors put on hedges or speculative bets that the bond insurers wouldn’t be creditworthy, and there’s a possibility some of those bets could become worthless” said CreditSights Inc. Analyst Brian Yelvington (The Wall Street Journal Online Feb. 19) … * Deterioration in the credit-risk profiles of bonds insurers could prompt about 20 banks and brokerages to set aside tens of billions of dollars in reserve, predicts Moody’s Investors Service. Bond insurers, which built their business by guaranteeing municipal bonds, guarantee payment of interest and principal on about $2.5 trillion of debt. However, bond insurers expanded their business to insuring securities backed by subprime mortgages in recent years. The subprime meltdown has subsequently exposed them to greater risk and threatened their ratings (The Wall Street Journal Online Feb. 19) … * Credit Suisse has suspended some of its traders in connection with a $2.85 billion overvaluation of assets. “I can’t tell you exactly how many, but a small number, a handful,” said company spokesman Marc Dosch. The Swiss bank said the misevaluation will lower its earnings by $1 billion during the first quarter. However, Credit Suisse said it still expects to remain profitable for the period. The company continues to investigate how its traders evaluate products, including commercial and residential mortgage-backed securities and collateralized debt obligations (Associated Press via The New York Times Feb. 19) … * Citigroup, which has been raising money after it took a huge hit from the subprime rout, has sold its Japan headquarters to competitor Morgan Stanley in a deal reportedly valued at $445 million. In January, the company reported a record loss and wrote off $18.1 billion for investments hit by the credit meltdown. Citigroup has said it plans to raise money, including from the Government of Singapore Investment Corp., the Kuwait Investment Authority and through sales (Reuters via The New York Times Feb. 19) … * Student lender Sallie Mae has extended the deadline for the closing of its current $30 billion credit facility under an agreement with Bank of America and JPMorgan Chase, as it completes a new $35 billion facility, according to a Securities and Exchange Commission filing. Sallie Mae said it expects the new facility to be completed by the end of this month (Associated Press via Yahoo! Finance Feb. 15) …

Market News (02/19/2008)

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MADISON, Wis. (2/20/08)
* Declining employment, weak retail and vehicle sales, and falling consumer and business confidence all signal an economy that is in recession, said Moody’s Economy.com (Feb. 19). The chance that the economy will sink into a recession within the next six months is now at 60%, up from 56% in December. The housing slump and credit rout has intensified, spilling over into the rest of the economy. The research firm predicts that the economy will experience a mild contraction during the first half of this year. Additional monetary easing probably will minimize the severity of the downturn … * Many Americans felt uneasy about the economy even when it was healthy because their paychecks weren’t keeping up with rising food, energy, and health-care costs. Worker’s pay is stagnant. Last year, the median male worker earned $16.85 an hour, adjusted for inflation. In comparison, the median male worker earned an inflation-adjusted $16.88 an hour in 1973. At the same time, workers have become increasingly more responsible for their health-care expenses and for building retirement savings. “…there is an increasing level of angst that is more fundamental and is not going to go away even when the economy improves,” said Moody’s Economy.com Chief Economist Mark Zandi. Almost two-thirds of Americans surveyed by The Rockefeller Foundation a year ago--when the economy was clearly expanding--said they were somewhat or much less economically secure than they were a decade ago. Fifty percent of respondents said they expect their children to experience even less security. Now that the housing slump has eroded equity and the economy is facing recession, consumers face an even more uncertain future (Associated Press via Yahoo! News Feb. 19) … * Many baby boomers will see their standard of living decline in retirement as they see health-care costs soar. Currently, the federal government estimates that an individual will need $3,800 each year during their retirement to cover costs for Medicare premiums, co-payments, and other costs. A couple will need $7,600 per year. A study released yesterday by the Center for Retirement Research at Boston College estimates that an individual will need $102,000 just to cover health-care costs in retirement. A couple will need $206,000. However, the center estimates that the median retirement savings balance for households approaching retirement is only $60,000. It estimates that, overall, 61% of baby boomers and Gen Xers are “at risk” for a lower standard of living in retirement. They’re considered “at risk” if their savings, Social Security, and pension benefits combined will be at least 10% lower than the income needed to support the same standard of living in retirement (Associated Press via Yahoo! News and CNNMoney.com Feb. 19) … * California’s Silicon Valley is losing its middle-class workforce at a significant rate even as it continues to add jobs, according to the 2008 Index of Silicon Valley, a report that tracks the technology region. Middle-wage jobs ($30,000 to $80,000 a year) declined to 46% of the workforce in 2006, from 52% in 2002. More than 50,000 middle-income jobs vanished during the four-year period. Those jobs were in the lower part of the white-collar workforce, and included secretaries, clerks, and customer-support representatives. At the same time, the percentage of higher-end jobs increased to 27% from 26%, while lower-wage jobs jumped to 27% from 22%. The report said the shift could make upward mobility harder. It also found that the region added 28,000 jobs in 2007 (The New York Times Feb. 19) … * Improved productivity and job cuts have helped airlines better prepare for a possible global economic slowdown, compared with the last major recession, according to the International Air Transport Association. However, the industry group said expensive fuel will continue to erode earnings. “Simplifying businesses brings in to the industry $6 billion in savings,” said Giovanni Bisignani, chief executive of the association. The industry has seen labor productivity surge 64% since 2001. Non-fuel unit costs have plunged 16%. However, rising fuel costs are offsetting some of those savings, said Bisignani. He noted that airlines are expected to spend $150 billion on fuel this year, compared with $44 billion in 2003. He also said the industry has $190 billion in debt, making it more vulnerable to a slowdown in traffic during an economic slowdown (Associated Press via Yahoo! News Feb. 19) …

News of the Competition (02/18/2008)

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MADISON, Wis. (2/19/08)
* The British government announced Sunday it will assume control of Northern Rock, a troubled mortgage lender, in the first nationalization of a British bank in more than 10 years. The move is a significant setback for the administration of British Prime Minister Gordon Brown, analysts said. Northern Rock began to falter last year after a money shortage resulted from the U.S subprime mortgage crisis. The government was compelled to help keep the lender afloat with about $107 billion in loans and guarantees. The government turned down two takeover proposals--from Northern Rock’s current management and from Richard Branson’s Virgin Group--reasoning that neither could “deliver sufficient value for money for the taxpayer,” said Alistair Darling, chancellor of the Exchequer. The government will bring Northern Rock into a temporary period of public ownership, he said. Taxpayers’ outstanding loans to Northern Rock will be repaid in full with interest, under the government ownership plan, Darling said, adding that the private sector ownership plans could not fulfill this promise (The New York Times Feb. 18) … * The country of Qatar is purchasing shares in Credit Suisse Group and has plans to spend up to $15 billion over the course of the year to buy U.S. and European bank stocks, according to an interview of Prime Minister Sheikh Hamad bin Jasim bin Jaber al-Thani, who also is CEO of the Qatar Investment Authority. U.S. banks ravaged by subprime mortgage losses are seeing their shares getting bought up by Persian Gulf Sovereign wealth funds--buoyed by near-record oil profits--and Asian counterparts, analysts said. Investors from counties including Kuwait and Singapore have invested $14.5 billion in Citigroup Inc. since mid-December. The Gulf funds have surpluses to invest and are seeking long-term appreciation, said Giyas Gokkent, head of research at National Bank of Abu Dhabi PJSC. If the investments help bolster domestic financial markets, that would be considered a bonus, Gokkent added (Bloomberg.com Feb. 18) …

Market News (02/18/2008)

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* Financial markets in the U.S. were closed on Monday in observance of the President's Day holiday … * Despite the mortgage-market turmoil, mortgage companies have not shed their advertising budgets. Consumer groups such as National Consumers League, a nonprofit organization in Washington, D.C., say some of the rosier ads are misleading (The New York Times Feb. 18). National television ads by the National Association of Realtors (NAR) say there has never been a better time to buy a home and that home values nearly double every decade. Industry experts indicate that ad spending will be strong this spring--the prime time for the home sales. During third-quarter 2007, mortgage companies spent nearly $409 million on advertising--more than they spent at the height of the housing boom, said TNS Media Intelligence. The Federal Trade Commission warned consumers to be especially wary. Meanwhile, mortgage lending giant Countrywide Financial said Friday its foreclosures and late payments rose in January to levels nearly twice as high as January 2007 … * The U.S. market for auction-rate securities--long-term bonds that reset their interest at auctions every seven, 28, or 35 days--failed to draw enough buyers last week. As a result, interest rates on the securities soared--in some cases to as high as 20% from more than 4%--and the higher rates could attract new investors, according to Bank of America Corp. Instead of stepping in when they couldn't attract bidders, banks such as Citigroup Inc. and Goldman Sachs Group Inc. allowed sales to fail. An unsuccessful auction raises the rate. Banks stopped buying the securities for their own accounts to prevent failures after disclosing at least $146 billion in credit losses and writedowns from the subprime mortgage market. Banks' efforts to preserve their bottom line by not buying auction-rate bonds may be ineffective because borrowers may draw on credit lines provided by banks, said BofA (Bloomberg.com Feb. 18) …

News of the Competition (02/15/2008)

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MADISON, Wis. (2/18/08)
* Mortgage insurer Radian Group on Friday reported a net loss of $618 million for the fourth quarter, as rising mortgage delinquencies and defaults forced the company to pay out more claims and boost loan-loss reserves. Philadelphia-based Radian said it took a $630 million charge to cover mortgage-insurance losses. For the full year, Radian lost $1.19 billion, compared with earnings of $582.2 million in 2006. Standard & Poor’s Ratings Services downgraded Radian Group’s credit on Thursday and said it may downgrade other mortgage insurers as defaults continue to grow. S&P lowered its rating on Radian to AA from AAA. S&P said it expects the firm to pay more in claims than it will collect in premiums this year. The ratings agency said it also is considering downgrades for PMI Group and Triad Guaranty Corp. (Associated Press via Yahoo! News Feb. 15) … * Moody’s Investors Service on Thursday downgraded the credit rating of bond insurer FGIC by six levels, from AAA to A3 (FT.com Feb. 14). The downgrade threatens the ratings of $300 billion of mostly municipal debt insured by FGIC. The market for municipal debt collapsed last week amid uncertainty over credit ratings. FGIC has been downgraded by all three ratings firms. FGIC has asked to be split into two units, the New York State Insurance Department said Friday (MarketWatch Feb. 15). The separation of its municipal bond-insurance business and its structured finance business would insulate the bond-insurance business from exposure to the subprime crisis. The collapse of the municipal bond market has boosted financing costs for states and cities … * Countrywide Financial, the nation’s largest mortgage lender, said Friday that mortgage delinquencies and foreclosures rose to record highs in January. The Calabasas, Calif.-based firm said the foreclosure rate jumped to 1.48%, from 1.44% in December and 0.77% a year earlier. The delinquency rate rose to 7.47%, from 7.20% in December and 4.32% a year earlier. However, the firm also reported a 72% surge in daily mortgage application volume in January, suggesting that many homeowners are taking advantage of lower interest rates to refinance their mortgages. A surge in refinancings could benefit other mortgage firms and title-insurance companies, noted Lehman Brothers Analyst Bruce Harting (Reuters Feb. 15) … * Global banks “remain at risk” from as much as $203 billion in additional writedowns as the bond-insurance rout deepens, according to a forecast by UBS AG. Writedowns for collateralized debt obligations and subprime-related losses already total $150 billion, noted UBS Analyst Philip Finch. He said a regulatory backlash against banks this year could lower profits by 5.3%. Citigroup predicts that UBS itself will have to write down $18.3 billion this year on securities affected by the subprime crisis (Bloomberg.com Feb. 15) …

Consumer confidence down Hampel tells IBloomberg TVI

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NEW YORK (2/15/08)--The consumer sector is in a recession, Bill Hampel, Credit Union National Association senior economist, told Bloomberg TV in an interview Friday afternoon. Hampel commented on a recent University of Michigan survey, which indicated that consumer confidence is at the lowest level since 1992.
Bill Hampel, the Credit Union National Association's senior economist, told Bloomberg TV Friday that consumer confidence is low.
The personal savings rate is currently at zero. Debt ratios remain high, at 125% of after-tax income, Hampel said. While the debt ratio has been rising for some time, home equity has been rising along with it--until two years ago. In the last 18 months, home equity has dropped, and “the debt is still there for us to pay for,” Hampel said. Hampel also noted the effect of the housing crisis on credit unions. Though credit unions lend conservatively and have avoided the subprime mortgage mess, some members have fallen behind on their mortgage payments. “The subprime crisis spread to a broader sector,” Hampel added. When asked about the impact of the Federal Reserve Board’s decision to drop the Fed funds interest rate, Hampel noted that it affects consumers in two ways. First, it allows them to refinance their debt, and second, it “takes the sting” out of interest rate resets on mortgages, he said.

