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News of the Competition (02/27/2009)

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MADISON, Wis. (3/2/09)
* U.S. banks posted their first quarterly loss since 1990 during the fourth quarter as the housing and credit crises intensified, the Federal Deposit Insurance Corp. (FDIC) reported Thursday. The nation’s banks lost $26.2 billion in the final three months of 2008. Banks set aside $69.3 billion to cover potential loan losses--more than twice the $32.1 billion set aside a year earlier. There were 252 problem banks at year-end 2008, up from 171 in the third quarter. For all of 2008, banks earned $16.1 billion--the smallest annual profit since 1990. The report said rising loan losses and eroding asset values “overwhelmed” banks’ revenues during the fourth quarter. However, FDIC Chairman Sheila Bair noted a bright spot in the report, as bank deposits increased to $307.9 billion in the final three months of the year--the biggest increase in 10 years. The FDIC estimates that U.S. bank failures will cost the deposit insurance fund more than $80 billion over the next four years as soaring unemployment and declining home prices prompt rising loan defaults. So far this year, 14 federally insured financial institutions have failed. In comparison, regulators shut down 25 banks in 2008 and just three banks in 2007 (Associated Press and Reuters via Yahoo News Feb. 27) … * The Federal Home Loan Banks of San Francisco, Pittsburgh, Boston and Chicago reported steep losses for the fourth quarter, prompted by writedowns on the value of mortgage securities. The FHLBs are cooperatives owned by the nation’s commercial banks, thrifts, credit unions and insurers. The Pittsburgh Home Loan Bank reported a $187.9 million loss, compared with net income of $66.7 million a year earlier. The Federal Home Loan Bank of Boston reported a $73.2 million loss, compared with $198.2 million in net income a year earlier. The Federal Home Loan Bank of San Francisco reported a $103 million loss, compared with $231 million in net income a year earlier. The Federal Home Loan Bank of Chicago said it expects to report a full-year 2008 loss of $119 million, compared with $98 million in net income for 2007, when it files results in March. In some good news, the Home Loan Banks of New York, Des Moines, Iowa and Topeka, Kan., reported net income for 2008 (The Wall Street Journal Online Feb. 28) … * The banking industry plans to fight key measures in President Obama’s budget plan, including a provision that would eliminate the mortgage-interest deduction for families who earn more than $250,000 a year. “We think that today’s economy calls for additional tax stimuli, not a reduction in housing-related tax benefits,” said Josh Denney, an associate vice president of public policy at the Mortgage Bankers Association. Ending the deduction would prompt wealthier Americans to pay down their mortgages, said Chris Low, chief economist for FTN Financial Capital Markets. Treasury Department officials noted that the tax code will maintain other homeownership incentives. “I’m not sure I accept the premise that” eliminating the deduction “would lead to a significant number of people who want to pay off their mortgage early,” said one official (American Banker Feb. 28) … * Cape Fear Bank of Wilmington, N.C., has entered into an agreement with the Federal Deposit Insurance Corp (FDIC) and the North Carolina Commissioner of Banks to adopt measures to enhance its strength and stability. Under the enforcement action, Cape Fear cannot declare or pay dividends without prior approval. The bank also cannot incur, increase, or guarantee any debt without prior approval. Cape Fear must maintain certain capital levels and report to regulators how it plans to improve its capital ratios. “Our customers can rest assured that the bank will continue to serve its customers with its full range of lending and retail banking services,” said President/CEO Ralph Strayhorn. “And all customer deposits remain fully insured to the highest limits set by the FDIC,” he added (BUSINESS WIRE and Dow Jones Newswires Feb. 26) …

Market News (02/27/2009)

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MADISON, Wis. (3/2/09)
* The economy contracted at the steepest pace since early 1982 during the fourth quarter, the Commerce Department reported Friday. The nation’s gross domestic product (GDP) fell at an annual rate of 6.2%, following a decline of 0.5% in the third quarter. The fourth-quarter decline was the steepest since a 6.4% decrease in the first quarter of 1982. A month ago, the department estimated that the economy shrank at a more moderate 3.8% pace during the fourth quarter. The steeper decline reflected downward revisions to exports, inventories, and personal spending. The biggest offset was a much larger decline in imports. Consumer spending, which accounts for more than two-thirds of economic activity in the U.S., fell at a 4.3% rate in the fourth quarter, the largest decline since the second quarter of 1980. Exports plunged at a 23.6% pace, the largest decline since 1971. Businesses inventories shrank $19.9 billion in the fourth quarter, instead of rising by $6.2 billion as Commerce originally estimated. Weak economic growth dampened inflationary pressures. The core PCE price index, the Federal Reserve’s preferred inflation gauge, rose at only a 0.8% pace in the fourth quarter, the smallest increase since 1997 (bea.gov, Reuters, and The Wall Street Journal Online Feb. 28) … * The stock markets largely shrugged off news that the economy shrank at a much larger pace then expected at the end of 2008, focusing instead on the government’s plan to boost its ownership of Citigroup. The Treasury Department announced Friday that it will increase its stake in the banking giant to 36%, from 8%. In a move that federal regulators have advocated, Citigroup will reconfigure its board so it has a majority of independent directors. CEO Vikram Pandit will remain. Citigroup’s shares were down 30% in late morning trading Friday, as investors fretted about how much the plan will dilute their holdings. Those investors include many large pension funds that manage money for ordinary investors. The Dow Jones Industrial Average, which earlier in the morning came within 34 points of breaching the 7,000 mark for the first time in 11 years, was down just 22 points, at 7,161, in late morning trading (The New York Times and Associated Press via Yahoo! News Feb. 28) … * Mortgage rates steadied last week amid mixed economic reports, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) edged up 3 basis points to 5.07%, while the 15-year FRM was unchanged at 4.68%, and the one-year, adjustable-rate mortgage (ARM) inched up 1 basis point to 4.81%. “Both the core producer price and consumer price indexes ticked up in January, higher than the market consensus, while consumer confidence in February fell to the lowest reading since records began in January 1967,” noted Freddie Mac Vice President and Chief Economist Frank Nothaft. “Lower house prices and affordable mortgage rates have yet to spur housing demand,” added Nothaft. The National Association of Home Builders reported last week that existing-home sales fell 4.7% in January. And the Commerce Department reported that new-home sales plunged 10.2% during the month. Mortgage rates remain much lower than a year ago. The 30-year FRM averaged 6.24% at this time last year, while the 15-year FRM was at 5.72%, and the one-year ARM averaged 5.11%. For CUNA's Daily Financial Rates, use the link … * Fannie Mae late Thursday reported a $25.2 billion loss for the fourth quarter, reflecting rising mortgage defaults and declines in the value of derivative contracts used to hedge against interest-rate risks. Fannie posted a loss of $58.7 billion for 2008, following a $2.1 billion loss in 2007. Last year’s loss is more than the net income for the prior 17 years. Fannie said the housing and financial market conditions that prompted last year’s huge losses probably will “continue and possibly worsen in 2009.” Fannie said it needs $15.2 billion in government aid to make up for losses from the housing crisis. After taking control of Fannie and Freddie Mac in September, the Treasury Department pledged up to $100 billion in aid for each firm. Last week the department doubled their lifelines to $200 billion each. Fannie and Freddie together own or guarantee almost 31 million home loans worth about $5.5 trillion, or more than half of all home mortgages in the U.S. (The Wall Street Journal Online, The New York Times, and Associated Press via Yahoo! News Feb. 28) … * Moody’s Investors Service announced Thursday that it is reviewing all 2005, 2006 and 2007 subprime mortgage bonds for downgrades, covering debt with $680 billion in original balances. The ratings agency forecasts that losses for mortgages backing 2006 securities will hit 28% to 32%. That’s up from its previous projection of 22%. In boosting the loss expectations, Moody’s cited “the continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates, and progressively diminishing prepayment rates.” Moody’s said the Obama administration’s loan-modification plan will have a “mitigating” effect on mortgage losses. That was reflected in its projections. In 2008, the ratings agency cut a record $1.4 trillion in asset-backed securities, after cutting $99 billion in 2007 (Bloomberg.com Feb. 26) … * Consumer confidence plunged to a three-month low in February amid deep concerns about the economic slump and mounting job losses. The Reuters/ University of Michigan Surveys of Consumers said its final reading of confidence for February sank to 56.3, from 61.2 in January and the lowest since 55.3 in November. The January reading isn’t far from the record-low 51.5 hit in May 1980. “Confidence remained unchanged at the same low level recorded at mid-month as consumers found no reason to expect that the recession would end during 2009 and reported record declines in their personal finances and job prospects,” said the report. “Moreover, nearly two-thirds of all consumers thought it would be at least five years before the full restoration of favorable economic conditions” (Reuters via CNNMoney.com Feb. 28) …

News of the Competition (02/26/2009)

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MADISON, Wis. (2/27/09)
* U.S. thrifts lost $3 billion during the fourth quarter and $13.44 billion in 2008--a record annual loss, the Office of Thrift Supervision (OTS) reported Thursday. Thrifts posted a $649 million loss in 2007. Last year thrifts set aside $38.7 billion for loan losses, the most since 1991, as mortgage delinquencies soared. High loan-loss provisions are needed because home prices probably will continue declining “for some time,” said OTS economist Sharon Stark. Last year’s results excluded Washington Mutual, which failed in September, and IndyMac Bank, which failed in July. The OTS also reported that there were 26 problem thrifts at year-end 2008, up from 11 a year earlier. Thrift mortgage originations plunged 43% to $404.9 billion last year (Associated Press via Yahoo! News Feb. 26) … * JPMorgan Chase announced Thursday that it plans to cut about 12,000 jobs as it integrates the operations of Washington Mutual (Associated Press via The New York Times Feb. 26). Last September, JPMorgan acquired Seattle-based WaMu, the largest financial institution to fail in U.S. history. The bank expects remaining losses on WaMu’s home-mortgage portfolio to total $32 billion to $38 billion. JPMorgan also warned that as much as 41% of its more credit-worthy home-equity borrowers will owe more on their homes than they are worth by the end of 2010--up from 27% at year-end 2008 (Reuters Feb. 26). The nation’s second-largest bank said it anticipates losses of $1 billion to $1.4 billion in each quarter this year from these lower-risk home-equity loans because home prices are declining … * Two money managers who oversaw investments for Carnegie Mellon University and other institutions were arrested Wednesday on charges of operating a $550 million, 10-year fraud. Paul Greenwood and Stephen Walsh, managing general partners of WG Trading Co. and Westridge Capital Management, were charged with conspiracy, securities fraud and wire fraud. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission also filed civil charges against the two men and their companies. The SEC said the men used client funds as “their personal piggy-bank,” to purchase multimillion-dollar homes, vehicles, and expensive collectibles. A Manhattan judge set their bail at $7 million, to be secured by $1 million in cash or property (Reuters via The New York Times Feb. 26) ... * Regional banks may gain new business as corporations retreat from larger lenders that are focused on rebuilding their balance sheets, according to a report by Greenwich Associates. U.S. Bancorp and PNC Financial Services Group are “at the top of the very short list of banks that have burnished their reputations among corporate clients in the U.S. as a result of their handling of the financial crisis,” said Greenwich. Banks that received the most bailout money probably will have the “most meaningful reduction in business,” said Greenwich consultant John Colon. “Companies are wary of overdependence on these banks, and the banks themselves are rebuilding balance sheets and trying to avoid loan losses. These conditions are hardly conducive to the rapid increase in lending hoped for by regulators and politicians” (Bloomberg News via American Banker Feb. 25) … * Bank of America is considering the sale of First Republic Bank, a private bank it inherited when it purchased Merrill Lynch, according to people familiar with the matter. The bank is seeking to shore up capital and perhaps shed some noncore assets. Bank of America already has a wealth-management business, U.S. Trust, which it acquired from Charles Schwab. Possible buyers of First Republic include Goldman Sachs and Morgan Stanley, which are trying to boost their deposit-gathering businesses after they converted to bank holding companies. Bank of America Chairman and CEO Kenneth Lewis has said the firm doesn’t need any further government money beyond the $45 billion it received (The Wall Street Journal Online Feb. 26) …

Market News (02/26/2009)

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MADISON, Wis. (2/27/09)
* Many baby boomers won’t have much to live on during their retirement years thanks to declining home and stock values. According to a study by the Center for Economic and Policy Research, 30% of boomers aged 45 to 54 are underwater in their homes, meaning they owe more on their mortgages than their homes are worth. And 18% of boomers aged 55 to 64 are underwater on their homes. The housing slump already has destroyed about $6 trillion in housing wealth for homeowners, noted report co-author Dean Baker. “This reality is compounded by the recent collapse of the stock market. Many baby boomers will only have Social Security and Medicare to rely on in their retirement.” The report found that boomers aged 45 to 54 have lost 45% of their median net worth--leaving them with only $80,000 in net worth. Boomers aged 55 to 64 have lost 38% of their net worth, leaving them with $140,000. The report also found that people who were renting their homes in 2004 will have more net worth in 2009 than those who were owners (CNNMoney.com Feb. 26) … * Sales of new single-family homes plunged 10.2% to a seasonally-adjusted annual rate of 309,000 in January--the lowest pace on records dating back to 1963. Sales were down 48.2% from a year earlier, according to the Commerce Department report. The median sales prices dropped to $201,100 in January--down a record 9.9% from December. Too many unsold homes on the market have pushed prices down. The seasonally adjusted estimate of new homes for sale at the end of January was 342,000--representing a 13.3-monthly supply at the current sales pace. The government revised data back to April 2008. An error in the counting of homes removed from the sales market caused the numbers of homes for sale from April through November to be overestimated (commerce.gov, Associated Press via Yahoo! News and The Wall Street Journal Online Feb. 26) … * The job market softened further last week, the Labor Department reported Thursday. First-time claims for unemployment insurance jumped by 36,000 during the week ending Feb. 21 to 667,000--the highest level since October 1982. The four-week moving average of jobless claims, which smoothes out weekly volatility, jumped by 19,000 to 639,000--the highest level in more than 26 years. People are having a tough time finding new jobs after they’ve been laid off. Continuing claims--the number of people still on the benefit rolls after an initial week of aid--jumped by 114,000 during the week ended Feb. 14 to a record-high 5.1 million, the fifth consecutive week that number has hit a new high on data going back to 1967. Continuing claims totaled just 2.8 million a year ago. Another 1.4 million people are now receiving jobless benefits under an extended program--boosting the total number of unemployment-benefit recipients to 6.5 million (bls.gov and Associated Press via The New York Times Feb. 26) ... * In a hopeful sign for the job market, fewer large U.S. employers say they plan to cut workers. According to a survey by consulting firm Watson Wyatt, 13% of large firms said they are planning to eliminate jobs--down from 23% in December and 26% in October. However, 52% of the firms polled said they’ve already fired workers--up from 39% in December and 19% in October. And 56% have a firing freeze in effect, up from 47% in December and 42% in October, while 12% have frozen their 401(k)match, up from 3% in December. “Companies have come to terms with the fact that this recession is going to last and that they can’t slash their way out of it,” said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt. Most respondents expect the economic slump to last through year-end (MarketWatch Feb. 26) … * General Motors reported a $9.6 billion loss for the fourth quarter and said it burned through $6.2 billion in cash during the fourth quarter as it coped with the weakest auto sales since 1982 (Associated Press via Yahoo! News Feb. 26). GM said it lost $30.9 billion for all of 2008. The firm has received $13.4 billion in federal loans and says it needs as much as $30 billion more to avoid bankruptcy. GM said it expects to reveal in its upcoming annual report whether its auditors believe there is a substantial doubt about its ability to continue operations. The company already has cut thousands of workers and plans to slash another 47,000 by year-end. In other news, Ford Motor said Thursday that it has lowered its low-end forecast for 2009 vehicle sales by 1 million, to 10.5 million (Bloomberg.com Feb. 26). However, the company said its high-end estimate is for 12.5 million vehicle sales. Ford restated its expectation that it won’t need any federal bailout money … * The manufacturing sector weakened further in January as the U.S. housing slump and the global downturn eroded demand. Orders for big-ticket durable goods plunged 5.2%--the sixth consecutive decline, the Commerce Department reported Thursday. That’s the longest string of declines since 1992. Weakness was widespread in January, as orders for vehicles, metal products, machinery, computers, and household appliances fell. The outlook for coming months remains grim. Orders for non-defense capital goods excluding aircraft, a proxy for future business spending, declined by 5.4% in January following a 5.8% drop in December. Year-over-year, orders were down 20.2% in January (Associated Press via The New York Times and The Wall Street Journal Online Feb. 26) …

News of the Competition (02/25/2009)

