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Market News (05/30/2008)

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MADISON, Wis. (6/2/08)
* Minorities and those without college degrees pay more mortgage fees than whites and those with a higher education, according to a study conducted for the Department of Housing and Urban Development and the Urban Institute. On average, black borrowers paid $415 more in closing costs than their white counterparts, while Hispanic borrowers paid $365 more. People living in neighborhoods where most adults have a college degree paid $1,100 less than people living in neighborhoods where no residents had a college education. The study also found that loans made by mortgage brokers were $300 to $425 more expensive than loans made directly by deposit-taking banks, credit unions, and thrifts (The New York Times May 30) … * Inflation wiped out all the gains in disposable personal income in April, and consumer spending was flat after adjusting for higher prices, the Commerce Department reported Friday. Nominal personal income, consumer spending, and consumer prices all rose 0.2%. Real (inflation-adjusted) disposable income was up just 1.8% over the past year. In April, employee compensation fell 0.1% in nominal terms, the first drop in a year. The small gain in income in April partly reflected the government’s tax rebates. The government so far has distributed $45.7 billion in tax rebates in its program. Much of that extra money may be consumed by higher fuel prices. Households will spend about $90 billion more this year on gasoline if prices stay at current levels, according to a forecast by Credit Suisse Holdings economists (MarketWatch and Bloomberg.com May 30) … * Cash-strapped consumers are facing ever-higher gasoline prices. Retail pump prices increased one cent Friday to a national average of $3.962 a gallon, according to a survey by AAA and the Oil Price Information Service “I do think we could get to $4,” said AAA Spokesman Geoff Sundstrom. Gasoline prices already average more than $4 in 12 states and in the District of Columbia. On Thursday, the Commodity Futures Trading Commission said that in December it launched an investigation of possible price manipulation in the oil futures market. The commission said it took the unusual step of publicizing the investigation “because of today’s unprecedented market conditions.” Since early December, crude prices have jumped more than 42%. And gasoline prices are nearing $4 a gallon, compared with $3.20 a gallon a year ago (Associated Press via Yahoo! News May 30) … * Consumer sentiment plunged to the lowest level in almost 28 years in May amid worries about inflation. The Reuters/ University of Michigan final consumer sentiment index fell to 59.8--from 62.6 in April and the lowest reading since June 1980. Consumers expect prices to increase 5.2%--the highest level in more than two decades. Planned purchases of big-ticket items plunged to their lowest level in more than 14 years. In addition, half of respondents said their finances had recently worsened, and 90% said they thought the economy already was in recession. “Consumers are painfully aware that their living standards are shrinking under the weight of higher food and fuel prices and see little hope for improvement any time soon,” said Survey Director Richard Curtin. “Consumers’ ability to buy has been diminished by smaller income gains, fewer jobs, higher prices of necessities, falling home prices, rising credit standards, and record levels of outstanding debt,” added Curtin (MarketWatch and CNNMoney.com May 30) … * Discount-window lending at the Federal Reserve was mixed last week, as investment banks curbed borrowings and commercial-bank borrowing surged, the central bank reported Thursday. Lending through the primary-dealer credit facility for investment banks totaled $10.12 billion--down from $13.55 billion the previous week. The Fed started lending directly to investment banks in March. Lending via the primary credit facility used by depository institutions totaled $19.04 billion last week, up from $15.26 billion the previous week. “Banks are either getting less shy about using the discount window or are having a greater degree of stress, or possibly some combination of the two,” said JPMorgan Chase Economist Michael Feroli (The Wall Street Journal Online May 30) …

Hampel on TV Recovery will have saucer-like bottom

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WASHINGTON (6/2/08)--Falling home values and rising gasoline prices are buffeting consumer confidence, which will result in a slow economic recovery with a “saucer-like” bottom, Credit Union National Association (CUNA) Chief Economist Bill Hampel told Bloomberg Television Friday.
CUNA Chief Economist Bill Hampel appears live Friday on Bloomberg Television.
Bloomberg anchor Kathleen Hays interviewed Hampel on the topic of consumer confidence. Real household spending on everything besides fuel is negative so far this year, said Hampel, who pointed out that fuel for transportation can account for more than 10% of a household’s budget. He said consumers’ inflationary expectations are somewhat inflated due to recent spikes in gasoline and food prices, while most other prices actually are well-behaved. “The other economists at CUNA and I actually believe inflation will be moderating for the rest of the year,” Hampel said. “This eventually will get built into consumer expectations and confidence.” Hampel believes economic indicators published later this year will show the U.S. economy entered a recession in December or January. He predicts the recovery to begin in the third quarter, but that the consequent growth will fall below recent trends. He also thinks the meager recovery will spur the Federal Reserve to cut interest rates another 25- to 50 basis points by the end of this year. Hampel said consumer balance sheets are in “lousy condition” after many borrowed against home equity, which in many cases has evaporated. "Consumer debt ratios are really high. It will take quite a long time to rebuild their net worth," said the CUNA economist.

News of the Competition (05/30/2008)

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MADISON, Wis. (6/2/08)
* Banks have raised nearly $36 billion in new capital since Mid-April but will need to raise much more because credit losses are just starting to be realized, according to a report by Keefe, Bruyette & Woods (KBW). “Credit losses have only begun to materialize, particularly for the regional banking universe,” said KBW Analyst Melissa Roberts. She said analysts are especially concerned about banks with a focus on residential-mortgage and construction lending, and those with portfolios centered in the West, Southeast, and Midwest. As many as 300 banks are expected to fail during the next two to three years (Dow Jones Newswires May 30) … * Mortgage insurers reported a surge in delinquencies in April, the Mortgage Insurance Companies of America reported Friday. Primary mortgage defaults jumped to 73,880, from 58,313 in March. However, the report noted that a change in reporting by one lender accounted for much of the surge. That lender changed its reporting rule from 90 days overdue to 60 days overdue to conform to the general rule. However, all mortgage insurers have seen losses jump, as foreclosures have increased, and most say they don’t expect to report a net profit for this year (Dow Jones Newswires May 30) … * Bradley Birkenfeld, a former executive at Zurich-based UBS AG, has agreed to plead guilty to tax fraud and to cooperate in a Justice Department investigation of wealthy Americans evading taxes, according to a report in The Wall Street Journal (May 30). The Swiss bank teamed up with banks in the tax haven of Liechtenstein to help wealthy Americans hide assets from the Internal Revenue Service (IRS), according to legal documents and court filings reviewed by the newspaper. Birkenfeld is expected to testify that the bank operated two systems for its U.S. clients. One contained accounts officially declared to the IRS, while the other contained undeclared accounts … * Direct mail solicitations by card issuers declined 18% to 1.13 billion in the first quarter, compared with a year earlier, as issuers curbed offers to subprime borrowers, New York-based Synovate reported last week. That’s the lowest number of solicitations since the fourth quarter of 2003. The response rate remained steady, at 0.4%. “Most major card issuers have scaled back their offers to lower-income households, resulting in a significant decline in overall mail volume,” said Andrew Davidson, vice president for competitive tracking services at the financial services group of Synovate. However, he noted that mailings from Washington Mutual, Citigroup, and Discover Financial Services were up from the fourth quarter, suggesting that the mailing rate may have bottomed out (American Banker May 30) …

News of the Competition (05/29/2008)

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MADISON, Wis. (5/30/08)
* New York City’s financial sector may lose 15,000 to 25,000 jobs during the current economic downturn--less than during past slowdowns, said Comptroller William Thompson. The sector lost 40,200 jobs during the last economic downturn, which followed the September 11, 2001, terrorist attacks. Thompson noted that the current cycle began last August and is expected to persist through March 2009 (Reuters via The New York Times May 29) … * The real-estate sector weighed down bank earnings during the first quarter, according to a report by the Federal Deposit Insurance Corp. (FDIC). Earnings fell 46% from a year earlier, to $19.3 billion. Four large banks accounted for more than half the earnings decline in the first quarter. “Higher loss provisions were the primary reason,” said the FDIC. Banks insured by the agency set aside $37.1 billion in loan-loss provisions for the first quarter--up sharply from $9.2 billion in the same quarter last year. The FDIC said the number of banks on its “problem list” rose to 90 from 76, the sixth-consecutive quarterly increase (MarketWatch May 29) … * Federally regulated savings and loans lost $617 million during the first quarter--compared with a $3.61 billion profit a year earlier, as they set aside $7.6 billion to cover losses on problem loans, the Office of Thrift Supervision (OTS) reported Wednesday. Thrifts lost $8.75 billion during the fourth quarter. Thrifts have aggressively set aside funds to meet loan losses, said OTS Director John Reich. “This forceful response to the housing market crisis continues to depress industry earnings, but it also strengthens institutions to withstand future challenges,” said Reich (Associated Press via CNNMoney.com May 29) … * Bear Stearns shareholders on Thursday approved the proposed acquisition of the firm by JPMorgan Chase. The takeover of the 85-year-old firm was announced in mid-March. Bear Stearns was on the verge of collapse after reporting billions of dollars in writedowns. As part of the deal, the Federal Reserve Bank of New York agreed to acquire $30 billion of the company’s assets. JPMorgan has said it will retain only 45% of Bear Stearns employees after the deal closes (CNNMoney.com May 29) … * Prudential Financial announced Thursday that it expects net credit losses from residential mortgage investments to total about $400 million over the next five years. “We have virtually no CDO exposure,” said Chief Executive John Strangfeld during an investor conference. He said the insurance company probably will experience double-digit earnings growth during the next five years. The firm posted a big earnings decline for the first quarter. Banks, insurers, and other financial-service firms have seen more than $300 billion in writedowns during the credit crunch (Reuters via The New York Times May 29) …

Market News (05/29/2008)

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MADISON, Wis. (5/30/08)
* The nation’s gross domestic product (GDP) expanded at a revised 0.9% annual rate during the first quarter, the Commerce Department reported Thursday. That’s slightly higher than the 0.6% pace the government reported last month. The economy expanded by 0.6% during the fourth quarter. The upward revision for the first quarter largely reflected a big decline in imports because of the weak value of the U.S. dollar. There also were upward revisions to investment in nonresidential structures and to consumer spending on nondurables. There were downward revisions to private investment in inventories, exports, and consumer spending on services. Residential fixed investment plunged by 26%. The core PCE deflator, an inflation measure closely tracked by Federal Reserve policymakers, rose by 2.1%, only slightly above the 2% upper end of the central bank’s comfort zone (CNNMoney.com and Economy.com May 29) … * The job market steadied last week. First-time claims for unemployment insurance rose by just 4,000 during the week ending May 24 to 372,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, declined by 2,500 to 370,500. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, increased by 36,000 during the week ended May 17 to 3.104 million. The current economic downturn is resulting in fewer layoffs than in past downturns because company payrolls already were relatively lean when the slump began, noted Monody’s Economy.com (May 29). However, the continuing claims data show that unemployed workers are finding it increasingly hard to find new jobs … * General Motors announced Thursday that about 19,000 of its employees--one-fourth of its U.S. hourly workforce--have agreed to take the firm’s latest buyout and early-retirement offers. In February, the automaker offered buyouts to all of its 74,000 U.S. hourly workers. The latest employees to accept buyouts will leave the firm by July 1, making way for new hires that will earn less money. The company has said it may hire as many as 16,000 workers at half the old wage of $28 per hour. More than 34,000 workers left the firm during GM’s last round of buyouts in 2006 (Associated Press via Yahoo! News May 29) … * Global prices for food crops over the next decade will be as much as 80% higher than they averaged during the past decade, according to a joint report by the Organization for Economic Cooperation and Development and the United Nations Food and Agriculture Organization. Soaring oil prices, changes in diet, urbanization, population growth, extreme weather, rising biofuel production, and speculation all have sent food prices higher, said the report. The poorest countries--especially those that import most of their food--will be the most vulnerable to soaring prices. The report predicts that prices for beef and pork will jump 20%, while prices for wheat, maize and skim-milk powder will soar 40% to 60% (MarketWatch and Associated Press via CNNMoney.com May 29) … * Fixed-rate mortgages (FRMs) increased this week amid growing worries about inflation, Freddie Mac reported Thursday. The average 30-year FRM rose 10 basis points to 6.08%--the highest level in 11 weeks. “Mortgage rates drifted up this week over market concerns that the Federal Reserve Board may raise short-term rates later this year,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Indeed, market inflation expectations increased over the last few weeks and the federal funds futures market now has a 25 basis-point rate hike priced in by the end of this year,” added Nothaft. Short-term rates were little changed this week. The one-year, adjustable-rate mortgage (ARM) edged down 2 basis points to 5.22%, while the five-year ARM inched up one basis point to 5.62% (CNNMoney.com and MarketWatch May 29). For CUNA's Daily Financial Rates, use the link. … * The Federal Reserve on Thursday announced a new round of auctions to help ease the credit crunch. The central bank said it will conduct three auctions next month--on June 2, June 16, and June 30--each making $75 billion available in short-term cash loans. Banks can bid for the available funds. The Fed created the auction program in December (Associated Press via Yahoo! News May 29) …

Market News (05/28/2008)

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MADISON, Wis. (5/29/08)
* New orders for U.S. durable goods in April fell 0.5% overall--a smaller decline than the consensus forecast for a 1.5% decline--to a seasonally adjusted $214.4 billion, the Commerce Department announced Wednesday. The April figures follow March's 0.3% drop. April's decline was the third decrease in the first four months of the year (Economy.com and Bloomberg.com May 28). Excluding the more volatile transportations orders, bookings for goods rose 2.5%, the most since July, and following a 1.7% increase in March, the department said. Orders for core capital goods rose 4.2% in April-- after a 1% decline in March. It was the first increase of 2008 and the largest since a 5.2% increase last December. Increases were driven by new orders in electrical equipment, appliances and components and machinery. Unfilled orders increase 1% and inventories rose 0.5% … * Mortgage applications for the week ending May 23 decreased 4.6% o a seasonally adjusted 593.3 from 621.6 the previous week, said the Mortgage Bankers Association (MBA) Wednesday in a press release. On an unadjusted basis, the Market Composite Index applications declined 4.6% from the previous week and 7.5% from the same week a year ago. Refinancings dropped by 8.9%--to 2013.5 from 2210.5 the previous week. Purchases rose 0.1%--to 352.7 from the prior week's 352.5. The four-week moving average for the seasonally adjusted Market Index rose 1%--to 636.2 from 629.6. For the Purchase Index, the four-week moving average rose 0.9% to 366.2 from 363.1. For the Refinance Index, the four-week average increased 12%--to 2230 from 2202.9. Refinances accounted for 46.1% of the total mortgage applications and were down from 48.2% of the total for the previous week. Adjustable-rate mortgages' ARMs) share of the activity dropped to 9.3% of total applications from 10% the previous week. The average contract interest rate for 30-year, fixed-rate mortgages rose to 5.96% from 5.90%. The interest rate for 15-year, fixed rate mortgages rose to 5.49% compared with the previous week's 5.42% … * Chain store sales remained weak, with no change in sales volume for the week ending May 24, according to the International Council of Shopping Centers (ICSC). The figures follow three consecutive declines, as consumers hold off on shopping while struggling with their own finances (Economy.com May 28). Sales have increased once in the past six weeks. Year-over-year growth also remained weak, at 1.5%--the same as the previous week. Factors in the slow sales include soaring gasoline prices, unseasonably cool weather, and rising food costs. Federal tax rebates helped some. ICSC predicted 1% to 2% in same-store sales growth for May. That is the same as last week's projection; however, it is lower than the original forecast of about 2% …