Market News (02/15/2008)

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MADISON, Wis. (2/18/08)
* The number of subprime-related lawsuits filed in federal courts is dramatically outpacing the savings-and-loan (S&L) litigation of the early 1990s, according to a study by Navigant Consulting. The number of subprime-related cases filed last year already equals half the total of 559 S&L cases handled over a number of years by the Resolution Trust Corp. The number of subprime-related cases doubled from 97 in the first half of 2007 to 181 in the last half of the year--for a total of 278 cases. “The S&L crisis has been a high- water mark in terms of the litigation fallout of a major financial crisis,” said Navigant Managing Director Jeff Nielsen. “The subprime-related cases appear on their way to eclipsing that benchmark.” About half of all subprime-related cases have been filed in California and New York (BUSINESS WIRE via Yahoo! News Feb. 14) … * Consumer confidence plunged in early February to a level typically seen in recessions (Reuters Feb. 15). The Reuters/ University of Michigan Surveys of Consumers index of consumer sentiment fell to 69.6, from 78.4 at the end of January and the lowest reading since February 1992. “The sentiment index has only been this low during the recessions of the mid 1970s, the early 1980s, and the early 1990s,” said Survey Director Richard Curtin. Eighty-six percent of respondents said they thought the economy already is in recession. The consumer faces many drags on confidence--including the housing slump, weak job growth, and near-record debt burdens, noted Moody’s Economy.com (Feb. 15). The research firm said confidence will remain pressured “for the duration of the recession.” … * Confidence in the global economy declined for a third consecutive month in February as the U.S. slowdown spread to Europe and Japan, according to a survey by Bloomberg News (Feb. 13). The Bloomberg Professional Global Confidence Index dropped to 14.3, from 21 in January and well below the 50 level that indicates positive sentiment. Global stocks have lost more than $6 trillion so far this year. Respondents in every economy except Hong Kong anticipate further stock declines. Financial institutions worldwide face $400 billion in writeoffs because of the U.S. subprime rout, according to a forecast by the Group of Seven. Financial institutions already have seen $145 billion in writedowns and losses since the beginning of last year … * Industrial production rose modestly in January, as strong utility output offset weakness in manufacturing and mining. Industrial output increased 0.1% in January, the same as in December, the Federal Reserve reported Friday. Capacity utilization held steady at 81.5%. Utility production jumped 2.2%, reflecting the cold weather that gripped most of the nation during the month. Mining output fell 1.8%, while manufacturing production was flat. Factories cut 28,000 jobs in January. The sector has lost 269,000 jobs over the past 12 months (Associated Press via Yahoo! News Feb. 15) … * The agricultural sector is experiencing boom times amid soaring demand for biofuels in the U.S. and for grain in developing countries. Net farm income in the U.S. is forecast to hit $92.3 billion this year--51% higher than the 10-year average of $61.1 billion. Corn is trading at more than $5 a bushel and soybeans are trading at more than $13. “We’re not going to go back to $2.10 per bushel corn,” said Mike Helmar, director of industry services at Moody’s Economy.com. On the downside, poor people dependent on stables like corn are being squeezed, as global food prices soar. International wheat prices jumped 83% in January, compared with a year earlier, according to the Food and Agriculture Organization of the United Nations. Soaring prices have prompted riots by poor people in Mexico and Senegal, noted the organization (The Wall Street Journal Online Feb. 15) … * Import prices surged 13.7% in January, compared with a year earlier, the largest gain since the Labor Department began tracking the data in 1982. The surge reflected higher prices for energy, food, and other commodities. Petroleum-import prices were up 66.9% over the 12 months ending in January. Food prices posted a 3.1% monthly gain in January--the largest in almost three years. Overall export prices rose 6.7% year-over-year in January, the largest increase since an 8.7% jump in September 1988 (The Wall Street Journal Online and Reuters via Yahoo! News Feb. 15) … * The federal budget deficit is running at a pace that is nearly double the pace in the same period last year, according to the Treasury Department. In the first four months of the current fiscal year, the deficit totaled $87.7 billion--double the $42.2 billion deficit during the same period in fiscal 2007. The Bush administration predicts that the deficit will total $410 billion in fiscal 2008--close to the record high $413 billion shortfall recorded in 2004. Continued large expenditures on the war will help swell the deficit, as will lower tax receipts because of the economic slowdown. The government’s stimulus plan also will take a toll (Associated Press via CNNMoney.com Feb. 13) …

News of the Competition (02/14/2008)

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MADISON, Wis. (2/15/08)
* The Securities and Exchange Commission (SEC) is conducting more than three dozen investigations in an effort to increase transparency as the subprime mortgage crisis deepens, said SEC Chairman Christopher Cox. He told a Senate Banking committee hearing yesterday that the agency is reviewing the accounting of securitized subprime loans, the capital profile of large investment banks, the “quality of issuer disclosure” by firms regarding structured finance, and the role of ratings agencies in valuating subprime loans. Cox said the agency is investigating whether the ratings agencies remained impartial in their ratings despite their role in bringing products like mortgage-backed securities to market (Reuters via The New York Times Feb. 14) … * Investors worried about the credit rout are avoiding securities tied to student loans, a trend that is boosting student-borrowing costs and could limit the amount of available credit. Auctions of such securities during the past week failed to gain investor interest. Even the investment banks conducting the auctions declined to boost demand by purchasing the debt themselves. Investors in the market are asking for an added 50 basis points on new deals backed by government-guaranteed student loans, said Sallie Mae Spokesman Tom Joyce. Yet default rates remain low. The default rate on Sallie Mae’s $28 billion portfolio of existing private student loans is only 3%--down from 3.5% at mid-year 2007 (Dow Jones Newswires Feb. 13) … * Swiss bank UBS on Thursday reported a huge loss due to the U.S. subprime crisis. The bank said it lost $11.3 billion in the fourth quarter and $4 billion for all of 2007. It confirmed a $13.7 billion charge--$10.8 billion of which was linked to subprime mortgages, $2 billion to Alt-A mortgages, and $871 million related to credit protection it purchased from bond insurers. UBS said it still has a significant exposure to U.S. mortgage assets even after those charges. In other news, UBS said it received a Wells Notice last week from the Securities and Exchange Commission related to the bidding of financial instruments in the municipal-bond market. Various government agencies have been conducting an investigation of alleged bid rigging in the municipal-bond market (MarketWatch Feb. 14) … * Fidelity Investments, the largest provider of workplace retirement-savings plans in the U.S., reported Thursday that the assets it manages and administers in employee retirement savings plans jumped 8% to $851.4 billion in 2007. Fidelity said passage of the U.S. Pension Protection Act of 2006 helped boost retirement savings. That law encourages companies to automatically route savings into lifecycle funds, which allocate assets based on the investor’s age (Reuters via Yahoo! News Feb. 14) …

Market News (02/14/2008)

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MADISON, Wis. (2/15/08)
* Home prices declined in a record number of metropolitan areas during the final three months of the year, according to the National Association of Realtors (NAR). Nationwide, the median sale price tumbled 5.8% to $206,200 in the fourth quarter, compared with the same period in 2006. Prices dropped in 77 of 150 metro areas--the largest number since the trade association began tracking the data in 1979. Sixteen metro areas saw price declines of 10% or more. “The continuing crunch in the jumbo loan market that began in August has disproportionately reduced the number of transactions in higher price ranges,” said NAR Chief Economist Lawrence Yun. “Higher ratios of sales for more moderately priced homes are naturally dampening the national median price, as well as the data for some of the more expensive markets,” added Yun. NAR also reported that existing-home sales totaled 4.96 million in the fourth quarter--down 8.5% from the third quarter and 21% from the fourth quarter of 2006 (realtor.org and Bloomberg.com Feb. 14) … * Fixed-rate mortgages (FRMs) increased this week but remain much lower than a year ago, according to Freddie Mac. The 30-year FRM rose 5 basis points to 5.72%, while the 15-year FRM increased 10 basis points to 5.25%. “This week was relatively light on the number of economic data releases, which painted a mixed picture regarding the current state of the economy,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He predicts that the 30-year FRM will average 5.5% this year, as the Federal Reserve continues to lower interest rates. But he noted that fewer borrowers will be able to take advantage of low rates as lenders continue to tighten standards. Rates remain much lower than a year ago. The 30-year FRM averaged 6.30% a year ago, while the 15-year FRM stood at 6.03%. Freddie also reported that the one-year, adjustable-rate mortgage steadied at 5.03% this week, compared with 5.52% a year ago (MarketWatch Feb. 14.) For CUNA's Daily Financial Rates, use the link. … * Delinquency problems are spreading to the auto sector, according to a report by Fitch Ratings. The percentage of auto loans that are 60 days or more overdue jumped to a 10-year high in January. The ratings company said 0.77% of prime and subprime auto asset-backed securities (ABS) were two months or more overdue--up 12% from December and 44% from January 2007. Subprime delinquencies were at 4.03%--up 10% from December and 43% from a year earlier. Fitch’s prime auto ABS annualized net loss (ANL) was 1.28% in January--down 4.5% from December but up 44% from January 2007. Subprime ANL was 8.48%--up 12% from the previous month and the highest level since January 2007. “Of particular concern regarding both delinquency and ANL performance is that the average rate of monthly and yearly increases produced by the indexes over the past year has been ticking up at a faster pace each month without any slowdown,” said Fitch Director Hylton Heard (The Wall Street Journal Online Feb. 14) … * The economic outlook for the U.S. has deteriorated, said Federal Reserve Chairman Ben Bernanke. Unsold homes continue to pile up, and foreclosures have increased to record highs, noted Bernanke during a speech to a Senate Banking Committee yesterday. “Further cuts in homebuilding and in related activities are likely.” Bernanke said the central bank “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” However, he said the Fed doesn’t predict a recession this year, just sluggish growth. And he cautioned that the Fed still needs to be vigilant about inflation, while realizing that “downside risks to growth remain.” (Associated Press via Yahoo! News Feb. 14) … * First-time claims for unemployment insurance edged down by 9,000 during the week ending Feb. 9 to 348,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, rose by 3,500 to 347,250. Continuing claims--the number of people still on the benefit rolls after an initial week of aid--fell by 9,000 during the week ended Feb. 2 to 2.761 million. Current weakness in the job market reflects slower hiring, not the mass layoffs that occurred during past economic slumps (The Wall Street Journal Online Feb. 13). There were 1.8 million layoffs in December 2007, about the same as in December 2006, according to government data. However, job growth has slowed. Only an average of 68,000 jobs per month have been created since July--far below the 100,000 to 150,000 pace of job creation that analysts say are needed to absorb labor-force growth … * The U.S. trade deficit narrowed in December--to $58.8 billion from $63.1 billion in November, the Commerce Department reported Thursday. The 2007 trade deficit narrowed by 6.2% to $711.6 billion, as the weak dollar helped boost exports. It was the first annual decline in five years. High oil prices also boosted imports last year. Oil imports averaged $64.27 a barrel last year, up 11% from 2006. Americans spent an average $8,350 per person on imported goods and services in 2007. China surpassed Canada to become the biggest source of U.S. imports last year. The trade gap with China rose 10.2% to $256.3 billion (CNNMoney.com Feb. 14) …