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MADISON, Wis. (2/26/09)
* A group of wealthy American clients has filed a lawsuit in Swiss federal court against UBS AG, seeking to prevent the disclosure of their identities as part of the U.S. Justice Department’s investigation of tax evasion. The suit claims UBS and the Swiss Financial Markets Supervisory Authority violated the country’s bank secrecy laws. Switzerland is the largest offshore tax haven in the world. UBS, the world’s largest private bank, agreed last week to give U.S. authorities the names of 250 wealthy Americans suspected of using UBS accounts to avoid taxes. However, the Justice Department is trying to force the company to disclose the names of 52,000 American clients that may have evaded taxes (The New York Times Feb. 25) … * Merrill Lynch disclosed late Tuesday that its losses for 2008 were $533 million higher than previously reported. Merrill, which was acquired by Bank of America on Jan. 1, has been criticized for the lavish bonuses it paid out to executives ahead of the sale, in December. New York Attorney General Andrew Cuomo is investigating the timing of the bonuses, and whether Merrill offered adequate disclosure about them and the firm’s finances. His office has subpoenaed former Merrill CEO John Thain and Bank of America CEO Kenneth Lewis about the matter (Associated Press via Yahoo! News Feb. 25) … * Ambac Financial Group reported a loss of $2.34 billion for the fourth quarter as the bond insurer set aside almost $1 billion for losses tied to residential mortgage debt. The loss was down from a year-earlier loss of $3.27 billion, which included record writedowns for credit derivatives positions. Ambac’s new municipal bond insurer, Everspan Financial Guarantee Corp. will be conducting business in the second quarter, said CEO David Wallis. Both Ambac and MBIA are separating their bond-insurer business from the remainder of their operations so they can win higher credit ratings (Reuters via The New York Times Feb. 25) … * Moody’s Investors Service has issued a report providing guidance on the rating agency’s bank ratings and how its ratings methodology is operating in the current environment of continued scarcity of private liquidity and a large degree of government support for the banking system. Gregory Bauer, managing director at Moody’s and author of the report, said the firm is “… putting more emphasis on support and on specific drivers of banks’ intrinsic safety and soundness--such as capital adequacy and core earnings--that best reflect the current realities of this enduring credit crisis. We will continue to refine the analysis that underlies our bank ratings to reflect the changing role of government support in the financial crisis” (Thaipr.net via Yahoo! News Feb. 23) …

Market News (02/25/2009)

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MADISON, Wis. (2/26/09)
* Federal Reserve Chairman Ben Bernanke again said a nationalization of major U.S. banks isn’t needed to ensure their viability. “It may be the case that the government will have a substantial minority share in Citi or other banks, but again we have the tools … to make sure that we get the good results we want in terms of improved performance” without the negative impact of a seizure or bankruptcy, which would disrupt the markets, said Bernanke in a second day of Congressional testimony yesterday. The Fed chairman also cautioned that “tremendous” problems in the housing market could push home prices down too far. But he again predicted that the recession will end this year and 2010 “will be a year of recovery,” if government actions create some stabilization of the financial markets (The Wall Street Journal Online Feb. 25) … * Sales of previously owned homes declined in January as some potential buyers waited to see how the government’s stimulus program would affect them, the National Association of Realtors (NAR) reported Wednesday. Existing-home sales (single-family, townhomes, condominiums and co-ops) declined 5.3% to a seasonally-adjusted annual rate of 4.49 million units. Sales were down 8.6% from a year earlier. NAR estimates that distressed sales--foreclosed and short sales--made up about 45% of all sales last month. The median existing-home price was $170,300 in January, down 14.8% from a year earlier. “The housing market will soon get a lift from very favorable buying conditions--not only from improved affordability, but also from the stimulus of an $8,000 first-time home buyer tax credit, and higher conforming loan limits that will allow more people to tap into 50-year low mortgage rates,” said NAR Chief Economist Lawrence Yun. The trade association predicts that the stimulus package and low interest rates till prompt 900,000 additional home sales this year (realtor.org Feb. 25) ... * Mortgage activity retreated last week as mortgage rates edged up, according to a report by the Mortgage Bankers Association (mbaa.org Feb. 25). The trade group’s Market Composite Index fell 15.1% during the week ending Feb. 20 to 743.5. The Refinance Index tumbled 19.1% to 3618, and the Purchase index fell 2.6% to 250.5. The average 30-year, fixed-rate mortgage (FRM) increased 8 basis points to 5.07% last week, while the one-year, adjustable-rate mortgage (ARM) rose 3 basis points to 6.13%. Mortgage rates remain attractive, with the 30-year FRM down 120 basis points from a year ago, noted Moody’s Economy.com (Feb. 25). However, record-low consumer confidence and uncertainty about employment and wages are keeping borrowers out of the market. The research firm said a slowdown in foreclosures is necessary for mortgage applications to begin recovering … * Employers slashed payrolls last month, the Labor Department reported Wednesday. Employers took 2,227 mass layoff actions in January, resulting in the separation of 237,902 workers (seasonally adjusted). That’s up nearly 50% from January 2008. Eleven industries--including mining, manufacturing, transportation, and financial services--reported the highest levels of job losses on government records going back to 1996 (Associated Press via Yahoo! News Feb. 25). The national unemployment rate was 7.6% in January, up from 7.2% in December and from 4.9% a year earlier. Total nonfarm payroll employment dropped by 598,000 in January and was down by 3.5 million from a year earlier. Growing unemployment will weaken consumer spending through the first half of the year, said Moody’s Economy.com (Feb. 25). The housing market probably won’t hit bottom until the end of the year … * Hourly workers at Ford Motor Co. were offered another round of buyout and early-retirement offers, and the firm’s top two executives will take 30% pay cuts as the automaker copes with the biggest sales decline in 26 years, according to a memo obtained by Associated Press (The New York Times Feb. 25). Buyout or early-retirement offers will be presented to all of the company’s 42,000 hourly workers. Cost-of-living pay raises also are being suspended, as are lump-sum performance bonuses and year-end bonuses. The plan probably will be a template for similar concessions at General Motors and Chrysler … * Almost 12% of the loans made by the Small Business Administration (SBA) last year are going into default, according to The Coleman Report. That compares with a failure rate of 8.4% in 2007 and just 2.4% in 2004. The numbers are brutal, but it validates what we already know,” said Robert Coleman, editor and publisher of the report. “In towns, we see established businesses going under every day, and [I’ve heard] bankers say their small business portfolios have become a disaster,” added Coleman. The SBA’s loan chargeoff rate--cash paid by the agency to honor its loan guarantees, divided by the total dollars disbursed--rose to 1.9% last year, from just 0.4% in 2004 (CNNMoney.com Feb. 25) …

News of the Competition (02/24/2009)

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MADISON, Wis. (2/25/09)
* Old-fashioned banking is making a comeback, some good news for the sector. Several large regional banks have reported recent upturns in net interest margin, as cheap funding and stricter loan policies make it easier for them to borrow money at a low rate and lend it out at a higher rate. U.S. Bancorp reported net interest margin of 3.8% for the fourth quarter, up from 3.5% a year earlier. BB&T Corp. said its net interest margin increased to 3.7% from 3.5%. Banks’ margin improvement is “one of the few relatively bright spots” in banking, said the Federal Deposit Insurance Corp. in its third-quarter banking profile. Deposit rates have declined as the government cut interest rates and as some banks that lured deposits with high rates failed. The average six-month certificate-of-deposit (CD) rate declined to 1.2% this week--from 3.6% in August 2007, according to Bankrate.com. Though the margin improvements are small, analysts say it’s a good sign that the industry has turned away from the no-interest loans and packaged securities backed by risky mortgages that banks depended on for profits during the housing boom. BB&T CEO Kelly King noted that securitization transformed banking, with banks losing the ability to set the prices they charged for loans as they were packaged for investors. “I really believe that when we get through this, we’re going to see some of the best times in basic commercial banking we’ve seen in a long time,” said King (The Wall Street Journal Online Feb. 23) … * The Federal Reserve is urging Wells Fargo and dozens of other banks that received bailout funds to use the money for new loans or loss reserves, not to pay dividends to shareholders, said two people familiar with the situation. The Fed is preparing to send a letter outlining those goals to regional bank supervisors. Wells Fargo, PNC Financial Services, U.S. Bancorp, and Capital One Financial are among firms that have maintained their dividends after receiving government bailout money. The Fed’s new guidance could provide cover to bank CEOs who know they should lower their dividends to preserve capital, said Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie who served as the New York Fed’s chief economist during the 1980s. “Now they can say, ‘Don’t blame me, blame the regulators’” (Bloomberg.com Feb. 24) … * American International Group (AIG) is asking for more federal bailout money as it faces a fourth-quarter loss of about $60 billion, according to a source familiar with the situation. The insurer expects to announce results next Monday. The plunge in earnings reflects writedowns on commercial real estate and other assets. AIG first received government money in September, after bad mortgage bets left the firm near bankruptcy. The government gave AIG $85 billion in bailout money (Reuters via The New York Times Feb. 24) … * Capital Bancorp is merging four of its Arizona banks into one, and nine of its Michigan banks into one, as it strengthens operations in states where problem loans are increasing. The 11-charter decline would match the number of banks it opened in 2007. Arizona accounts for about 15% to 20% of Capital’s problem loans, said Michael Moran, the bank’s chief of capital markets. He said Michigan accounts for more than half its problem loans. Applications for both the Arizona and Michigan consolidations are pending. The company withdrew from its high-growth strategy several months ago, so it could focus on preserving capital, cutting costs, and coping with problem loans. Capitol posted a $28.6 million loss for 2008, compared with a $21.9 million profit in 2007 (American Banker Feb. 23) …

Market News (02/24/2009)

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MADISON, Wis. (2/25/09)
* The economy is suffering a “severe contraction,” said Federal Reserve Chairman Ben Bernanke. In his semiannual report to the Senate Banking Committee yesterday, Bernanke pledged to use all available tools to help the economy recover. He said the economy probably will keep contracting during the first six months of this year. However, he said “there is a reasonable prospect” that the recession will end later this year. He also noted that “significant stresses remain in many markets. Notably, most securitization markets remain shut … and some financial institutions remain under pressure.” Addressing another issue, Bernanke said a nationalization of major U.S. banks isn’t needed to ensure their viability. “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when that just isn’t necessary.” His assurance that the government won’t nationalize banks and his forecast that the recession will end this year soothed investors. The Dow Jones Industrial Average jumped 182 points to 7,266.59 in mid-afternoon trading. On Monday, the Dow plunged 251 points to 7114.7, the lowest close since May 7, 1997 (Associated Press via Yahoo! News and The Wall Street Journal Online Feb. 24) … * Consumer confidence plunged to a new record low in February amid concern about mounting job losses and dwindling retirement accounts. The Conference Board’s Consumer Confidence Index tumbled 12.4 points to 25. The reading was down sharply from 76.4 a year earlier and the lowest since the survey was launched in 1967. Consumers’ assessment of current economic conditions dropped to 21.2 from 29.7, while expectations for the next six months plunged to 27.5 from 42.5. “Looking ahead, increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever,” said Lynn Franco, director of the Board’s Consumer Research Center. In the February poll, 47.8% of respondents said jobs are “hard to get,” up from 36.9% the previous month. Not surprisingly, buying plans remained weak in February. Just 2.3% of consumers said they planned to buy a home within the next six months, down from 2.5% the previous month. And 4.7% said they planned to purchase a vehicle, down from 5.3%, while 24.5% said they planned to buy an appliance, up slightly from 23.6% (Associated Press via The New York Times and Moody’s Economy.com Feb. 24) … * Home prices plunged at the largest annual rate on record during the fourth quarter, according to two housing indexes. The Standard & Poor’s/Case-Shiller U.S. National 20-City Home Price Index tumbled 18.5% during the quarter, from the same period a year earlier, the largest decline in the 21-year history of the index. The 10-city index posted a bigger year-ago decline of 19.2%. Both indexes saw larger year-earlier percentage declines in December than during November. “Most of the nation appears to remain on a downward path,” noted David Blitzer, chairman of S&P’s index committee. In another report, the Federal Housing Finance Agency said home prices plunged 8.2% from a year earlier, the largest annual decline since the index was launched in 1991. That index probably underestimates the decline in home prices because it relies on data collected by Fannie Mae and Freddie Mac, so it excludes non-conforming loans such as those purchased with jumbo loans (Associated Press and Reuters via The New York Times and Moody’s Economy.com Feb. 24) … * After keeping most of the multifamily mortgages they purchased in their portfolios the past few years, Fannie Mae and Freddie Mac are planning to increase securitization of these loans. While Fannie once depended heavily on mortgage-backed securities to fund its business, Freddie never did much multifamily loan securitization. Freddie “decided that having more options on how we finance makes a lot more sense and makes us competitive through all market cycles,” said Michael May, Freddie’s senior vice president for multifamily. “I want to see a material amount of my mortgage purchases … financed with some form of securitization. … The more you do, the more people understand, the less fear there is, the more liquidity that’s generated, and the better the pricing. It’s a virtuous cycle” (American Banker Feb. 24) … * Confidence in the economy remained flat among small business owners in February--with little help from the government’s stimulus package expected, according to the latest Discover Small Business Watch. The index edged up to 71.9 from 71.4 in January. More than half of small business owners said they plan to decrease spending on business development over the next six months. Only 19% see conditions for their business improving. And 70% said they aren’t aware of any provisions in the stimulus package that could help their business. Still, 60% of small-business owners said it is not at all or not very likely they will have to close their business because of current economic conditions (BUSINESS WIRE Feb. 23) …

News of the Competition (02/23/2009)

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MADISON, Wis. (2/24/09)
* Executives at seven major U.S. financial institutions that either have collapsed, were sold at distressed prices, or have obtained federal bailout money received a total $464 million in performance compensation since 2005, according to an analysis conducted by Equilar, a compensation-research firm, for The New York Times (Feb. 21). Nearly half of that compensation was in cash. The companies--American International Group, Bear Stearns, Citigroup, Countrywide Financial, Lehman Brothers, Merrill Lynch, and Washington Mutual--reported $107 billion in losses since 2007. And $740 million in stock value has been lost since the firms’ shares peaked in 2007. Now some critics are calling for executives to give their performance pay back. “This is really in our view a giant fraudulent conveyance, where money was paid out to executives at firms that were fatally undercapitalized,” said Daniel Pedrotty, director of the AFL-CIO’s office of investment. Many shareholder groups also are advocating “clawbacks” of executive pay if compensation encouraged risky behavior and if it was based on profits that later disappeared … * Losses reported by Merrill Lynch as a result of the credit crisis totaled $35.8 billion in 2007 and 2008--enough to erase the 11 years’ worth of earnings previously reported by the firm, according to the analysis conducted by Equilar for The New York Times (Feb. 21). For the 11-year period from 1997 to 2008, Merrill give its chief executives more than $240 million in performance compensation. E. Stanley O’Neal received $157.7 million in compensation for the six years he ran Merrill. He was ousted by the board in 2008. Merrill was acquired by Bank of America in a distress sale last autumn. Countrywide Financial saw losses of $3.9 billion in 2007 and early 2008--wiping out the firm’s total earnings for 2007 and half its profit for 2006. Yet CEO Angelo Mozilo received $82.4 million in performance pay between 2005 and 2008, half of it in cash. Countrywide was acquired by Bank of America in July. Washington Mutual saw mortgage-related losses of $8 billion in 2007 and 2008--erasing all its earnings for 2006 and 2005 and three month’s worth of earnings for 2004. Yet CEO Kerry Killinger received $82.4 million in performance pay between 2005 and 2008. Federal authorities forced the sale of WaMu to JPMorgan Chase last year … * A little-noticed provision in the federal government’s huge stimulus packages discourages banks receiving federal bailout money from hiring skilled foreign workers. It imposes increased government scrutiny of banks and other companies receiving federal money if they use the H-1B visa program to hire skilled foreign workers. The visa program requires employers to ensure they don’t replace U.S. workers with foreign ones. However, critics say companies find ways to circumvent the law. “While we are suffering through the worst economic crisis since the Great Depression, the very least we can do is to make sure that banks receiving a taxpayer bailout are not allowed to import cheaper labor from overseas while they are throwing American workers out on the street,” said U.S. Sen. Bernie Sanders, an independent from Vermont who advocated for the provision in the stimulus package. He estimates that major U.S. banks employed at least 1,200 foreign employees under the H-1B visa program in 2006 (The Wall Street Journal Online Feb. 23) … * Silver Falls Bank of Silverton, Ore., became the 14th U.S. bank to fail this year. The bank was shut down Friday by the Oregon Department of Consumer and Business Services. The Federal Deposit Insurance Corp. (FDIC) was named receiver. Citizens Bank of Corvallis, Ore., assumed the deposits of Silver Falls Bank. It was the second bank to fail in Oregon this year. Regulators have shut down eight banks nationwide in February, the highest monthly total since 1993. Last year 25 banks were closed. Silver Falls was heavily dependent on commercial construction loans, many of which weren’t performing, said David Tatman, administrator of the Oregon regulator’s Division of Finance & Corporate Securities. The FDIC estimates the failure will cost the deposit insurance fund $50 million (Bloomberg.com Feb. 21) …

Market News (02/23/2009)