News of the Competition (05/28/2008)

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MADISON, Wis. (5/29/08)
* Direct-mail offerings from financial services companies are being significantly cut back, according to a Mintel Comperemedia of Chicago survey released Tuesday. In the first quarter of 2008, the number of direct mailings fell by 10% compared with the same period last year, Mintel estimated. “With credit lines tapped and people struggling to make ends meet, both consumer spending and savings are down,” said Mintel Senior Analyst Chris Zagorski in a press release. “Banks, card issuers and lenders have to look at today’s consumers in a new light and find innovative ways to secure and maintain their business.” Among the report highlights: overall financial services direct-mail volume fell 13% to 4.2 billion pieces from 4.8 billion; credit card issuers reduced direct-mail volume the most, dropping 14% to 2.6 billion mailers from 3 billion; and three top credit card issuers--Bank of America, Chase and HSBC--reduced mailings by 15% between the first quarter of 2007 and the first quarter of 2008 (CreditCards.com May 27) … * American Express will again offer its card members an opportunity to purchase tickets for the 2008 U.S. Open tennis tournament prior to public sale. The offer is made in conjunction with the U.S. Tennis Association. Also, card members will receive one free ticket for every ticket purchased for specific U.S. Open sessions. Card members also can redeem Membership Rewards points for tickets (Centredaily.com May 27) … * The National Association of Realtors reached an antitrust settlement with the Justice Department Tuesday that gives discount Internet brokers and other real estate agents access to its listing of home sales. Filed in U.S District Court in Chicago, the settlement calls for a revision to a policy that allowed real estate agents to exclude their sales information from websites. The government claimed the practice hurt consumers who can save 1% of the price of a home by using a Web-based broker. The settlement prevents traditional brokers from deliberately impeding competition, said Deborah Garza, deputy assistant attorney general in the Justice Department’s antitrust division (Bloomberg.com May 27) … * Countrywide Financial Corp. President/Operating Chief David Sambol won’t be staying on after Bank of America Corp. acquires the company later this year. Sambol was going to head up BofA’s consumer mortgage operations after the planned $4 billion acquisition was finalized. However, due to opposition from U.S. Sen. Charles Schumer (D-New York), BofA said Sambol will retire after helping Barbara Desoer take over the combined companies’ consumer real-estate operations. Sambol has come under fire from those who questioned Countywide’s lending practices. Some, such as Schumer, have said the practices significantly contributed to the subprime mortgage crisis (The Wall Street Journal May 28) …

News of the Competition (05/27/2008)

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MADISON, Wis. (5/28/08)
* The biggest providers of home loan financing in the U.S.--Fannie Mae and Freddie Mac--indicated Friday they are experiencing their fastest investment growth since at least 2004. The government-sponsored enterprises (GSEs) stocked up on their purchases of securities backed by home loans, despite reports of billons of dollars in losses due to falling real estate prices and soaring delinquencies since June. However, lawmakers and regulators have told the GSEs to increase their mortgage investments in efforts to stabilize the U.S. housing market. In April, McLean, Va.-based Freddie Mac’s investments rose to a record $737.54 billion, based on a push from mortgage purchase activity. Washington-based Fannie Mae contracted to purchase and retain $30.66 billion worth of mortgages in April, up from $8.1 billion in March and the most since September 2004. Fannie’s total purchase commitments shot up to $45.85 billion from $31 billion (Reuters May 23) … * When a box of data storage tapes went missing in February, Bank of New York Mellon Corp. lost the Social Security numbers and other personal information of about 4.5 million customers, according to the Connecticut attorney general. “I am alarmed and deeply concerned by a recent and serious data breach at the Bank of New York Mellon, involving the loss of computer backup tapes,” Connecticut Attorney General Richard Blumenthal said in a statement issued Wednesday. The computer storage tapes contained sensitive information and were unencrypted, he added. The bank said there is no evidence that the data has been inappropriately accessed or used. This information is being disseminated to affected clients and shareowners, the bank said in a statement (Reuters May 21) … * The second-quarter profit estimates of Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley were cut by Bank of America Corp. (BofA) and analysts at Sanford C. Bernstein due to the risk of further asset writedowns. BofA’s Michael Hecht lowered his estimate for Lehman Brothers to a loss of 50 cents per share from a previous prediction of 76 cents in earnings; Morgan Stanley was reduced to 95 cents from $1.40; and Goldman Sachs was cut to $3.45 per share from $3.75. Because of the manner in which they’ve booked hard-to-value stakes for which market prices are scarce, the largest U.S. investment banks might be overstating their assets by about 20%, the BofA report said (Bloomberg.com May 27) … * Although eight of 12 Federal Home Loan banks saw first-quarter earnings increase, the rate of growth for advances slowed to just 4.3%. Since the credit crunch arrived in August, the advance business had been booming, and many financial institutions went to Home Loan banks as sources of cheap liquidity. In 2007, the Home Loan bank system’s advance business grew 36.6%. Some of the banks said in quarterly reports and interviews that the slowdown is an indication that credit crunch is ebbing. However, during the first quarter of 2008, advances at three banks declined and five others had single-digit growth. Advance growth remained strong at the Cincinnati, Dallas, Des Moines and Indianapolis banks (American Banker May 27) …

Market News (05/27/2008)

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MADISON, Wis. (5/28/08)
* American consumers' confidence in the economy fell more than expected during May--the fifth consecutive month the index has shown a drop, reported the Conference Board. The New York-based private research group reported the Consumer Confidence Index declined to 57.2 in May, down slightly from April's revised 62.8 reading. Economists had expected May's reading to be 60. The May index reading is at a 16-year low, said Lynn Franco, Conference Board Consumer Research Center director. Franco cited weakening business and job conditions plus a growing pessimism about the short-term future as factors. The index was 87.3 in January. May's reading is slightly more than half of its May 2007 reading of 108.5. The board's index of present conditions dropped to 74.4 in May from April's 81.9 reading. The expectations index for the next six months dropped to 45.7 from 50 in April. The projected inflation rate a year from now rose to a record 7.7% (The Wall Street Journal and Bloomberg.com May 27) … * Prices of single-family homes across the country dropped 14% during first quarter from first-quarter 2007, according to the Standard & Poor's/Case Shiller national home price index. Prices fell 6.7% since fourth-quarter 2007. The drop is the largest in the 20-year history of the index. Home prices in 10 major metropolitan areas in March fell 15% from March 2007 and 2.4% from February. In 20 major metro areas, prices dropped 14% from a year earlier and 2.2% from February. "There are very few silver linings that one can see in the data," said David Blitzer, chairman of S&P's index committee. A separate index released last week by the Office of Federal Housing Enterprise Oversight noted home prices fell an average of 1.7% during first quarter from the final three quarters of 2007--the largest decline in that index's 17-year history. OFHEO data excludes homes with jumbo mortgages (Economy.com, The New York Times and The Wall Street Journal May 27) … * Sales of new homes increased 3.3%--lower than forecasted--in April to 526,000 annualized units, said the Commerce Department Tuesday. Sales were 42% lower than the sales of April 2007 (The Wall Street Journal May 27). New home sales for March were revised to 509,000, a decline of 11%. Originally, the government said March sales dropped by 8.5% to 526,000. Economists had predicted April sales would be 533,000. The median price of a new home rose by 2.5% to $246,100 in April from $242,500 a year earlier. The average price increased by 3%-- to $321,000--from April 2007, when the average price was $311,700. The increase in prices may translate to more sales, because many buyers have been waiting for even lower prices. Inventories at the end of April were at 456,000 homes for sale, down from 467,000 in March. The ratio of new houses for sale to houses sold dropped to 10.6 in April from 11.1 in March (Economy.com and The Wall Street Journal May 27) … * The negative effects of the housing crisis are spilling over into the auto industry, analysts say. Because auto lenders and banks are tightening the spigots on their loan funds, hundreds of thousands of consumers are unable to obtain financing for their cars. Home equity loans are no longer available as an easy source of money for many prospective buyers. When lenders were less impacted by the credit crunch, one out of every nine auto deals involved home equity loans, analysts said. Now with auction lots full of repossessed cars and gas-guzzling trucks, used-car prices have fallen nearly 6%. Along with the deteriorating economy, these forces are putting even more pressure on the U.S. auto industry, facing what many believe is the worst year in perhaps more than a decade. In 2008, about 15 million vehicles are predicted to be sold, compared with 16.2 million last year, with sales dipping to the lowest level since 1995, according to marketing firm J.D. Power & Associates (The New York Times May 27) …

News of the Competition (05/23/2008)

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MADISON, Wis. (5/27/08)
* The housing slump has prompted a surge of class-action lawsuits against lenders. A total 448 lawsuits related to the subprime crisis were filed during the 15 months through March 2008, according to a report by Navigant Consulting. During the first quarter, 46% of the 170 cases filed were borrower class-action suits. That data compares with 559 lawsuits related to the savings and loan crisis during the 1980s and 1990s. “Each of the top 10 subprime mortgage lenders for 2006 was named in at least one borrower class action suit during 2007,” said the Navigant report. Targeted lenders include Wachovia Corp., Bear Stearns, Wells Fargo, Citigroup’s CitiMortgage unit, and Countrywide Financial, which has agreed to be acquired by Bank of America (Reuters via Yahoo! News May 23) … * Bank of America is facing a class-action suit filed on behalf of investors who purchased auction-rate securities from the company. The suit alleges that BofA misled investors about the safety of the securities and the auction market in which the securities are traded. The auctions that determine the rates for the securities failed, as the credit crunch intensified. The suit claims BofA continued to market the securities as liquid investments even after the company determined that it probably would withdraw its support for the auctions. The suit also alleges that the firm marketed the securities as cash alternatives even though they, in fact, are long-term securities with 30 year or longer maturity dates (Thomson Financial May 23) … * Moody’s Investors Service has lowered the senior unsecured debt rating of American International Group (AIG) and several of its subsidiaries “whose ratings have relied on material support from” AIG and those “with significant exposure to the U.S. residential-mortgage market.” The ratings agency also said the possibility of further downgrades remains. Moody’s noted that AIG has reported more than $18 billion in losses during the past two quarters. Ratings agency Fitch has affirmed its ratings on AIG, noting that it has raised $20 billion in new capital (The Wall Street Journal Online May 23) … * Both banks and investment firms reduced their borrowing from the Federal Reserve last week, according to daily averages. Banks averaged $13.5 billion in daily borrowing during the week ending May 21--down from $14.4 billion the previous week, the Fed reported Thursday. Investment banks averaged $14.2 billion in daily borrowing--down from $16.6 billion. The Fed also auctioned $46.1 billion in Treasury securities Thursday. The central bank’s ninth auction drew bids for less than the $75 billion available, suggesting that the credit crunch may be easing (Associated Press via CNNMoney.com May 23) … * Investigators at Societe Generale said they believe former futures trader Jerome Kerviel had help in covering up the huge trading positions that prompted a $7 billion loss at the firm. They said management lapses and a culture of risk taking were partly responsible for the firm’s failure to identify the positions. Investigators also said they found no signs of embezzlement by Kerviel, but they thought he wanted to boost his performance to obtain a larger bonus (Associated Press via Yahoo! News May 23) …

Hampel housing analysis in IU.S. News and World ReportI IBiz WeekI

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WASHINGTON (5/27/08)--Two prominent national news magazines Friday featured analysis of housing inventory data by Credit Union National Association Chief Economist Bill Hampel. Hampel's analysis appeared in U.S. News & World Report and BusinessWeek. Hampel discussed the 10.5% jump in the inventory of unsold homes during April. The number of homes available for sale totaled 4.55 million. "Looking ahead, the most important part of this month's report is the increase in unsold homes on the market, to a very high 11.2 months' supply," Hampel told U.S. News & World Report. "Further price reductions will be necessary to move the excess inventory." March inventories equated to a 10-month supply of homes. "The increase in inventories is a bad sign for the next several months," Hampel told BusinessWeek. "It means we're not out of the woods yet." Of particular concern is the Office of Federal Housing Enterprise Oversight's (OFHEO) home price index, which posted a 3.1% decline for the first quarter compared to a year ago--the deepest drop in the index's 17-year history. The OFHEO index tracks conforming loans of less than $417,000 that are backed or owned by Fannie Mae and Freddie Mac. It doesn't include subprime loans and jumbo mortgages. "If the OFHEO index is showing weakness--and it is the least likely to show a home price decline--then there is serious downward pressure on prices," Hampel told BusinessWeek.