Mortgage crisis hits prime market

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MADISON, Wis. (2/14/08)--Many borrowers with good credit and big incomes took out adjustable-rate mortgages to buy high-priced homes during the housing boom, betting that home prices would continue to soar. Like subprime mortgages, many prime loans now are facing resets, and homeowners are having a tough time refinancing as home prices fall and lenders tighten standards. Credit unions can come to the rescue of subprime borrowers, suggests The Wall Street Journal (Feb. 13) in an article, "Credit Unions Offer Lifeline on Mortgages." Credit Union National Association Chief Economist Bill Hampel is quoted in The Wall Street Journal as noting some credit unions have experienced "collateral damage" from the subprime crisis because members have lost jobs in depressed areas. But, he added, most have strong balance sheets and near record capital levels. As a result, credit unions will make any loan they possibly can make. Because credit unions typically don't loan in the subprime mortgage market, they also will be in good position to help members weather the refinancing in the prime market. “This collapse in housing value is sucking in all borrowers,” said Moody’s Economy.com chief economist Mark Zandi. James Keegan, a portfolio manager at American Century Investments, noted that the subprime problem was a symptom of a credit bubble, and the collapse of that bubble has hit prime loans. Almost 4% of prime mortgages were overdue or in foreclosure at the end of the third quarter—the highest rate since the Mortgage Bankers Association began tracking the data in 1998. At 7.3%, the delinquency and foreclosure rate for all types of mortgages is the highest since the group started tracking that statistic in 1979. That overall increase is primarily due to the recent jump in subprime lending. About 24% of subprime mortgages are delinquent or in foreclosure. Problems are spreading to home-equity lines and auto loans as well. About 5.7% of home-equity-lines-of-credit were delinquent or in default at year-end 2007—up sharply from 4.5% at the end of 2006, according to data from Economy.com and Equifax. About 7.1% of auto loans were delinquent or in default, up from 6.1%. (The New York Times Feb. 12).

News of the Competition (02/13/2008)

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MADISON, Wis. (2/14/08)
* Mortgage insurer MGIC Investment Corp. announced Wednesday that it lost $1.47 billion in the fourth quarter as delinquencies and payouts increased. The company will face further losses this year as delinquencies and payouts continue to rise, said Chairman and Chief Executive Curt Culver. However, he said the firm has enough money to pay claims. MGIC paid out $870 million in claims last year--up from $611 million in 2006. The company announced in December that it expects to pay out $2 billion in claims in 2008. The company is trying to limit its exposure to weak housing markets by requiring bigger downpayments and higher credit scores. MGIC said it has hired an advisor to help it explore alternatives for increasing capital (Associated Press via Yahoo! News Feb. 13) … * Morgan Stanley announced Wednesday that it is cutting 1,000 mortgage jobs at its U.S. and U.K. lending units. The investment bank said it will shut down its U.K. mortgage unit, Advantage Home Loans, and scale back mortgage operations in the U.S. The moves will leave the company “appropriately positioned” for the housing slump, which has boosted mortgage defaults, said Chief Operating Officer Anthony Meola. Morgan Stanley said it will continue to service mortgage loans in the U.S. through its Saxon Mortgage Services unit in Texas. It also will continue to offer mortgage loans to its retail brokerage customers. More than 100 mortgage lenders have cut jobs during the past year, as the housing downturn and credit rout deepened (Associated Press and Reuters via Yahoo! News Feb. 13) … * Citigroup announced Tuesday that it plans to provide a $3.5 billion facility to support six of the seven structured investment vehicles (SIVs) it brought onto its balance sheet in December. The firm said the move will help maintain the SIVs’ credit ratings and protect creditors. Citigroup and other banks, including JPMorgan Chase and Bank of America, planned to create a bailout fund for their SIVs. However, the banks instead turned toward individual solutions (Reuters and CNNMoney.com Feb. 13) … * Losses at Japanese banks, related to the U.S. subprime rout, more than doubled in the fourth quarter, to $5.6 billion, according to Japan’s Financial Services Agency (FSA). The agency said banks hold $14.17 billion worth of subprime-related products. Mizuho Financial Group, Japan’s second-largest bank, was hit hardest by the U.S. subprime crisis. It announced $3.2 billion in subprime losses last month. “The agency will closely watch the markets’ conditions, including securitized products which don’t contain subprime securities,” said an FSA official. “The value could be marked down amid overall market deterioration.” (The Wall Street Journal Online and Reuters via Yahoo! News Feb. 13) … * Bank of America plans to create a team to identify and finance “the best new ideas in the green economy,” said CEO Kenneth Lewis. Richard Cohen of BofA’s strategic interest group will head the new team. The bank already is working on green technology on several fronts, said Lewis during an energy forum in Raleigh, N.C., this week. BofA is working with the Chicago Board of Trade to create carbon-trading markets in the U.S. The firm also has a pilot program to establish green technology in 3,200 banking centers. Standards for green home mortgages also need to be created, Lewis said (bizjournals.com via msn.com Feb. 13) …

Market News (02/13/2008)

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MADISON, Wis. (2/14/08)
* Rust Belt and Sun Belt cities saw the highest foreclosure rates last year, RealtyTrac reported Wednesday. Detroit, which has been hit by rising unemployment in the auto-industry downturn, had the highest foreclosure rate in the nation. An estimated 4.9% of households in the Detroit area were in some stage of foreclosure (notices of default, auction-sale notices, or bank repossessions) in 2007. Stockton, Calif., ranked second, at 4.8%, while Las Vegas came in third, at 4.2%. “As expected, the number of properties entering some stage of foreclosure in 2007 was up in the vast majority of the nation’s 100 largest metro areas, with 86 metros reporting increases from 2006,” said RealtyTrac CEO James Saccacio. “Most of the metro areas with the highest foreclosure rates were either cities like Stockton and Las Vegas, which experienced meteoric growth and unsustainable price appreciation over the past few years, or cities like Detroit, which are undergoing a more widespread economic downturn along with higher unemployment rates,” added Saccacio (Associated Press via Yahoo! News and CNNMoney.com Feb. 13) … * Delinquency rates and charge-offs on credit cards will increase over the next year, as consumer income and home prices weaken, said Moody’s Investors Service. The agency predicts that charge-offs will peak in 2009, as that measure “tends to trail an economic contraction by about a year.” However, Moody’s said the negative forecast doesn’t have immediate implications for the ratings of securities backed by credit-card debt. The agency said issuance of securities backed by credit cards will remain “very close to the 2007 record levels” of about $94 .6 billion. The charge-off rate on credit cards was below 5% in November, less than the historic average of 5.5%. Chargeoffs peaked at 7.2% in May 2003, following the last recession (Bloomberg.com and Associated Press via Yahoo! News Feb. 12) … * The $17 billion title-insurance industry is under scrutiny for allegedly fixing prices and paying kickbacks to agents to obtain business. A suit filed in Brooklyn claims the nation’s four largest title-insurance firms--First American, Fidelity National Financial, LandAmerica Financial Group, and Stewart Title Insurance-- illegally fixed prices in New York. The suit, which is seeking to represent all homebuyers in the state, said consumers paid hundreds of millions of dollars in added closing costs. At least five other states have targeted alleged kickbacks by title insurers. The price of title-insurance policies increases when insurers compete to pay generous referral fees. The New York suit notes that homeowners in the state paid $1.2 billion for title insurance in 2006--up significantly from $260 million in 1996 and among the highest fees in the nation. The suit claims title-insurance firms skirt antitrust laws by concealing referral fees and other payments that make up much of a policy’s cost (The Wall Street Journal Online Feb. 12) … * Mortgage applications declined last week, according to the Mortgage Bankers Association (mbaa.org Feb. 13). The Market Composite Index fell 2.1% during the week ending Feb. 8 to 1063.5, as both purchase and refinancing applications declined. Mortgage rates increased last week. The 30-year, fixed-rate mortgage (FRM) rose 11 basis points to 5.72%, while the one-year, adjustable-rate mortgage (ARM) increased 10 basis points to 5.72%. One-year ARMs are still equal to 30-year FRMs--suggesting that banks are skeptical about ARMs, said Moody’s Economy.com (Feb. 13). The research firm noted that the level of refinancings remains high, but that purchase applications probably will continue to slow as home prices keep declining … * Retail sales rose 0.3% in January--rebounding from a 0.4% drop in December, the Commerce Department reported Wednesday. However, sales were flat last month when gasoline and autos were excluded. Gasoline station sales jumped 2%, reflecting higher prices. Vehicle sales rose 0.6%, the largest increase since September. Analysts said the increase in auto sales probably reflected higher prices or a more costly mix of autos purchased by consumers. The impact of the housing slump was apparent in the report. Sales at hardware and garden stores plunged 1.7%, while furniture sales fell 0.5%, and sales at appliance and electronic stores declined 1%. Analysts expect consumer spending to weaken this year as the economic slowdown continues (MarketWatch Feb. 13) …

News of the Competition (02/12/2008)

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MADISON, Wis. (2/13/08)
* Billionaire investor Warren Buffett said Tuesday that he has offered to assume responsibility for $800 billion of municipal bonds guaranteed by insurers MBIA Inc., Ambac Financial Group, and FGIC Corp. In an interview with CNBC television, Buffett said his Berkshire Hathaway firm would provide reinsurance for the debt. However, the offer doesn’t include the insurers’ subprime-related obligations. Buffet said one company has refused the offer, and the other two haven’t responded. The three insurers could lose their AAA credit ratings after incurring $5 billion in losses from insuring mortgage-related securities. That would crimp their sales to municipalities. They face losses of as much as $41 billion if the debt they insure continues to fall in value, according to JPMorgan Chase analysts. If the bond insurers’ municipal debt is reinsured by Berkshire, the municipalities also will retain the top rating, noted Buffett (Bloomberg.com Feb. 12) … * The Federal Reserve announced Tuesday that it auctioned $30 billion in funds to commercial banks at a 3.010% interest rate on Monday. A series of five special auctions have pumped $130 billion into the banking system to buoy liquidity. Rates for the five auctions declined as the Fed continued to cut the target for the fed funds rate. At 3.010%, the fifth auction was lower than the previous auction rate of 3.123%. Two auctions in December provided funds at 4.65% and 4.67%, while the first auction in January saw a rate of 3.95%. Market participants expect the Fed to continue cutting rates this year (Associated Press via Yahoo! News Feb. 12) … * IndyMac Bancorp, one of the largest originators of Alt-A loans during the housing boom, reported a $614.8 million loss for 2007--the first annual loss in its 23-year history. That compares with a $342.9 million profit for 2006. IndyMac said the loss mostly reflected bulk loan purchases and discontinued operations related to subprime, home equity, and home-construction lending. The company suspended its dividend to boost capital and increase loan-loss provisions. Credit reserves for future losses totaled $2.4 billion at year-end 2007, more than four times higher than a year earlier. IndyMac said it expects charge-offs to increase “substantially” in 2008. The company announced plans in January to cut its workforce by almost one-fourth this year. CEO Michael Perry estimates that more than 225 independent mortgage companies have gone out of business in the housing slump, and more than 100,000 industry jobs have been lost (MarketWatch and Associated Press via Yahoo! News Feb. 12) … * Credit Suisse Group, Switzerland’s second-largest bank, reported a $1.88 billion writedown for subprime-related assets in the fourth quarter. The bank’s earnings tumbled 72% to $1.2 billion. Credit Suisse said it has received subpoenas and other requests for data from regulators about subprime mortgages. And it is facing a class-action lawsuit related to its role in underwriting mortgage pass-through certificates for a Countrywide Financial Corp. unit. Standard & Poor’s said Credit Suisse’s earnings report didn’t affect its ratings because it views the firm’s “performance to date as relatively resilient, thanks mainly to the benefits of diversity at the group level, low exposures to collateralized debt obligations, and extensive hedging activity.” (Associated Press via Yahoo! News Feb. 12) …