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MADISON, Wis. (2/24/09)
* The current recession will be the worst in more than 30 years, according to a survey of economists by the National Association for Business Economics (NABE). The consensus calls for the economy to decline 1.9% this year and a total 2.8% for the downturn--the steepest recession since 1973-75. NABE predicts that another 3.2 million Americans will lose their jobs this year--pushing the unemployment rate to 9% by year end, from the current 7.6% rate. “The steady drumbeat of weak economic and financial market data have made business economists decidedly more pessimistic,” noted NABE President Chris Varvares. “Further pronounced weakness in housing and deteriorating labor markets underscore the risks for 2009. A meaningful recovery is not expected to take hold until next year,” added Varvares. NABE predicts that consumer spending will decline 1.3% this year. The cost of living is expected to fall 0.8%, as lower raw material costs are passed through to consumers (Bloomberg.com and Associated Press via The New York Times Feb. 23) … * Facing high medical costs and shrinking retirement savings, elderly Americans are emerging as a new class of workers, and the unemployed. The percentage of people aged 65 and older who are in the workforce jumped to 16.8% at year-end 2008, from 11.9% a decade earlier. The number of workers aged 75 and older rose to 7.3% from 4.7%. Many of these older workers are losing their jobs. Among workers aged 65 and older, the unemployment rate is 5.7%--below the overall national average but much higher than in previous recessions. For example, the jobless rate was 4.3% during the 1981 recession. Older workers spend more time being unemployed. According to the AARP Public Policy Institute, the average period of joblessness for workers older than 55 was 25 weeks in December, compared with 18.7 weeks for people under 55. Many older Americans find their meager Social Security benefits don’t cover expenses, and they rack up big credit card bills to pay for prescriptions and other medical costs (The Wall Street Journal Online Feb. 23) … * Ford Motor Co. said Monday that it had reached an agreement with the United Auto Workers union for the firm to contribute equity, rather than cash, to its retiree health care fund. Ford said common stock can now make up as much as half the payments made to the fund. Ford is the only U.S automaker to forego any federal bailout money. Its agreement with the union could serve as a blueprint for how General Motors and Chrysler will meet their retiree health care obligations. Those two companies have received bailout money. The Ford agreement still requires ratification by union members (Bloomberg.com Feb. 23) … * Housing affordability jumped to a five-year high in the fourth quarter amid declining home prices and favorable mortgage rates. The National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index showed that 62.4% of all new and existing homes that were sold during the last three months of 2008 were affordable to families earning the national median income of $61,500. That’s up from 56.1% in the third quarter and 46.6% a year earlier. “Falling home prices and very favorable mortgage rates both contributed to the housing affordability gains we saw in the fourth quarter of 2008,” said NAHB Chairman Joe Robson. “However, at the same time, worsening economic conditions, historically low consumer confidence and uncertainty about future home prices kept many qualified buyers on the sidelines,” added Robson (nahb.org Feb. 19) … * Annual net losses on securities backed by auto loans surged in January in response to rising unemployment and near-record-low recovery rates on repossessed vehicles, Fitch Ratings reported Friday. Fitch Managing Director John Bella predicted that losses will continue increasing this year. Fitch’s prime annualized net losses index rose to a record-high 2.2%. The delinquency rate--60 days or more overdue-- increased to a record-high 0.9%. The ratings agency said prime transactions from 2007 and 2008 are contributing most to the losses because they are less seasoned, and they typically include weaker credit quality, higher loan-to-value ratios, and longer loan terms. Prime delinquencies increased 2.4% from December, noted Fitch, as more consumers fell behind on their auto-loan payments (Dow Jones Newswires Feb. 20) …

News of the Competition (02/20/2009)

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MADISON, Wis. (2/23/09)
* Many unemployed workers are paying bank fees to obtain access to their unemployment benefits, according to an analysis by Associated Press (Yahoo! News Feb. 20). Thirty states have agreements with banks including Citigroup, Bank of America, JPMorgan Chase, and US Bancorp. Several states require the unemployed to use debit cards to access benefits. Banks charge fees for withdrawals and phone customer service. Some also charge overdraft fees as much as $20, although they could simply decline charges. According to their agreements, some banks also earn money on the state deposits. With job losses mounting, the profit picture for banks is soaring. States paid $2.8 billion in unemployment benefits via debit cards in 2007, up from just $4 million in 2003, according to Mercator Advisory Group. The consulting firm predicts that total will jump to $10.5 billion by 2010. States using banks to distribute benefits save money by not having to print and mail checks. Banks say they could forgo charging the unemployed fees if the states picked up administrative costs … * Bank of America Chairman/CEO Kenneth Lewis has received a subpoena from the New York State Attorney General’s office, related to an investigation of whether the bank violated state law by withholding information from investors, a source familiar with the matter told CNN (Feb. 20). Attorney General Andrew Cuomo has accused Merrill Lynch, which was acquired by Bank of America last year, of secretly granting huge bonuses before it reported a large loss for the fourth quarter. It “appears that, instead of disclosing their bonus plans in a transparent way as requested by my office, Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives,” said Cuomo. Merrill reported a $15.31 billion net loss for the fourth quarter. Bank of America reported a $1.79 billion loss. Bank of America has said it urged Merrill to reduce bonuses. But Merrill was an “independent company” when the bonuses were awarded, said Bank of America spokesman Scott Silvestri … * Bank of America is rebranding its Countrywide Financial mortgage unit as Bank of America Home Loans. The Charlotte, N.C.-based bank, which acquired the struggling subprime lender in July 2008, hopes to put some distance between the tarnished name and itself through the move. BofA plans to hire about 1,000 people for the mortgage unit and shift 500 current employees to mortgage processing from home-equity processing, said Barbara Desoer, head of the mortgage unit. She said 7,500 layoffs related to the integration of the two firms still are ongoing. BofA’s stock has struggled since the company received $45 billion in government bailout money. Its stock has traded between $3.77 and $43.50 a share over the past year. The bank already has taken writedowns on Countrywide’s assets, said Desoer. However, Friedman, Billings, Ramsey Group analyst Paul Miller said the bank still may have to absorb $30 billion in further losses related to Countrywide (The Wall Street Journal Online Feb. 19) … * The performance of credit card-backed securities should improve with the federal government’s $787 billion stimulus package, because of the close tie between unemployment rates and chargeoffs, said Moody’s Investors Service. According to a report by the ratings agency, the chargeoff rate on receivables jumped to 7.7% in December when the unemployment rate hit 7.2%. In comparison, the chargeoff rate was 5.1% in December 2007, when the jobless rate was just 4.9%. Moody’s expects the economy to stabilize by year-end. But “unemployment and credit conditions will not reach their worst until next year” (CardLine via American Banker Feb. 20) …

Market News (02/20/2009)

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MADISON, Wis. (2/23/09)
* Consumer prices rebounded last month amid higher energy costs, the Labor Department reported Friday. The Consumer Price Index (CPI) rose 0.3% in January, after declining in each of the three previous months. The energy index jumped 1.7% in January, the first increase in six months, while the food index edged up 0.1%. Consumer prices were unchanged over the 12 months ending in January. That’s the first time it hasn’t increased since 1955 (Bloomberg.com Feb. 20). Excluding food and energy, the core CPI was up 0.2% in January and 1.7% over the last 12 months, the smallest gain since March 2004. The increase in the core last month reflected higher prices for vehicles, clothing, education, and medical care. Analysts expect consumer prices to remain tame this year amid weak economic growth. However, the government’s huge stimulus package and the Federal Reserve’s massive asset purchases could spark an inflation surge over the long term … * Mortgage rates followed bond yields down last week, according to Freddie Mac. The average 30-year, fixed-rate mortgage (FRM) fell 12 basis points to 5.04%, while the 15-year FRM dropped 13 basis points to 4.68%, and the one-year, adjustable-rate mortgage (ARM) declined 14 basis points to 4.80%. “Mortgage rates followed bond yields lower this week as recent economic reports suggest the economy is still slowing, which reduces the future threat of inflation,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He noted that new-home sales declined to a record low in January. “Although home builder confidence ticked up in February from a record low, builder expectations of sales over the next six months hit a record low since it was first published in January 1985.” That’s according to a report by the National Association of Home Builders. A year ago, the 30-year FRM averaged 6.04%, while the 15-year FRM stood at 5.64%, and the one-year ARM was at 4.98%. For CUNA's Daily Financial Rates, use the link. … * Jumbo-mortgage loan defaults are increasing at the fastest pace in more than 15 years as the economic slump hits wealthier borrowers. An estimated 2.57% of prime borrowers who obtained jumbo loans in 2008 were 60 days or more overdue on their payments--the highest since at least 1992, according to LPS Applied Analytics. That’s nearly twice as much as the delinquency rate for 2007 borrowers. The rise in delinquencies on jumbo loans means they will be more difficult to obtain, and more expensive. Jumbo lending slowed to $11 billion, or 4% of the mortgage market, during the fourth quarter--the lowest quarterly total since Inside Mortgage Finance began tracking the statistics in 1990. In comparison, jumbo loans made up 14% of mortgage originations in 2007. The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg statistics. That compares with about 20 basis points for the past “several decades,” according to BanxQuote CEO Norbert Mehl (Bloomberg.com Feb. 20) … * Microsoft Corp.’s plan to lay off U.S. workers after lobbying for more foreign-worker visas is making some employees and lawmakers angry. Microsoft, which uses more H1-B guest-worker visas than any other company in the U.S., is laying off about 5,000 workers. Other big users of the visas--including Intel Corp., International Business Machines, and Hewlett-Packard--also are cutting jobs. Senator Chuck Grassley (R-Iowa) sent a letter to Microsoft after the firm announced the layoffs, demanding that CEO Steve Ballmer fire visa holders first. Despite the layoffs, Microsoft plans to hire 2,000 to 3,000 workers over the next year-and-a-half. Some of the workers hired certainly will be on visas, said company spokeswoman Ginny Terzano. She declined to say how many laid-off workers were on visas (Bloomberg.com Feb. 20) … * General Motor’s Stockholm-based Saab subsidiary went into court protection from creditors Friday so the unit can be spun off or sold by its U.S. parent. GM hopes the bankruptcy reorganization will ready Saab for a sale, said GM spokesman Chris Preuss. However, the Swedish government rejected a request from GM to inject money into Saab. In its restructuring, GM estimates it will need as much as $30 billion in additional funds from the U.S. Treasury Department to keep it afloat. The automaker plans to cut another 47,000 jobs worldwide and shut down five more factories in the U.S. GM is seeking about $6 billion in support from the governments of Canada, Germany, Britain, Sweden and Thailand to support its foreign operations in those countries (Associated Press via Yahoo! News Feb. 20) …

News of the Competition (02/19/2009)

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MADISON, Wis. (2/20/09)
* The Justice Department on Thursday filed a lawsuit against UBS AG, in an attempt to force the firm to disclose the identities of as many as 52,000 U.S. customers with secret Swiss accounts. The suit was filed a day after Switzerland’s largest bank agreed to settle investigations by the Justice Department and the Securities and Exchange Commission by disclosing the names of about 250 accountholders to avert prosecution on a charge that it helped thousands of wealthy Americans avoid taxes. The firm also agreed to pay $780 million. “At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” said John DiCicco, acting assistant general attorney general in the tax division at Justice. The department alleges that U.S. customers failed to report and pay U.S. income taxes on income earned on 52,000 accounts, which held about $14.8 billion in assets as of the mid-2000s (Bloomberg.com Feb. 19) … * Financial regulators in past years missed a series of red flags that some analysts say could have discovered the alleged fraudulent investment scheme operated by Robert Allen Stanford, chief of the Stanford Financial Group. The Securities and Exchange Commission on Tuesday filed civil charges against him, centering on an $8 billion certificate-of-deposit program. “As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, director of the Division of Enforcement at the SEC. Agency officials said Wednesday that they are reviewing the regulatory history of the Stanford Group, and whether the agency should have been more vigilant in the case. In 2007, the firm paid $20,000 to settle charges that it didn’t have adequate capital to meet the requirements of a broker-dealer. The firm paid another $10,000 later that year to resolve allegations that it provided “misleading, unfair and unbalanced information” about its certificates of deposit. Stanford spent millions on campaign donations and trips for Congressional lawmakers. There’s no evidence the money influenced regulators (The New York Times Feb. 19) … * Sixty-seven percent of consumers who have a primary financial institution with ATMs said they would be at least somewhat likely to switch financial institutions if their primary financial institution saw an instance of ATM fraud or data beach. That’s according to a survey conducted by Harris Interactive for Level Four Americas, a supplier of open standards-based ATM software. Almost one in four said they would be likely or very likely to switch. “Because consumers rely on financial institutions to safeguard their privacy, allowing fraud to occur at any level is unacceptable,” said Steven Lund, president of Level Four Americas (BUSINESS WIRE Feb. 17) … * Bond insurer MBIA Inc. announced Wednesday that it plans to form a separate company to guarantee public-finance debt. MBIA hopes the split in its operations will boost liquidity in the market and generate confidence in its public-finance insurance business. “This is a split along structured finance and U.S. public finance lines that was essential as a first step to transform the company, stabilize the business, and help unfreeze the U.S. public finance capital markets,” said MBIA Chairman and CEO Jay Brown. New York State Insurance Superintendent Eric Dinallo said splitting the firm should help stabilize and perhaps boost the ratings on MBIA-insured public bonds outstanding (Associated Press via The New York Times Feb. 18) …

Market News (02/19/2009)

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MADISON, Wis. (2/20/09)
* The Federal Reserve has sharply lowered its economic forecast for this year. The Fed now predicts that the economy will contract by 0.5% to 1.3% in 2009. It would be the first annual contraction since a 0.2% drop in 1991, and the largest since a 1.9% plunge in 1982. In its mid-November forecast, the Fed called for the economy to decline by 0.2% or expand by 1.1% this year. The central bank also became gloomier about the job market. The latest forecast calls for the unemployment rate to increase to between 8.5% and 8.8% this year, from the current 7.6% rate, and far above the last forecast of 7.1% to 7.6%. The Fed said unemployment will stay “substantially” higher than normal through the end of 2011 “even absent further economic shocks.” The weak economy is expected to subdue inflation. The central bank said it expects consumer prices to increase only 0.3% to 1% this year, and there is “some risk of a protracted period of excessively low inflation” (Associated Press via The New York Times Feb. 18) … * A jump in the money supply boosted a major forecasting gauge in January. The Conference Board’s index of leading economic indicators, which predicts the direction of the economy over the next three to six months, rose 0.4% following a revised 0.2% gain in December. Increased lending and purchases by the Federal Reserve boosted the real money supply. Other positive indicators were the yield curve, consumer expectations, new orders for non-defense capital goods, and consumer goods. “The economy has been in recession for over a year, but the level of intensity may begin to ease over the next few months,” said Ken Goldstein, a labor economist at the Board. “The second half of 2009 may see a period of anemic growth,” added Goldstein. Negative contributors to the index in January were building permits, average weekly manufacturing hours, stock prices, supplier deliveries, and average weekly claims for unemployment insurance (Bloomberg.com and The Wall Street Journal Online Feb. 19) … * People are having a tough time finding new jobs after they’ve been laid off, according to a Labor Department report. Continuing claims, the number of people still on jobless-benefit rolls after an initial week of aid, surged by 170,000 during the week ending Feb. 7 to a record-high 4.99 million. That’s up significantly from 2.77 million a year earlier. Another 1.5 million people are receiving benefits under an extended unemployment program approved by Congress last year. That brings the total number of people receiving benefits to 6.54 million. The government also reported that new applications for unemployment benefits totaled 627,000 during the week ending Feb. 14, unchanged from the previous week (Associated Press via Yahoo! News Feb. 19) … * Wholesale prices rebounded in January, the Labor Department reported Thursday. The Producer Price Index (PPI) rose 0.8% last month following five consecutive months of decline. The rebound in January was led by energy prices, which jumped 3.7% after declining 9.1% in December. Food prices edged down 0.4% following a 1.4% drop. Excluding the volatile food and energy categories, the core PPI rose 0.4% after a 0.2% increase. The core was up 4.2% over the past 12 months, compared with a 1% decline in the overall PPI. The monthly increase in both the overall PPI and the core should ease concerns about disinflation in the economy. Price gains outside food and energy were widespread … * The world’s developed economies saw their biggest contractions in output in nearly 50 years during the fourth quarter, the Organization for Economic Cooperation and Development (OECD) reported Wednesday. The combined gross domestic product (GDP) of the OECD’s 30 member nations contracted by 1.5% in the fourth quarter--the largest decline since the organization began tracking the data in 1960. Combined GDP fell 0.2% in the third quarter. The Paris-based OECD said global economies are expected to weaken further this year (Bloomberg.com and The Wall Street Journal Online Feb. 18) …

News of the Competition (02/18/2009)

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MADISON, Wis. (2/19/09)
* The nation’s largest banks reduced lending to consumers and businesses during the fourth quarter, even as the government invested tens of billions of dollars in them to stimulate new lending, the Treasury Department reported Wednesday. In its survey of the 20 largest banks that collectively received more than $206 billion in bailout money, Bank of America and Citigroup led the retreat in lending. Mortgage loan originations by the two banks in December declined $3.6 billion, or 15%, from October. New lending commitments to commercial and industrial customers fell by $2.4 billion, or 11%. The banks cut the collective spending limit of their credit card customers by $45 billion, or 2%. Overall, lending by the banks in the survey was stagnant or declined slightly. However, Treasury officials said that much of the overall decline in lending by the 20 banks resulted from the recession, which lowered demand and weakened the creditworthiness of many borrowers. And they said lending “levels would likely have been lower had Treasury not taken actions to stabilize the financial system” (The Wall Street Journal Online and washingtonpost.com Feb. 18) … * The world’s banks have seen their overall market value plunge by $5.5 trillion since the beginning of the financial crisis, according to a report published yesterday by The Boston Consulting Group (BCG). The losses are equivalent to 10% of global gross domestic product. By more than halving the banking industry’s market value in 2008, the financial crisis effectively eliminated all the gains made since 2003. Just four banks had market values of $100 billion or more at year-end 2008--ICBC, China Construction Bank, JPMorgan Chase, and HSBC--compared with 11 at year-end 2007. The market value of the world’s 30 largest banks fell to $1.7 trillion at the end of last year--down 47% from $3.2 trillion in 2007 (Market Wire via Yahoo! Finance Feb. 18) ... * The huge losses seen by the world’s banks since the beginning of the financial crisis, along with the transformation of the global financial order, will make banks rethink how they do business, said Lars-Uwe Luther, co-author of The Boston Consulting Group report. “There is going to be a ‘new normal’--a more difficult, challenging environment for financial institutions, which will persist for a considerable time,” he added. The report said “old-fashioned” banking will again become the preferred business model. Customer relationships will become the centerpiece of strategy, taking the place of risky activities. And while securitization won’t disappear, banks will again focus on generating new deposits. “They have learned the lesson that their modern financial wizards were no more able to turn lead into gold than the alchemists of old,” said the report (Market Wire via Yahoo! Finance Feb. 18) … * London-based Barclays announced Tuesday that it has shut down its U.S. subprime mortgage-lending unit EquiFirst Corp. The closure comes less than two years after the British bank purchased the business from Regions Financial Corp. for $76 million. Barclays said it is closing EquiFirst because of difficult market conditions. The bank said it remained committed to its other mortgage businesses in the U.S. (AFP and Reuters via Yahoo! News Feb. 18) … * MasterCard Worldwide on Wednesday announced an exclusive, five-year debit deal with the banking unit of tax-preparer H&R Block Inc. MasterCard will become the only network that can carry transactions of H&R Block’s reloadable Emerald MasterCard. The card is offered primarily through the firm’s network of 13,000 offices. Cardholders can reload their cards at more than 40,000 retail locations. H&R Block offers the Emerald card as a way for customers to access their tax refunds. The firm said it issued more than 2.6 million cards in 2008, and expects that number to increase to 3 million during this year’s tax season (American Banker and finextra via Yahoo! News Feb. 18) …