Market News (05/23/2008)

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MADISON, Wis. (5/27/08)
* Sales of previously owned homes declined in April, while prices plunged and inventories surged. Existing-home sales fell 1% to an annual rate of 4.89 million units last month, the National Association of Realtors reported Friday. Sales were down 17.5% from a year earlier. The national median existing-home price declined 8% from a year earlier, to $202,300. Because the slowdown in sales from a year earlier is larger in high-cost areas, there is a downward distortion in the median with relatively more sales in low- and moderate-priced markets, noted the trade association. The nation’s inventory of unsold homes jumped 10.5% to 4.55 million in April. That represents an 11.2-month supply at the current sales pace, up from a 10-month supply in March (realtor.org May 23) … * Home-equity loans may experience “unprecedented” losses because of lax underwriting and falling home prices, said Comptroller of the Currency John Dugan. He noted that banks typically keep home-equity loans on their balance sheets, thus retaining credit risk. Dugan said the loss rate for home-equity loans rose to almost 1% in the fourth quarter, and to 1.73% in the first quarter. In dollar terms, losses totaled $2.4 billion in the fourth quarter and $273 million in the first quarter. He said examiners are urging banks to set aside more funds for home-equity losses. However, he noted that losses will be mitigated by the relatively small size of the market (Dow Jones Newswires May 23) … * Consumers have become more pessimistic about the housing market, according to the Reuters/ University of Michigan survey. In the latest poll, 28% of respondents said they expect their home’s value to decline during the next 12 months--up from 14% in a survey conducted a year ago. Only 17% expect the value of their home to increase--down from 35%. “Continuing declines in home prices have been a substantial factor underlying the slump in confidence and the shift among consumers toward more cautious spending plans,” said the report. Homeowners also are more downbeat about the long-term prospects for the housing market. The percentage of respondents who anticipate an increase in home prices over the next five years declined to 58% from 65% (Reuters via The New York Times May 23) … * United Auto Workers (UAW) members at American Axle and Manufacturing Holdings have approved a new contract with the auto-parts manufacturer that calls for big pay cuts, pension freezes, and other concessions. “Our members have had to make some tough decisions for themselves and their families and have done so with careful deliberation,” said UAW President Ron Gettelfinger. The vote ends a strike that lasted almost three months and slashed General Motor’s production of sport utility vehicles. GM lowered production at or temporarily shut down more than 30 plants, prompting thousands of layoffs. GM accounts for about 80% of the auto-parts maker’s business. American Axle plans to resume production this week (Associated Press via The New York Times May 23) … * Nine airlines are facing a credit downgrade because of soaring fuel prices. Standard & Poor’s Ratings Services last week placed the airlines on CreditWatch with negative implications, which means their credit rating probably will be lowered. The ratings agency took that action because of “potential severe financial damage” from record fuel prices, said S&P Senior Credit Analyst Philip A. Baggaley. The price of jet fuel has soared 82.5% over the past year and 10% in just the past month. The affected airlines are American, Continental, Delta, Southwest, United, US Airways, AirTran, Alaska, and JetBlue. Northwest was placed on CreditWatch negative in April after it announced an agreement to merge with Delta (The New York Times May 23) … * Airlines’ flight delays caused $1.6 billion worth of jet fuel to be wasted last year--draining $41 billion from the overall economy, according to a report by the Joint Economic Committee. Delays in the air are the most expensive for burning fuel. The report also found that travelers spent about 20% of their flying time on delays. Delays cost passengers and their employers about $12 billion in lost productivity and business opportunities, and in lost leisure pursuits. Industries such as lodging and food service lost about $10 billion due to delays. Six small airlines have filed for bankruptcy this year because of soaring fuel costs. Other carriers are boosting fees and cutting routes (The Wall Street Journal Online May 22) …

Schenk Consumer response rates could fuel rebound

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MADISON, Wis. (5/23/08)--The reaction of consumers to the federal tax rebates--along with a decline in interest rates--could help jump start an economic rebound, Mike Schenk, vice president of economics and statistics with the Credit Union National Association, told Investor’s Business Daily Wednesday. The Fed expects the economy to shrink in the first half of 2008, and then start to recover as interest rate cuts and the $168 billion government stimulus plan begins to take effect, the newspaper said. “If consumers respond aggressively to this fiscal stimulus, the combination of this and very low interest rates” could cause the economy to rebound strongly and fuel inflation, Schenk told the paper. However, with oil prices continuing to climb since President Bush signed the stimulus bill, Americans may be spending a good portion of their tax rebates putting fuel into their vehicles, the paper said.

Market News (05/22/2008)

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MADISON, Wis. (5/23/08)
* Home prices plunged 3.1% in the first quarter, from a year earlier--the largest first-quarter decline since the Office of Federal Housing Enterprise Oversight (Ofheo) began tracking the data 17 years ago. Prices dropped 1.7% from the fourth quarter--the biggest quarterly decline on record. Prices dropped in 43 states during the quarter. In California and Nevada, prices plunged more than 8%. “The large overhang of real estate inventory awaiting sale continues to force price declines in many areas, but particularly in places that had seen very sharp appreciation,” said Ofheo Chief Economist Patrick Lawler. The Ofheo index tracks mortgage loans of $417,000 or less that are purchased or backed by Fannie Mae and Freddie Mac. Other indexes that include larger loans and more-risky loans have posted even bigger declines (Associated Press via The New York Times May 22) … * Long-term mortgage rates edged down for a third consecutive week amid weak economic reports, Freddie Mac reported on Thursday. The average 30-year, fixed-rate mortgage (FRM) slipped 3 basis points to 5.98% this week, while the 15-year FRM fell 5 basis points to 5.55%. The one-year, adjustable-rate mortgage (ARM) rose 6 basis points to 5.24%. “Interest rates for fixed-rate mortgages fell slightly this week on news of both weaker industrial production in April and consumer sentiment falling in May to its lowest level since June 1980,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “ARM rates, however, rose slightly on market forecasts that the Federal Reserve may not pursue any more rate cuts over the near term,” added Nothaft. Mortgage rates are lower than a year ago. The 30-year FRM averaged 6.37% a year earlier, while the 15-year FRM stood at 6.06%, and the one-year ARM was at 5.64% (MarketWatch May 22). For CUNA's Daily Financial Rates, use the link. … * The Federal Reserve slashed its forecast for economic growth this year due to the housing slump and soaring energy prices, according to minutes of the Fed’s late April meeting released on Wednesday. The central bank also projected higher unemployment and inflation. On April 30, the Fed lowered the fed funds rate by 25 basis points, to 2%. “Most members viewed the decision to reduce interest rates at this meeting as a close call,” said the Fed report. The stock markets slumped following the Fed release, as investors bet the Fed won’t lower interest rates further. The central bank now expects the economy to expand just 0.3% to 1.2% this year--weaker than the 1.3% to 2% forecast it made in February. The unemployment rate is projected to increase to between 5.5% and 5.7%, up from its previous forecast of 5.3%. And the Fed expects consumer inflation of 3.1% to 3.4%--much higher than its previous forecast of 2.1% to 2.4% (Associated Press via Yahoo! News May 21) … * The credit crunch has hit the small-business sector, which historically has been a major engine of job growth. According to a Federal Reserve report last month, 52% of banks said they had tightened lending standards for small businesses--up from 30% in January. The Small Business Administration reports that it issued about 20% less 7(a) small-business loans in April, compared with a year earlier. Analysts say small firms probably are turning to credit cards, as banks tighten business-loan standards, adding to their expenses. “These entrepreneurs helped the economy recover by creating new jobs,” said Todd McCracken, president of the National Small Business Association. “My main concern is if they can’t gain access to credit, we’re going to have a slower recovery.” (Reuters via Yahoo! News May 22) … * The job market showed some signs of stabilizing last week. First-time claims for unemployment insurance edged down by 9,000 during the week ending May 17 to 365,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, rose by 5,000 to 372,250. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, remained unchanged during the week ended May 10, at 3.073 million. However, that level is the highest in four years, noted Bloomberg.com (May 22). Weekly claims have averaged 357,300 so far this year--up from an average of 321,000 in 2007 … * Consumers are too deep in debt to lead the economy out of recession, according to a report by Moody’s Economy.com and Equifax. During the first quarter, consumers had the lowest percentage of unspent cash since the autumn of 1991. Debt burdens are at record highs. Consumers put 14.3% of their disposable income towards debt during the first three months of this year--close to the record high of 14.5% set at year-end 2007 and far above the 12.3% rate in 2000. “Consumers just don’t have the cash right now that they had a few years ago,” said Scott Hoyt, senior director of consumer economics at Economy.com (CNNMoney.com May 22) …

News of the Competition (05/22/2008)

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MADISON, Wis. (5/23/08)
* Subprime mortgages bundled into securities that were rated between 2005 and 2007 continue to see rising defaults as home prices continue to decline, Standard & Poor’s reported Thursday. Delinquencies among 2005-vintage loans increased by 2% to 36.8% in April. Delinquencies among 2006-vintage loans rose 4% to 37.1%, while delinquencies among 2007 loans jumped 6% to 25.9%. The ratings agency said the 2007-issuance year is the worst in terms of cumulative losses. After 12 months, cumulative losses for 2007 represent 0.49% of the original aggregate size of securities--compared with 0.29% for 2006-vintage loans (Associated Press via msn.com May 22) … * Prosecutors on Thursday said seven more individuals, including former stock-lending supervisors at Morgan Stanley and Janney Montgomery Scott, have been indicted in an ongoing investigation into kickbacks involving stock lending on Wall Street. So far, 18 people have pleaded guilty to criminal charges for allegedly funneling millions of dollars in fake finder’s fees from brokerages in connection with stock-loan transactions. Traders use stock loan desks to access securities to purchase or borrow short. They sometimes use “finders” to help locate hard-to-borrow stocks. Prosecutors allege that the stock-loan traders at the big brokerages conspired with stock finders to funnel millions of dollars in fake fees to the finders or the finders’ relatives, in exchange for kickbacks. Other traders targeted in the investigation are employed at A.G. Edwards, Kellner Dileo, Oppenheimer, TD Waterhouse, Nomura Securities, and Van der Moolen Specialists (Dow Jones Newswires and forbes.com via msn.com May 22) … * A Florida pension fund has filed a lawsuit against American International Group (AIG) and four of its top officials for allegedly issuing false and misleading statements that inflated the price of the firm’s securities. The Jacksonville Police and Fire Pension Fund is seeking class-action status for its suit. The pension fund alleges that the insurer falsely assured investors that it was insulated from the credit crunch. The firm posted a $7.8 billion loss for the first quarter. Former AIG Chief Executive Maurice “Hank” Greenberg may face civil charges for his alleged role in inflating the firm’s financials (Reuters via The New York Times May 22) … * Sales by AmeriCredit Corp and British home lender HBOS PLC this week suggest a bottom to the credit crunch. AmeriCredit sold $750 million worth of bonds backed by subprime auto loans. And HBOS, the U.K.’s largest home lender, sold $1 billion in top-rated bonds backed by mortgage loans. The HBOS securitization attracted investors including global banks and insurance firms. The deal suggests that the Bank of England’s effort to boost liquidity my be succeeding. In April, the central bank launched a new securities-lending program designed to help banks sell mortgages (The Wall Street Journal Online May 21) … * Zurich-based UBS AG, which has been hit hard by its exposure to the U.S. mortgage market, announced Thursday that it plans to raise $15.5 billion in a rights issue at a 31% discount. The issue is fully underwritten by Goldman Sachs, JPMorgan Chase, Morgan Stanley, and BNP Paribas. The firm continues to lower its exposure to mortgage securities. On Wednesday, UBS finalized the sale of $15 billion in subprime and Alt-A mortgage assets to U.S.-based BlackRock Inc. (Reuters via The New York Times May 22) …

News of the Competition (05/21/2008)

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MADISON, Wis. (5/22/08)
* Wall Street firms continue to cut jobs amid the credit crunch. More than 7,600 employees of Bear Stearns, about 55% of its staff, will lose their jobs after the firm is acquired by JPMorgan Chase, said JPMorgan Chief Executive James Dimon on Tuesday. The acquisition, which the Federal Reserve supported to avert a bankruptcy, is expected to close around June 1. In other news, Lehman Brothers Holdings said Tuesday that it plans to cut about 1,300 jobs worldwide, or 5% of its staff. The firm already has eliminated about 5,000 jobs since the middle of last year. Sluggish economic growth and the credit crunch may cost New York City 59,400 jobs between now and mid-2009, according to the city’s Independent Budget Office. That loss would represent about one-fourth of private employers’ hiring since the 2001 recession (Reuters via The New York Times May 21) … * The banking sector will continue to slump well into next year, said analysts at Oppenheimer on Tuesday. “Our view is that the credit crisis will extend well into 2009 and perhaps beyond, and although the complexion will change, the net effect will be the same: three years of multibillion-dollar revenue reversals,” wrote the analysts. They noted that loans were underwritten with the assumption that home prices would accelerate indefinitely. Banks also depended too much on securitizations for liquidity. In other news, investment bank Keefe, Bruyette & Woods said Wednesday that the financial-services sector is no longer the largest sector in the Standard & Poor’s 500 index. At closing on Tuesday, financial-sector shares made up 16.19% of the benchmark index, while technology shares accounted for 16.26%. That’s the first time since mid-2001 that technology has been the largest sector (MarketWatch May 21) … * JPMorgan Chase announced last week that it no longer will offer subprime and home-equity loans through brokers. Many other lenders, including Bank of America and Washington Mutual, also have shut down their third-party channels. Brokers’ share of the market declined to about 40% in the second half of last year--from a peak of 68% in 2004, as many brokers closed, according to Wholesale Access Mortgage Research. The broker channel “will recover but maybe not for one or two more years,” said Wholesale Access Managing Director David Olson. He said the channel will recover because it has significantly lower costs (American Banker May 21) … * Impac Mortgage Holdings of Irvine, Calif., reported Tuesday that it lost $2.05 billion last year as mortgage delinquencies and defaults mounted. The firm set aside $1.39 billion for credit losses--up from $34.6 million a year earlier. Impac had specialized in Alt-A mortgage loans, which are between prime and subprime. In September, the firm exited almost all mortgage lending. Since the end of 2007, more than 100 mortgage lenders in the U.S. have halted lending, filed for bankruptcy, or sold themselves (Reuters via The New York Times May 21) …

Market News (05/21/2008)

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MADISON, Wis. (5/22/08)
* U.S. auto sales boomed during the first five years of the decade--spurred by cheap gasoline, a soaring stock market, and generous sales incentives. Sales peaked at 17.4 million in 2000 and stayed close to 17 million for the following five years. That compares with a pace of about 15 million throughout most of the 1990s. Sales began declining in 2006, however, and this year sales are expected to total about 15 million. In response, the industry has slashed tens of thousands of jobs. The shift has wide implications for the U.S. economy. The auto industry, which employs about 2.5 million workers, is the largest manufacturing sector in the nation. The industry also spends tens of billions of dollars annually on research and development. The economic downturn and soaring gasoline prices have intensified the industry’s problems this year. In response, domestic automakers are shutting down plants, and foreign manufacturers are scaling back expansion plans (The Wall Street Journal Online May 20) … * Oil prices soared to record highs again on Wednesday as investors continued to fret about supplies (Reuters via The New York Times May 21). July crude jumped by $2.90 to a record-high $132.08 a barrel on the New York Mercantile Exchange. The Energy Information Administration reported that domestic crude stocks declined by 5.4 million barrels to 320.4 million barrels last week. Crude-oil imports also plunged. Higher crude prices have fueled price surges in gasoline. Retail gas prices hit record highs for the 14th consecutive day on Wednesday, according to AAA (CNNMoney.com May 21). The nationwide average for regular unleaded increased to $3.807 a gallon, from $3.80 the previous day. Gas prices are up 9% from last month and 19% from a year ago. High gasoline prices have weakened auto sales and pinched consumers already strapped by rising food and medical-care costs … * Declining prices have made homes more affordable in many cities, according to the latest Wells Fargo/ National Association of Home Builders (NAHB) Housing Opportunity Index. During the first quarter, 53.8% of all new and existing homes sold nationwide were affordable to households earning the median income of $61,500. That’s up from 44% during the fourth quarter and the highest level since the second quarter of 2004. “Three factors combined to substantially increase housing affordability nationwide--mortgage rates returning to near the record low levels of a few years ago, a $2,500 rise in family income nationwide and lower house prices,” said NAHB President Dandy Dunn. However, critics note that rising affordability alone won’t boost home sales. “While affordability is an important factor that will contribute to recovery of housing markets eventually, improved affordability is unlikely to lift markets out on its own,” said National City Corp. Chief Economist Richard DeKaser. NAHB’s index assumes constant lending standards. However, lenders have substantially tightened standards this year (CNNMoney.com and nahb.org May 21) … * Home prices will continue to decline, said Fannie Mae President and Chief Executive Daniel Mudd in a speech to shareholders in New Orleans on Tuesday. The housing crisis is “about halfway through,” and prices could plunge as much as 25% before the market begins to recover, said Mudd. He noted that the housing market is in the middle of its most severe downturn since the Great Depression. However, Mudd said Fannie will be able to weather the downturn and expand its business. Federal regulators have eased capital requirements for Fannie and Freddie Mac, in a bid to help them bolster the housing market (Associated Press via CNNMoney.com May 21) … * Mortgage activity declined last week as rates rose, the Mortgage Bankers Association reported Wednesday (mbaa.org May 21). The trade group’s Market Composite Index fell 7.8% during the week ending May 16 to 621.6. The Refinance Index declined 8.7% to 2210.5, while the Purchase Index dropped 6.9% to 352.5. The average 30-year, fixed-rate mortgage (FRM) rose 8 basis points to 5.9%, and the one-year, adjustable-rate mortgage increased 11 basis points to 6.71%. Falling home prices, tight lending standards, and still-high mortgage rates continue to dampen mortgage activity, said Moody’s Economy.com (May 21). The research firm noted that the 30-year FRM is 70 basis points higher than it was at the bottom of the 2001-2003 economic downturn … * A 12% plunge in home prices in March, compared with a year earlier, along with a 16.1% jump in unemployment claims will weaken consumer spending in the months ahead, according to the Deloitte Research Leading Index of Consumer Spending. The index declined to 1.3% in March--from 1.51% a month earlier and the lowest level since 2001. “The current economic downturn is as significant as anything we have seen since the last recession,” said Deloitte Chief Economist Carl Steidtmann. Declining real (inflation-adjusted) wages and rising food and energy prices also will weigh on consumer spending, according to the index. A lower tax burden, due to slower income growth, is the only positive supporting consumer spending (/PRNewswire/ May 21) …