Market News (02/12/2008)

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MADISON, Wis. (2/13/08)
* Six of the nation’s largest lenders announced a plan Tuesday to temporarily halt foreclosure proceedings. Under Project Lifeline, all legal measures to foreclose on seriously delinquent borrowers will be postponed for 30 days, during which lenders and borrowers will try to work out payment alternatives. The program will be made available to people who have all different types of mortgages, not just subprime loans. “For many families, Project Lifeline will temporarily pause the foreclosure process long enough to find a way out,” said Alphonso Jackson, secretary of Housing and Urban Development. “Loan modifications may follow.” Citigroup, Countrywide Financial, Bank of America, JPMorgan Chase, Washington Mutual, and Wells Fargo say they will contact homeowners who are 90 days or more overdue on their monthly payments to discuss options to help them avoid foreclosure. More financial institutions may join the program if it proves successful. Foreclosures have become unprofitable for lenders because many borrowers owe more on their mortgage than their home is worth in today’s declining market (CNNMoney.com and Associated Press via The New York Times Feb. 12) … * More than 30% of people who purchased a home during the last two years owe more on their mortgage than their home is now worth, according to a report by Zillow, a housing-market research firm. The company found that 39% of people who purchased a home in 2006 with a median 10% downpayment now have negative home equity. And 30% of those who bought a home in 2007 now have negative equity. “With consecutive declines (in home prices) over the past five quarters, we haven’t seen the housing market bottom yet, and it may very well get worse before things get better,” said Stan Humphries, vice president of data and analytics at Zillow. Still, less than 1% of all homes in the U.S. have negative equity, noted Zillow (Reuters via The New York Times Feb. 12) … * Foreign-born people will make up a record-high 15% of the U.S. population--more than 1 in 7 residents--between 2020 and 2025, according to a study by the Washington-based Pew Research Center. That’s up from 12% in 2005, 14.7% in 1910 and almost 15% in the late 1800s. Looking further ahead, the U.S. population is projected to jump to 438 million by 2050, from 303 million today, as the Hispanic population triples. New immigrants and their offspring born in the U.S. will account for 82% of the population surge from 2005 to 2050. Non-Hispanic whites will become a minority by 2050--making up 47% of the population, compared with 85% in 1960. The Hispanic population will triple, accounting for 29% of the U.S. population by 2050--compared with 14% in 2005. Blacks will remain 13% of the population. “We’re assuming that the rate of immigration will stay roughly constant,” said study co-author Jeffrey Passel. However, Hispanics’ share of the population will rise even if immigration is curbed because they have higher birth rates than other groups (The New York Times and USA TODAY Feb. 11) … * With slumping sales in the U.S., General Motors is planning to replace most of its domestic workforce with lower-paid new hires. In its latest effort, GM is offering buyouts to all its hourly workforce of 74,000 employees. Those employees who agree to leave the company and give up pension and health-care coverage will receive a $140,000 lump sum if they’ve worked for the company for 10 years. Employees with less than 10 years will receive a $70,000 payout. General Motors reported a $38.7 billion net loss for last year. GM hopes to grow aggressively in Latin America and Asia (CNNMoney.com Feb. 12) … * Small-business optimism dropped to a 17-year low in January, according to a survey by the National Federation of Independent Business (NFIB). The trade group’s confidence index fell by 2.8 percentage points to 91.8--the lowest reading since January 1991. The net percentage of business owners anticipating an improved economy tumbled 12 points to minus 22% last month. In anticipation of weaker sales, owners reported cutting back plans for spending and hiring. “The index is sending a recession signal,” said NFIB Chief Economist William Dunkelberg. “But… this January reading is more of a recession in expectations than in hard economic data,” added Dunkelberg. He said hiring plans today suggest a stronger economy than in 1991 (Bloomberg.com and Reuters via Yahoo! News Feb. 12) … * The economy will experience very weak growth during the first quarter, according to a survey of forecasters by the Federal Reserve Bank of Philadelphia. Respondents predict economic growth of only 0.7%. That’s down from a previous forecast of 2.2% growth for the period. Forecasters expect job growth of just 39,400 per month during the first quarter--much weaker than the 100,600 per month previous forecast. And respondents predict an inflation rate, as measured by the price index for core--excluding food and energy--personal consumption expenditures, of 2.2% during the current quarter. That’s above the 2% comfort level for Federal Reserve policymakers (Reuters via Yahoo! News Feb. 12) …

Market News (02/11/2008)

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MADISON, Wis. (2/12/08)
* Business sentiment in the U.S. remains consistent with an economic contraction despite aggressive actions by fiscal policymakers and the Federal Reserve, according to the latest Moody’s Economy.com Survey of Business Confidence. Assessments of current conditions and expectations for the next six months are the weakest they’ve been in the five years of the survey. Businesses report that they’ve cut investment in equipment, software, and hiring during the last three weeks. And despite rising energy costs, companies aren’t boosting prices because demand remains weak. The latest survey results suggest a struggling global economy and a probable U.S. recession … * The odds of a recession have increased to 50% as the job market continues to weaken and financial-market stress accelerates, according to the latest forecast by The Blue Chip Economic Indicators. “The economic malaise that originated in the housing sector during 2006 [and] spread to the financial market in 2007, now appears to be infecting Main Street,” said the newsletter. Still, most economists expect the Federal Reserve to continue cutting interest rates, helping the economy narrowly avoid recession. They expect weak economic growth of just 1.7% this year. New-home construction is expected to plunge 25%, while home sales are forecast to decline another 14%. Despite sluggish growth, inflation is expected to pick up. Core consumer prices--excluding food and energy--are forecast to increase 2.3% this year, above the Fed’s comfort zone (Reuters via Yahoo! News Feb. 11) … * Group of Seven officials meeting in Tokyo this weekend said countries may have to lower interest rates further and cut taxes to boost the global economy. The G-7 pledged “appropriate actions, individually and collectively,” to help the global economy cope with “downside risk,” including the U.S. housing slump and credit rout. At the same time, the group said “heightened inflation expectations in some countries,” mean some central bankers will want to limit rate reductions. The G-7 predicts that banks worldwide will see about $400 billion in writedowns, said German Finance Minister Peer Steinbrueck (Bloomberg.com Feb. 11) … * Global equity markets lost $5.2 trillion in January, according to a Standard & Poor’s report. Emerging markets declined 12.44%, while developed markets fell 7.83%. “Whether we’re in a recession or not, we’re acting like we are,” said Howard Silverblatt, senior index analyst at the ratings agency. “When the U.S. consumer starts pulling back, it’s going to affect everyone,” he added. But Silverblatt noted that central banks worldwide “have been quick to intervene with cash infusions, as well as rate reductions…” (CNNMoney.com Feb. 11) … * Vehicle sales will gear down to a 15.7 million pace this year--from 16.1 million in 2007, according to Paul Taylor, chief economist for the National Automobile Dealers Association. “Energy costs of gasoline, home heating and cooling will continue to drain money from consumer budgets and slow down consumer spending,” said Taylor during the association’s annual convention in San Francisco this weekend. He forecasts weak economic growth of around 2% this year, along with rising unemployment and a continued downturn in the housing sector (Associated Press via Yahoo! News Feb. 11) … * Yahoo Inc. on Monday rejected Microsoft’s $45 billion unsolicited bid, saying the proposal undervalued Yahoo and thus wasn’t in the best interest of its shareholders. However, a statement announcing the rejection appeared to leave the door open for other proposals. It said Yahoo’s board “is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment.” (CNNMoney.com Feb. 11) …

News of the Competition (02/11/2008)

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MADISON, Wis. (2/12/08)
* Countrywide Financial and the Association of Community Organizations for Reform Now (ACORN) announced an agreement Monday to formalize workout programs for borrowers with subprime loans. The plan calls for Countrywide to manage payment plans for borrowers already delinquent in their payments regardless of what kind of subprime mortgage they have. Almost 7% of the firm’s 9 million mortgage loans were delinquent at the end of 2007--up from about 5% at year-end 2006. About 1% of its mortgage loans were pending foreclosure, up from 0.65%. “Through this partnership, Countrywide and ACORN have agreed to a set of home retention standards to help borrowers who are in various situations of financial difficulty to establish suitable repayment plans or other solutions,” said Steve Bailey, senior managing director of loan administration at Countrywide (Associated Press via CNNMoney.com Feb. 11) … * Agricultural lenders in the Midwest are reaping the benefits of a land boom in the Midwest, as demand for ethanol grows and low interest rates and the weak dollar boost U.S. food exports. The Federal Reserve Bank of Chicago said the price of land in that district jumped 15% in the first nine months of last year. Farm Credit Services, a top lender to farmers in the upper Midwest, said farmland prices jumped 20% in Iowa, Nebraska, South Dakota, and Wyoming in 2007. The trend should help regional banks offset weakness in the mortgage sector. Insurers, pension funds, and individual investors also have become more interested in the Midwestern agricultural market, as the stock markets continue to slump (American Banker Feb. 11) … * The Standard & Poor’s financials will see mortgage and other credit-related writedowns of $125 billion to $175 billion, according to Bear Stearns Analyst Jonathan Golub. Investors worldwide will see total economic losses from the mortgage market of $250 billion to $300 billion. He said the S&P financials have lost $593 billion in market capitalization since the end of September. “Our sense is that European financial institutions are well behind their U.S. counterparts in recognizing likely losses,” noted Golub. He said European firms also have been slower than U.S. companies to revise their earnings estimates downward (Reuters via The New York Times Feb. 11) … * Citigroup and Goldman Sachs are the firms most exposed to further writedowns from leveraged loans during the first quarter, according to Bank of America analysts. “Even though exposures stand at smaller levels, the larger price declines and lack of offsetting fee income imply larger potential writedowns than during the third quarter of last year,” wrote analysts Jeffrey Rosenberg and Clemens Mueller. At $43 billion, Citigroup had the biggest exposure to leveraged loans and bonds in the fourth quarter, while Goldman Sachs had the second-largest exposure ($36 billion). In other news, American International Group said Monday that problems in valuing its credit derivatives prompted auditors to question its internal controls. Shares of the world’s largest insurer plunged more than 11% following the announcement (Reuters Feb. 11) …

Market News (02/08/2008)