Market News (02/18/2009)

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MADISON, Wis. (2/19/09)
* Housing starts plunged to a 50-year low in January, the Commerce Department reported Wednesday (commerce.gov and AFP via Yahoo! News Feb. 18). Privately owned housing starts tumbled 16.8% to a seasonally-adjusted annual rate of 466,000 units--the lowest pace since the department started tracking the data in January 1959. Starts were 56.2% below the January 2008 rate of 1,064,000 units. Building permits, an indication of future building activity, fell 4.8% to an annual pace of 521,000, also the lowest pace on record. Permits were 50.5% below the year-ago rate. In another indication of further weakness ahead, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index rose just one point to 9 in February--virtually unchanged from last month’s record low (nahb.org Feb. 17). “Home builders are especially concerned about the continually rising number of foreclosures and short sales, which are flooding the market with excess inventory and undermining overall home values,” said NAHB Chief Economist David Crowe … * Mortgage activity rebounded last week as mortgage rates declined, according to the Mortgage Bankers Association (mbaa.org Feb. 18). The trade group’s Market Composite Index jumped 45.7% during the week ending Feb. 13 to 875.3. The Refinance Index surged 64.3% to 4472.9, while the Purchase Index rose 9.1% to 257.3. Both long- and short-term mortgage rates declined last week. The average 30-year, fixed-rate mortgage (FRM) dropped 20 basis points to 4.99%, and the one-year, adjustable-rate mortgage (ARM) fell 12 basis points to 6.10%. The strong rebound in mortgage applications doesn’t indicate a bottom to the housing market, said Moody’s Economy.com (Feb. 18). The research firm predicts that home prices will continue to decline throughout 2009 … * The Federal Reserve will do “everything possible within the limits of its authority” to restore stable markets and pull the economy out of recession, said Fed Chairman Ben Bernanke in a speech to the National Press Club yesterday. Taking a step towards setting an inflation target, Bernanke said the central bank will extend its economic forecast to five or six years, from the current three-year horizon. “The longer-term projections of inflation may be interpreted … as the rate of inflation that FOMC (Federal Open Market Committee) participants see as most consistent with the dual mandate given to it by Congress--that is the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.” He said this “increased clarity” should anchor inflation expectations, “thus contributing to keeping actual inflation from rising too high or falling too low” (The Wall Street Journal Online and Reuters via Yahoo! News Feb. 18) … * The manufacturing sector weakened further in January, according to a Federal Reserve report. Industrial production dropped 1.8%, following declines of 2.4% in December and 1.2% in November. The Fed said a plunge in motor vehicles and parts output that resulted from extended plant closures subtracted more than 1 percentage point from the change in manufacturing production. The output of mines fell 1.3%, while below-average temperatures contributed to a 2.7% jump in utility production. The overall capacity-utilization rate--the percentage of the sector’s production capacity that is actually used--fell to 72% in January--from 73.3% in December and 8.9 percentage points below its 1972-2008 average … * Automakers General Motors (GM) and Chrysler are seeking billions of dollars more in government loans as they plan to cut thousands of jobs. In restructuring plans presented to the government Tuesday, GM said it plans to slash 47,000 jobs worldwide, 19% of its workforce, by the end of the year. The firm also plans to shut down five more U.S. factories, and slash its number of vehicle brands in half, to only four: Chevrolet, Cadillac, GMC, and Buick. GM said it may need as much as $30 billion from the Treasury Department, including the $13.4 billion the firm already has received. Chrysler said it plans to cut 3,000 more jobs and discontinue the production of three vehicle models. The automaker is seeking another $5 billion in new loans on top of the $4 billion it received in December. Both GM and Chrysler are hammering out agreements with their unions to cut expenses. Details of the discussions were not announced (Associated Press via Yahoo! News and The New York Times Feb. 18) … * Goodyear Tire & Rubber Co., the nation’s largest tire manufacturer, announced Wednesday that it plans to cut almost 5,000 jobs this year, 7% of its workforce, after posting a fourth-quarter loss. The Akron, Ohio-based firm already cut 4,000 jobs during the second half of 2008. Goodyear said it lost $330 million during the fourth quarter, as its sales slumped 19%. “The global economic slowdown increased both in severity and geographic scope throughout the year,” said Goodyear Chairman and CEO Robert Keegan. “By year end, it had a significant impact in volume in each of our major business units,” added Keegan (Associated Press via Yahoo! News Feb. 18) …

News of the Competition (02/17/2009)

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MADISON, Wis. (2/18/09)
* The Securities and Exchange Commission (SEC) on Tuesday filed civil charges against Robert Allen Stanford, chief of the Stanford Financial Group, for orchestrating a fraudulent investment scheme centering on an $8 billion certificate-of-deposit program. Also named were two other executives and some affiliates of the Stanford Financial Group. “As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors,” said Linda Chatman Thomsen, director of the Division of Enforcement at the SEC. The CDs were sold by Stanford International Bank of Antigua through the firm’s broker-dealer and investment adviser. The agency alleges that the bank sold $8 billion of “certificates of deposit” to investors by promising “improbable and unsubstantiated high interest rates.” The SEC said the defendants also falsely claimed that the bank reinvested client funds mostly in “liquid” financial instruments (sec.gov and The New York Times Feb. 17) … * Commercial loan losses are rising nationwide, but analysts said banks probably won’t receive any direct government help for those losses. Chargeoffs at 250 U.S. banks and thrifts that reported commercial loan statistics accounted for 0.85% of their commercial loans during the fourth quarter--up from 0.55% in the third quarter, according to Friedman, Billings, Ramsey & Co. Analyst David Rochester. He predicts that chargeoffs will continue rising this year. However, corporate loan quality should slowly improve as government programs to unfreeze the credit markets and boost consumer confidence take hold (American Banker Feb. 17) … * Citigroup and Morgan Stanley plan to pay brokers about $3 billion in retention bonuses to keep them from being lured away from their joint venture, say people familiar with the situation. Morgan Stanley is paying Citigroup $2.7 billion to take control of the joint venture, which will combine Morgan Stanley’s brokerage operations with Citigroup’s Smith Barney brokerage. Although broker-retention bonuses are common practice, they also could be politically sensitive for Citigroup and Morgan Stanley because the federal government holds stakes in the firms as part of its bailout. The House Committee on Oversight and Government Reform is looking into the matter, said Ronald Stroman, the committee’s staff director (The Wall Street Journal Online Feb. 16) … * Florida Insurance Commissioner Kevin McCarty has conditionally approved State Farm Mutual Automobile Insurance Co.’s request to stop providing homeowner coverage in the state. One condition McCarty imposed was that none of the firm’s current policyholders end up in Citizens Property Insurance Corp., Florida’s insurer of last resort. State Farm, the state’s largest insurer, decided to exit the state after an administrative law judge in October denied its request to boost rates an average 47%. State Farm had 700,000 homeowner policies in the state as of Sept. 30 (The Wall Street Journal Online Feb. 16) … * Zurich-based Credit Suisse is taking steps to increase transparency in its relationship with U.S. clients in light of stricter rules on the taxation of U.S. residents’ foreign assets, the Swiss newspaper Sonntag reported Sunday. Credit Suisse is sending letters to its U.S. clients, asking them to sign a form that will reveal them to U.S. authorities. Credit Suisse is taking steps ahead of the new rules, said the newspaper. UBS, another Swiss bank, is facing a U.S. investigation that claims the bank helped wealthy Americans hide money from tax authorities (Reuters via Yahoo! News Feb. 16) …

Market News (02/17/2009)

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MADISON, Wis. (2/18/09)
* The federal government’s efforts to shore up money market funds has boosted fund inflows and added to the assets of the Treasury Department. After a major money-market fund declined below a $1 net-asset-level value last year, investors began yanking money from funds. In response, Treasury began insuring assets in money-market funds. In addition, the Federal Reserve set up a liquidity facility to finance purchases of asset-backed commercial paper held by money funds. The intervention worked. Money-fund assets have increased by $450 billion since mid-September, to almost $4 trillion. Money funds also have become more comfortable purchasing commercial paper and asset-backed securities. And the Treasury Department, which so far has collected $813 million in fees to insure money funds, hasn’t yet paid any claims (The Wall Street Journal Online Feb. 17) … * Stocks plunged Tuesday as investors fretted that the government won’t be able to quickly turnaround the economic slump. The Dow Jones Industrial Average tumbled 271.28, or 3.46%, to 7,579.13 in early afternoon trading. The Standard & Poor’s 500 Index fell 33.7, or 4.08%, to 793.14. Automakers were a major concern for investors yesterday. General Motors and Chrysler faced a Tuesday deadline to present a plan for returning to profitability so they can repay billions of dollars in government aid. Investors are nervous that GM will say it can’t survive without more bailout money--a move that would lead investors to ask, “What if GM does go under?” said Sam Stovall, chief investment strategist at Standard & Poor’s (Associated Press via Yahoo! News Feb. 17) … * Warning that one million jobs are at risk from a collapse of the industry, U.S. auto-parts suppliers formally requested $25.5 billion in emergency aid from the Treasury Department on Monday (FT.com Feb. 17). About one-third of companies are in “imminent financial distress,” and another one-third will be in distress during the first quarter, said two groups representing suppliers. In other news, about 800 jobs are being eliminated at the steering division of Delphi Corp. (Associated Press via Yahoo! News Feb. 17). The auto-parts supplier has been operating under bankruptcy protection since October 2005 … * German automaker Daimler reported a net loss of 1.53 billion euros ($1.93 billion) for the fourth quarter related to its investment in Detroit-based Chrysler and lower earnings at Mercedes-Benz. Daimler predicts that auto demand will plunge by another 10% this year. “The Daimler Group is in a relatively strong position to meet this crisis,” said Chairman Dieter Zetsche. The company’s stock has declined 13% so far this year (The New York Times Feb. 17) … * Manufacturing activity in the New York region declined sharply in February as the recession deepened. The New York Federal Reserve’s Empire State factory index plunged to a record low of minus 34.65--from a minus 22.2 reading in January. It was the tenth consecutive month of decline and the largest drop since the survey began in July 2001. The survey’s index of new orders tumbled to a record low of minus 30.51, from minus 22.81. The employment gauge dropped to a record low of minus 39.08, from minus 26.14. Manufacturers are expected to continue cutting jobs as demand slumps (Reuters via The New York Times and Moody’s Economy.com Feb. 17) … * Foreign appetite for U.S. financial assets has recovered, according to Treasury Department data. Total net purchases of long-term equities, notes, and bonds jumped to $34.8 billion in December, from net selling of $25.6 billion in November. Foreign investors bought a net $41 billion in U.S. corporate debt in December, following five consecutive months of net selling. Net foreign purchases of Treasury notes and bonds was $14.9 billion, compared with sales of $25.8 billion a month earlier. However, foreign demand for U.S. agency debt from firms such as Fannie Mae and Freddie Mac declined for a third consecutive month. And the overall improvement in foreign demand still isn’t enough to finance the monthly U.S. trade deficit, which has been in the $56.5 billion to $39 billion range during the last four months (Moody’s Economy.com and Bloomberg.com Feb. 17) …

News of the Competition (02/16/2009)

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MADISON, Wis. (2/17/09)
* Another four banks were shut down on Friday--boosting the total number of bank failures this year to 13. Altogether, 38 banks have failed since the beginning of the credit crisis. The four bank failures announced Friday will cost the Federal Deposit Insurance Corp. about $341.6 million. The deposits of Cape Coral, Fla.-based Riverside Bank of the Gulf Coast will be assumed by TIB Bank of Naples, Fla. It is the second bank failure in Florida this year and the fourth since the credit crisis began. Corn Belt Bank and Trust Company of Pittsfield, Ill., is the third bank to fail in that state since January 2008. Its deposits were assumed by The Carlinville National Bank of Carlinville, Ill. The deposits of Pinnacle Bank of Beaverton, Oregon will be assumed by Washington Trust Bank of Spokane, Wash. The deposits of Sherman County Bank of Loup City, Neb., will be assumed by Heritage Bank of Wood River, Neb. It is the first bank to fail in Nebraska since 1990 (CNNMoney.com and MarketWatch Feb. 16) … * Two Florida banks are joining some of the nation’s biggest lenders in temporarily placing a moratorium on home foreclosures. On Friday, Fannie Mae, Freddie Mac, and lenders JPMorgan Chase, Citigroup, Morgan Stanley, Wells Fargo, and Bank of America said they were halting foreclosures for a least one month. BankUnited of Coral Gables, Fla., and Fort Lauderdale-based BankAtlantic followed suit on Monday. “Treasury’s plan may provide different avenues of relief for consumers, and we don’t want them to miss an opportunity to take advantage of the program,” said BankUnited President/CEO Ramiro Ortiz. Florida, California, Nevada and Arizona accounted for almost half the nation’s foreclosures last year, according to RealtyTrac Inc. Two of the 13 financial institutions that have failed this year were based in Florida (Associated Press via Yahoo! News and Dow Jones Newswires Feb. 16) … * Shareholder initiatives to curb executive compensation at banks and securities firms have rebounded this year as politicians focus on the issue. More than 40 financial firms--including Bank of America, Citigroup, JPMorgan Chase, and Morgan Stanley--have seen pay-related proposals. That’s up from about 24 such initiatives last year, according to RiskMetrics Group. Most targets of pay proposals this year are recipients of Troubled Asset Relief Program (TARP) money. The United Brotherhood of Carpenters has submitted shareholder proposals to 21 TARP recipients. The union wants to limit bonuses and severance pay for senior executives to no more than the executive’s annual salary. Companies are fighting back. The carpenter’s union says about a dozen firms have asked securities regulators for approval to keep some executive-pay measures off proxy statements (The Wall Street Journal Online Feb. 13) … * Struggling banks may need more government money to stay afloat this year, say analysts. Some recommend that the U.S. government follow the lead of other governments, including Japan and Sweden, and weed out the shakiest banks, give capital to the stronger banks, and sell off bad assets. Estimates of the capital infusion that would be needed in the U.S. range from $1 trillion to $1.8 trillion or more. Other analysts say the value of some sour assets could recover along with economic recovery. “If they had to sell these securities today, the losses would be far beyond their capital at this point,” said Raghuram G. Rajan, an economist at the University of Chicago. “But if the prices of these assets will recover over the next year or so--if they don’t have to sell at distressed prices--the banks could have a new lease on life by giving them some time,” added Rajan (The New York Times Feb. 13) …

Market News (02/16/2009)

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MADISON, Wis. (2/17/09)
* Economists now expect weaker economic growth for the U.S. economy during the last half of the year, according to a survey by The Wall Street Journal Online (Feb. 13). The consensus forecast calls for growth of just 0.7% in the third quarter, less than half the growth expected during a poll conducted last autumn. Respondents expect economic growth of 1.9% in the fourth quarter, down slightly from 2.1%. Some economists don’t expect the economy to recover at all this year. “We don’t have sufficient economic plans at present to resolve the banking system or the financial crisis, and the stimulus package seems loaded for 2010,” said Brian Fabbri, chief economist at BNP Paribas. Many economists said the government stimulus package is inadequate. Still, the consensus calls for a loss of about 183,000 jobs per month this year, or 270,000 per month absent a stimulus package … * Japan’s economy contracted at the largest pace in 35 years during the fourth quarter as the global meltdown eroded export demand (Associated Press via The New York Times Feb. 16). Economic output of the world’s second-largest economy fell at an annual rate of 12.7% last quarter--the steepest rate of contraction since the oil shock of 1974. In comparison, the U.S. economy contracted at a 3.8% pace in the fourth quarter, while the euro-zone economy declined at a 1.2% pace. Economy Minister Kaoru Yosano said Japan now is facing “the worst economic crisis in the postwar era.” Hundreds of laid-off temporary workers protested in Japan on Monday, asking companies to giver them social protection as the economy faces its worst economic crisis since World War II (AFP via Yahoo! News Feb. 16). At least 125,000 temp workers have been laid off or will be fired by March when the fiscal year ends, according to government estimates … * President Barack Obama has created a task force to oversee the restructuring of the auto industry, said a senior administration official Monday. General Motors and Chrysler LLC are facing a deadline Tuesday to detail their plans for restructuring. The administration’s task force will include members from the Departments of Treasury, Labor, Transportation, Commerce and Energy, and from the National Economic Council, the White House Office of Energy and Environment, the Council of Economic Advisers, and the Environmental Protection Agency. Treasury Secretary Timothy Geithner and White House Economic Adviser Larry Summers will oversee the task force. Ron Bloom, a restructuring expert, also will join the team as a senior adviser at the Treasury Department (CNNMoney.com Feb. 16) … * The companies in the Standard & Poor’s 500 Index are on track to post a collective quarterly loss for the first time in history. The banking sector is suffering the largest losses. However, only consumer staples, utilities, and health care have maintained or added to profits. S&P companies lost an average $10.44 a share during the fourth quarter. Analysts will have to cut their earnings expectations even further in coming quarters, predicted Jennifer Ellison, a principal at investment firm Bingham, Osborn & Scarborough. “I don’t know of very many people who believe that there is going to be much recovery at all in 2009,” said Ellison (Associated Press via Yahoo! News Feb. 16) … * Exxon Mobil Corp. won’t curb investments in new crude-oil production despite plunging oil prices, said Russell Bellis, the firm’s regional head of exploration. “We take a long-term view, and even if prices stay at these kind of levels for a number of years, it will make no impact on our investment strategy,” said Bellis during an industry meeting in London yesterday. Oil prices have plunged by more than $100 a barrel since hitting a record above $147 a barrel last July (Reuters via The New York Times Feb. 16) …