News of the Competition (05/20/2008)

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MADISON, Wis. (5/21/08)
* Goldman Sachs, Morgan Stanley, and UBS AG plan to link their private stock-trading operations to boost liquidity and compete more effectively with alternative exchanges. The arrangement will give each bank’s clients access to the others’ “dark liquidity pools,” the private interbank or intrabank platforms used to trade stocks away from the exchanges. Clients including hedge funds use the pools to buy and sell big blocks of stocks away from public scrutiny and without the chance of shifting the public price of a stock on an exchange. The arrangement will let the algorithmic trading orders received by each company be processed by the Goldman Sachs Sigma X, the Morgan Stanley MS Pool, and the UBS PIN Alternative Trading System--three of the biggest broker-dealer-operated dark liquidity pools in the nation (FT.com May 20) … * A huge loss in a Citigroup hedge fund has created big losses for at least three large U.S. banks. The affected banks sank more than $1.6 billion in the hedge fund, according to people familiar with the situation. Citigroup’s Falcon Strategies hedge fund, which the firm reportedly touted as a safe haven, has tumbled more than 75% in value. Falcon attracted large banks that invested in the fund as part of their bank-owned life insurance programs (BOLIs). In such programs, banks purchase policies for their employees, and then collect on them when employees die. Some critics say BOLIs are a tax shelter because the banks collect the money tax free. Wachovia Corp. of Charlotte, N.C., had more than $1 billion invested in Citigroup’s hedge fund, said people familiar with the matter. Cincinnati-based Fifth Third invested $612 million, according to a lawsuit filed by the bank against Citigroup last month (The Wall Street Journal Online May 20) … * Wells Fargo said Monday that its health savings account (HSA) deposits have increased 41% so far this year, to $264 million (American Banker May 20). Wells Fargo health benefit services, a Minneapolis-based unit of Wells Fargo Bank, has more than 150,000 HSA holders. In other news, Wells Fargo said Tuesday that it will no longer consolidate student loans (bizjournals.com via msn.com May 20). According to a report in St. Paul’s Pioneer Press, 83 lenders have exited one or more federal loan programs--including nine of the 10 largest consolidators … * The Federal Reserve’s 12th auction through its Term Auction Facility (TAF), held Monday, lent $75 billion in 28-day credits at a 2.10% stop-out rate. That’s higher than the 2% fed funds target rate and lower than the 2.25% discount rate. Monday’s auction had 75 bidders, requesting a total $84.44 billion--above the $75 billion that was accepted. The central bank has pledged to continue the TAFs for at least six months, and longer depending on financial conditions (Thomson Financial May 20) …

Market News (05/20/2008)

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MADISON, Wis. (5/21/08)
* The current level of interest rates should stimulate economic growth and moderate inflation, said Federal Reserve Vice Chairman Donald Kohn yesterday in a speech to the National Conference on Public Employee Retirement Systems in New Orleans. “Monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. But a large measure of uncertainty surrounds that judgment, and as the economy evolves, so will the appropriate stance of policy.” Kohn’s remarks suggest the Fed probably will keep interest rates on hold for now. Fed funds futures traders anticipate a 90% chance that the central bank will keep rates steady in June. Kohn was downbeat on the housing market. “The supply of existing homes on the market … remains quite high and is likely to be augmented in coming months by rising foreclosures. As a result, further cuts in construction appear to be in store.” (Bloomberg.com May 20) … * Wholesale inflation retreated last month, while core inflation rebounded. The Producer Price Index (PPI) rose just 0.2% in April--slowing from a 1.1% jump in March, the Labor Department reported Tuesday. Energy prices edged down 0.2% following a 2.9% surge, while food prices were unchanged after a 1.2% jump. However, within the food category, the price of rice surged by 17.4%--the largest increase since 1993 (Reuters via The New York Times May 20). Excluding food and energy, the core PPI rose 0.4% in April, following a 0.2% gain in March, as vehicle and furniture prices accelerated. The overall PPI was up 6.5% from a year earlier, compared with a 3% gain in the core PPI. Analysts expect food and energy prices to continue climbing in the months ahead, adding to overall inflation and making it tough for consumers to cope … * Food prices will jump 4.5% to 5.5% this year--near the 5.8% surge in food prices seen in 1990, according to the latest forecast by the U.S. Agriculture Department. The forecast is a half-percentage point higher than the agency’s April forecast. The department has boosted its forecast for food inflation during each of the past three months. Food prices increased 4% in 2007. The latest forecast means the average U.S. household will pay about $350 more for food this year. Agriculture Secretary Ed Schafer said rising food prices reflect soaring oil prices, which have boosted transportation and packaging costs, and foreign weather problems. He minimized the impact of the ethanol industry’s appetite for corn, which some analysts say is the main factor behind soaring food costs. Agriculture Department economists predict that the ethanol industry will consume about one-third of the 12.1 billion bushels of corn that farmers will produce this year (The Wall Street Journal Online May 20) … * Oil prices surged to a new high Tuesday amid supply concerns, soaring global demand, and a declining dollar. Light, sweet crude for June delivery traded as high as $129.58 on the New York Mercantile Exchange, before retreating slightly. Oil prices are about twice as high as they were a year ago. Adding to concerns, the Organization of Petroleum Exporting Countries said Monday that the oil cartel won’t boost output during the U.S. summer-driving season. Soaring oil prices have boosted gasoline prices in the U.S. “Gasoline at the pump is averaging 28.5% above last year’s pace,” said Stephen Schork of the Schork Report (Associated Press via The New York Times May 20) … * Home-improvement retailer Home Depot said Tuesday that its first-quarter profit plunged 66% to $356 million, reflecting continued weakness in the housing market and a one-time, after-tax charge of $341 million. Sales at stores open at least one year tumbled 6.5% in the first quarter. “The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country,” said CEO Frank Blake. Earlier this month, Home Depot announced plans to close 15 of its flagship stores. On Monday, home-improvement retailer Lowe’s Cos. also announced a sharp decline in profit for the first quarter. That firm also plans to reevaluate its expansion plans (Associated Press via The New York Times May 20) … * Luxury-home prices in California dropped during the first quarter, the second consecutive quarterly decline, as banks required higher credit scores and larger downpayments, according to a survey by First Republic Bank, a unit of Merrill Lynch. Los Angeles prices fell 2.2% to $2.35 million, while San Diego prices dropped 2.2% to $2.07 million. Prices in the San Francisco Bay Area declined 0.8% to $3 million. Mortgages have become harder to obtain after large banks reported more than $300 billion in writedowns. “It’s really a liquidity problem,” said Guy Cecala, publisher of Inside Mortgage Finance. “There’s no market for securitized jumbo loans. Investors are still not convinced that the mortgage market has cleaned up its act.” (Bloomberg.com May 19) …

Hampel outlines economic rebound in ITheStreet.comI

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WASHINGTON (5/20/08)--With inflation beginning to back off, and government rate cuts and tax rebates, the economy should begin to rebound soon, Bill Hampel, chief economist with the Credit Union National Association (CUNA), told TheStreet.com Saturday. This week, the government is expected to report that its producer price index, which measures wholesale prices, rose 0.3% in April--a decline from the 1.1% pace it set in March. “We’re expecting inflation to back off a bit from what it has been recently,” said Bill Hampel, CUNA chief economist. “Core inflation hasn’t absorbed high food and energy prices. Producer prices have been running at about 7% on an annual basis, and we should see that moderate over the next few months.” This development, along with other factors, will help the economy as whole, which Hampel said he believes will improve. “The economy will look much better than it has over the next three of four months, due to all the rate cuts from the Fed and tax rebates that are being sent out to consumers now,” Hampel said. “After a surge in the third quarter, though, consumers will be struggling again, and the economy will settle back into really sluggish, below-trend, weak growth. “The unemployment rate will continue to rise, and that’s not a world in which the Fed will be raising interest rates, so we’re forecasting that the fed funds rate will get down to 1.5% by the end of this year,” he concluded.

Market News (05/19/2008)

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MADISON, Wis. (5/20/08)
* Credit-card delinquencies in the U.S. continued to increase in the first quarter, according to Moody’s Investors Service. The delinquency rate averaged 4.54% during the first three months of the year--the highest level since the first quarter of 2004. The charge-off rate rose to 5.71%--from 4.49% in the same period last year. The charge-off rate “could well surpass the peaks of just over 7% that followed the recessions of 1991 and 2001,” said Moody’s. The firm predicts that the charge-off rate will peak sometime next year if the economy starts to recover during the second half of this year (Dow Jones Newswires and Thomson Financial May 19) … * The economy will weaken further and the unemployment rate will increase this year, according to the latest forecast by the National Association for Business Economics (NABE). In the latest poll, 56% of economists said the economy has started or will enter a recession this year--up from 45% in a February poll. They now predict 1.4% growth in 2008, down from 1.8%. Respondents expect the jobless rate to hit 5.3% this year and 5.6% in 2009. Home prices are expected to continue declining this year and next. However, respondents expect the credit crunch to begin easing during the second half of this year. They forecast that consumer prices will increase 3.7% this year, up from their previous 3% forecast, as food and gasoline prices continue to rise. Respondents expect the Federal Reserve to hold the fed funds rate steady at 2% for the remainder of the year (Associated Press via The New York Times May 19) … * The economy probably will remain weak--but not in recession, according to a Conference Board report. The Board’s index of leading economic indicators rose 0.1% in April following a 0.1% gain in March. The index had declined for the previous five months. “These data certainly reflect a weak economy, but not one in recession,” said Board Labor Economist Ken Goldstein. The small gains the past two months “could be a signal that the economy may not weaken further,” added Goldstein. Six of the 10 leading indicators were positives in April: Stock prices, interest-rate spread, building permits, unemployment claims, vendor performance, and consumer-goods orders. Consumer expectations, factory hours, and orders for capital goods were negatives, while the money supply was neutral (MarketWatch May 19). * In an effort to better address the credit crisis and obtain greater control over interest rates, Federal Reserve Chairman Ben Bernanke has asked Congress to push up the date when the central bank can pay interest on commercial-bank reserves. Congress had given the Fed authority to pay interest, beginning in 2011. “In order to prevent further delay in realizing the benefits of this legislation, we recommend that the date be changed to make the legislation effective immediately,” said Bernanke in a letter last week to House Speaker Nancy Pelosi. If banks earned interest on their commercial-bank reserves, they would no longer have an incentive to lend out excess reserves. That would give the Fed more control over the fed funds rate (The Wall Street Journal Online May 19) … * In its 12th auction, the Federal Reserve Monday offered banks $75 billion in 28-day credit. The minimum bid was 1.99%, and the minimum amount per bid was $5 million. In an effort to ease the credit crunch, the Fed launched its term auction facility (TAF) in December. Last week Fed Chairman Ben Bernanke said the central bank will increase the size of TAF auctions as market conditions require (Dow Jones Newswires May 19) … * Home-improvement retailer Lowe’s Cos. announced Monday that its profit plunged 18% to $607 million in the first quarter, compared with a year earlier, as the housing slump eroded demand and the economic downturn weakened consumers’ discretionary spending. About 80% of the firm’s stores are located in housing markets that are experiencing price declines. The company said it is controlling expenses and reevaluating its expansion plans. “The external pressures facing our industry will likely persist throughout 2008,” said CEO Robert Niblock. He said the company also is taking a “conservative” outlook on the Federal Reserve’s interest-rate reductions and on the federal government’s tax-rebate checks because of the rising costs consumers face (MarketWatch May 19) … * The average price of a gallon of gasoline surged another 17 cents over the past two weeks to $3.79 a gallon, according to the Lundberg Survey. “We are within 21 cents of $4 a gallon,” said survey publisher Trilby Lundberg. “There seems to be a very good chance that we will reach it,” added Lundberg. Two areas with the highest average prices already have crossed that threshold. The average price was $4.07 in Chicago and $4.01 in Long Island, New York. “That is the first time in history we have ever had two metro areas over $4 a gallon,” said Lundberg (CNNMoney.com May 19) …

News of the Competition (05/19/2008)

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MADISON, Wis. (5/20/08)
* The collapse of the auction-rate bond market is costing companies more than $1.8 billion in investment losses. Royal Bank of Canada told shareholders last week that the value of its bond investments declined by $185 million. Google has lost $10.8 million on the $259.6 million it invested in the bonds. The market collapsed in February, as investors became concerned about the creditworthiness of the bond insurers that back the debt. The dealers that supported the market for 20 years stopped acting as last-resort buyers. More than 300 firms are now struggling to value auction-rate bonds, estimates Barry Silbert, CEO of Restricted Stock Partners, operator of the biggest trading system for the securities (Bloomberg.com May 19) … * Most foreign banks haven’t taken the opportunity to purchase U.S. banks, even though the financial rout has made many domestic banks affordable. Only one of the 50 bank deals announced so far this year includes a foreign buyer, according to SNL Financial. That’s down from 10 last year and 13 in 2006. Many foreign banks have experienced large writedowns because of the U.S. mortgage crisis, leaving them less able and willing to expand. In addition, the importance of expanding into the U.S. has waned, as developing nations have become more important. Uncertain valuations for possible U.S. targets and the declining dollar are other reasons for the lack of appetite among foreign banks (American Banker May 19) … * Citigroup may slash almost one-fourth of the jobs in its U.K. consumer business, as it targets its Citi and Egg brands. Citigroup said Monday that it plans to halt new lending through its Future Mortgage and CitiFinancial units. In early May, the company said it planned to eliminate $400 billion in assets worldwide after posting huge losses because of the mortgage rout. In other news, a group led by Citigroup has offered $12.8 billion to lease the Pennsylvania Turnpike and manage its operation and maintenance, Gov. Ed Rendell announced Monday. He said the deal would raise $150 million annually to improve the state’s transportation. “Citigroup is probably as American an institution as you can find,” said Rendell (Reuters May 19) … * Morgan Stanley has eliminated 31 managing and executive directors worldwide from its workforce in response to the credit rout. The bank reported a 42% decline in first-quarter earnings, compared with a year earlier, as it took $2.3 billion in writedowns from exposure to mortgage assets. In other news, UBS AG has cut about 50 positions from its prime brokerage unit, according to sources (Dow Jones Newswires May 19) … * Wells Fargo may boost reserves because of the real-estate crunch, according to a media report. The San Francisco-based bank may be boosting reserves because of its holdings in the California real-estate market, which has been hit hard by the housing downturn, said Keefe, Bruyette & Woods Analyst Frederick Cannon in an interview with Bloomberg News. “Wells Fargo is heavily exposed in areas where we will see significant credit losses over the next two years, and reserve levels are simply too low for those kind of costs,” said Cannon (bizjournals.com via msn.com May 19) …