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MADISON, Wis. (2/11/08)
* Consumer borrowing slowed sharply in December, but posted a large gain for the year as consumers shifted from home-equity loans to credit cards. Consumer credit, which excludes mortgage and home-equity debt, increased at an annual rate of just 2.1% in December following an 8.2% surge in November. For all of 2007, consumer credit rose 5.5%--after a 4.5% gain in 2006 and the strongest increase since a 5.5% gain in 2004. Revolving debt, which includes credit cards, jumped by 7.8% last year following gains of 6.1% in 2006 and 3.1% in 2005. Nonrevolving debt, which includes loans for autos, boats, and education, rose 4.2% last year after gains of 3.6% in 2006 and 4.9% in 2005. “Demand for revolving credit will remain sturdy as rising joblessness, falling house prices and slower income growth force consumers to turn to credit cards to finance consumption,” said Moody’s Economy.com Economist Ryan Sweet. (federalreserve.gov and Associated Press via CNNMoney.com Feb. 8) … * The supply of homes available for sale nationwide rose just 1.1% in January, according to a report by ZipRealty Inc., suggesting that people are delaying sales in the soft housing market. Home listings typically increase 5% in the first month of the year, noted housing economist Thomas Lawler. Homeowners who want to sell their property face competition from homebuilders offering big discounts and lenders offering cheaper foreclosed homes. With sales so weak, there’s a big inventory of homes available for sale in the 18 metropolitan areas Zip tracks year over year. Housing inventory last month was up 20% from January 2007 (The Wall Street Journal Online Feb. 8) … * The economy has sunk into a recession that will be more prolonged and painful than the typical downturn, predicts Richard Curtin, director of the Reuters/ University of Michigan consumer sentiment survey. Citing data from the Conference Board in his report, Curtin said inflation will continue to be a concern despite a slowdown in consumer spending--making it difficult for Federal Reserve policymakers. “Consumers must take more drastic steps to stabilize their finances in the midst of high fuel and food prices, stagnant incomes, and record debt,” said Curtin. He also noted that with increased income inequality, lower-income Americans will suffer disproportionately during this recession. “Growing income inequality has insulated higher income groups to a greater extent than ever before,” said Curtin (Reuters via Yahoo! News Feb. 8) … * Consumers are cutting back on their discretionary spending as basic household expenses increase. Discover Financial Services’ consumer spending confidence index fell to 86.1 in January, from 90.5 in December and the fourth consecutive decline. In the latest index, 49% of consumers said they plan to spend less on discretionary items in February--up almost 5 points from December. Rising prices for gasoline and groceries have prompted consumers to curb discretionary spending, said Margo Georgiadis, executive vice president and chief marketing officer for Discover. She also noted that the Federal Reserve’s rate cuts and the government’s stimulus plan haven’t made consumers more optimistic. “Our sense is that sentiment about the economy is in steady decline,” said Georgiadis (Associated Press via CNNMoney.com Feb. 7) … * Economic growth will slow sharply this year, according to a survey of economists by Bloomberg News (Feb. 8). The economy will expand at only a 0.5% annual pace in the first quarter as consumer spending slows to a 1% rate of increase--the weakest since 2001, according to the median estimate of respondents. The growth forecast for all of 2008 is just 1.7%, the softest pace in six years. Economists predict that the Federal Reserve will lower the target for the fed funds rate by 25 basis points to 2.75% this quarter … * Economists put the odds of a recession occurring this year at 49%, according to a survey of economists by The Wall Street Journal Online (Feb. 7). That’s up from 40% in a January poll and just 23% in a June survey. Respondents predict the Federal Reserve will cut the target for the fed funds rate by 50 basis points to 2.50% by the end of June. They expect the economy to expand at a 0.6% pace during the first quarter. And they predict that home prices, as measured by the Office of Federal Housing Enterprise Oversight, will decline 4.5% this year. The economy is expected to create less than 50,000 jobs per month this year. The nation’s unemployment rate is forecast to increase to 5.4% by December, from the current 4.9% rate … * Wholesale inventories jumped last month as sales declined. Wholesale inventories rose 1.1% to a seasonally-adjusted $411.6 billion, the Commerce Department reported Friday. It was the largest gain since August 2006. Sales fell by 0.7% to $376.65 billion. The inventory-to-sales ratio, how many months it would take to deplete current inventories at the existing sales pace, rose to 1.09 from 1.07. Over the 12 months ending in December, sales were up 10.6%, while inventories were up 6.1% (The Wall Street Journal Online Feb. 8) …

News of the Competition (02/08/2008)

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MADISON, Wis. (2/11/08)
* A lawsuit has been filed against homebuilder KB Home and its joint venture with Countrywide Financial, alleging that the firms and two appraisers inflated home values to hide the housing slump. Homeowners Deborah and Lonnie Bolden, and David and Dolores Contreras claim KB Home sold them homes at prices that were higher than comparable properties. The suit alleges that the appraisers cited pending sales as comparable sales, even though buyers had backed out of the sales. It also claims the appraisers used “dissimilar properties” in other housing developments as comparable sales. KB said the suit is “without merit.” Countrywide couldn’t be reached to comment on the suit (The Wall Street Journal Online Feb. 8) … * The Justice Department’s U.S. Attorney’s office in Manhattan has notified the Securities and Exchange Commission (SEC) that it wants to see information from the agency’s investigation of Merrill Lynch, say people familiar with the situation. They say the request could lead to a criminal probe of Merrill. The SEC is investigating whether Merrill booked inflated mortgage-bond prices even though it knew the values had declined. Merrill has announced $22.4 billion of writedowns of mortgage securities. Financial firms have announced more than $100 billion in writedowns on mortgage-related assets over the last few months (The Wall Street Journal Online Feb. 8) … * Former trader Jerome Kerviel has been ordered to jail for the duration of the investigation and possible trial, related to an alleged fraud that cost his former employer, Societe Generale, more than $7 billion. The company claims Kerviel enacted a series of fictitious trades. The prosecutor argued that Kerviel might flee or contact people who could influence the investigation. French financial police are questioning a second person related to the case (The New York Times Feb. 8) … * Alliance Data Systems has withdrawn its lawsuit against affiliates of The Blackstone Group for terminating its proposed acquisition. Alliance says the firm appears to be working towards completing the deal. Blackstone had said regulatory burdens placed on the deal would make it too burdensome (Associated Press via Yahoo! News Feb. 8) … * The goodwill held on bank balance sheets is another casualty of the economic slowdown. At least 17 publicly-traded banks took large impairment charges, reflecting the falling value of goodwill in the fourth quarter. As of Feb. 5, goodwill impairment charges totaled $4.2 billion for the fourth quarter--higher than the total taken by the banking industry in the prior 27 quarters, according to SNL Financial. Falling stock prices explain part of the surge. Loan chargeoffs also are increasing, noted Dan Bass, managing director of Carson Medlin’s Houston office (American Banker Feb. 8) …

Market News (02/07/2008)

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MADISON, Wis. (2/8/08)
* Home sales and prices will continue to decline this year, according to the National Association of Realtors. NAR’s latest forecast calls for a 1.2% drop in existing-home prices this year, to a median $216,300. Just a month ago, the trade group predicted that prices would be flat this year. NAR said it expects a 4.8% decline in existing-home sales this year, compared with a 0.9% increase forecast last month. NAR also released its Pending Home Sales Index for December. The index fell 1.5% to 85.9--the second-lowest level since NAR started tracking the data in 2001. The December reading was 24.2% lower than the December 2006 level of 113.3. “We’re seeing a pattern that is consistent with skimming along the bottom of the cycle, and sales could ease modestly,” said NAR Chief Economist Lawrence Yun. In other forecasts, NAR is calling for a 17.7% drop in new-home sales this year. The median new-home price is projected to decline 4.3% to $236,300. The 30-year, fixed-rate mortgage is forecast to increase slowly to a 5.9% range during the fourth quarter, and to an average 6.3% in 2009 (realtor.org and CNNMoney.com Feb. 7) … * Most borrowers who were seriously delinquent on their mortgage loans in October weren’t receiving help to avoid foreclosure, according to a report released Thursday by the State Foreclosure Prevention Working Group. It found that 75% of such borrowers weren’t seeking ways to prevent foreclosure. A lack of interaction between homeowners and mortgage servicers was a major obstacle, said the group. Of those delinquent borrowers who were in contact with their servicers, 45% were working towards modifying their mortgage loans. The study also found that mortgage servicers held almost 100,000 foreclosed properties on their books at the end of October. And it found that resets aren’t the main issue for many delinquent homeowners. More than 30% of homeowners with subprime or Alt-A adjustable-rate mortgages are 30 days or more overdue with their payments, although they haven’t yet seen a reset of their rates. The group is a coalition of state attorneys general and banking regulators from 11 states (Reuters via Yahoo! News and The Wall Street Journal Online Feb. 7) … * Mortgage rates steadied this week amid recession fears, Freddie Mac reported Thursday. The 30-year, fixed-rate mortgage (FRM) averaged 5.67%, little changed from 5.68% last week. “Economic news released in the past week showed that the economy continues to be weak,” said Frank Nothaft, Vice President and Chief Economist at Freddie Mac. He noted that the service sector contracted in January while the economy lost 17,000 jobs. Freddie also reported that the 15-year FRM averaged 5.15% this week, down slightly from 5.17% last week, while the one-year, adjustable-rate mortgage (ARM) averaged 5.03%, down from 5.05%. Rates remained well below year-ago levels. The 30-year FRM stood at 6.28% a year ago, while the 15-year FRM was at 6.02%, and the one-year ARM averaged 5.49% (MarketWatch and CNNMoney.com Feb. 7) … * While falling mortgage rates boosted mortgage bond prepayments in January, tight lending standards continued to restrict the housing market. The rate of prepayments increased 4.6% to a 12.1% constant prepayment rate, according to Credit Suisse. But in a report, the firm said “weaker credit coupled with higher LTVs (loan-to-value) on higher coupons, steep home-price declines and a much tighter underwriting regime should result in a much dampened refi response, compared with that observed during similar rate levels in the past.” New fees that Freddie Mac and Fannie Mae are assessing on mortgages they guarantee also could slow housing turnover (Reuters via Yahoo! News Feb. 7) … * The job market is weakening as the housing slump spills over to the broader economy. First-time claims for unemployment insurance fell by 22,000 during the week ending Feb. 2 to 356,000, the Labor Department reported Thursday. However, claims had jumped to a two-year high of 378,000 a week earlier. And analysts expect layoffs to mount this year as the economy softens. “Layoffs are accelerating as businesses are very cautious due to the uncertain economic outlook,” said Ryan Sweet, an economist with Moody’s Economy.com. The government also reported that continuing claims--the number of people still on the benefit rolls after an initial week of aid--increased by 75,000 during the week ended Jan. 26 to 2.785 million, suggesting that unemployed workers are finding it tough to find new jobs. Homebuilders and financial firms continue to announce layoffs this year. Retailers also are cutting staff as the economy weakens. Department-store chain Macy’s Inc. said Wednesday that it plans to cut 2,300 jobs this year due to softer sales (Bloomberg.com Feb. 7) …

News of the Competition (02/07/2008)