News of the Competition (02/13/2009)

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MADISON, Wis. (2/16/09)
* JPMorgan Chase and Citigroup have agreed to weeks-long moratoriums on home foreclosures while the government develops programs to help keep people in their homes and stabilize the financial system. “We will not add to the foreclosure process any new owner-occupied residential loans that are owned and serviced by JPMorgan Chase,” said CEO Jamie Dimon in a letter to Rep. Barney Frank (D.-Mass). The moratorium will remain in effect through March 6. Citigroup said its foreclosure moratorium applies to all “Citi-owned first mortgage loans that are the principal residence of the customer as well as all loans Citi services where we have reached an understanding with the investor” until the administration finalizes its loan-modification program, or March 12, whichever is earlier (Associated Press via Yahoo! News and The Wall Street Journal Online Feb. 13) … * The federal government has declined to support a private bid for BankUnited Financial Corp., the largest Florida-based bank (The Wall Street Journal Online Feb. 13). Investors W.L. Ross & Co. and Carlyle Group are interest in a joint acquisition of the Coral Gables, Fla.-based bank, but want the government to share losses on its troubled mortgage portfolio, said people familiar with the situation. These people said the government doesn’t want to participate because it has decided a potential failure of BankUnited wouldn’t be a risk to the overall financial system. Earlier last week, BankUnited estimated a $306 million loss for its fiscal first quarter ended Dec. 31 (BizJournals via Yahoo! News Feb. 10). The Office of Thrift Supervision required that the bank have a tier 1 core capital ratio of 7% on Dec. 31, but it declined to 1.37%, said BankUnited in a Securities and Exchange Commission filing … * The Federal Reserve’s asset holdings declined for a sixth consecutive week, the central bank reported Thursday. Assets fell to $1.84 trillion last week as borrowing from several facilities dropped. That’s down from $1.85 trillion a week earlier and $2 trillion at the beginning of the year. However, analysts say the decline may be short term because the Fed is creating new programs to help stabilize the financial system. Discount-window borrowing fell to $142.85 billion last week--from $149.03 billion the previous week and more than $400 billion in October. Fed holdings in connection with a commercial-paper lending facility fell by $7.45 billion to $251.21 billion last week. The program topped out at $334 billion at the beginning of the year. Analysts say the declines suggest that government programs are having their intended effect of stabilizing the system (The Wall Street Journal Online Feb. 13) … * The Federal Reserve’s decision to boost its consumer-lending program to as much as $1 trillion could result in some hard choices about how to fund the effort. The Fed plans to tap financial institutions’ reserves at the Fed to support the Term Asset-Backed Securities Loan Facility (TALF). Those reserves totaled $600.1 billion as of Feb. 11, 33 times higher than a year ago but far short of the $1 trillion that could be needed. One option for the Fed is to pay more interest on reserves. Higher interest payments would be a “windfall” for bankers that could be politically unpopular, said Gil Schwartz, a former Fed attorney. Another option would be for the Fed to borrow more from the Treasury. But the Fed could soon reach its current debt limit, noted Lou Crandall, chief economist at Wrightson ICAP. Schwartz said another option would be for the Fed to sell off some securities to fund its programs (American Banker Feb. 13) …

Market News (02/13/2009)

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MADISON, Wis. (2/16/09)
* Households became poorer last year as plunging home and stock prices wiped out income gains made in previous years, according to new Federal Reserve data. The median net worth of households--not adjusted for inflation--jumped by 17% between year-end 2004 and year-end 2007. However, after adjusting for slumping home and stock prices last year, the Fed estimates that the median family was 3.2% poorer as of October 2008 than it was at year-end 2004. The report also noted that, when adjusted for inflation, median household income actually declined over the three years ended in 2007. And a growing share of income came from investment profits rather than from wages and salaries over the period. Most of the gains accrued to wealthier families. The Fed report also noted that the percentage of households with loan payments exceeding 40% of their income increased 2.5 percentage points between 2004 and 2007, to 14.7%. Borrowing for second homes was a large factor pushing up debt over the period (The New York Times and The Wall Street Journal Online Feb. 13) … * Declining fixed-mortgage rates (FRMs) are prompting more homeowners to refinance their mortgages, Freddie Mac reported Thursday. The average 30-year FRM fell 9 basis points to 5.16% last week, while the 15-year FRM dropped 11 basis points to 4.81%. “Interest rates for 30-year FRMs are almost 1.5 percentage points below 2008’s peak set on July 24, 2008, offering many homeowners an incentive to refinance,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He noted that the weighted average mortgage rate of outstanding loans during the fourth quarter was 6.2%, according to the Bureau of Economic Analysis. “As a result, the share of refinancing among the total number of conventional mortgage applications has exceeded 50% for the past 11 weeks and averaged 80% over this period,” said Nothaft, citing Mortgage Bankers Association data. For CUNA's Daily Financial Rates, use the link. … * The Federal Open Market Committee announced Friday that it will expand its March, August, September, and December meetings this year to two days to allow for additional discussion time. That means all eight scheduled meetings are now planned for two days. The four meetings previously planned as one-day meetings will start on Tuesday and continue on Wednesday. The tentative meeting schedule for this year is: March 17-18; April 28-29; June 23-24; Aug. 11-12; Sept. 22-23; Nov. 3-4; and Dec. 15-16 … * The federal budget deficit has soared this year as the government spent billions to aid the financial system, and as tax receipts fell in the recession. The deficit jumped by $83.8 billion in January--boosting the deficit for the first four months of the fiscal year to $569 billion and already topping the $455 billion deficit for all of fiscal 2008, according to the Treasury Department. In comparison, the government ran an $89 billion surplus during the first four months of fiscal 2008. Analysts predict that the budget deficit will soar further this year as the government tries to aid the economy and job losses continue to mount. The Congressional Budget Office forecasts a deficit of $1.2 trillion for all of fiscal 2009 (CNNMoney.com Feb. 12) … * Consumer confidence fell to a three-month low in February amid concern about a deepening recession. The Reuters/ University of Michigan Surveys of Consumers said its confidence index plunged to 56.2, from 61.2 in January and the lowest level since confidence hit a 28-year low in November. Almost two-thirds of respondents expect the economic downturn to last five more years. The component of the index measuring consumers’ view of the 12-month economic outlook tumbled to a record-low 27 in February, from 47 in January. Consumers expect an inflation rate of just 1.6% over the next 12 months, highlighting concerns that the economic slump may produce a period of deflation. However, five-year inflation expectations were 3%. People probably are concerned that the government’s massive spending programs will lead to a long period of inflation (Reuters via The New York Times Feb. 13) … * Toyota Motor announced Friday that it plans to further cut North American production, slash executive compensation up to 30%, and offer buyouts to about 18,000 employees. The buyouts won’t be offered to unionized plants in the U.S. and Mexico. The world’s largest automaker also is initiating a shorter workweek at some plants. Toyota is expecting its first annual loss since 1950 this year. Other automakers are cutting back as well as sales slump in the U.S. Earlier last week, General Motors said it plans to offer voluntary buyouts or early retirement to all its 62,000 hourly production workers. It also plans to cut 10,000 white-collar jobs this year (Associated Press via Yahoo! News Feb. 13) …

News of the Competition (02/12/2009)

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MADISON, Wis. (2/13/09)
* An additional $59.14 billion of commercial mortgage-backed securities (CMBS) were downgraded by Moody’s Investors Service this week amid concerns that losses will grow from increased leverage, reduced reserves to pay debt, and loan losses. The ratings firm said last week that it planned to review the ratings of $300 billion of bonds backed by commercial real estate loans. Moody’s said it will apply new assumptions about declining-property cash flows and stressed capitalization rates when reviewing ratings of the bonds. Altogether, $146.33 billion of CMBS has been downgraded by Moody’s during the last week. The commercial real estate market began to deteriorate rapidly at the end of last year as the economic downturn deepened (The Wall Street Journal Online Feb. 12) … * An estimated $171 billion of commercial/multifamily mortgages held by non-bank lenders and investors are set to mature this year, according to a Mortgage Bankers Association survey. The amount of maturing loans varies significantly by the type of investor holding the loan. Short-term, floating-rate mortgages in commercial mortgage-backed securities (CMBS) and mortgages held by credit companies, warehouse facilities, and other investors are more likely to mature this year and in 2010 than are fixed-rate CMBS mortgages, mortgages held by life insurers, or multifamily mortgages held or guaranteed by Fannie Mae, Freddie Mac, or FHA. The trade group said about $120 billion of nonbank commercial and multifamily mortgages are set to mature next year. “Substantial concerns have been raised about the volume of mortgages maturing in the face of the current credit crunch,” said Jamie Woodwell, vice president of commercial real estate research by the MBA. “Across all these investor groups, commercial/multifamily lenders and servicers have a wide variety of tools to help them deal with maturing mortgages, which should mitigate--but not eliminate--the impact of maturities in 2009,” added Woodwell (mbaa.org and National Mortgage News Feb. 11) … * Banks could lose as much as $20 billion in annual revenue if many checking-account holders shift their funds to prepaid debit cards, according to a study by Aite Group LLC. At least 14% of checking-account customers would save money if they switched to prepaid debit. Such customers, most with low incomes, paid 4% of the money they deposited in checking accounts last year in fees. But there’s a bright spot for banks, said Gwenn Bezard, research director at Aite and author of the report. “The most sophisticated among them could profit on the appeal of prepaid debit cards. For example, banks could rapidly gain market share by striking co-brand deals with leading prepaid debit card marketers that have a head start in this race,” said Bezard (American Banker and banktech.com Feb. 12) … * The average cost of a data breach for American companies jumped to about $202 for each compromised record last year--up 11% from 2006, according to a report by Ponemon Institute LLC. The average total cost per breach was up 40.4% to more than $6.6 million. Negligence by company insiders prompted 88% of breaches in 2008, while malicious attacks accounted for 12%. With insider negligence, the loss of a laptop computer accounted for 35% of breaches, while system failures caused 33%. Lost backup storage accounted for 5%, as did cybercrime (CardLine via American Banker Feb. 12) …

Market News (02/12/2009)

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MADISON, Wis. (2/13/09)
* Foreclosures pushed home prices to a five-year low during the fourth quarter, the National Association of Realtors (NAR) reported Thursday. Prices of existing single-family homes plunged a record 12.4% in the final three months of 2008, compared with a year earlier, to $180,100--the lowest level since the second quarter of 2003. During the period, 134 of 153 metropolitan areas posted declines in home prices. NAR said distressed sales--foreclosures and short sales--accounted for 45% of transactions during the fourth quarter, pushing prices down. “Distressed home sales have risen from about 38% of transactions in the third quarter, meaning people are responding to discounted prices and are slowly absorbing the excess inventory,” said NAR President Charles McMillan. “Buyers clearly see value in today’s pricing,” added McMillan. NAR also reported that existing-home sales fell 5.9% from a year earlier to a seasonally adjusted annual rate of 4.70 million units in the fourth quarter. Sales were up in just six states (realtor.org and Reuters via Yahoo! News Feb. 12) … * Foreclosures eased in January but were up sharply from a year earlier, according to a RealtyTrac report. Foreclosure filings--default notices, auction-rate notices, and bank repossessions--totaled 274,399 last month--down 10% from December but up 18% from January 2008. One in every 466 homes was the subject of a foreclosure filing in January. The drop from December reflects “the Fannie moratorium on all foreclosure sales that was extended through the end of January, along with Florida’s voluntary 45-day freeze on all new foreclosure actions and scheduling of foreclosure sales that was announced at the beginning of December,” said RealtyTrac CEO James J. Saccacio. In Florida, foreclosures declined 20% in January, compared with the previous month. Nevada continued to have the highest foreclosure rate in the nation, at one in every 76 homes, followed by California (one in 173), and Arizona (one in 182). Analysts expect foreclosure filings to increase this year as job losses continue to mount (MarketWatch and CNNMoney.com Feb. 12) … * The number of people claiming unemployment benefits for more than one week jumped by 11,000 during the week ending Jan. 31 to a record-high 4.81 million, the Labor Department reported Thursday. That’s the highest level since the government began tracking the data in 1967. Another 1.5 million Americans are receiving benefits under an extended jobless program approved by Congress last year--bringing the total to 6.3 million. First-time claims for jobless benefits edged down by 8,000 during the week ending Feb. 7 to 623,000, not far below the level hit two weeks earlier, which was the highest since October 1982. Companies continued to announce layoffs this week. General Motors said Thursday that it will offer voluntary buyouts or early retirement to all its 62,000 hourly production workers. Two days earlier, the struggling automaker said it planned to cut 10,000 white-collar jobs this year. “The goal is to allow us to hire more tier-two workers, who start with a lower wage and benefit cost, once business starts to pick up again,” said GM spokesman Tom Wilkinson (Associated Press via Yahoo! News Feb. 12) … * In a bright spot for the economy, retail sales rebounded by 1% in January, according to the Commerce Department. Sales gains were widespread last month, led by nonstore retailers, electronics, appliance stores and gasoline stations. On a more pessimistic note, sales for December were revised down to a 3% decline. And sales in January were down 9.7% from a year earlier. Sales were below a year earlier in all sectors except those selling food and health-care goods, where prices are increasing and spending is less discretionary. Retail sales are expected to weaken in coming months as job losses continue to mount (Moody’s Economy.com Feb. 12) … * Businesses slashed inventories in December amid plunging holiday sales. Inventories fell 1.3% during the month--the fourth consecutive decline and the largest since a record 1.5% drop in October 2001, the Commerce Department reported Thursday. Business sales fell 3.2% in December following a 5.7% plunge in November. For the full year, inventories increased 0.9%, while sales plunged 11.8%. In December, businesses had enough goods on hand to last 1.44 months at the current sales pace--up from 1.41 months the previous month and the highest level since April 2001. The high ratio suggests a large correction for inventories this year, weighing on economic growth (Bloomberg.com and The Wall Street Journal Online Feb. 12) … * The economy will post its largest economic decline since 1946 this year as consumer spending plunges, according to a survey of economists by Bloomberg.com (Feb. 12). The consensus forecast calls for the economy to contract at a 4% annual rate during the first quarter and a 2% pace for the year. Respondents put the odds of the economy emerging from recession within the next 12 months at 53%. Consumer spending is expected to decline at a 2.7% pace during the first quarter following a 3.5% drop in the fourth quarter. Inflation will cool as the economy slows. The core PCE price index, the Federal Reserve’s preferred inflation gauge, is expected to rise just 1.2% this year--the smallest gain since 1962. The unemployment rate is projected to increase to an average 8.4% this year …

News of the Competition (02/11/2009)

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MADISON, Wis. (2/12/09)
* New York Attorney General Andrew Cuomo revealed more details about the $3.6 billion in bonuses Merrill Lynch executives received at the end of last year. The bonuses were paid out in late December, only days before Bank of America completed its purchase of Merrill. The bonuses also were paid out before Merrill reported a fourth-quarter loss of more than $15 billion. In a letter to House Financial Services Chairman Barney Frank, Cuomo said he requested information on Merrill’s expected bonuses as early as Oct. 29, but never received any details. “In a surprising fit of corporate irresponsibility, it appears that, instead of disclosing their bonus plans in a transparent way as requested by my office, Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives,” wrote Cuomo. Both Merrill and Bank of America could face charges of securities fraud in New York, said a person familiar with the investigation (Associated Press via The New York Times Feb. 11) … * The political outrage in the U.S. over CEOs’ huge compensation packages isn’t likely to be repeated in Japan. CEOs at Japan’s top 100 firms received an average of about $1.5 million last year--compared with $13.3 million for U.S. CEOs and $6.6 million for European chief executives, according to a Towers Perrin study. And unlike their American counterparts, Japanese CEOs often take pay cuts when company profits decline. Critics say Japanese corporations should reward their executives more, and they should link their compensation more to performance. But Japanese chief executives say any move to boost CEO pay would be disliked by the public and voted down by Japanese shareholders, noted Barclays Global Investors Strategist Takaaki Eguchi (BusinessWeek Online via Yahoo! News Feb. 11) … * Federal Bureau of Investigation (FBI) Director John Pistole told Congress yesterday that his agency is conducting 530 investigations of corporate fraud, and 38 of them involve corporate fraud or financial-institution wrongdoing tied to the economic crisis. He said the fraud cases are straining the resources of the FBI. Neil Barofsky, special inspector general for the Troubled Asset Relief Program, also testified before Congress yesterday. He said trillions of dollars of taxpayer money potentially are at risk of fraudulent activity in the various rescue programs. “We have already opened several criminal investigations involving multiple jurisdictions, and … are closely coordinating our executive-compensation oversight efforts with the New York State Attorney General,” said Barofsky (Associated Press and Reuters via The New York Times Feb. 11) … * The wife of accused Ponzi-scheme swindler Bernard Madoff withdrew $15 million out of a brokerage account just days before her husband was arrested, said Massachusetts Secretary of State William Galvin on Wednesday. He said Ruth Madoff withdrew $5.5 million on Nov. 25 and $20 million on Dec. 10. He cited reports by Cohmad Securities, the company co-owned by Bernard Madoff. He was arrested and charged with securities fraud on Dec. 11. Prosecutors say Madoff masterminded a $50 billion Ponzi scheme. Galvin is trying to suspend Cohmad’s Massachusetts license so the firm can no longer act as a broker in the state (Reuters via Yahoo! News Feb. 11) …