Hampel to IBloomberg TVI Consumers upset inflation wanes

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WASHINGTON (5/19/08)--Although U.S. consumers are upset with the current state of the U.S. economy, inflation is retreating and the economy should start to turn around soon, Bill Hampel, chief economist at the Credit Union National Association, told Bloomberg TV Friday. A recent national report indicated that consumer confidence has fallen to the lowest level in 28 years. Hampel was asked for his take on it during the “Bloomberg on the Economy” show.
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“It looks really terrible, but it isn’t as bad as it looks,” Hampel said. “It’s not as bad as 1980. The consumer is really upset now because of higher energy prices and food costs, and the loss of jobs over the past four months.” Although the U.S. is in a recession, the economy will start to come out of it, as the federal rebate checks come in, Hampel said. “There will be some saving going on at first, but I think most of the money [from the rebate checks] will be spent in the third quarter,” he explained. However, falling net worth in the real estate market will hurt the economy, especially next year, Hampel said. The good news is that inflation should not hurt consumers, Hampel said. “I think inflation maxed out a few months ago,” Hampel concluded. “It is becoming more well-behaved. Food and energy prices will stay up, but other prices won’t. I don’t think inflation will be a problem; it is backing down.”

Market News (05/16/2008)

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MADISON, Wis. (5/19/08)
* Housing starts rebounded last month, but the increase was concentrated in multi-family construction. Overall housing starts jumped 8.2% to a seasonally-adjusted annual rate of 1.032 million units in April, the Commerce Department reported Friday. The gain followed a 13.8% plunge a month earlier. Multifamily starts (five units or more) jumped 40.5% to 326,000, while single-family housing starts fell 1.7% to 692,000. Overall housing starts were down 30.6% from a year earlier. Building permits rose 4.9% in April, suggesting gains ahead. However, the National Association of Home Builders (NAHB) reported Thursday that its Housing Market Index edged down one point to 19 in May--within a point of the record low set in December (nahb.org May 15). “Despite the Federal Reserve’s concerted efforts to lower short-term interest rates, free up credit markets and shore up the national economy, the housing market has shown no evidence of improvement thus far,” said NAHB Chief Economist David Seiders. “In fact, conditions have continued to deteriorate in recent times.” … * Fannie Mae announced Friday that it is easing rules on mortgage downpayments in an effort to help the housing market recover. Starting June 1, Fannie will accept up to 97% loan-to-value ratios for conventional, conforming mortgages processed via its Desktop Underwriter automated underwriting system. The maximum loan-to-value ratio for loans written outside the system will be 95%. The new rules will replace the policy Fannie adopted in December that required higher downpayments in markets where home prices are falling “This new down payment policy reinforces our goal to support successful home-owning, not just home-buying, as we seek to bring liquidity to all communities and help the housing market recover,” said Marianne Sullivan, senior vice president in charge of single-family credit policy and risk management. “We are able to adopt this new, national down-payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model …will limit risk layering and assess each loan more precisely,” added Sullivan … * The average 30-year, fixed-rate mortgage (FRM) declined for a second consecutive week, Freddie Mac reported Thursday. The 30-year FRM edged down 4 basis points to 6.01% last week, while the 15-year FRM held steady at 5.60%. The one-year, adjustable-rate mortgage (ARM) dropped 11 basis points to 5.18%. “Recent remarks by Federal Reserve officials, which partly bolstered optimism that financial markets will recover later this year, helped mortgage rates ease up a little this week,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He also noted that economic news was positive, with retail sales excluding vehicles up 0.5% in April and consumer prices posting a smaller-than-expected gain. Mortgage rates remain lower than a year ago. The 30-year FRM averaged 6.21% a year earlier, while the 15-year FRM stood at 5.92%, and the one-year ARM was at 5.48% (Reuters via Yahoo! News May 15). For CUNA's Daily Financial Rates, use the link. … * Investment firms continued to borrow from the Federal Reserve’s emergency lending program at a steady pace last week, while banks increased their borrowing. Investment firms averaged $16.6 billion in daily borrowing, little changed from $16.5 billion the previous week, the Fed announced Thursday. In an effort to ease the credit crunch, the central bank agreed in March to temporarily allow investment banks to borrow from the Fed, a privilege previously given only to commercial banks. Last week, commercial banks’ daily borrowing averaged $14.4 billion--up from $11.7 billion the previous week. In another effort to ease the credit rout, the Fed auctioned $7.2 billion in Treasury securities to investment firms on Thursday. The auction drew bids less than the $25 billion made available, a possible signal that the credit crunch is easing (Associated Press via CNNMoney.com May 16) … * Consumer confidence plunged to a 28-year low in May amid declining home values, record-high energy prices, and a soft job market (Bloomberg.com May 16). The Reuters/ University of Michigan preliminary index of consumer sentiment fell to 59.5--from 62.6 in April and the lowest level since June 1980. The index of current conditions fell to 71.7--from 77 and the lowest level since December 1980. The index of consumer expectations dropped to 51.7 from 53.3. Respondents said they expect an inflation rate of 5.2% over the next 12 months. The low level of consumer confidence is becoming indicative of a severe recession, said Moody’s Economy.com (May 16). Soaring energy and food costs continue to weigh heavily on consumers … * Oil prices jumped more than $3 on Friday to almost $128 a barrel. Light, sweet crude for June delivery rose to $127.82 a barrel on the New York Mercantile Exchange before easing slightly. Saudi Arabia, the largest oil producer in the world, said it won’t boost oil output. Massive damage from the earthquakes in China also pushed oil prices up, as investors bet the country would need more fuel to rebuild. Gasoline prices increased further Friday, according to a report by AAA and the Oil Price Information Service. The average pump price rose almost a penny to $3.787 a gallon. Many analysts expect gasoline prices to hit $4 a gallon during the peak summer driving season (Associated Press via The New York Times May 16) …

News of the Competition (05/16/2008)

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MADISON, Wis. (5/19/08)
* Washington Mutual has reduced or suspended $6 billion in home equity lines of credit to its customers in order to lower its risk during the housing slump. Despite homeowners’ credit history, their lines of credit probably will be reduced if their home has depreciated. Home equity loans won’t be affected, said company Spokeswoman Darcy Donahoe-Wilmot. Seattle-based WaMu announced $1.1 billon in bad home-equity loans and lines of credit for the first quarter--up 35% from a year earlier. Other financial firms--including Bank of America and Countrywide Financial--have reduced their customers’ home-equity credit lines during the credit crunch (bizjournals.com via msn.com May 16) … * The Federal Deposit Insurance Corp. said Friday that is becoming increasingly concerned about banks that aggressively gathered brokered deposits to fund real-estate lending. “Broker deposits can be easy to get and they can fuel rapid growth with institutions that maybe shouldn’t be growing that fast,” said FDIC Chairman Sheila Bair. Bentonville, Ark-based ANB Financial, which aggressively sought brokered deposits, was shut down May 9 by the FDIC. The bank used its brokered deposits to fund real-estate loans that quickly went sour when the housing market slumped. It was the third bank failure this year. Bair also noted that it costs the FDIC more to shut down a bank with a high percentage of broker deposits because they have less franchise value (Dow Jones Newswires May 16) … * Barclays PLC, the U.K.’s third-largest bank by market capitalization, announced a profit for the first quarter despite $3.3 billion in writedowns on mortgages and other investments. The bank didn’t announce a capital injection, as have other rival banks including Royal Bank of Scotland and HBOS PLC. However, some analysts predict Barclays will begin raising capital during the third quarter. Credit losses at European banks total $158 billion, compared with $153 billion at U.S. banks, according to Joseph Quinlan, an analyst at Bank of America’s Investment Strategies Group. European banks have raised just 67% of that amount in new capital, compared with 88% at banks in the U.S. (The Wall Street Journal Online May 16) … * Joining a growing number of lenders that are raising capital during the housing slump, Flagstar Bancorp, one of the largest savings and loans in the Midwest, said Friday that it plans to raise $100 million by selling stock at a discount. The Troy, Mich.-based thrift reported a $10.6 million loss for the first quarter. Three months ago, Flagstar suspended its common stock dividend, citing a need to reserve cash as the housing market continues to deteriorate (Reuters via Yahoo! News May 16) … * Sanford, Fla.-based Federal Trust Corp, which lost $2.2 billion during the first quarter, must raise capital by July 15 or sell itself, according to a cease-and-desist order issued by the Office of Thrift Supervision (OTS). In anticipation of the OTS order, Federal Trust already announced plans to complete a common stock rights offering by midyear. Federal Trust’s ratio of total capital to risk-weighted assets was 9.77% in the first quarter, less than the 10% necessary to be considered well capitalized (American Banker May 16) …

Market News (05/15/2008)

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MADISON, Wis. (5/16/08)
* Financial institutions should continue raising capital to avoid deeper damage to the economy, said Federal Reserve Chairman Ben Bernanke. “I strongly urge financial institutions to remain proactive in their capital-raising efforts,” said Bernanke in a speech to a Fed banking conference in Chicago on Thursday. “Doing so not only helps the broader economy, but positions firms to take advantage of new profit opportunities as conditions in the financial markets and the economy improve.” He noted that sovereign wealth funds have contributed as much as one-third of the capital banks have raised. Banks and brokerages have raised around $244 billion in capital since July, following credit losses and writedowns of more than $333 billion. In his speech, Bernanke also said financial institutions need to improve their ability to detect and protect themselves against risks, and to prepare for liquidity disruptions. “Improvements in banks’ risk management will provide a more-stable financial system by making firms more resilient to shocks,” said Bernanke (Bloomberg.com and Associated Press via Yahoo! News May 15) … * The continued U.S. housing slump in the first quarter has prompted the United Nations to lower its forecast for global economic growth this year to 1.8%, from a 3.4% forecast in January. The global economy expanded by 3.8% in 2007. The U.N. also lowered its forecast for U.S. economic growth this year to negative 0.2%, from a positive 2% forecast in January. “The world economy is teetering on the brink of a severe global economic downturn,” said the U.N. “If a continuing fall in house and equity prices is blended with a severe credit contraction, the world economy could come to a virtual standstill. Additionally, the unfolding food crisis, which is not only a grave humanitarian issue but also a serious threat to social and political stability in some developing economies, endangers the achievement of the Millennium Development Goals by reversing some of the progress towards those goals made so far.” A major U.N. goal is to cut global poverty and hunger in half by 2015 (Bloomberg.com May 15) … * Industrial production plunged in April, reflecting declines in autos and other manufacturing industries, and in the mining sector. Industrial output fell 0.7% following a 0.2% increase in March, the Federal Reserve reported Thursday. Manufacturing production declined by 0.8%, reflecting an 8.2% plunge in the sale of vehicles and parts. Strikes and strike-related parts shortages resulted in production halts at many plants. Excluding vehicles and parts, manufacturing output fell by 0.4% last month. Mining output declined by 0.8%, while production at the nation’s utilities edged up 0.3%. Factories, mines, and utilities operated at 79.7% of capacity in April--down from 80.4% in March and the first time the rate dropped below 80% since October 2005 after Hurricane Katrina slammed into the Gulf Coast. The level is 1.3 percentage points below its 1972-2007 average. “We think the economy is in recession since the end of 2007, and it appears the problems are consistent throughout manufacturing,” said Gus Faucher, director of macroeconomics at Moody’s Economy.com, a West Chester, Pa-based research firm (Associated Press via The New York Times and CNNMoney.com May 15) … * More Americans applied for unemployment benefits last week, as the economy continued to weaken. First-time claims for jobless benefits increased by 6,000 during the week ending May 10 to 371,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, declined by 1,000 to 365,750. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, increased by 28,000 during the week ended May 3 to 3.06 million--suggesting that people are having a tough time finding new jobs after they’ve been laid off. * Consumers struggling with soaring food and energy prices will also face soaring medical-care costs this year, according to a study by Milliman Inc., a consulting and actuarial firm. Families with job-based health insurance will spend almost 11% more on medical expenses in 2008, as employers shift more costs onto employees and as pharmaceutical prices soar. The cost of pharmacy services is expected to surge 10.7% to $2,302 this year. “This is a trend we expect will continue for several years, as fewer high volume drug patents expire,” said Milliman principal and study co-author Gary Brace. “For many Americans, this rate of increase is exceeded only by fuel and certain food costs,” added Brace (Dow Jones Newswires May 15) … * CEO compensation at the nation’s largest corporations declined last year, reflecting tough business conditions at large financial firms, according to a study by consulting firm Mercer. CEOs of 50 large U.S. companies saw their direct compensation drop 15.8% from 2006. Median total direct compensation for the CEOs studied was almost $14 million last year. That total doesn’t include retirement benefits (Reuters via Yahoo! News May 15) …

News of the Competition (05/15/2008)