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MADISON, Wis. (2/8/08)
* Bond insurer MBIA said Wednesday that it plans to sell $750 million in common stock in an effort to retain its AAA credit rating. The company will offer 50.3 million shares, at $14.91 a share, to raise funds. MBIA said it will use the money to cover claims. Private-equity firm Warburg Pincus said it will support the offering in exchange for preferred stock. Warburg already has invested $500 million in the bond insurer. Ratings agencies have cautioned bond insurers that they may face downgrades as mortgage defaults mount. Some already have been downgraded, including Ambac Financial and Security Capital Assurance (Associated Press via The New York Times Feb. 7) … * Moody’s Corp. reported a 54% decline in net income for the fourth quarter as the weak global credit markets weakened revenue. The firm’s income fell to $127.3 million, from $278.6 million a year earlier. Revenue at Moody’s Investors Service declined 16% to $460.7 million. Moody’s is trying to rebuild its reputation by restructuring its ratings criteria. The company downgraded $75.9 billion worth of collateralized debt obligations last year. Moody’s is considering a different scale of ratings and the addition of warning labels that caution about ratings’ limitations (The Wall Street Journal Online Feb. 7) … * Citigroup on Wednesday announced the launch of its QuikRemit remittance platform. The service, which was previously offered by PayQuik, lets banks, corporations, and money-transfer organizations offer customers international funds-transfer capabilities. Citi acquired PayQuik last month. “The remittance market, traditionally dominated by money transfer organizations, is seeing increased participation by banks who can offer a wide distribution network and a safe, secure, and private service,” said Paul Galant, chief executive of Citi’s Global Transaction Services business. “Citi’s QuikRemit Service enables financial institutions and corporations to offer these benefits to their clients,” added Galant. Global remittance flows will hit a half trillion dollars annually by 2010, according to Aite Group (BUSINESS WIRE via Yahoo! News Feb. 6) … * Microsoft’s $44.6 billion bid to acquire Yahoo Inc. would give the deal’s four bank advisers--Goldman Sachs, Lehman Brothers Holdings, Morgan Stanley, and Blackstone Group--an estimated $1.3 billion altogether in advisory fees. Yahoo’s advisers, Lehman and Goldman, would split about $446 million. Microsoft’s advisers, Morgan Stanley and Blackstone, stand to rake in $890 million. Goldman took the top spot among advisors last year--advising on $1.17 trillion worth of deals, according to Dealogic. Morgan Stanley also ranked high, advising on $1.03 trillion worth of deals (Dow Jones Newswires Feb. 7) … * Discover Financial Services announced Thursday that it has agreed to sell its U.K. Goldfish credit-card business to Barclays Bank. The British bank will acquire a card portfolio of 1.7 million accounts with about $4 billion of receivables. The aggregate sale price of Goldfish is about $70 million. The deal is expected to close by the end of Discover’s second quarter (Dow Jones Newswires Feb. 7) …

Market News (02/06/2008)

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MADISON, Wis. (2/7/08)
* Worker productivity (a measure of employee efficiency) accelerated to a 1.6% pace in 2007, from a 1% rate the previous year, the Labor Department reported Wednesday. However, last year’s gain was well below increases of 3.8% in 2003 and 4.1% in 2002. Unit labor costs rose 3.1% last year--accelerating from a 2.9% gain the previous year and the largest since a 4.1% increase in 2000. Worker productivity slowed sharply in the fourth quarter--to a 1.8% gain from a 6% pace in the third quarter. Unit labor costs accelerated to a 2.2% gain in the fourth quarter, after declining 2% in the third quarter and falling 1.1% second quarter. With the economy probably in recession, companies will hold onto their workers even as demand weakens because they’re concerned about labor shortages once growth picks up again, said Moody’s Economy.com (Feb. 6). The research firm predicts that growth in labor costs will soften over the next year as the weak job market curbs compensation growth … * The number of speculators (people who purchased homes only as investments) in the recent housing boom was much higher than previously thought because many speculators lied on their loan applications to obtain better loan terms. About 20% of mortgage fraud involved “occupancy fraud,” borrowers falsely claiming that they planned to live in a home, according to a study by BasePoint Analytics. In another analysis, Fitch Ratings studied 45 subprime loans that defaulted within the first 12 months of the loan even though the borrowers had strong credit scores. The ratings agency found that in two-thirds of such cases, borrowers said they planned to live in the home but never did. As many as 60% of the foreclosures in Las Vegas last year involved homes that weren’t owner-occupied, according to a study by Applied Analysis. Speculators are much more likely to walk away from their mortgages when home prices begin to decline, thus exacerbating the price declines. They also make it tougher for local governments to help address the problem (The Wall Street Journal Online Feb. 6)… * Some cities hit hard by rising foreclosures are trying to lower the number of homes left vacant so they can help neighborhoods remain viable and retain valuable property-tax dollars. County treasurers and mayors are filing lawsuits against lenders and creating land banks to purchase distressed properties so they can either fix them up for resale or demolish them. The U.S. Conference of Mayors forecasts that 361 metropolitan areas will take a combined $166 billion economic hit this year because of rising foreclosures. Baltimore now has 16,000 vacant foreclosed properties, up from 12,300 in 2000. Cuyahoga County (which includes Cleveland) has 17,000 such properties, representing about 4% of its homes (Associated Press via The New York Times Feb. 6) … * Mortgage activity rose again last week as purchase applications rebounded (mbaa.org Feb. 6). The Mortgage Bankers Association’s Market Composite Index increased 3% during the week ending Feb. 1 to 1086.6. The trade group’s Purchase Index jumped 12% to 405.3, while the Refinance Index fell 1% to 5054. The refinance share of overall applications declined to 69.2% from 73% the previous week. The average 30-year, fixed-rate mortgage (FRM) edged up one basis point to 5.61% last week, while the one-year, adjustable-rate mortgage (ARM) fell eight basis points to 5.62%. One-year ARMs continue to top or match 30-year FRMs due to ARMs’ higher and usually nonconforming loan volume and because of the risk associated with ARMs, noted Moody’s Economy.com (Feb. 6). ARMs made up 8.8% of overall loan volume in the latest week, little changed from 8.6% a week earlier. The ARM share of applications was a much higher 22% a year ago … * Luxury homebuilder Toll Brothers said its home-construction revenue plunged 22% in the first quarter, compared with a year earlier. Toll said it doesn’t yet see a bottom to the housing market. Writedowns for the first quarter (which ended Jan. 31) will total $150 million to $300 million, estimates Chief Financial Officer Joel Rassman. John Tomlinson, an analyst at Majestic Research, noted that the government’s plan to temporarily increase the limit on conforming loans would especially help luxury builders like Toll (MarketWatch Feb. 6) …

News of the Competition (02/06/2008)

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MADISON, Wis. (2/7/08)
* Ratings agency Standard & Poor’s (S&P) said Tuesday that it is requesting input from investment and mortgage market participants on its proposal to have issuers offer more detailed data on mortgage-backed securities so it can more accurately rate the securities. S&P will accept comments until Feb. 22. The ratings agency said downgrades of bond insurers could significantly affect commercial and investment banks, prompting downgrades. “Bond insurers are suffering as a result of their roles as guarantors of mortgage-related securities, and downgrading them could affect all markets in which they are active, including the municipal bond, commercial mortgage-backed securities, and other structured finances areas,” said Tanya Azarchs, a credit analyst at S&P. “In turn, dislocation in those markets could affect banks,” added Azarchs (Associated Press via CNNMoney.com Feb. 6) … * The values of many buyout loans issued in 2007 are plunging amid concerns about rising corporate defaults. In turn, banks are having a tough time issuing new loans as the market prices of existing loans tumble. Investors have little incentive to purchase new loans unless they’re sold at big discounts. This means more assets building up on bank balance sheets. In one such example, the loans of First Data Corp., which was taken private last year, are trading in the market at an 11.5% discount to par value, according to Reuters LPC. Just last autumn they were sold at a 4% discount to par value (The Wall Street Journal Online Feb. 6) … * The boards of the Federal Home Loan banks of Chicago and Dallas have approved a plan to merge. If approved by the Federal Housing Finance Board, it would be the system’s first merger in 60 years. Executives at other Home Loan banks have said they might consider mergers if the Chicago/Dallas plan is approved. A cease-and-desist order by the Finance Board in October probably nudged the Chicago bank into pursuing a merger that may be less than equal. The Chicago bank essentially will sell itself to the Dallas bank, say sources (American Banker Feb. 6) … * Standard & Poor’s said it has lowered a key credit rating for Sallie Mae and may lower it more if a new $31 billion financing agreement for the student lender doesn’t go forward. In that agreement, Sallie Mae said it would drop its lawsuit against an investor group that backed out of a previous financing deal. The ratings agency cut the investment-grade rating for Sallie Mae’s transactions in the debt markets to BBB-/A-3 from BBB+/A-2 due to lower profitability, funding pressures, and the softening economy. Sallie Mae posted a $1.6 billion loss for the fourth quarter, reflecting rising borrowing costs and higher delinquencies and defaults. Seven banks including JPMorgan Chase and Bank of America are part of the new $31 billion financing deal (Associated Press via Yahoo! News Feb. 6) … * JPMorgan Chase announced Wednesday that it has been selected to provide the Department of Transportation and the Interior Department with credit cards. Total spending on the combined 88,000 cards the firm is supplying to the two departments is expected to top $660 million a year (Associated Press via msn.com Feb. 6) …

News of the Competition (02/05/2008)

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MADISON, Wis. (2/6/08)
* Moody’s Corp. said Tuesday that it is considering an overhaul of its ratings procedures that may include new labels to help investors differentiate collateralized debt obligations (CDOs) and other structured-finance investments from corporate bonds and Treasury securities (The Wall Street Journal Online Feb. 5). One change the company is considering is a new 21-point numerical scale for rating structured securities. Letter grades would be reserved for corporate bonds and Treasuries. In other news, Fitch Ratings said it has made significant proposals to change its rating methodology for corporate CDOs (BUSINESS WIRE via Yahoo! News Feb. 5). “The intention is to produce CDO ratings that perform similarly in terms of default risk and ratings migration with the market’s expectation for other asset classes,” said John Olert, managing director and head of global structured credit. “This is particularly true for ‘AAA’ and other highly rated CDO tranches.” … * GMAC Financial Services reported a $724 million loss for the fourth quarter as homeowners struggled to make their mortgage payments. That compared with $1 billion in earnings in the same period during 2006. GMAC’s Residential Capital unit lost $921 million during the quarter--reflecting writedowns on credit residuals and mortgage-backed securities, as well as larger funding costs and restructuring charges. GMAC’s auto-lending unit posted $137 million in earnings. For all of 2007, GMAC posted a $2.3 billion loss, compared with $2.1 billion in earnings in 2006 (Associated Press via Yahoo! News Feb. 5) … * Accredited Home Lenders, a subprime-mortgage lender that slashed its workforce last year after posting significant loan losses, is once again targeting non-prime borrowers. The company has originated about $86 million in non-prime loans since November, according to founder Jim Konrath. Accredited, which was acquired by Lone Star Funds in October, cut 1,600 jobs from its workforce of 2,600 to keep afloat last year. The company’s new subprime loans are concentrated in California, Florida, and New York. Accredited is using stricter underwriting standards this time around. It still is making “stated income” loans but restricting them to self-employed people who’ve been in business three years or more. Borrowers also must have high credit scores (Reuters via The New York Times Feb. 5) … * The Federal Reserve on Monday announced Canada Connection, a new marketing kit that banks can use to show customers they can initiate electronic payments to Canada. The Fed is jointly marketing the kit with Scotiabank, which operates Canada’s ACH gateway. The central bank introduced a similar promotion in 2005. Its Directo a Mexico promoted its payment service to Mexico (American Banker Feb. 5) …

Market News (02/05/2008)