Market News (02/11/2009)

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MADISON, Wis. (2/12/09)
* The number of foreclosures plunged during January despite rising unemployment and continued tight credit, according to a report by ForeclosureS.com. The U.S. Foreclosure Index tumbled 26% to 72,694 in January--the lowest level since April. “Efforts last year by government and industry to lay the groundwork for housing recovery finally are yielding the hoped-for slowdown in the foreclosure hemorrhage,” said Alexis McGee, president of the foreclosure-listing service. Some of the hardest-hit areas of the nation saw big declines in foreclosures last month. In California, foreclosures plunged 31% to the lowest level since December 2007. Foreclosures in Florida dropped 22%, and Nevada saw a 20% decline (Dow Jones Newswires Feb. 11) … * Mortgage activity declined sharply last week as refinancings tumbled and purchase applications fell to the lowest level in more than eight years, the Mortgage Bankers Association (MBA) reported Wednesday (mbaa.org Feb. 11). The trade group’s Market Composite Index tumbled 24.5% during the week ending Feb. 6 to 600.6. The Refinance Index plunged 30.3% to 2722.7, while the Purchase Index fell 9.8% to 235.9--the lowest level since the end of 2000. Refinancings made up 66.7% of overall applications in the latest week--down from 73.2% the previous week. Mortgage demand may have declined because potential applicants are delaying their applications in anticipation of new government efforts to lower mortgage rates, said Moody’s Economy.com (Feb. 11). The research firm also noted that the real level of applications may be overstated because tight credit is prompting potential borrowers to apply to multiple lenders … * The deepening recession and credit crunch continue to dampen builder confidence in the multifamily housing market, according to a survey released Wednesday by the National Association of Home Builders (NAHB). The component of the survey that tracks supply conditions plunged during the fourth quarter--to 22.4 for affordable apartments and 18.6 for market-rate apartments. That compares with 45.3 and 40, respectively, a year earlier. The supply component for condos dropped 11 points to a record-low 7.8. “Job losses and tightening credit continue to depress current and future multifamily construction,” said NAHB Chief Economist David Crowe. He said an overhang of unsold single-family homes and condos is “casting a shadow over every sector of the housing market.” Crowe predicted that the housing markets will continue to deteriorate until consumers see the government addressing housing issues (nahb.org Feb. 11) … * The Federal Reserve said Tuesday it will work with the administration of President Barack Obama to lend up to $1 trillion against consumer-related securities. Treasury Secretary Timothy Geithner said the expansion of the Term Asset-Backed Securities Loan Facility will “kick-start the secondary lending markets to bring down borrowing costs and to help get credit flowing again.” Both the Fed and Treasury indicated that residential mortgage-backed securities could become eligible. And Treasury said the new plan will include commercial mortgage-backed securities. The central bank originally agreed to buy securities backed by credit card, auto and student loans (American Banker Feb. 11) … * The U.S. trade deficit declined to a six-year low in December as the recession dampened demand for imports, the Commerce Department reported Wednesday. The deficit fell 4% to $39.9 billion, the smallest trade gap wince $39.7 billion in February 2003. For the full year, the deficit dropped 3.3% to $677.1, the lowest annual total since 2004. It was the second-consecutive annual decline following five straight years of record deficits. Analysts say the trade deficit will post an even larger decline this year as the recession continues (Associated Press via The New York Times Feb. 11) …

League economist Government pushing vs. strong forces

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NEW YORK (2/12/09)--The federal government is “really pushing against some very strong forces” as it deals with a nearly 25% drop in demand for U.S. mortgage applications last week, a California Credit Union League economist said. Average 30-year mortgage rates dipped to 5.19% from 5.28% a week earlier, the association said (Reuters Feb. 11). Consumers not only are waiting for the rate to drop further, but they also looking for home prices to continue to fall, Daniel Penrod, industry analyst for the league, told Reuters. Consumers reason that it doesn’t make sense to pay $200,000 for a home when the price may slide to $180,000 or even $150,000 in a few months. Although increased government action will help the situation, what is really needed is more lending by financial institutions and a more stable employment environment, Penrod told the news service. The Mortgage Bankers Association’s seasonal adjusted home purchase applications index fell to its lowest level since the end of 2000--a 9.8% drop to 235.9 for the week ended Feb. 6.

News of the Competition (02/10/2009)

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MADISON, Wis. (2/11/09)
* Losses on hybrid adjustable-rate mortgages (ARMs) backing 2006 and 2007 prime-jumbo securities will hit 8% to 10% because of soaring defaults, according to a report by JPMorgan Chase analysts John Sim and Abhishek Mistry. “The pickup of defaults in prime during the second half of 2008 has caused us to nearly double our loss projections on prime hybrids,” wrote the analysts. The percentage of prime-jumbo mortgages that are 60 days or more overdue jumped 0.71 percentage point to 5.29% in the month covered by January bond reports. JPMorgan said losses on prime-jumbo mortgages with completely fixed rates in “recent vintage” bonds will be lower than losses on hybrid ARMs. That’s because more borrowers will be able to refinance out of those bonds. The percentage of Alt-A mortgages underlying bonds at least 60 days overdue, in foreclosure, or already turned into seized properties jumped 1.53 percentage points to 22.88% last month. Defaults on option ARMs surged 2.47 percentage points to 30.96% (Bloomberg.com Feb. 9) … * American Eagle Outfitters Inc. has filed a lawsuit against Citigroup Global Markets, alleging that the financial firm fraudulently persuaded the company to purchase $258 million worth of auction-rate securities that it now can sell only at a huge loss. The suit by the Pittsburgh-based clothing retailer alleges that Citigroup said the securities were safe and liquid, even though it was aware there wasn’t enough demand to keep them liquid. The market for auction-rate securities froze a year ago, leaving tens of thousands of investors holding securities they couldn’t sell. Citigroup in December agreed to buy back $30 billion worth of auction-rate securities in a settlement approved by the Securities and Exchange Commission (Associated Press via The Wall Street Journal Online Feb. 10) … * Noca Inc., a startup launched by two former Visa Inc. employees, is using the automated clearing house network to offer online retailers low-cost transactions. The Secure Check service lets consumers enter bank account data on participating retailers’ websites so they can initiate debits from their accounts. The processing fee of 0.25% of the purchase is much less expensive than the interchange rate, noted Pankaj Gupta, founder and president of Noca. He was director of network security when he worked at Visa. S. Randy Nott, chief architect and acting vice president of engineering at Noca, helped develop Internet applications at Visa (American Banker Feb. 10) … * Fannie Mae is easing a restriction to encourage lending to property investors. Beginning in March, Fannie will purchase or guarantee mortgage loans to borrowers who have mortgaged as many as nine other properties. The current limit is three. The change will “bring added liquidity to the investor segment of the market and help hasten the recovery,” said Fannie. However, the firm will tighten some other requirements. An investor will have to hold six months of payments in reserve rather than two months (Financial Planning.com Feb. 10) ... * MRU Holdings Inc., a New York-based student loan provider known as My Rich Uncle, filed for Chapter 7 bankruptcy protection Friday. Citing liquidity problems, the firm stopped originating loans in September. The company had offered unconditional 1% upfront discounts on its loans. In its bankruptcy filing, MRU listed four times as many liabilities as assets (The Wall Street Journal Online Feb. 10) …

Market News (02/10/2009)

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MADISON, Wis. (2/11/09)
* Losses on private-label credit cards hit a three-year high of 10.51% in January--up 44% from a year earlier, according to Fitch Ratings. The rate is much higher than general credit card losses of 7.5%, noted Fitch. The ratings agency predicts that private-label card losses will top 12% by the middle of this year. In comparison, losses on general cards are expected to hit 8%. Private-label cards, which only can be used at a single retailer, make up about 11% of all credit-card loans outstanding. “The higher rate of charge-offs on private label reflects the impact that the economic downturn is having on all customer classes, with a particular strain on lower- and middle-class income households,” said John Grund, a partner at advisory firm First Annapolis. He expects charge-offs to increase as job losses mount. That will dampen sales at retailers. Grund estimates that 30% to 40% of department store sales are on private label cards (The New York Times Feb. 10) … * The number of homes listed for sale in 29 top metropolitan areas declined 2.5% in January, according to ZipRealty Inc. Historically, home inventories increase in January. The average January increase over the last 25 years has been 8.7%, said Ivy Zelman, chief executive of the Zelman & Associates research firm. She said the January decline probably reflects banks’ price cutting, which has helped move foreclosed homes off the market. ZipRealty also reported that January inventory was down 13% from a year earlier (The Wall Street Journal Online Feb. 10) … * The economy will slowly emerge from recession in the second half of 2009, according to the latest Blue Chip Economic Indicators survey of economists. Blue Chip economists now predict that the economy will expand by 0.8% in the third quarter, down from a 1.2% forecast made last month. The economy is expected to grow 2% in the fourth quarter, down from a previous 2.2% forecast. For the full year, the economy is predicted to contract 1.9%, compared with the previous forecast of a 1.6% contraction. “The year-over-year contraction in real GDP this year now is expected to equal the decline registered in 1982 that was the largest in the post-World War II era,” said Blue Chip economists. The Commerce Department reported last month that the economy contracted at a 3.8% annual pace during the fourth quarter. Blue Chip economists expect the economy to continue contracting in the first half of 2009 as firms work down inventories (Reuters via Yahoo! News Feb. 10) … * Wholesale inventories tumbled by 1.4% in December--the fourth consecutive decline and the largest in 16 years, the Commerce Department reported Tuesday. Wholesalers are working down inventories as consumer and business spending slows. Sales at the wholesale level plunged 3.6% in December following a 7.3% drop the previous month. Wholesalers had enough goods on hand to last 1.27 months at the current sales pace, up from 1.24 the previous month and the highest level since March 2002. Wholesale inventories make up about 25% of all business stockpiles. Factory inventories account for about one-third of the total, while retail stockpiles make up the remainder (Associated Press via Yahoo! News and Bloomberg.com Feb. 10) … * About 25% of businesses have frozen employees’ salaries for 2009, according to a survey by consulting firm Mercer Inc. An additional 20% are considering a salary freeze for the year. About 33% of companies will have frozen wages at 2008 levels by the end of this year, said Mitch Barnes, a Mercer compensation authority. “It’s not an easy message to communicate to employees, but we think managers will be aided by the unprecedented context of these difficult decisions, including low inflation and high unemployment,” added Barnes. At those companies that do plan pay increases, the average expected pay raise is only 3.2%--down from a planned 3.6% increase in an October poll (CNNMoney.com and Jacksonville Business Journal Feb. 10) … * General Motors announced Tuesday that it plans to slash another 10,000 salaried jobs in the U.S. in 2009, about 12% of its U.S. salaried workforce. The Detroit automaker said the cuts are inevitable because of plunging sales and a looming government restructuring deadline. GM said most of the remaining salaried employees will see their compensation reduced. The firm’s salaried workforce already has declined by 33% since 2000. GM’s hourly workforce fell by 50% over the period. In its latest round of layoffs, GM won’t offer any buyout or early retirement packages. The federal government imposed a deadline of Feb. 17 for GM to present a plan demonstrating how it can become viable. The automaker received a $9.4 billion infusion from the Treasury Department, and expects to receive $4 billion more (Associated Press via Yahoo! News Feb. 10) …

News of the Competition (02/09/2009)

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MADISON, Wis. (2/10/09)
* Another three banks were shut down by regulators Friday, bringing the total number of 2009 bank and thrift failures to nine. The California Department of Financial Institutions shut down County Bank of Merced on Friday and appointed the Federal Deposit Insurance Corp. (FDIC) as receiver. Westamerica Bank of San Rafael will assume all of the bank’s deposits. CountyBank is located near the San Joaquin Valley, which has seen some of the highest foreclosure rates in the country. States at the center of the housing boom and subsequent slump have seen the greatest number of bank failures. Of the 34 bank and thrift failures since the beginning of last year, eight were in California, six were in Georgia, and three were in Florida. Alliance Bank of Culver City, Calif., also was shut down by regulators Friday. The FDIC entered into a purchase and assumption agreement with California Bank & Trust of San Diego. Also on Friday, the Georgia Department of Banking and Finance shut down FirstBank Financial Services of McDonough, Ga. Regions Bank of Birmingham, Ala. will assume the deposits of FirstBank. The FDIC now expects losses to its deposit insurance fund to top $40 billion over the next several years (Dow Jones Newswires and TheStreet.com Feb. 9) … * Real estate investment trusts that own retail properties are taking a hit as co-tenancy clauses allow merchants to pay less when anchor tenants are shut down, according to Real Point LLC. The drop in rental income could keep mall owners from making their debt payments, and some are near bankruptcy, noted Andy Day, an analyst of commercial mortgage-backed securities at Morgan Stanley. Co-tenancy clauses let smaller tenants pay less when an anchor store leaves. The 60-day delinquency rate on retail mortgages that were bundled and sold as bonds is now 0.96%--up from 0.32% in September, according to Morgan Stanley statistics (Bloomberg News via American Banker Feb. 9) … * Investors should sell prime jumbo mortgage bonds trading at the highest prices because they may lose their top ratings as home prices decline--lowering their value to banks and insurers, say Amherst Securities Group analysts. “Many AAA-rated prime securities should be trading at much lower dollar prices, and therefore are a candidate for sale,” wrote analysts Laurie Goodman and Roger Ashworth in a report issued last week. Banks and insurers purchasing debt that could be downgraded may see their risk-based capital requirements increase. Loans in one bond that was considered “stable” became at least 60 days delinquent at a 6% annualized rate in the last three months--twice the pace in the prior three-month period, the analysts noted (Bloomberg.com Feb. 6) … * The Securities and Exchange Commission (SEC) on Monday announced a deal with Bernard Madoff that could eventually force the money manager to pay a civil fine and return money to investors. The agreement won’t affect the continuing criminal investigation of Madoff, who authorities say perpetrated a $50 billion Ponzi scheme. In the SEC agreement, Madoff can’t contest allegations of civil fraud. Possible penalties will be determined “at a later time.” The agency said it submitted the deal to a federal judge in Manhattan (Associated Press via The New York Times Feb. 9) …

Market News (02/09/2009)

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MADISON, Wis. (2/10/09)
* Home prices in much of the nation will bottom out during the fourth quarter, according to a forecast by Moody’s Economy.com. The report noted that home sales are stabilizing as buyers snag bargains on foreclosures. In addition, the supply of unsold homes is falling in many areas. And moves by the Obama administration to lower mortgage rates, avert foreclosures, and generate jobs “will help place a floor under the housing downturn.” The research firm said home prices will bottom out in the final three months of this year at a level that will be 36% below the peak hit in the first quarter of 2006. However, some of the hardest hit housing markets won’t reach a bottom in home prices until 2010 or 2011. The assumptions are based on a prediction that the recession will end late this year. “A number of uncertainties in both the housing and economic outlooks remain, and the risks tilt to the downside,” said Economy.com Chief Economist Mark Zandi (The Wall Street Journal Online Feb. 9) … * The stimulus package that Congress is debating would boost the federal government’s commitment to resolving the financial crisis to $9.7 trillion--or enough money to pay off more than 90% of the home mortgages in the U.S. The stimulus plan is expected to total at least $780 billion. The Federal Reserve, Treasury Department, and Federal Deposit Insurance Corp. have lent or spent nearly $3 trillion, and have promised to spend another $5.7 trillion, if needed. These pledges amount to nearly two-thirds of the value of everything produced in the nation in 2008. In other terms, the amount would be enough to give $1,430 to every adult and child in the world (Bloomberg.com Feb. 9) … * Job market indicators are plunging at the fastest pace in 25 years, the Conference Board reported Monday. The board’s employment trends index for January was down 1% from December and 18.6% over the past year--the steepest decline since the 1974 recession. “It is becoming clearer that the continued worsening economic conditions are forcing many companies to make further downward adjustments to their workforce,” said Gad Levanon, senior economist at the board. The index has declined for the past 18 consecutive months. The Conference Board projected last month that the economy will lose 2 million more jobs this year, following the loss of 3 million jobs in 2008 (CNNMoney.com Feb. 9) … * Global business confidence weakened further in early February, according to the latest Moody’s Economy.com Survey of Business Confidence (Feb. 9). Sentiment is now close to the record low hit in the middle of December. The collapse in hiring plans since last October is especially troublesome. Results are consistent with job losses of more than 500,000 per month in the U.S. Companies also are cutting their investment in inventories and office space. And pricing power has collapsed. A record one-third of respondents say they are lowering prices, up from just 5% last summer and the highest percentage since the survey was launched in 2003 … * Oil prices rebounded towards $42 a barrel on Monday after the Organization of Petroleum Exporting Countries (OPEC) said it was willing to lower oil production further to stabilize prices. Prices also were supported by optimism that the administration of President Barack Obama would secure passage of its massive stimulus package this week. U.S. crude for March delivery jumped $1.43 to $41.60 a barrel in late morning trading yesterday. OPEC Secretary-General Abdullah al-Badri said the cartel is in 80% compliance with previous production cuts. Oil prices had slumped Friday after the Labor Department reported the loss of almost 600,000 jobs in January--the most since December 1974 (Reuters via Yahoo! News Feb. 9) … * Beazer Homes USA reported Monday that its loss narrowed in the first quarter, even as home closings and new orders plunged. The Atlanta-based homebuilder lost $80.3 million, compared with a loss of $138.2 million a year earlier. Beazer offered fewer sales incentives in the latest quarter. The company has slashed 70% of its workforce since 2006. The housing sector “continued to face the most difficult business conditions in many decades,” said CEO Ian J. McCarthy. The homebuilder’s cancellation rate was 45.6% in the first quarter, compared with 46.6% a year earlier (Associated Press via Yahoo! News Feb. 9) …