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MADISON, Wis. (5/16/08)
* U.S. prosecutors plan to serve Swiss powerhouse UBS AG with a broad subpoena for the names of wealthy Americans who may have used the bank’s services to avoid income taxes, say people involved in the case. On Tuesday, former UBS private banker Bradley Birkenfeld and Liechtenstein businessman Mario Staggl were indicted in Florida federal court for allegedly helping UBS clients hide their assets in Swiss and Liechtenstein accounts. Birkenfeld pleaded not guilty. Staggl, who is believed to be in Liechtenstein, has not responded to the indictment. In December, California real-estate developer Igor Olenicoff, a client of Birkenfeld and Staggl, pleaded guilty to filing a false 2002 tax return. He agreed to cooperate with investigators (The Wall Street Journal Online May 15) … * Directors and officers of mortgage-lender Countrywide Financial must face a lawsuit by shareholders that accuses them of insider trading and of failing to monitor the lending policies that prompted the firm’s collapse, according to a ruling by Judge Mariana R. Pfaelzer of the Federal District Court in Los Angeles. Rejecting the claims of executives and directors that they weren’t aware of the lax loan practices, Judge Pfaelzer said confidential witness testimony suggest “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.” The Arkansas Teacher Retirement System is a lead plaintiff in the suit. “We are pleased with the court’s ruling, as it enables the shareholders to move forward with our case and remedy this wrong,” said Christa Clark, chief legal counsel for the retirement system (The New York Times May 15) … * The nation’s largest financial institutions say online and mobile banking will be the top priorities for product development during the next two years, according to a survey by Aite Group. Those priorities were cited by 23 of the 80 biggest financial institutions polled. In addition, 65% of respondents said they will target expedited bill payment as a top priority, and 61% said they will make pre-approved, special offers to online customers a priority. Nick Holland, a senior analyst for Aite Group, said banks also are interested in the “Holy Grail” of mobile banking--the phone as a payment device. However, he said banks may have to wait at least three to five years for that capability (MarketWatch May 15) … * Bank of America and Wells Fargo on Thursday announced the formation of a joint venture to operate a single, combined automated clearinghouse (ACH) platform for the banks and their clients. Pariter Solutions will become the nation’s largest ACH payment processor. Operations are expected to begin late next year. Bank of America and Wells Fargo top the rankings in ACH payments, according to the Electronic Payments Association (NACHA). Bank of America is first for receiving payments, while Wells ranks second. Bank of America ranks second for originations, and Wells ranks third. Almost 14 billion ACH payments were made last year, according to NACHA (/PRNewswire-FirstCall/ May 15) …

News of the Competition (05/14/2008)

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MADISON, Wis. (5/15/08)
* Freddie Mac, the second-largest buyer and backer of mortgage loans in the nation, announced Wednesday that its loss widened to $151 million in the first quarter, as the housing slump deepened. That’s up from the $133 million loss the firm reported for its year-ago quarter. Freddie said it set aside $1.2 billion for loan losses as a result of rising mortgage delinquencies and declining home prices and sales. However, its shares rose after the first-quarter announcement because the loss was smaller than Wall Street expected and because investors anticipate that eased requirements by Freddie’s regulator will allow the firm to play a bigger role in the mortgage market. Freddie also announced that it plans to raise $5.5 billion in new capital and use it to help the housing market. Still, Freddie Mac Chief Executive Richard Syron said the company faces more tough times ahead, as the housing market remains weak. Freddie expects total losses from bad mortgages and foreclosed properties to hit $3.1 billion this year, or 0.16% of the total value of all mortgages the firm guarantees (Associated Press via The New York Times and MarketWatch May 14) … * Home-equity lines of credit (HELOCs) have become the latest hot spot for bond insurers, as many homeowners find themselves unable to make payments when their adjustable-rate mortgages reset and home prices decline. So far this year, Financial Security Assurance (FSA), the third-largest U.S. bond insurer, has paid $104.2 million in net claims on HELOCs. Second mortgages are another hot spot, because first mortgages receive the first claim on proceeds after a sale. Bond insurers MBIA Inc. and Ambac Financial Group, the two largest bond insurers, said in recent weeks that their losses on some second mortgages have increased sharply. Moody’s Investors Service this week increased its loss expectations for securities backed by subprime second mortgages to 17% for 2005-vintage subprime pools, to 42% for 2006 pools, and to 45% for 2007 pools (Dow Jones Newswires May 18) … * JPMorgan Chase may slash as many as 4,000 of its own employees worldwide as the firm prepares to absorb the workforce of Bear Stearns after that acquisition, at the same time that it deals with the financial-market rout, say people familiar with the matter. About 2,000 JPMorgan employees may lose their jobs because of the acquisition, while another 1,000 to 2,000 may lose their positions because of the slowdown in investment banking. Once the fifth-largest securities firm in the U.S., Bear Stearns was forced to agree to the takeover by JPMorgan on March 16. The deal is expected to close around June 1. Banks, brokerages, insurers and other financial-service firms in the U.S. have announced almost 50,000 layoffs so far this year, according to the outplacement firm Challenger, Gray & Christmas (Reuters via The New York Times, Bloomberg.com, and Dow Jones Newswires May 14) … * Discover Financial Services has received antitrust approval to acquire the Diners Club International card business from Citigroup, the Federal Trade Commission announced Tuesday. Discover has said that the $165 million deal would give its cards much wider acceptance internationally. Diners Club is the oldest credit-card brand in the world, accepted in 185 countries. Citigroup announced last week that it plans to sell about $500 billion of its noncore businesses and other assets, including mortgage-related securities, to raise cash (Associated Press and Reuters via Yahoo! News May 14) …

CPI posts modest gain food prices soar

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MADISON, Wis. (5/15/08)--Consumer prices posted a modest gain last month, even as food prices surged. The Consumer Price Index (CPI) rose 0.2% in April following a 0.3% increase in March, the Labor Department reported Wednesday.
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The index for energy was virtually unchanged following a 1.9% jump. The food index rose 0.9%--up sharply from a 0.2% advance and the largest gain in 18 years (CNNMoney.com May 14). Food costs were up 5.1% from April 2007. Excluding the volatile food and energy categories, the core CPI was up only 0.1% in April and 2.3% over the past year. That compares with a 3.9% year-over-year increase in the overall CPI (see chart). The increase in the core is only slightly above the Federal Reserve’s upper comfort zone of 2%. However, that’s little solace to consumers coping with soaring food costs.

Market News (05/14/2008)

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MADISON, Wis. (5/15/08)
* The government statistics on consumer inflation understate the true pain consumers face on a daily basis, say many analysts. Part of that disconnect is that nondurable goods, including food and gasoline, make up just 12% of the Consumer Price Index. Yet those two consumer nondurables make up a much larger percentage of many Americans’ budgets. More than half of respondents in a recent CNN/Opinion Research survey said inflation was the largest problem they face. Changes in the way some products such as food are tracked by the government have contributed to lower readings for the CPI, noted Bill Gross, manager of Pimco Total Return, the largest bond fund in the U.S. Gross said the CPI is a “con job” that intentionally understates the price pressures people face in order to keep Social Security and other government costs that are linked to the CPI low. He estimates that without those changes, the CPI would be at least 1 percentage point higher (CNNMoney.com May 14). * Foreclosure filings jumped to a record high in April, RealtyTrac Inc. reported on Wednesday. An estimated 243,353 households--or almost one in every 519 in the nation--received a foreclosure filing, including notices of default, auction sales, and bank repossessions--up 4% from March and 65% from a year earlier. An estimated 54,574 homes were fully repossessed by banks in April--up 145% from a year earlier. Local governments are losing out big on tax revenue from sales, with more homes being seized by banks, noted RealtyTrac Marketing Vice President Rich Sharga. He predicts that banks will seize about 60,000 properties a month through December, when about 1 million homes--or one-fourth of all homes for sale--may be bank-owned (CNNMoney.com and Bloomberg.com May 14) … * Cities in California and Florida have been especially hard hit by foreclosures, according to the RealtyTrac report. Cities in those two states accounted for nine of the top 10 metropolitan foreclosure rates in April. California had the second-highest foreclosure rate among states in the nation last month, at one in 204 households. The top spot was held by Nevada, at one in 146 households. Arizona came in third, at one in 224 households. Florida had the fourth-highest rate, at one in every 242 households. Foreclosures “contribute to already bloated inventories of homes for sale, and put downward pressure on home values,” noted RealtyTrac Chief Executive James Saccacio. The National Association of Realtors reported Tuesday that the median single-family home price tumbled 7.7% during the first quarter, compared with a year earlier, to $196,300--the largest year-over-year decline since the trade association began reporting the data in 1982 (CNNMoney.com and Bloomberg.com May 14) … * Mortgage activity increased again last week, as falling mortgage rates prompted a surge in refinancings, the Mortgage Bankers Association reported Wednesday (mbaa.org May 14). The trade group’s Market Composite Index rose 2.9% during the week ending May 9 to 674.4. The Refinance Index increased 6.5% to 2422.1, while the Purchase Index edged down 0.7% to 378.5. Refinancings made up 48.7% of overall applications in the latest week--up from 47.1% the previous week and 42% a year earlier. ARMs made up 8.3% of mortgage activity last week--up from 6.8% the previous week, but down from 17% a year earlier. The average 30-year, fixed-rate mortgage (FRM) fell 9 basis points to 5.82% last week, while the one-year, adjustable-rate mortgage (ARM) dropped 17 basis points to 6.6% … * The U.S. economy is in a recession, and the federal government’s tax-rebates will just temporarily stem a decline in consumer spending, said Merrill Lynch Economist David Rosenberg. “I still maintain the business cycle is bigger than the government,” said Rosenberg at a client conference in Singapore on Wednesday. He noted that consumer spending and confidence have declined, and job losses have mounted. Rosenberg predicts that home prices will plunge another 15% to 20% before they stabilize. He expects inflation to cool, as consumer spending weakens, and the Federal Reserve to lower rates further to deal with recession (Reuters via The New York Times May 14) …

News of the Competition (05/13/2008)

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MADISON, Wis. (5/14/08)
* Bank of America customers are feeling “significant economic pressure,” as falling home prices leave little home equity to borrow, said Liam McGee, president of global consumer and small business banking at the Charlotte, N.C.-based firm. He said losses in the bank’s home-equity portfolio “will be higher than 2.5%.” The bank also has seen a “recent sharp increase” in spending on necessities by its credit-card customers. McGee said BofA is targeting “mass affluent” consumers--those with $100,000 to $3 million to invest--to offset pressure from the credit crunch. That consumer segment accounts for 23% of the bank’s total households. McGee said the economy probably will shrink during the second quarter (The Wall Street Journal Online and Bloomberg.com May 13) … * Credit-card profits (after tax) for Visa Inc. and MasterCard Inc. issuers totaled $18.08 billion in 2007--down 1.6% from the previous year--as financial firms boosted their loan-loss provisions amid rising chargeoffs, according to a report by Cards&Payments. Profits represented 2.79% of average outstandings--down from 2.97%. Penalty-fee revenue surged 17% to $7.54 billion this year, as issuers boosted late fees and the percentage of late accounts assessed fees increased. Issuers are still facing challenges from the housing slump and economic slowdown this year, said Jeffrey Green, editor-in-chief of the publication. “Their card programs are still making money, but their charge-off rates are escalating. And this is causing issuers to set aside more loan-loss reserves to handle those losses.” (MarketWire via Yahoo! Finance May 13) … * IndyMac Bancorp, which thrived during the housing boom by offering low- and no-documentation mortgage loans, posted an $184.2 million loss for the first quarter. The firm said it may fall below the minimum capital level needed to be classified as “well capitalized” and is considering measures to raise capital. After the credit crunch hit, IndyMac shifted its focus to loans that can be sold to Fannie Mae, Freddie Mac and the FHA. Its loan production plunged to $9.71 billion in the first quarter, from $25.93 billion a year earlier. Analysts say IndyMac’s problems could reveal whether there’s still a place in the mortgage market for pure-play mortgage lenders that aren’t part of a big bank (The Wall Street Journal Online May 13) … * JPMorgan Chase said Monday that the Securities and Exchange Commission (SEC) may bring civil charges against the firm related to the bidding of instruments tied to municipal bonds (Associated Press via Yahoo! News May 13). In a regulatory filing, the bank said the SEC’s regional office in Philadelphia sent it a Wells Notice. The agency alleges that its securities unit violated federal securities laws. In other news, Wachovia Securities said it has received subpoenas and inquiries from the SEC and regulators in several states requesting information on auction-rate securities (bizjournals.com via msn.com May 13). Regulators have requested data from the Charlotte, N.C.-based firm concerning the underwriting, sale and subsequent auctions of municipal auction-rate securities. In recent months, the auctions that set the rates for most auction-rate securities have failed, prompting a loss of liquidity for the securities …

Market News (05/13/2008)

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MADISON, Wis. (5/14/08)
* The median single-family home price tumbled 7.7% during the first quarter, compared with a year earlier, to $196,300--the largest year-over-year decline since the National Association of Realtors (NAR) started reporting the data in 1982. Liquidity problems in high-priced housing markets skewed the statistics, noted NAR Chief Economist Lawrence Yun. “These are highly unusual results because there were very few jumbo loan originations in the latest quarter, so sales are much slower in high-cost areas, and at the same, time foreclosures related to subprime mortgages rose,” said Yun. Median home prices declined in two-thirds of the 149 metropolitan areas covered by the trade association’s survey. Just 48 metro areas saw price gains, while one reported no change. Nationwide, home sales fell by 22.2% in the first quarter, compared with a year earlier, with 46 states reporting declines (CNNMoney.com and Associated Press via Yahoo! News May 13) … * The financial markets are calming as a result of the Federal Reserve’s steps to ease the credit crunch, but the situation still is “far from normal,” said Fed Chairman Ben Bernanke. The central bank’s decision to let investment firms borrow directly from the Fed “seems to have bolstered confidence,” said Bernanke in a Tuesday speech to a financial markets conference sponsored by the Federal Reserve Bank of Atlanta. He noted that credit spreads have narrowed. However, Bernanke said Fed policymakers stand ready to further increase the size of loans in its term auction facility program. And he said financial firms eventually will have to raise new capital and improve their risk-management policies to address the source of financial strains (Associated Press via CNNMoney.com and The Wall Street Journal Online May 13) ... * Slumping auto sales drove overall retail sales down in April. Retail sales declined 0.2%, following a 0.2% gain the previous month, the Commerce Department reported Tuesday. Sales of motor vehicles and parts tumbled 2.8%. Excluding autos, retail sales increased 0.5%. Sales at gasoline stations declined, despite rising prices, probably because consumers cut back consumption. However, food prices boosted sales at grocery stores and restaurants. Compared with the same month last year, sales growth was led by gasoline stations, grocery stores, warehouse clubs, and restaurants. Tax-rebate checks could help lift spending in May, said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com. However, he added that the real measure of consumer spending will be how much of the rebate money is spent on food and energy (Economy.com and CNNMoney.com May 13) … * Middle-aged and older Americans are being hit especially hard by the economic slump, according to an AARP survey released Tuesday. One in 10 baby boomers said they have to borrow money for everyday living expenses--asking help from family, friends, or charities. One-third said they have stopped putting money into their retirement accounts, while 25% said they are prematurely taking money out of their retirement plans and other investments, and 27% said they have postponed plans to retire due to the economic downturn. In addition, 14% said they have cut back on their medications, and more than 25% said they are having problems paying their mortgage or rent. The current economic slump is forcing millions of people to make tough decisions about their immediate survival and their long-term financial security, said AARP Chief Operating Officer Tom Nelson. Taking money out of your retirement fund means your money isn’t allowed to grow, noted Nelson. Even worse, shortchanging your health care now can lead to higher health-care costs in the future (/PRNewswire-USNewsire/ and Associated Press via Yahoo! News May 13) … * Corporate-tax revenues are declining as financial-market turmoil and the housing slump continue to slow the economy. Corporate income-tax revenue for the first seven months of the fiscal year was $171.1 billion--down 14.7% from a year earlier, the Treasury Department reported Monday. Government outlays jumped 7.3% to $1.7 trillion, while the federal deficit surged 88% to $152 billion. “The budget picture is growing darker and is set to get much darker in the next few months, as the impact of the tax rebates hit the government’s bottom line,” said Moody’s Economy.com Chief Economist Mark Zandi. The Congressional Budget Office forecasts that the federal deficit for the entire fiscal year will top $400 billion (The Wall Street Journal Online May 13) …