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MADISON, Wis. (2/6/08)
* The service sector shrank last month, according to a report by the Institute for Supply Management (ISM). The group’s non-manufacturing index, which includes banks, retailers, restaurants, and construction firms, plunged to 44.6 from 54.4 in December. It was the first time the index has contracted since March 2003. ISM also said its non-manufacturing business activity index fell to 41.9 from 54.4. Tuesday’s report included a new composite index designed to reflect changes in current measures of business activity, new orders, employment, and deliveries. Respondents said the service sector has “come to the end of a long-term period of growth,” said Anthony Nieves, chairman of the group’s non-manufacturing business survey committee. Respondents cited fears about recession, high energy prices, and the housing market. New orders fell to 43.5 from 53.9, while the employment index dropped to 43.9 from 51.8. A measure of prices declined to 70.7 from 71.5 (Associated Press via Yahoo! News, Bloomberg.com, and Economy.com Feb. 5) … * Credit-card lenders are tightening standards as the credit rout continues. Large issuers such as Citigroup are requiring new customers to have higher credit scores. Others such as Bank of America are offering lower credit lines to new customers. Credit-card approval rates have fallen to 32% of applicants from 40% a year earlier, according to R. K. Hammer Chief Executive Robert Hammer. Issuers also are conducting fewer mail solicitations. Mailings fell to 650 million at the end of November--down 16% from January, according to Mintel Comperemedia. At the same time, many issuers are boosting penalty fees to help offset risk. Penalty fees increased to $18.1 billion in 2007, from $17.1 billion in 2006, according to Hammer. He predicts that fees will increase another 6% in 2008 (The Wall Street Journal Online Feb. 5) … * Student-loan borrowers also are facing a credit crunch as lenders boost rates and fees and tighten standards. The average rate on private student loans has risen 0.5% to 1% in recent months, according to FinAid.org Publisher Mark Kantrowitz. Citing rising delinquencies and loan losses, Sallie Mae said it will tighten standards and curb lending to borrowers with lower credit scores and those attending nontraditional schools. Marblehead Corp., another large provider of private student loans, said it is tightening its credit standards to target “high-quality borrowers.” The company also said it plans to boost fees and rates (The Wall Street Journal Online Feb. 5) … * More than eight in 10 respondents in a new Washington Post-ABC News survey say the economy is “not so good” or “poor.” Almost six in 10 say the economy is already in a recession. Just 19% rate the economy positively, the smallest percentage since June 1993. And about half of respondents say the U.S. economy is in a long-term decline. Only about 30% of respondents believe Congress’ stimulus proposal would be enough to avert or alleviate a recession. When asked what they would do with their rebate money, 27% said they would save it, 26% said they would use it to pay bills, 20% said they would spend it, and 5% said they would use the money to pay down debt (washingtonpost.com Feb. 4) … * Most tax-rebate money would go towards paying off debt, according to a UBS Securities-commissioned poll released by the International Council of Shopping Centers (ICSC). Forty-three percent of respondents said they would use their tax rebates to pay down debt. Just 26% said they would save the money while only 24% said they plan to spend it. “Lenders will see the money before retailers do,” said Michael Niemira, the ICSC’s chief economist and director of research. “But still, about $25 billion will head into the spending stream and that is positive for the economy,” added Niemira (Dow Jones Newswires and CNNMoney.com Feb. 5) ...

News of the Competition (02/04/2008)

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MADISON, Wis. (2/5/08)
* Banks tightened standards for almost every type of loan during the fourth quarter, according to the Federal Reserve’s January Senior Loan Officer Opinion Survey. A net 71.5% of respondents reported tighter standards for subprime mortgages, and 85% said they tightened standards on nontraditional mortgages. Tighter standards also spread to prime mortgages in the latest period. About 55% of respondents said they tightened their lending standards on prime mortgages. That’s up from 40% in the previous survey. About 60% said they tightened standards for revolving home equity lines of credit (HELOCs). And 10% reported tighter standards for credit card loans, up from 5% in the previous survey. Loan demand weakened in the fourth quarter. About 60% said demand for prime mortgage loans weakened, while 70% noted weaker demand for subprime and nontraditional mortgage loans. About 35% reported weaker demand for HELOCs (federalreserve.gov, Economy.com and Associated Press via Yahoo! News Feb. 4) … * Lending standards for commercial and industrial (C&I) loans also tightened during the fourth quarter, according to the Federal Reserve’s January Senior Loan Officer Opinion Survey. A net 32.2% of banks reported tighter standards for large and mid-sized companies--up from 19.2% in the previous poll. A net 30.4% of banks reported tighter standards for small firms. Banks said they tightened standards because of the uncertain economy and a lower tolerance for risk. In its latest poll, the Fed also asked special questions about banks’ expectations for delinquencies and charge-offs for loans to both households and businesses. Between 75% and 85% of respondents said they expect their C&I loans to deteriorate, while 15% to 20% expect deterioration in their commercial real-estate portfolios. And 70% to 80% expect the quality of their prime, nontraditional, and subprime residential mortgage loans as well as their HELOCs to deteriorate this year. Seventy percent predict a deterioration in the quality of credit cards and other consumer loans. Finally, more than 85% said they expect loan-by-loan modifications based on borrowers’ specific circumstances to be at least a somewhat important loss-mitigation strategy (federalreserve.gov, Economy.com and Associated Press via Yahoo! News Feb. 4) … * A proposal being developed by Freddie Mac would allow it to create and sell bonds backed by multifamily mortgages, meaning it would be more competitive on Wall Street when investment banks scared away by defaults return to that market(The Wall Street Journal Feb. 4). Freddie Mac and especially Fannie Mae have captured a larger share of the home-mortgage-financing market while other investors have been skittish of the market because of increasing defaults. Weaker credit quality also meant investors have steered clear of buying commercial-mortgage-backed securities (CMBS). CMBS mortgages--which are pooled and packaged into bonds with different returns and risks--is an $800 billion market. Bonds with multifamily mortgages account for about 18% of that market … * Saying they don't want to be involved with debt that goes bad as a result of government limitations greenhouse-gas emissions, Citigroup Inc., J.P. Morgan Chase & Co. and Morgan Stanley planned to announce Monday they will impose new environmental standards making it harder for utility companies to get finance building of coal-fired power plants in the U.S. The banks said they believe the federal government will cap power plants' greenhouse-gas emissions within several years. Utilities seeking financing for plants before then will be required to prove the plants will be economically viable even under possibly stringent federal caps on carbon dioxide. Coal provides about half of the electricity in the U.S. but emits large amounts of carbon dioxide, the largest man-made greenhouse gas. The standards would apply to all but the smallest plants (The Wall Street Journal Feb. 4) … * France's government was to release a report Monday urging tightened risk-control measures at Societe Generale as well as a review of other French banks. The report stems from $74 billion in losses the bank had in a trading scandal, say sources familiar with the report. The report, by Finance Minister Christine Lagarde, urges the banking regulator to focus on three areas where risk controls failed: 1) controls preventing employees from being reassigned to the trading floor after spending time working in the back office, which is responsible for detecting fraud; 2) security problems with the bank's internal computer system; and 3) the lack of a process to alert management about unusual transactions by individual traders. The scandal, involving a single trader, Jerome Kerviel, was announced two weeks ago. It was the biggest trading fraud in history (The New York Times Feb. 4) … * A former Credit Suisse Group investment banker was found guilty by a U.S. jury Monday of insider trading related to a series of corporate takeovers, including the $32 billion private equity buyout of TXU Corp., a power company. Hafiz Naseem, 37, was convicted of 28 counts of insider trading and one count of conspiracy to commit securities fraud. He allegedly participated in a scheme that gained $7.5 million from leaking inside information about pending deals to a friend in Pakistan. The friend then traded on the illegal tips. The crimes carry a penalty of 12 to 15 years in prison and deportation (The New York Times Feb. 4) …

Market News (02/04/2008)

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MADISON, Wis. (2/5/08)
* Credit card and auto loan delinquencies will surge this year as unemployment rises and consumer costs continue to escalate, according to a report by Fitch Ratings. The ratings agency predicts that credit card firms will write off more than 7% of their portfolios--up from a 5.21% pace last year. Subprime auto lenders are expected to write off 11% of their portfolios, about twice the pace of 2006. Fitch said prime auto lenders will write off 2% of their loans, an increase of nearly 50% from last year. Fitch tracks consumer delinquencies because credit card and auto loans are often bundled into bonds. When the quality of the underlying loans decline, bond prices fall. “The U.S. economy is showing more cracks, which will continue to impact the performance of U.S. credit card and auto loan asset-backed securities,” said Fitch. However, the ratings agency noted that the bonds will remain essentially safe because they’re structured to weather even higher losses (Associated Press via Yahoo! News Feb. 4) … * The pace of layoffs accelerated last month as the economy continued to struggle with the housing slump. Major firms announced 74,986 job cuts in January--up 69% from the previous month and 19% from a year earlier, according to the outplacement firm Challenger, Gray & Christmas. The January total was the highest since August. At 15,789, the financial sector accounted for much of January’s increase--followed by pharmaceuticals (7,628); retail (7,176); automotive (7,142); and industrial goods (5,186). However, layoffs remain much lower than during the 2001 recession, noted John Challenger, chief executive of the Chicago-based firm. “The fact that job cuts have not reached pre-Sept. 11 levels could be an indication that the impact of the economic slowdown on the job market may be muted,” said Challenger. But he also noted that layoffs will accelerate further if the government’s proposed stimulus package fails to keep the economy from falling into an outright recession (CNNMoney.com and Economy.com Feb. 4) … * Factory orders increased by only 1.4% in 2007--slowing sharply from a 5.1% gain in 2006 and the weakest increase since 2002, the Commerce Department reported Monday. Manufacturers struggled last year as the housing slump continued, auto sales slowed and competition from foreign firms intensified. U.S. manufacturers have eliminated 269,000 jobs over the past 12 months, the Labor Department reported last week. Yesterday’s report contained some good news for the economy. Demand for manufactured goods rebounded in December, increasing 2.3%. Orders for big-ticket durable goods such as autos jumped by 5%, offsetting a 0.4% dip in orders for nondurables such as clothing (Associated Press via Yahoo! News Feb. 4) … * President Bush sent Congress a $3.1 trillion federal budget proposal that calls for slashing Medicare and other health-care programs and significantly boosting military spending. The budget proposal would cut spending for entitlement programs (including Medicare and Medicaid) by $208 billion over the next five years. Military spending would jump 7.5% to $515 billion--the 11th consecutive annual gain. The budget deficit is projected to surge to $410 billion this year, from $162 billion last year and close to the record $413 billion shortfall in 2004. The government has provided $691 billion for the wars in Iraq and Afghanistan. Bush’s proposal calls for another $70 billion this year. Military spending makes up about one-fifth of the federal budget. The proposal also calls for President Bush’s tax cuts to be made permanent. They are scheduled to expire in 2011. Democrats were quick to criticize the plan. The budget proposal “bears all the hallmarks of the Bush legacy--it leads to more deficits, more debt, more tax cuts, more cutbacks in critical services,” said House Budget Committee Chairman John Spratt (D-S.C.) (Bloomberg.com Feb. 4) … * Chrysler Corp. announced Monday that it plans to temporarily shut down four plants because of a bankruptcy filing at one of its suppliers. Chrysler is still trying to assess what further effects the bankruptcy of Plastech Engineered Products will have on the auto company, said Chrysler spokeswoman Michelle Tinson. Plastech has 36 plants and 7,600 employees in the U.S. and Canada (Associated Press via CNNMoney.com Feb. 4) …

Rick Job-decline numbers signal shift to recession

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MADISON, Wis. (2/4/08)-- Economic forecasters were taken aback by the surprisingly weak payroll employment numbers on Friday, Steve Rick, senior economist at the Credit Union National Association (CUNA) told News Now.
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"A job loss of 17,000 is a powerful signal the economy has shifted into reverse," he said. Nonfarm payroll employment fell by 17,000 in January (see chart), the Labor Department reported Friday. It was the first decline since August 2003. The government released benchmark revisions with the report. Last year ended with 376,000 fewer jobs (on a seasonally adjusted basis). Total job growth in 2007 was 1.137 million. Many economists were forecasting job growth in the 75,000 to 100,000 range, Rick said, adding, "This news solidified in the minds of many financial market participants that the economy is in recession and will continue to be for the first half of 2008. "With expectations of negative economic growth and lower inflation, bond demand rose, pushing up bond prices and pushing down bond interest rates," he said. "The benchmark 10-year Treasury interest rate fell to 3.59%, from 3.67% the day prior, and coming close to the recent low of 3.51% set on Jan. 23. With the two-year T-note interest rate at 2.09% and the three-month T-bill at 2%, the yield curve has regained a significant upward slope not seen in while. "This is, of course, good news for credit unions. The business of borrowing short-term and lending long-term has become a bit more rewarding," Rick said. The January employment drop reflected declines in construction and manufacturing. Construction employment fell by 27,000 last month and has declined by 284,000 since peaking in September 2006. Manufacturing employment fell by 28,000 in January. The sector has lost 269,000 jobs during the past 12 months. Employment in financial services was essentially unchanged in January as commercial banking lost 4,000 jobs, and securities, commodity contracts and investments added 5,000 jobs. Employment in financial activities has fallen by 99,000 since peaking in December 2006. The unemployment rate, which is based on a separate survey, edged down to 4.9% in January from 5% in December. Average weekly earnings declined by 0.1% in January to $598.18. Over the 12 months ending in January, weekly earnings rose by 3.4%.