News of the Competition (02/06/2009)

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MADISON, Wis. (2/9/09)
* Bank stocks led a market rally Friday, as investors bet the bleak jobs report would boost the chances for a quick passage of an economic stimulus package. The Dow Jones Industrial Average jumped 230 points, or 2.8%, to 8295 by early afternoon, while the S&P 500 surged 2.8%. The financial sector of the S&P 500 soared 6.2%. A possible Senate vote on the administration’s stimulus plan was expected to come as early as Friday after the Labor Department reported that nonfarm payrolls fell by 598,000 in January. And on Monday, Treasury Secretary Timothy Geithner is expected to outline the administration’s plan to address the financial crisis. Widely anticipated is the creation of a “bad bank” to contain sour loans (The Wall Street Journal Online Feb. 6) … * President George W. Bush’s administration overpaid tens of billions of dollars for stocks and other assets in its huge bailout of Wall Street banks and financial institutions last year, according to a report released Friday by the Congressional Oversight Panel. The panel found that insurer American International Group received $40 billion from the Treasury for assets valued at $14.8 billion. The Treasury Department used taxpayer money to pay $62.5 billion more than the value of 10 other transactions studied by the panel. In December, Treasury claimed it paid $1 for every $1 dollar of assets. “The way the Treasury secretary described it does not fit with the numbers that were produced in our much more extensive valuation analysis,” said panel chairwoman Elizabeth Warren (Associated Press via msn.com Feb. 6) … * Fitch Ratings downgraded the preferred stock of Bank of America and Citigroup to junk territory on Friday due to “significant performance pressures” expected at the two financial firms this year and the potential for them to defer paying preferred dividends to preserve capital. Shares of Bank of America are down 60% this year, while Citigroup shares are down 44%. Each bank has received $45 billion in bailout funds from the government. Each also are in the process of slashing tens of thousands of jobs. Fitch said Bank of America probably will see losses on home-equity loans and credit-card loans mount this year. The firm also may have to further mark down the value of some of the assets acquired through its purchase of Merrill Lynch (The Wall Street Journal Online Feb. 6) … * Bank of America plans to pay back Treasury Department bailout funds within the next three years, CEO Ken Lewis told CNBC on Friday. He said the firm “categorically” doesn’t need any more government funds. Bank of America has received $45 billion from the government’s Troubled Asset Relief Program. Lewis said he dislikes the $500,000 limit on executive compensation imposed on banks receiving funds. He also said mortgage refinancing was “on fire” in January at Countrywide Financial, which the bank recently acquired (MarketWatch Feb. 6) … * Community banks needing liquidity soon will have a less expensive way to sell debt guaranteed by the Federal Deposit Insurance Corp (FDIC). Several securities firms are working on programs for small banks to pool their debt together into larger offerings, which would be more cost effective because fees would be shared among the banks. Most banks issuing bonds through the Temporary Liquidity Guarantee Program have been large banks. The pooled debt would cost community banks 3.5% to 4%--more expensive than borrowing from the Federal Home Loan banks, noted Joe Ford, a partner in the Austin office of DLA Piper. However, issuing pooled debt would let the banks “keep Federal Home Loan bank powder dry so they could have this and that,” added Ford (American Banker Feb. 6) …

Market News (02/06/2009)

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MADISON, Wis. (2/9/09)
* Employers slashed another 598,000 jobs in January, while the unemployment rate jumped to 7.6% from 7.2%, the Labor Department reported Friday. The job loss was the largest since December 1974, and the unemployment rate is now at its highest level since September 1992 (The Wall Street Journal Online Feb. 6). Payroll employment has plunged by 3.6 million since the beginning of the recession in December 2007. About half of this drop has occurred in just the past three months. Job losses in January were large and widespread across almost all major sectors. Only the health care (19,000) and private education sectors (33,000) added jobs. Manufacturing employment tumbled by 207,000 last month--the largest decline since October 1982. Construction lost 111,000 jobs. Employment in that sector has declined by about 1 million since peaking in January 2007. Retail trade employment dropped by 45,000 in January and has fallen by 592,000 since peaking in November 2007. Employment in the financial sector fell by 42,000 last month and by 388,000 since its peak in December 2006 … * An estimated 2.6 million people have now been out of work for more than six months, according to the Labor Department report. That’s the highest number of long-term unemployed since 1983 (CNNMoney.com Feb. 6). The “underemployment rate,” which includes those who have stopped seeking work and those who are working part-time although they want full-time jobs, jumped to 13.9% in January--from 13.5% in December and the highest level since the government began tracking the data in 1994. The average workweek was unchanged at 33.3 hours in January. Both the manufacturing workweek and factory overtime fell by 0.1 hour over the month, to 39.8 hours and 2.9 hours, respectively. Average hourly earnings rose by 5 cents to $18.46 in January. That followed gains of 7 cents in December and 6 cents in November. Average hourly earnings were up 3.9% from January 2008 … * Mortgage rates surged last week but remained very affordable, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) jumped 15 basis points to 5.25%, while the 15-year FRM rose 12 basis points to 4.92%. The one-year, adjustable-rate mortgage (ARM) edged up 2 basis points to 4.92%. “Interest rates for fixed-rate mortgages rose this week amid economic reports that were somewhat better than consensus forecasts had anticipated,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He also noted that low mortgage rates and declining home prices have boosted housing affordability. “The National Association of Realtor’s monthly affordability index rose to an all-time record high in December 2008 since records began in January 1971.” Rates remain lower than a year ago. At this time last year, the 30-year FRM averaged 5.67%, while the 15-year FRM stood at 5.15%, and the one-year ARM was at 5.03%. For CUNA's Daily Financial Rates, use the link … * Toyota Motors forecast its first annual net loss since 1950 on Friday as demand for vehicles plunged and the strong yen eroded earnings. The world’s largest automaker said it expects a net loss of $3.85 billion for the fiscal year through March. The loss would follow a record profit last year. Toyota is slashing jobs and temporarily shutting down plants as demand slows. In other industry news, U.S. auto-parts supplier Delhi Corp. asked a bankruptcy judge last week to let it cancel health care and life insurance benefits for its current and future salaried retirees. Delphi said its plans to exit bankruptcy were based on a more optimistic forecast for auto sales this year of 14.2 million units. The firm now expects that sales will range from 12 million to 12.5 million (Associated Press via Yahoo! News Feb. 6) … * Dividends for Standard & Poor’s 500 Index companies will tumble 13.3% in 2009--the largest annual drop since 1942, according to an S&P forecast. Firms in the index are on track to make $214.7 billion in payouts this year, down from $247.9 billion last year. Dividend increases will slow this year because of the economy and increased concern about dividend cuts, said S&P Index Analyst Howard Silverblatt. “Unless companies believe that their financial future will improve, their need to conserve cash will outweigh their desire to pay dividends,” added Silverblatt (Bloomberg.com Feb. 6) …

News of the Competition (02/05/2009)

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MADISON, Wis. (2/6/09)
* More than 80% of all commercial mortgage-backed securities (CMBS) loans that were one month delinquent in the fourth quarter remained delinquent after 60 days, according to Fitch Ratings. That’s more than twice the rate during the first three quarters of 2008. Fitch said the shift reflected deteriorating real estate fundamentals and the inability of borrowers to overcome property-specific issues. Previously, Fitch didn’t consider 30-day delinquencies to be an important indicator of defaults because they usually reflected chronic late payers or errors in account creations for new loans. That has changed as “borrowers are less inclined to come out of pocket for a property not covering debt service if the perceived value of the equity in the property has declined substantially,” said Fitch Managing Director Eric Rothfeld. Fitch predicts that more properties will become delinquent this year (Dow Jones Newswires Feb. 4) … * The Federal Deposit Insurance Corp. (FDIC) has increased its estimate for the cost of U.S. bank failures this year as the economy and financial sector continue to deteriorate. The FDIC now expects losses to the deposit insurance fund to top $40 billion over the next several years, FDIC Chief Operating Officer John F. Bovenzi told a House panel this week. A surge in bank failures this year has eroded the agency’s deposit insurance fund. Bovenzi called for an increase in the agency’s Treasury credit line to $100 billion. He said the FDIC board also should be able to request even more borrowing authority in emergency situations. And he said Congress should let the FDIC impose special assessments on bank holding companies (Dow Jones Newswires Feb. 3) … * For the first time, some banks are passing the cost of higher Federal Deposit Insurance Corp (FDIC) premiums along to business customers. The FDIC’s rate hike on Jan. 1 significantly boosted the premiums many bankers will pay in 2009, say analysts. Cullen/Frost Banks, Umpqua Holdings Corp., 1st Source Corp., and First Horizon National Corp. are among the financial firms raising charges on their business customers. It is appropriate to pass along costs to business customers because the FDIC now provides insurance for up to $250,000 per account, said Greg Pauly, an executive vice president at Memphis-based First Horizon (American Banker Feb. 5) … * Wells Fargo, which received $25 billion in federal bailout money last year, has canceled its plan to host a lavish employee conference in Las Vegas amid widespread criticism by lawmakers and the media. The bank previously had defended the event as a way to recognize “the hard-working team members who made homeownership achievable and sustainable for borrowers across the nation.” Wells performed better than most U.S. banks last year. However, it posted a $2.55 billion loss for the fourth quarter, its first since 2001 (The Wall Street Journal Online Feb. 4) … * MasterCard reported a fourth-quarter profit of $239.4 million as it cut expenses and consumers continued to shift towards paying bills with debit and credit cards instead of cash (Associated Press via The New York Times Feb. 5). Earnings were down 21% from a year earlier. However, the year-ago results included a large gain from an investment sale. For the full year, MasterCard posted a loss of $253.8 million, reflecting a $1.65 billion charge related to a settlement with American Express and an $827.5 million charge related to a settlement with Discover Financial Services. In other news, Visa Inc. said earnings for its fiscal first quarter, which ended Dec. 31, jumped 35% from a year earlier to $574 million (American Banker Feb. 5). However, the firm lowered some forecasts for this year amid concerns about the economy. Visa now expects to report revenue growth in the “high single digits” for the year, down from the range of 11% to 15% it expected in December …

Market News (02/05/2009)

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MADISON, Wis. (2/6/09)
* Credit-card delinquencies jumped to a record high last month, and are expected to climb further as the recession continues and job losses mount. The credit-card delinquency rate--60 days or more overdue-- jumped 47 basis points to a record-high 3.75% in January, according to Fitch Ratings. The chargeoff rate surged 66 basis points to 7.50%--the highest level since a bankruptcy-reform surge in late 2005, when the rate hit 7.53%. The chargeoff rate was 40% higher than a year earlier. “U.S. consumers continue to struggle in the face of mounting pressures on multiple fronts from employment to housing to net worth,” said Fitch managing director Michael Dean. The ratings agency expects chargeoffs to hit 8% in coming months, and to increase to almost 9% during the second half of the year. Despite the deterioration, Fitch said downgrades on securities backed by credit card receivables will be limited because of lower funding costs (FT.com and BUSINESS WIRE Feb. 5) … * Adjustable-rate mortgage (ARM) lending plunged last year as initial-payment savings disappeared, according to a report by Freddie Mac. The survey found large premiums for initial interest rates on Treasury-indexed ARMs and a continued decline in the ARM share of lending. “Our survey found that starting rates for conforming one-year ARMs averaged 1.76 percentage points above their fully indexed rate, the largest rate premium observed since Freddie Mac began collecting ARM data in 1984,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. In addition, added Nothaft, with rates on conforming 30-year fixed mortgages declining to a 50-year low, consumers could find such loans with rates about the same as or lower than the initial rate on an ARM. Only 21% of lenders offered a conforming one-year ARM last year--compared with 96% of lenders in 1999 and the smallest percentage in 25 years (freddiemac.com and National Mortgage News via American Banker Feb. 3) … * Consumers avoided adjustable-rate mortgages last year as lenders shied away from them and rate savings disappeared, according to the Freddie Mac survey. Just 3% of mortgage applications were for ARMs in December 2008--compared with about 36% in the peak months of 2005, 2004, 2000 and 1995. Homeowners who refinanced also avoided ARMs. About 94% of conventional prime borrowers who originally had a one-year ARM chose a new conforming fixed-rate loan when they refinanced during the third quarter. About 82% of borrowers with hybrid ARMs refinanced into fixed-rate mortgages (freddiemac.com and National Mortgage News via American Banker Feb. 3) … * The job market deteriorated rapidly last week as the economic downturn deepened. First-time claims for unemployment insurance jumped by 35,000 during the week ending Jan. 31 to a 26-year high of 626,000, the Labor Department reported Thursday (Bloomberg.com Feb. 5). It was the highest level since October 1982. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, surged by 20,000 during the week ended Jan. 24 to a record-high 4.788 million. Another 1.739 million people are claiming emergency benefits through programs enacted last year (Moody’s Economy.com Feb. 5). That brings the total to 6.5 million. The numbers are expected to continue rising through much of this year as the recession persists … * Non-farm productivity jumped in the fourth quarter as firms reduced work hours to cope with the deteriorating economy. Productivity--the amount of output per hour of work--rose at a 3.2% annual pace, up from a 1.5% gain in the third quarter, the Labor Department reported Thursday. Unit labor costs edged up at a 1.8% annual pace, slowing sharply from a 2.6% rate in the previous quarter. The number of hours worked plunged at an 8.4% annual rate during the fourth quarter. For the full year, productivity increased 2.8%--twice the 1.4% gain in 2007 and the strongest since a 2.8% rise in 2004. However, last year’s productivity gain was due more to the decline in hours than the small 1% gain in output. Unit labor costs increased just 0.5% last year--much smaller than the 2.7% gain in 2007 and the weakest since a 0.3% increase in 2003 (bls.gov and Associated Press via The New York Times Feb. 5) … * Factory orders declined for a fifth consecutive month in December, closing out the weakest year for manufacturers since 2002. Orders plunged by 3.9% in December, following a 6.5% drop in November and the longest stretch of declines since the Commerce Department began tracking the data on a comparable basis in 1992. For all of 2008, factory orders rose just 0.4%--the weakest reading since a 1.8% decline in 2002. The manufacturing sector is expected to remain weak this year as the recession continues. Demand for nondefense capital goods excluding aircraft, a proxy for future business investment, tumbled by 3.2% in December (commerce.gov and Associated Press via Yahoo! News Feb. 5) ...