News of the Competition (05/12/2008)

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MADISON, Wis. (5/13/08)
* One of the largest U.S. providers of subprime mortgages--before regulators ordered it to stop issuing loans--said Friday it might file for bankruptcy protection. Fremont General Corp., a Brea, Calif.-based company made its intentions known one day after announcing its plans to sell some mortgage servicing rights to Litton Loan Servicing LP--an affiliate of Goldman Sachs Group Inc. In April, Fremont agreed to sell branches and deposits to CapitalSource Inc. The sales cover nearly all of the assets of its Fremont Investment & Loan thrift unit, the company said. Fremont General said--barring a viable transaction for its remaining assets--it expects to file for Chapter 11 bankruptcy protection because it cannot comply with rules for obtaining shareholder approval of the CapitalSource transaction. The transaction could then be approved per U.S. bankruptcy laws Fremont said. The company plans to complete an orderly liquidation of Fremont Investment & Loan if asset sales to CapitalSource and Litton take place, Fremont said. (Reuters May 9) ... * The Office of Thrift Supervision (OTS) has ended the priority regulatory requirement Friday that H&R Block maintain 3% adjusted tangible capital at the parent-company level at all times, the company said in a press release. The decision reflects the closing of the sale on April 30 of the mortgage servicing business of H&R Block’s Option One subsidiary and the deleveraging of H&R Block, the company said. The “3% Rule” applied to adjusted tangible capital levels to be maintained by H&R Block. The 3% Rule rescinded Friday was separate from the capital requirements applied to H&R Block Bank, which is not affected by the action (BusinessWire May 9) … * The Australian Reserve Bank has made known its concerns regarding plans by auction behemoth eBay to restrict payment mechanisms on its website by initiating new arrangements that would confine transactions to cash on delivery or through PayPal. Owned by e-Bay, PayPal permits customers to nominate their credit card, debit card or bank account for purchases. PayPal customers are charged between 1.1% and 2.4% per transaction. By using the PayPal-only plan, e-Bay said it wants to reduce disputes and restore trust in the marketplace. eBay said that PayPal allows it to stop fraud more efficiently than with outside payment services, because eBay and PayPal have the capability to share information on each transaction. However, the Australian Bankers Association said in a filing with regulators Thursday that the move will restrict competition, innovation and new entry, resulting in PayPal increasing fees and charges to e-Bay users (Australian IT and Associated Press May 10) … * In the aftermath of speculation of a cash shortage pushing rival Bear Stearns Cos. to the precipice of bankruptcy, Lehman Brothers Holdings Inc. bolstered its pool of cash and liquid assets to $36 billion. The fourth-largest U.S securities firm increased its liquidity from $30 billion at the end of the first quarter, said Erin Callan, Lehman chief financial officer, at a Monday banking conference in New York. The company also obtained new clients and has no plans to exit any of its businesses, Callan added (Bloomberg.com May 12) … * HSBC Holdings Plc said its first-quarter profit increased because it spent less on bad loans in the U.S. Europe’s biggest bank by market value put aside less than the originally estimated $3.2 billion to absorb the loan loss. There has been a lull in U.S. delinquencies, even as the economy has slipped into recession, said Michael Geoghegan, HSBC CEO. The outlook for the rest of 2008 “remains unusually difficult to foresee in the current environment,” the company said in a statement. To cope with declining earnings in the U.S., Geoghegan cut 2,000 jobs in the first quarter (Bloomberg.com May 12) ….

Growing card balances will hurt economy Hampel tells ICNNI

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NEW YORK (5/12/08)--As more cash-strapped consumers pay for their living expenses on credit cards, their growing card balances could hurt the economy, Bill Hampel, chief economist at the Credit Union National Association, told CNNMoney.com Friday. Americans’ credit card debt spiked 6.7% in the first quarter of 2008 to $957.2 billion, the Federal Reserve reported Wednesday. Because the economy is dependent on consumer spending, growing card balances and delinquencies are a drag on the U.S. economic condition, Hampel explained. “A lot of people will quit going out to dinner if they see their balances rise,’ Hampel told CNNMoney. “This will hurt the economy.”

Market News (05/09/2008)

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MADISON, Wis. (5/12/08)
* The number of companies defaulting on their junk-rated debt and filing for bankruptcy in North America already is running at the quickest pace since 2003, as the economic downturn and credit crunch continues, according to a report by Standard & Poor’s Ratings Service. So far in 2008, credit defaults have hit 28 entities, affecting $18.4 billion worth of debt. That already tops last year’s 22 defaults, affecting $8.1 billion worth of debt. Of the 28 defaults so far this year, 27 are from the U.S. and one is from Canada. “As economic conditions deteriorated … and volatility in the financial markets protracted, corporate casualties began to emerge at a rate unseen in years,” said Diane Vazza, head of the ratings agency’s Global Fixed Income Research Group. She predicted that high default rates will continue through the remainder of this year and in 2009 (FT.com and Thomson Financial via Yahoo! News May 8) … * The nation’s trade deficit narrowed in March, as the economic downturn prompted softer domestic demand for foreign goods, and the weak dollar made purchases more costly. The trade deficit totaled $58.2 billion--down from a revised $61.7 billion in February, the Commerce Department reported Friday. U.S. imported goods and services declined 2.9% to $206.7 billion, the largest monthly decline since December 2001. Imports would have declined even more except for rising oil prices. U.S. exports fell 1.7% to $148.5 billion, the first decline since April 2007. However, analysts said the decline reflected a temporary pause in airplane exports. U.S. exports are benefiting from the weak dollar and stronger overseas economies. The nation’s trade gap with China, its largest, narrowed in March--by 12.4% to $16.1 billion. China accounted for almost 28% of the nation’s trade deficit (CNNMoney.com May 9) … * Rising food and energy prices worldwide mostly reflect fundamental market conditions, not an investment bubble, according to the latest survey of economists by The Wall Street Journal (May 9). Only 11% of respondents cited a potential bubble driven by speculation. On average, the economists predict that the price of crude oil will decline to about $105 by the end of June, and to about $93 by year end. Still, gasoline prices are forecast to remain high--at an average $3.45 a gallon during the next 12 months. Economists forecast economic growth of less than 2% until the second quarter of 2009. The target for the fed funds rate is expected to remain at 2% for the remainder of this year … * Oil jumped to more than $126 a barrel on Friday, and increased almost $10 last week. Investors are concerned about a possible conflict between Venezuela and the U.S. that could reduce exports from the South American nation. The Wall Street Journal reported that possible closer ties between Venezuelan President Hugo Chavez and rebels trying to overthrow the Columbian government could lead to sanctions against Venezuela. Light, sweet crude for June delivery jumped to a new record-high of $126.20 in morning trading on the New York Mercantile Exchange before retreating. Gasoline prices rose to an average $3.67 a gallon. Analysts say the weak dollar and growing demand from developing countries also are keeping energy prices high (Associated Press via The New York Times May 9) … * Commercial banks held basically steady in their use of the Federal Reserve’s discount window last week, while investment banks reduced their borrowing. Lending via the primary credit facility for commercial banks as of May 7 totaled $11.49 billion--down slightly from $11.96 billion the previous week, the Fed reported Thursday. Lending via the separate primary-dealer credit facility for investment banks was $16.26 billion--down from $17.78 billion. The reduction suggests that the credit crunch may be easing. Total borrowing at the discount window, including primary dealers and depository institutions, stood at $27.79 billion as of May 7--down $2 billion from the previous week (The Wall Street Journal Online May 9) … * The Federal Reserve will work with NeighborWorks America, an affordable housing group, to help stabilize neighborhoods with high foreclosure rates, said Fed Governor Randall Kroszner last week. The partnership’s goal is to teach the community group’s local affiliates and other community organizations how to purchase, rehabilitate, and manage foreclosed homes. Kroszner said the Fed will create training resources and strategies for the sale and productive use of foreclosed homes in specific markets. Lenders initiated about 1.5 million foreclosures last year--up 53% from 2006. Kroszner said foreclosures rates rose even higher during the first quarter of this year (Reuters via Yahoo! News May 8) …

News of the Competition (05/09/2008)

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MADISON, Wis. (5/12/08)
* European banks continued to tighten credit standards in the first quarter, the European Central Bank reported Friday (Dow Jones Newswires May 9). About 50% tightened credit standards for large firms. Banks also reported a net tightening of standards for mortgage loans and other consumer credit. The U.S. Federal Reserve last week also reported tighter standards for consumer and business loans. In that poll, 55.4% of banks reported tighter conditions for commercial and industrial loans to large and mid-sized companies, while 60% reported tighter standards for prime mortgage loans, 80% said they tightened standards on subprime mortgage loans, and 75% reported tightening standards for nontraditional mortgage loans … * Zurich-based USB AG has agreed to return about $35 million to Massachusetts cities and towns that purchased investments for short-term cash needs but then couldn’t sell the securities during the credit rout. In February, the state began investigating whether the Swiss banking giant misled cities about whether auction-rate securities were allowable under state law. Auction-rate securities are long-term bonds that were treated as short term because investors could sell them at frequent auctions. Those auctions have failed during the credit crunch. The Swiss bank’s U.S. units have agreed to purchase back the principal of the securities at par value (The Wall Street Journal Online May 9) … * American International Group (AIG), the world’s largest insurer, announced Thursday that it lost $7.81 billion in the first quarter--its biggest loss on record--after writing down assets linked to subprime mortgages. The loss followed a $5.3 billion loss in the fourth quarter, which also was driven by writedowns. AIG said it planned to raise $12.5 billion in capital to replenish its balance sheet. Included in the first-quarter loss was a $9.11 billion charge for declines in the market value of credit derivatives, which the firm used to insure subprime mortgage bonds against default (Reuters via washingtonpost.com May 9) … * Citigroup announced Friday that it plans to shed about $500 billion in assets and boost revenue by 9% over the next several years, as it tries to recover from huge writedowns linked to the mortgage and credit markets. The bank has written down about $38 billion worth of assets tied to bad debt and has cut 13,200 employees since last summer. Citigroup also has announced plans to cut its residential mortgage assets by $45 billion during the next year. Citigroup could need to write down another $15 billion, according to Deutsche Bank Analyst Mike Mayo. Because the company has $63 billion in exposure to home-equity loans, $150 billion to mortgage loans, $21 billion to auto loans, and other exposure to consumer loans, Mayo estimates the firm will have to boost its reserves by another $5 billion (Associated Press via Yahoo! News May 9) … * Philadelphia-based Sovereign Bancorp, the nation’s second-largest savings and loan, plans to raise about $1 billion in an equity offering as it copes with rising credit losses, said a person close to the matter. The firm is trying to decide how much Banco Santander will participate in the offering. Banco Santander has a 25% stake in the thrift. Sovereign reported a 43% drop in profit for the first quarter. Other financial institutions, including Citigroup and Washington Mutual, also have raised capital this year, as the credit crunch continues (Reuters via The New York Times May 9) …

Market News (05/08/2008)

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MADISON, Wis. (5/9/08)
* Consumers are relying more on their credit cards as the job market weakens, food and energy prices rise, and the housing slump makes home-equity borrowing difficult. Consumer credit, which excludes mortgages and home-equity loans, increased at an annual rate of 7.2% in March--up sharply from a 3.1% pace the previous month, the Federal Reserve reported Wednesday. Revolving credit, which includes credit cards, surged at a 7.9% pace following a 5% gain. Nonrevolving credit, which includes auto, vacation, and boat loans, also increased at a strong pace last month. Borrowing in that category surged at a 6.8% pace after a 2% gain. While good news for spending, sustained growth in consumer credit raises concerns about credit quality, said Moody’s Economy.com (May 8). Household financial obligations already are almost at a near-record high, and this eventually will prompt a slowdown in consumer-credit growth and spending, along with higher savings … * Consumer spending rebounded in April, but the gain largely reflected calendar differences, warmer weather, and high gasoline and food prices. Chain store sales jumped 3.6% during the month, compared with a year earlier, according to a report by the International Council of Shopping Centers (ICSC). However, much of the growth was taken from March due to weather and calendar effects. Chain store sales were up only 0.5% in March. Sales were up a modest 1.5% for the two months combined--the weakest gain for those two months since 2001. And growth was concentrated at retailers selling gasoline, food, and/or pharmaceuticals--goods with high price inflation. The ICSC projects sales growth of about 2% in May, as consumers begin to spend their tax-rebate checks (Economy.com May 8) … * Cash-strapped consumers faced another jump in energy prices Thursday. Gasoline prices rose 2.7 cents overnight to a new record $3.645 a gallon, according to AAA and the Oil Price Information Service. Light, sweet crude for June delivery declined 12 cents to $123.41 a barrel on the New York Mercantile Exchange yesterday. With oil prices probably headed higher, however, analysts say gas prices could soon hit $4 a gallon (Associated Press via The New York Times May 8) … * Jobless claims remained at an elevated level last week. First-time claims for unemployment insurance declined by 18,000 during the week ending May 3 to 365,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, edged up by 2,500 to 367,000. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, declined by 10,000 during the week ended April 26 to 3.02 million. Initial unemployment claims have averaged 353,300 so far this year--compared with a 321,000 average for all of last year, noted Bloomberg.com (May 8). Financial-services firms have been especially hard hit during the housing slump and economic downturn. The world’s largest banks and securities firms have cut 65,000 jobs during the past 10 months, according to Bloomberg statistics … * Women are continuing to gain jobs during the economic slump, even as job losses among men keep mounting. From November though April, women aged 20 years and older gained almost 300,000 jobs, according to the Labor Department. However, men lost almost 700,000 jobs during the period. Men’s jobs are concentrated in the manufacturing and construction sectors--which are seeing steep employment losses. The manufacturing sector is about 70% male, while the construction sector is about 88% male. At the same time, the education and health-services sectors, which continue to post strong employment growth, are 77% female. Still, men typically continue to earn more than women. Median weekly earnings for men rose 4.6% from the first quarter of last year through the first quarter of this year--compared with a 3.1% gain for women. And 75% of the people who earned more than $100,000 in 2007 were men (BusinessWeek Online via Yahoo! News May 8) … * Mortgage rates steadied this week amid stronger-than-expected economic reports, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) edged down 1 basis point to 6.05%, while the 15-year FRM edged up 1 basis point to 5.60%. The one-year, adjustable-rate mortgage was unchanged at 5.29%. “Despite a weak housing market, mortgage rates remained almost unchanged this week, based on better-than-expected economic data releases that indicated the economy still has some staying power,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. The Labor Department reported Friday that the economy lost 20,000 jobs in April, lower than the 75,000 loss many economists forecast. Reports on the manufacturing and service sectors also were stronger than expected. However, Nothaft noted that, despite signs of economic improvement, homeownership has declined. The national homeownership rate held steady at 67.8% in the first quarter--down from its recent peak of 69% in the third quarter of 2007 and the lowest since the second quarter of 2002, according to Census Bureau data (MarketWatch and CNNMoney.com May 8). For CUNA's Daily Financial Rates, use the link. …