Market News (02/01/2008)

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MADISON, Wis. (2/4/08)
* The number of people out of work for long periods is increasing to levels usually not seen until far into a recession. The number of long-term unemployed was a seasonally-adjusted 1.4 million in January, according to Labor Department data. That’s up about 21% from a year earlier. The average for all of 2007 was 1.2 million--twice the number in 2000. For the full year, about 17.6% of the unemployed had been out of work six months or longer--compared with 11.4% in 2000. People who’ve been unemployed that long lose their jobless benefits and may use up their savings. Many of the long-term unemployed eventually accept jobs at much lower wages. A Congressional Budget Office report last year found that more firms today are laying people off on a permanent basis. It said the aging workforce also is a factor because older people often find it tougher to find a new position. And the housing slump plays a role in the phenomenon, said John Challenger, chief executive of the outplacement firm Challenger, Gray & Christmas. He said job seekers may not want to relocate to take a new position if they have to take a loss when they sell their home. In the fourth quarter of last year, 11% of job seekers relocated--down from 15.6% a year earlier, noted Challenger (CNNMoney.com Feb. 1) … * Despite a small increase in consumer sentiment in January, confidence is much lower than in the same month last year--falling about one-fifth over the last 12 months, according to the Reuters/ University of Michigan consumer sentiment poll. The index was 78.4 in January--up from 75.5 in December but much lower than the 96.9 reading in January 2007. Recent polls have found the biggest gap in more than 25 years in how different income groups see their financial situation. Households with income below $75,000 were twice as likely as higher-income households to say their finances had weakened because of higher food and energy prices and weaker income gains. “Over the past decades, whether inflation was much higher or lower, or incomes grew faster or more slowly, there has never been such a wide divergence in the experiences across income groups,” said Survey Director Richard Curtin. For the first time in 20 years, more homeowners said their homes had lost value than reported that values had increased. “The housing market will not benefit as quickly as in the past from cuts in interest rates, given the near universal rise in credit standards, as well as continued declines in home values, making even refinancing more difficult,” said Curtin. He predicts that the economy will stall during the first half of this year (reuters.com Feb. 1) … * Exxon Mobil on Friday announced the largest quarterly and annual profits on record for a U.S. firm amid soaring oil prices. The world’s biggest publicly-traded oil company said its net income jumped 14% from a year ago to $11.66 billion in the fourth quarter. The company reported record profit of $40.61 billion for the year--earning almost $1,300 per second. Crude oil prices soared nearly 60% in 2007. Consumer groups have advocated a windfall profit tax on oil companies. They’ve also proposed breaking up the huge oil firms formed during the 1990s merger boom (CNNMoney.com Feb. 1) … * Microsoft Corp. offered Yahoo Inc. $44.6 billion in an unsolicited takeover bid to counter the dominance of Google Inc. in online advertising and search markets. Yahoo said it will “carefully and promptly” consider the offer. The bid boosted Yahoo’s stock price by nearly 50% in morning trading Friday. In its bid, Microsoft offered a 62% premium over Yahoo’s Thursday closing price. Yahoo’s shares had declined by 46% since peaking at $34.08 in October. Google controls about 60% of the U.S. search market. A merger between Microsoft and Yahoo would result in a 33% share, according to comScore Media Metrix (Associated Press via Yahoo! News Feb. 1) … * Construction spending fell by 2.3% last year, according to the Commerce Department. Private residential construction declined 20.4%, while total private nonresidential construction rose 20.4%. Total public construction was up 10.1% last year. In December, overall construction spending declined by 1.1%, as spending on home construction fell 2.8%. Nonresidential spending rose 1.3%, while public construction declined by 1.5%. Moody’s Economy.com (Feb. 1) predicts that private residential construction will fall more than 8% this year, while nonresidential construction will increase just 4%. The research firm forecasts that real economic growth will be around 2% in 2008 …

CUs need measured response to any recession

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WASHINGTON (2/4/08)—-While the onset of a recession likely means “it’s not going to be pretty” for credit unions, the downturn in the economy deserves a disciplined response from credit unions, according to a new analysis prepared by the Credit Union National Association’s (CUNA) economic team. The trio said gloomier economic conditions do not necessarily translate into tighter credit standards, higher rates and fees, lower dividends, cutting back services or laying off employees just to keep net income from falling for a year or two. That’s because most credit unions now “have very strong balance sheets and near-record high capital levels,” states the report, prepared by CUNA Chief Economist Bill Hampel with senior economists Mike Schenk and Steve Rick. In the face of the developing recession “the appropriate course of action for most credit unions is therefore to let the capital cushion do its work: temporarily let net income fall as a result of the loan losses.” The CUNA report, “The U.S. Mortgage Crisis/Causes, Effects and Outlook Including Suggested Credit Union Responses,” points out that a recession’s impact on credit unions means:
* Faster saving and asset growth; * Significant increases in loan delinquencies and losses; * Substantial downward pressure on net income; and * Falling net worth ratios.
These factors will certainly snatch the attention of boards and senior management, notes the report. “But, in this case, we urge caution in your response,” the economists write. They note that the downturn is neither the fault of credit unions, individually or as a group, and not likely to be very long term. “In many cases, the appropriate actions needed to deal with these challenges will be modest,” the report states. Importantly, however, the report warns against credit unions taking actions that are too strong in response to the recession’s impact. “It is imperative to avoid doing unnecessary harm to the credit union that would result from trying to maintain net income in the current environment,” the report states. “The best response to a decline in net income caused by rising loan losses may be to adjust your budget and then carefully let it happen.” The report advises that credit unions “keep an even keel and let capital absorb much of the short-term dislocation,” thus giving credit unions the opportunity to show their members and the public “the unique and substantial benefits of the cooperative structure.” “There will be a rise in disgruntled bank customers in the coming year. This may help overcome their inertia in considering another financial institution,” the report states. In analyzing the current economic situation, the report points out that credit unions are largely “collateral damage” of a subprime mortgage debacle, which largely did not originate with credit unions. “This has had two effects on credit unions: First, some members with toxic mortgage loans from other lenders are finding it difficult to pay their credit union loans. Second, the broader economic slowdown that is spreading from the subprime mortgage mess is causing other members to have economic difficulty, and therefore fall behind on their loans.” The report estimates that the duration of the problem affecting credit unions should be about three years: One year of a recession, followed by a two-year recovery to reach the economic level of activity that occurred before the recession set in. “Of course, in some regions of the country the recession will be more severe, and in others less so.” More specifically, under that scenario, the report suggests that credit unions may expect:
* Rising loan losses and falling net incomes in 2008; * Flattening (but still high) loan losses and stable (but still low) net income in 2009; and * Falling loan losses and improving net income in 2010.
Access the CUNA report’s complete text online using the resource link below.

News of the Competition (02/01/2008)

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MADISON, Wis. (2/4/08)
* The Federal Reserve announced Friday that it will conduct two auctions of 28-day credit via its Term Auction Facility (TAF) in February to help ease the credit crunch. It will offer $30 billion in an auction Feb. 11 and $30 billion in an auction Feb. 25. The Fed will lower the minimum bid size to $5 million, from $10 million in previous auctions, to facilitate participation by smaller institutions. The central bank will announce the minimum bid rate at noon EST the Friday prior to each auction. The Fed has said it will continue to offer biweekly TAF auctions as needed to meet liquidity pressures in the short-term funding markets. Banks have been hesitant to use the discount window for their borrowing needs because they fear it will signal they’re in trouble financially. Last week the Fed cut the discount rate by 50 basis points to 3.5%. It also lowered the fed funds rate by 50 basis points to 3%. Discount window borrowings have increased in recent weeks. Borrowings totaled $46 million as of Jan. 30--up from $20 million the previous week (Dow Jones Newswires Feb. 1). Lending via the primary credit facility was $43 million, while seasonal credit was $3 million … * Merrill Lynch has agreed to pay the city of Springfield, Mass., $13.9 million to settle a disagreement about collateralized debt obligations (CDOs) that lost value. The brokerage said it agreed to the settlement because its brokers purchased the CDOs without the city’s “express permission.” Cities nationwide have lost money purchasing CDOs as the mortgages backing them plunged in value. CDOs and similar securities have prompted more than $133 billion in losses and writedowns for financial firms (Bloomberg.com Feb. 1) … * Consumer groups in California, New York, New Jersey, and North Carolina are asking banking committees in Congress to hold hearings on the proposed acquisition of mortgage lender Countrywide Financial by Bank of America. They want Countrywide borrowers at risk of losing their homes to be offered low-cost, fixed-rate loans so they can avoid foreclosure. In other news, Florida Attorney General Bill McCollum is investigating Countrywide for possible unfair and deceptive business practices. A subpoena issued by his office is seeking documents describing how the company decides if borrowers quality for subprime loans. It’s also asking for documents with information about how borrowers’ payments are applied to bankruptcy debt. Attorneys general in California and Illinois are conducting similar investigations of Countrywide (Associated Press via Yahoo! News Feb. 1) … * A group of big banks has teamed up to find ways to rescue bond insurer Ambac Financial Corp, according to a person briefed on the situation. Bond insurers are seeking to boost their capital in order to retain their credit ratings. They’re expected to incur big losses because they insure repackaged subprime mortgages. A downgrade on bond insurers would boost borrowing costs for cities and consumers. Banks holding insured assets also would incur losses (Reuters via Yahoo! News Feb. 1) … * MasterCard’s profit soared in the fourth quarter as its global business prospered. The credit-card processor said its profit jumped about seven-fold to $304 million. The company’s full-year profit was $1.09 billion. Unlike card companies such as American Express and Discover Financial Services, MasterCard processes payments, but doesn’t assume the debt. Instead, the debt is held by the 25,000 financial institutions that process the cards. However, a slowdown in U.S. consumer spending this year would erode MasterCard’s earnings as merchant fees decline. “Despite economic uncertainties in the U.S., we continue to leverage our unique assets and world-renowned brands to position MasterCard for long-term growth and success,” said President/CEO Robert Selander (Associated Press via The New York Times Jan. 31) …