News of the Competition (02/04/2009)

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MADISON, Wis. (2/5/09)
* Forty-two local banks in 25 states have recently received a combined $1.15 billion in government bailout money under the Troubled Asset Relief Program (TARP), the Treasury Department announced Tuesday. The department said it has now infused $195.3 billion in 359 institutions in 45 states and Puerto Rico. In the latest round, Anchor Bancorp and Legacy Bancorp became the first Wisconsin banks to receive TARP funds. Farmers and Merchants Bank became the first Nebraska bank to receive money. Other banks receiving TARP money in the latest round include Flagstar Bancorp of Michigan, PrivateBancorp of Illinois, and W.T.B. Financial Corp of Washington (CNNMoney.com Feb. 4) … * Freddie Mac has announced a pilot program targeting 5,000 delinquent borrowers who have high-risk mortgages. The firm plans to hire an outside company to identify a subset of homeowners who have missed two mortgage payments. The company will put more effort into some types of high-risk loans, such as Alt-A mortgages. These loans account for half of Freddie’s delinquencies, even though they make up only a small portion of its loan portfolio, noted company spokesman Brad German. He said the program will target states with high delinquency rates, such as California and Nevada. However, the program could be extended to other states (washingtonpost.com Feb. 4) … * Fannie Mae plans to announce new refinancing options designed to help homeowners take advantage of low mortgage rates, according to a person familiar with the program. The options will involve a different approach to appraisals than the firm has taken with its streamlined refinancing program. In that program, Fannie lets lenders use the original appraisal for the new mortgage loan. But the lender must get a new appraisal if it is concerned about promising Fannie that the property’s value hasn’t declined (American Banker Feb. 4) … * The Federal Home Loan Bank of Chicago’s subordinated debt has been placed on review by Moody’s Investors Service for a possible downgrade. Capital levels at many Home Loan Banks could be hit by bad mortgage investments when fourth-quarter results are released. However, Moody’s said there is only a small risk that the Chicago bank wouldn’t be able to make its debt payments. The Chicago bank’s subordinated debt is now rated Aa2 (American Banker Feb. 3) … * American Express can’t force its merchants to waive their right to join in class-action lawsuits, an appeals court ruled Friday in reinstating a suit filed by the National Supermarkets Association against the credit-card issuer. The ruling voids a clause in the firm’s contract with merchants that requires them to arbitrate disputes and prohibits them from joining in class-action suits. In allowing the case to proceed, the court cited the high cost of litigation. The court focused on whether the waiver was valid in this particular case, and avoided the issue of whether waivers are always void (Bloomberg.com Jan. 30) …

Market News (02/04/2009)

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MADISON, Wis. (2/5/09)
* President Barack Obama and Treasury Secretary Timothy Geithner announced Wednesday that the government will require that financial firms receiving “exceptional” aid from the government in the future cap the compensation of top officials at $500,000 a year. “In order to restore our financial system, we’ve got to restore trust,” said Obama. “And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street,” added Obama. Top executives can receive additional compensation as restricted stock that can’t be sold until the government has been paid back. Last year, Wall Street gave executives $18.4 billion in bonuses even as the financial crisis deepened and the economy sank further into recession (Bloomberg.com Feb. 4) … * Vehicle sales plunged to the lowest pace since mid-1982 in January, as a decline in fleet sales offset improved demand from consumers. Vehicles sold at an annual pace of just 9.5 million units, down from a 10.3-million unit pace in December and a 27-year low. Fleet sales plunged because of weaker business demand and because automakers couldn’t fill orders due to cuts in auto-production capacity. Consumer demand improved last month, but remains low by historical standards. Vehicle sales for all of 2009 probably will total a weak 10.8 million units as the job market continues to deteriorate and credit remains tight (Moody’s Economy.com Feb. 3) … * Mortgage activity rebounded last week as a surge in refinancings offset a drop in purchase applications, the Mortgage Bankers Association reported Wednesday (mbaa.org Feb. 4). The trade group’s Market Composite Index rose 8.6% during the week ending Jan. 30 to 795.4. The Refinance Index jumped 15.8% to 3906.3, while the Purchase Index tumbled 11.2% to 261.4. The average 30-year, fixed-rate mortgage (FRM) edged up 6 basis points to 5.28% last week, while the one-year, adjustable-rate mortgage (ARM) rose 13 basis points to 6.09%. Both the market and refinance indexes remain at just two-thirds of the levels recorded throughout December and most of January, noted Moody’s Economy.com (Feb. 4). The research firm expects the housing market to decline throughout most of this year … * Announced layoffs by major companies jumped to the highest level in seven years during January, according to a report by the outplacement firm Challenger, Gray & Christmas. Job-cut announcements jumped to 241,749 in January--up 45% from December and the highest level since January 2002. Last month’s layoffs were 222% higher than in January 2008. Major companies announced 1.2 million job cuts last year. Retailers slashed 53,968 jobs in January after experiencing the weakest holiday season in decades. Other sectors reporting major cuts in January were industrial goods (32,083); computers (22,330); pharmaceutical (22,063); and aerospace (17,800). “The variety of industries represented among the top five job-cutting sectors in January is further evidence of how far the impact of this recession has spread,” said John Challenger, chief executive of the Chicago-based firm. “Industries that at first appeared to be immune to downturns, such as computer and pharmaceutical, are now rapidly shedding workers,” added Challenger (MarketWatch and CNNMoney.com Feb. 4) … * The service sector shrank for a fourth consecutive month in January, but at a slower pace than in December. The Institute for Supply Management (ISM)’s non-manufacturing index, which makes up about 90% of the economy, rose to 42.9, from 40.1 in December. A reading below 50 indicates contraction in the sector. Only two service industries in the ISM poll reported growth for January--health and social assistance, and finance and insurance. The export-orders index fell to 39 from 39.5, while the employment index edged down to 34.4 from 34.5. The economy won’t stabilize “until we see employment start leveling off to where it’s not in that freefall,” said Anthony Nieves, chairman of the group’s services survey. “I’m not seeing anything that’s instilling confidence,” added Nieves (Bloomberg.com and Associated Press via Yahoo! News Feb. 4) … * An estimated 84% of the nation’s cities are in financial trouble--up from 64% just six months ago, according to a report by the National League of Cities. That’s the highest percentage since the group began conducting surveys in 1985. Cities’ financial problems continue to intensify as property values plunge, unemployment rises, and consumer spending weakens. Almost 70% of cities have initiated hiring freezes or layoffs to cope with their financial problems, and 42% are postponing or canceling infrastructure projects. Cities are seeing increased demand for services, even as tax revenues are falling, said Donald Borut, executive director of the league (CNNMoney.com Feb. 4) …

News of the Competition (02/03/2009)

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MADISON, Wis. (2/4/09)
* The Federal Reserve announced Tuesday that it extended five temporary programs designed to boost liquidity in the global financial system by six months. The programs, which had been set to expire on April 30, have been extended through Oct. 30. “The board of governors and the Federal Open Market Committee took these actions in light of continuing substantial strains in many financial markets,” said the Fed in a statement. The programs include currency swap lines with 13 central banks and facilities providing loans and liquidity to the commercial paper and money markets (AFP and Reuters via Yahoo! News Feb. 3) … * Citigroup announced Tuesday that it plans to use $25.7 million of the $45 billion it received in government bailout money to boost residential mortgage lending. Citi said it also would use $2.5 billion for personal and business loans, $1 billion for student loans, $5.8 billion for credit-card loans, and $1.5 billion for corporate loans. “The government, on behalf of the American taxpayer, has invested in Citigroup,” said CEO Vikram Pandit. He said the bank’s goals are “to help expand available credit for consumers and businesses; restore liquidity and stability to the capital markets, and support the recovery of the U.S. economy” (MarketWatch Feb. 3) … * West Virginia Attorney General Darrell McGraw has settled a lawsuit that accused national mortgage lender Countrywide Financial Corp. of unfair and deceptive practices. The suit accused the firm of luring customers with teaser rates that quickly rose to as high as 18%. The settlement creates a loan-modification program for West Virginians who received subprime loans from the company and its subsidiaries, said McGraw. He said mortgage rates on eligible loans could be lowered in some cases to 2.5% for five years, saving homeowners about $8.9 million. Countrywide also agreed to pay $340,901 to some consumers who lost their homes to foreclosure (Associated Press via msn.com Feb. 3) … * Finance company GMAC LLC posted a $7.46 billion profit for the fourth quarter, compared with a $724 million loss a year earlier and following five consecutive quarterly losses. The firm said a gain from a debt swap offsets billions of dollars in losses from its auto and mortgage units. Last year, GMAC won bank-holding company status and received $6 billion in government bailout money. GMAC posted a $1.31 billion loss from auto finance in the fourth quarter, reflecting higher loan losses and lease writedowns stemming from falling used-vehicle prices. Its Residential Capital mortgage unit posted a $981 million loss (Reuters via The New York Times Feb. 3) … * Pittsburgh-based PNC Financial Services Group reported a $248 million loss for the fourth quarter, due to its acquisition of National City Corp. on Dec. 31, and said it plans to cut 5,800 jobs by 2011. PNC was the first U.S. bank to use money from the government’s bailout program to make an acquisition. PNC’s provision for loan and lease losses increased to $3.9 billion in the fourth quarter, from $830 million a year earlier. Net chargeoffs rose to $207 million from $83 million. PNC said its full-year 2008 net income was $882 million, compared with $1.47 billion in net income for 2007 (Associated Press via Yahoo! News Feb. 3) …

Market News (02/03/2009)

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MADISON, Wis. (2/4/09)
* Pending home sales rebounded in December as buyers bought properties at steep discounts. The National Association of Realtors’ (NAR) Pending Home Sales Index rose to 87.7, up 6.3% from a record-low 82.5 in November. The index was 2.1% higher than in December 2007. “The monthly gain in pending home sales, spurred by buyers responding to lower home prices and mortgage interest rates, more than offset an index decline in the previous month,” said NAR Chief Economist Lawrence Yun. “The biggest gains were in areas with the biggest improvements in affordability.” Still, the overall number of pending sales for 2008 was down 9.5% from 2007. By region in December, pending home sales rose 12.8% in the Midwest and 13% in the South. They edged down 1.7% in the Northeast and 3.7% in the West (The New York Times and realtor.org Feb. 3) … * A record 19 million homes were vacant during the fourth quarter of 2008 as banks seized homes faster than they could sell them and prices continued to decline, the Census Bureau reported Tuesday. Vacant homes rose by 6.7% from the same period a year earlier. The vacancy rate edged up to 2.9% in the fourth quarter, from 2.8% in the previous quarter and the highest rate since data tracking began in 1956. There were 2.2 million new home foreclosures last year, or an average 6,090 a day, according to the Hope Now Coalition of mortgage lenders, servicers, and consumer advocates. Banks owned $11.5 billion of homes they seized from delinquent borrowers at the end of the third quarter--up from $5.4 billion a year earlier, according to Federal Deposit Insurance Corp. data (Bloomberg.com Feb. 3) … * The housing market lost $3.3 trillion of value in 2008, after losing $1.3 trillion in value in 2007, and nearly one in six owners owed more on their mortgages than their homes were worth last year, according to a report by Zillow.com, a Seattle-based real-estate data service. An estimated $6.1 trillion in value has been lost since the housing market peaked during the second quarter of 2006. The median home price tumbled 11.6% to $192,119 in 2008. “It’s difficult to say when we’ll see a bottom to the housing market,” said Stan Humphries, Zillow’s vice president of data and analytics. The number of homeowners with negative equity--owing more on their homes than they are worth--jumped to 17.6% in the fourth quarter, from 14.3% in the previous quarter. Negative equity will increase foreclosures--further depressing prices, noted Humphries (Bloomberg.com Feb. 3) … * Credit remained tight at banks during the last three months of 2008, according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey. About 65% of banks polled said they tightened lending standards on commercial and industrial loans--down from 85% in the previous survey. Banks “pointed to a less favorable or more uncertain economic outlook as a reason for tightening their lending standards and terms” on business loans, said the Fed. The percentage of banks tightening their standards on credit card and other consumer loans was unchanged at about 60%. About 45% of banks reported weak consumer-loan demand, unchanged from the previous poll. Demand for prime mortgage could be firming. Only 10% of banks saw weaker demand for prime mortgages during the past three months, compared with 50% in the October survey. Almost one-third said demand had been stronger. Most banks said they kept lending standards the same for both prime and nontraditional mortgage loans since the October poll (The Wall Street Journal Online and Moody’s Economy.com Feb. 3) … * The credit quality of small-business loans is deteriorating--threatening to deepen the recession and boost losses at banks. The Small Business Administration (SBA) said losses from loans made through its lending programs more than doubled to $1.3 billion in 2008. The SBA charged off $504 million in loans in 2007, up from $276 million in 2005. Deterioration in the small business sector is hitting some banks hard. Bank of America said it took permanent losses on 2.9% of its small business loans in the fourth quarter, at an annual loss rate of nearly 12%. Capital One Financial reported in January that its level of nonperforming small business loans increased to 1.79% in the fourth quarter, up almost 70% from a year earlier. Problems in the small business sector are important for the overall economy. Small businesses provide a large percentage of the nation’s jobs, and support local economies via taxes and office rentals (The Wall Street Journal Online Feb. 3) …

News of the Competition (02/02/2009)

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MADISON, Wis. (2/3/09)
* Another three banks failed Friday. In a worrying sign, the Federal Deposit Insurance Corp agreed to write checks to the depositors of Utah’s MagnetBank after it failed to find a buyer for its deposits or assets. The checks probably will cover the total $282.8 million in deposits the lender had. Ocala National Bank in Florida and Suburban Federal Savings Bank in Maryland also failed Friday, and those banks’ deposits were sold to other financial firms. The failures are expected to cost the deposit insurance fund about $350 million. Six banks failed in January, and regulators are expecting dozens more to fail in coming months. Regulators shut down 25 banks last year, the most since 1993 (Bloomberg.com and The Wall Street Journal Online Feb. 2) … * The nation’s top banks sought government permission to bring in thousands of foreign workers into the U.S. for high-paying jobs, even as the financial system was imploding last year and huge numbers of bank employees were laid off, according to a study of visa applications by Associated Press (Yahoo! News Feb. 2). The number of visas sought by the dozen banks now receiving the largest federal rescue packages jumped by almost one third, to 4,163 in fiscal 2008. Over the past six years, those dozen banks sought visas for more than 21,800 foreign workers. The average annual salary for these top-level jobs was $90,721--almost two times the median income for all U.S. households. The banks receiving bailout money also employed an unknown number of foreign workers through intermediary companies. Banks using foreign workers under the H-1B visa program typically pay less than they would to U.S. workers … * At least 50 banks that qualify for the Treasury Department’s $700 billion bailout have rejected the funds, partly because of concerns that the government may impose tougher restrictions, such as limits on dividends and executive compensation. Others are applying for money, but then rejecting it in a public-relations gambit to impress investors. Some banks also are concerned about closing costs, according to the Government Accountability Office (The Wall Street Journal Online Feb. 2) … * The New Orleans Employees’ Retirement System has filed a shareholder lawsuit against Switzerland’s UBS AG related to allegations that the bank helped thousands of Americans avoid paying U.S. taxes. The suit alleges that the bank concealed the tax scheme from U.S. authorities. The bank’s stock price plunged when the scheme became public. A UBS spokeswoman declined to comment on the matter (Dow Jones Newswires Feb. 2) … * Federal and state banking regulators have filed cease-and-desist orders against West Suburban Bank of Lombard, Ill., and Corn Belt Bank & Trust Co. of Pittsfield, Ill. The order against West Suburban didn’t include a fine but ordered the bank to beef up its Bank Secrecy Act program. Regulators reprimanded Corn Belt for an inadequate board, for operating with an inadequate level of capital considering its asset quality, and for “operating in a manner which has resulted in inadequate earnings.” The order said the bank’s “hazardous” lending policies included having too many bad loans, and not diversifying its loan base adequately (chicagotribune.com and American Banker Feb. 2) …

Market News (02/02/2009)

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MADISON, Wis. (2/3/09)
* Consumer spending posted the smallest annual gain since 1961 last year, while income posted the weakest increase since 2003. Consumer spending rose only 3.6% in 2008, and incomes increased just 3.7%, the Commerce Department reported Monday. Worried about rising layoffs, consumers boosted their savings last year. The personal savings rate jumped to 3.6% of after-tax income in December--from 2.8% in November and the highest level since tax rebates temporarily boosted the rate to 4.8% in May. For all of last year, the saving rate rose to 1.7%, higher than in previous years when the housing and stock markets were booming. The savings rate fell to a low of 0.4% in 2005 at the pinnacle of the housing boom. Inflation cooled as the economy weakened last year. The core PCE price index--excluding food and energy--was up just 1.7% year-over-year in December--the smallest 12-month increase since January 2004 (Associated Press and Reuters via The New York Times Feb. 2) … * The wealthiest Americans have seen their income soar even as they paid a lower effective tax rate on that income, the Internal Revenue Service (IRS) reported last week. The income of the 400 wealthiest Americans surged to an average $263 million in 2006--up almost 23% from $214 million the previous year. Since 1996, these wealthiest Americans have almost doubled their share of all income earned in the nation. The group paid about $18 billion in federal income taxes in 2006, an average of $45 million, on a record $105 billion in total income. That’s the lowest effective tax rate in the 15 years since the IRS started releasing the data. In comparison, all other individual taxpayers paid about $1 trillion in 2006. Wealthy people now pay income tax rates that are much lower than those of working-class people because of many new tax breaks, noted Robert S. McIntyre, director of Citizens for Tax Justice. The wealthiest Americans saw their income from capital gains soar as tax rates on such income were cut by the Bush administration. The capital-gains tax was slashed to 15%--from 28% in 1997 (The New York Times Jan. 30) … * The manufacturing sector contracted at a slower pace in January. The Institute for Supply Management’s (ISM) factory index rose to 35.6--from a 28-year low of 32.9 in December. A reading below 50 indicates contraction in the sector. Employment and production remained weak last month. The employment index was 29.9, unchanged from the previous month. The production index rose to 32.1 from 26.3, while the new-orders index rose to 33.2, from a record-low 23.1. Respondents said “that it will take a recovery in automobiles and housing for the manufacturing sector to once again prosper,” noted Norbert Ore, chairman of ISM’s manufacturing business survey committee. However, he said the index continues to show significant deflation in the prices manufacturers pay for materials, which eventually will benefit consumers (The Wall Street Journal Online and Bloomberg.com Feb. 2) … * The construction sector weakened significantly last year, according to a Commerce Department report. Construction spending declined by a record 5.1% to $1.079 billion in 2008, following a 2.6% drop in 2007. Weakness in both years reflected plunges in home construction, which tumbled a record 27.2% last year in the largest decline since comparable records began in 1993. Nonresidential construction rose 15.3% last year, the third consecutive double-digit gain. However, nonresidential construction contracted during the fourth quarter, and analysts expect the sector to weaken further this year as banks continue to tighten lending and the economic downturn deepens (Associated Press via The New York Times and The Wall Street Journal Online Feb. 2) … * Chrysler LLC’s drive to boost vehicle sales has run into problems from its former financing unit, Chrysler Financial. Private-equity firm Cerberus Capital Management acquired Chrysler in 2007, and split the automaker and lending unit into separate firms. Last summer, the lender stopped offering leases and cut back on auto loans, making it tougher for the automaker to boost sales. Chrysler’s sales plunged 53% in December. Similarly, GMAC cut its auto lending after Cerberus acquired a 51% stake from General Motors. Ford Motor has less difficulty obtaining loans for its customers and dealers because it retained control of Ford Motor Credit (The Wall Street Journal Online Feb. 2) … * The global economy has plunged into a severe recession, according to the results of the latest Moody’s Economy.com Survey of Business Confidence. Sentiment has improved only slightly since hitting a record low in December. Pricing pressures have collapsed amid tumbling commodity prices and the global downturn. Almost 30% of respondents say they are lowering prices, the largest percentage since the survey was launched in 2003. Hiring plans have declined significantly, and businesses are slashing their investment in inventories and office space …