News of the Competition (05/08/2008)

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MADISON, Wis. (5/9/08)
* State Street Corp., the nation’s largest money manager for institutions, may have to pay more than 12 times the $625 million it has set aside for damages from lawsuits related to losses from the subprime-mortgage investments made for pension funds. Prudential Financial is suing State Street on behalf of more than 200 retirement plans. The insurer alleges that the firm inappropriately invested funds in risky securities. Three other firms have filed similar suits. The suits claim State Street breached its fiduciary duty by investing pension funds in risky securities instead of investing in conservative funds, as promised. State Street probably will become a target of more lawsuits, especially from public-sector pension funds, said Derek Loeser of the law firm Keller Rohrback (Bloomberg.com May 8) … * Two former principals at Olympia Mortgage Corp., a Brooklyn mortgage lender, have been charged with fraud in schemes to steal more than $44 million in payoff profits from refinanced mortgages. They also are charged with fraud in a separate ploy to sell nonperforming mortgage loans with falsified loan histories. Leib Pinter and Barry Goldstein each face a maximum of 30 years in prison. Prosecutors allege that Pinter defrauded Fannie Mae by stealing payoff proceeds from 257 refinanced mortgages that the company was servicing for Fannie. They allege that Goldstein instructed other Olympia employees to create false loan histories for nonperforming loans in order to sell them to Credit Suisse First Boston (The Wall Street Journal Online May 8) … * A bankruptcy judge has rejected Countrywide Financial’s proposal to settle accusations that it falsified evidence used in a bid to foreclose on a home. Saying he wants to know more about the alleged fabricated documents, Judge Thomas Agresti of the U.S. Bankruptcy Court in Pittsburgh dismissed the request by the nation’s largest mortgage lender to settle with Sharon Diane Hill, a Pittsburgh-area women who was threatened with foreclosure. While she was current on her mortgage payments, Countrywide threatened to foreclose if she didn’t pay thousands of dollars worth of additional fees. Judge Agresti said the settlement was deficient because it didn’t reveal what her attorneys discovered about the alleged fabricated documents. He also said he was worried about “the potential effect that a settlement in this case may have in other cases involving Countrywide.” (The Wall Street Journal Online May 8) … * New York-based Citigroup strengthened its foothold in the cash-rich Middle East this week, announcing Wednesday that it plans to move Alberto Verme, its global head of investment banking, to Dubai. He will become the first major U.S. investment-banking head stationed there. Citigroup already has financial ties in the Middle East. It received a $7.5 billion investment from Abu Dhabi Investment Authority late last year. And Saudi Prince Al-Walid bin Talal owns more than 5% of Citigroup through investments. Those investments and others by sovereign wealth funds in U.S. banks have prompted concern about the safety of the U.S. banking system (MarketWatch May 8) … * NCR Corp. announced Wednesday that its first-quarter earnings jumped 41% from a year earlier to $48 million--reflecting higher demand for ATMs abroad, especially in Europe, the Middle East, and Africa. The Dayton, Ohio-based firm’s revenue jumped 19% to $1.18 billion. Sales in Europe, the Middle East, and Africa surged 30%, compared with a 6.8% gain in the Asia-Pacific region, and a 15% increase in the Americas (Bloomberg News via American Banker May 8) …

News of the Competition (05/07/2008)

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MADISON, Wis. (5/8/08)
* The Federal Reserve has asked Congress for authority to begin paying interest on commercial-bank reserves, so it can better control interest rates and have more leverage to address the credit crisis. Fed Chairman Ben Bernanke plans to present a formal request soon, said people familiar with the matter. The central bank currently isn’t authorized to begin paying interest on bank reserves until 2011. Paying interest on bank reserves could let the Fed pump more funds into the banking system without pushing the fed funds rate lower. “It would have the effect of putting a floor under the federal funds rate,” said Walker Todd, a research fellow at the American Institute for Economic Research (The Wall Street Journal Online and Bloomberg.com May 7) … * Credit-card charge-offs continued to increase in March, but a “robust” excess spread and a high payment rate helped card trusts enjoy a solid performance, according to Standard & Poor’s Ratings Services’ latest Credit Card Quality Index. The overall charge-off rate edged up 0.5 percentage point from February, to 5.7%. “Despite the negative trend, the current charge-off rate still remains well below the average high of 7.1% reported between 2002 and 2003 and the five-year average of 6.6% between 2000 and 2004, before the implementation of the Bankruptcy Reform Act in October 2005,” noted Kelly Luo, a credit analyst at S&P. Excess spread edged down 0.3 of a percentage point from February, to 8.1% in March. The payment rate increased a half percentage point to 19.1%. The delinquency rate for accounts 30 days or more overdue was unchanged at 4.5%. The delinquency rate for accounts 60 days or more overdue also was unchanged, at 3.2% (Dow Jones Newswires May 6) … * Countrywide Financial told a Senate panel Tuesday that it is taking steps to improve its conduct towards homeowners. Countrywide plans to hire an independent auditor to randomly review loans in bankruptcy to determine the accuracy of the firm’s accounting for borrowers’ payments, said Steve Bailey, the firm’s chief executive for loan administration. He said the company also plans to create a bankruptcy-ombudsman position that will review abuse claims made by borrowers and their attorneys. Bankruptcy judges have determined that Countrywide failed to appear at court-authorized depositions and charged debtors erroneous fees. The firm has agreed to be acquired by Bank of America (The Wall Street Journal Online May 7) … * Swiss Reinsurance Co., the world’s largest reinsurer, announced Wednesday that its net profit plunged 53% in the first quarter, as it was hit with large writedowns on its U.S. subprime-linked investments. Swiss Re said its net profit fell to $592 million. The company also cautioned that it expects more losses during the second quarter (The Wall Street Journal Online May 7) … * A senior employee at UBS AG was detained briefly by U.S. authorities in April as part of an investigation of the bank’s cross-border transactions, UBS acknowledged on Wednesday. The Department of Justice is investigating whether U.S. clients tried to avoid paying taxes with the help of client advisors at UBS, said the bank (Reuters via Yahoo! News May 7) …

Market News (05/07/2008)

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MADISON, Wis. (5/8/08)
* Home sales will remain flat over the next two months before picking up during the summer, according to the latest forecast by the National Association of Realtors (NAR). “Some time is needed for FHA and new conforming jumbo loans to become widely available,” said NAR Chief Economist Lawrence Yun. The trade association reported that the number of homes under contract for sale declined in March, to a new record low for a second consecutive month. NAR’s Pending Home Sales Index dropped to 83--down 1% from February and 20.1% from a year earlier. NAR predicts that existing-home sales will increase from an annual 4.95 million pace in the first quarter to a 5.82 million pace in the fourth quarter. Sales for the full year are projected to total 5.39 million, a 4.7% decline from last year, before increasing to 5.72 million in 2009. Existing-home prices are expected to fall 2.4% this year, then increase 4.1% in 2009 (realtor.org and CNNMoney.com May 7) … * Fannie Mae plans to alter its policies and pricing to help ease the housing downturn. Fannie said Tuesday that it will handle refinancings of non-delinquent mortgages for as much as 120% of property values when it owns the existing loans. The government-sponsored enterprise also said it plans to buy jumbo mortgages for the same price as smaller mortgages. “On the jumbo side, any improved liquidity is going to be a big help,” said Dan Cutaia, president of Madison, Wis.-based Fairway Independent Mortgage Corp. Fannie reported a $2.19 billion loss for the first quarter and said it plans to lower its dividend and raise $6 billion in new capital (Bloomberg News via Yahoo! News May 7) … * Mortgage activity rebounded last week, as mortgage rates declined, the Mortgage Bankers Association reported Wednesday (mbaa.org May 7). The trade group’s Market Composite Index rose 15.6% during the week ending May 2 to 655.4. The Refinance Index jumped 19.3% to 2273.8, while the Purchase Index increased 12.1% to 381.3. The average 30-year, fixed-rate mortgage (FRM) fell 10 basis points to 5.91%, and the one-year, adjustable-rate mortgage declined 9 basis points to 6.77%. The report is a hopeful sign that the mortgage market may have bottomed out, said Moody’s Economy.com (May 7). Still, the mortgage market remains quite weak when compared to the peak of the housing bubble in late 2006 … * Productivity accelerated during the first quarter, as employers cut jobs and hours, leaving fewer workers to do more. Non-farm productivity, the amount of output per hour of work, increased at a 2.2% annual rate following a 1.8% gain in the fourth quarter, the Labor Department reported Wednesday. Unit labor costs rose at a 2.2% pace, down from a 2.8% gain. The larger-than-expected increase in productivity and the smaller-than-expected increase in unit labor costs signal that inflationary pressures from the labor market remain under control. The number of hours worked declined at a 1.8% pace during the first quarter--the largest drop since the first quarter of 2003, as firms cut payrolls amid the economic slowdown. A total 260,000 jobs have been lost so far this year (Bloomberg.com and Associated Press via CNNMoney.com May 7) … * Gasoline prices will jump 11 cents in June, increasing pressure on consumers already strapped by rising food costs and a weak job market. The Energy Department predicts that average monthly gasoline prices will peak at $3.73 a gallon in June. For the full year, gasoline prices are forecast to average $3.52 a gallon--71 cents higher than last year’s average. Diesel prices are expected to average $3.94 a gallon, up from $2.88 a gallon in 2007. The department predicts that average daily oil consumption in the U.S will decline by 190,000 barrels this year due to high prices and the sluggish economy (Associated Press via CNNMoney.com May 7) …

News of the Competition (05/06/2008)

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MADISON, Wis. (5/7/08)
* Morgan Stanley announced Monday that it plans to lay off about 5% of its staff, or about 2,000 positions, most of them in the U.S. The firm already has eliminated about 3,000 jobs since October. The company posted a $3.6 billion loss for the fourth quarter. Morgan Stanley Chief Executive John Mack said in April that the credit crunch will last “a couple of quarters” longer, as it spreads to commercial real estate, to subprime mortgages in Europe, and to mid-sized banks in the U.S. Large banks and securities firms worldwide have eliminated at least 50,000 jobs during the past year. About 100,000 jobs may be cut by the time layoffs are done, say analysts (Reuters via The New York Times and nydailynews.com May 6) … * Zurich-based UBS announced Tuesday that it plans to eliminate 5,500 jobs. It also plans to exit the municipal bond business and sell a $15 billion portion of its risky mortgage assets, including subprime and Alt-A mortgages, to a new fund managed by BlackRock Inc. The latest round of job cuts are on top of about 1,500 positions that already have been eliminated. UBS posted a loss of $10.99 billion for the first quarter--reflecting writedowns of $19 billion. “UBS expects this difficult environment to remain and be characterized by a continuing unfavorable global economic climate, de-leveraging by institutional and private investors, slower wealth creation and lower trading and capital market activity,” the bank said in a statement (MarketWatch and Bloomberg.com May 6) … * Charlotte, N.C.-based Wachovia Corp, the nation’s fourth-largest bank, doubled its previously stated loss for the first quarter due to a writedown of three contracts in a bank-owned life insurance portfolio. The company is now reporting a $708 million net loss. Bank-owned life insurance--which insures against the lives of employees and directors--helps firms manage risk and offset the cost of employee benefits. Wachovia is faced with mounting losses as its $121.2 billion portfolio of option adjustable-rate mortgages continues to deteriorate (Reuters via The New York Times May 6) … * Discount retailer Target Corp. announced Tuesday that it has agreed to sell an undivided interest representing 47% of its $8.2 billion credit-card portfolio to JPMorgan Chase for $3.6 billion. Target said the deal will provide “substantial liquidity” for expanding stores, paying down debt, and repurchasing shares. The deal is structured so that Target can retain control over its credit-card operations. In recent years, many other large retailers have sold off their private-label card portfolios to banks. Target announced Monday that it raised its estimate for net write-offs on its card portfolio to a range of 7% to 8% (The Wall Street Journal Online May 6) …

Market News (05/06/2008)

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MADISON, Wis. (5/7/08)
* The surge of foreclosures hitting the U.S. largely reflects an almost unprecedented drop in home prices and requires a joint government and private-sector response, said Federal Reserve Chairman Ben Bernanke. “Realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment,” said the Fed chairman in a speech to the Columbia School of Business yesterday. He noted that many mortgage borrowers are now “upside-down” on their loans, or owe more than their homes are worth. “A widespread decline in home prices … is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue.” He said a writedown of principal could be an effective solution in some cases. Bernanke said more than 156,000 families lost their homes during the first quarter. And with about $1.8 million adjustable-rate mortgages scheduled to reset this year, there’s much work ahead (CNNMoney.com May 6) … * Home values in the U.S. tumbled 7.7% in the first quarter to the lowest level in almost three years, according to estimates by online data provider Zillow.com. The drop is the largest in the 12 years of statistics complied by the company. Zillow estimates that about 52% of the homeowners who purchased homes when prices peaked in 2006 are now “underwater” on their mortgages, or owe more than their homes are worth. “The inability to secure refinancing is ultimately contributing to the growing rates of foreclosure in many parts of the country,” said Stan Humphries, Zillow vice president of data and analytics (Bloomberg.com May 6) … * The credit crunch extended into mid-April, as financial institutions continued to tighten lending standards on all types of consumer and business loans, according to the Federal Reserve’s April Senior Loan Officer Opinion Survey. In the poll, 55.4% of banks reported tighter conditions for commercial and industrial loans to large and mid-sized companies--up from 30% in a January survey. About half of respondents said the uncertain economic outlook was their primary reason for tightening. About 80% of banks reported tighter lending standards for commercial real-estate loans. Further, about 60% reported tighter standards for prime mortgage loans, while 80% said they tightened standards on subprime mortgage loans, and 75% reported tightening standards for nontraditional mortgage loans. Financial institutions are even tightening credit-card lending standards. And 55% of the banks participating in the federal student-loan program said they planned to reduce their lending this fall (Economy.com and The Wall Street Journal Online May 5) … * Fannie Mae reported a larger-than-expected loss of $2.2 billion for the first quarter, and said it planned to cut its dividend and raise $6 billion in new capital. Fannie said it expects “severe weakness” in the housing market to continue through 2008--prompted rising mortgage delinquencies, defaults, and foreclosures. CEO Daniel Mudd noted that credit spreads hit 22-year highs during the first quarter, and home values declined at a larger-than-expected pace. Mudd doesn’t expect the housing market to begin recovering until 2010 (MarketWatch May 6) … * Insurer Aflac has become the first U.S. firm to give its shareholders a vote on top management’s compensation. In an advisory vote on Monday, shareholders signaled that the firm’s compensation committee is doing a good job. About 93% of shareholders approved the $11.96 million compensation package that Aflac CEO Daniel P. Amos received in 2007. Analysts say a growing number of U.S. companies will give shareholders a voice in compensation policies. They note that shareholders in British and Australian firms have a say on compensation, a trend that probably has curbed growth in executive compensation in those countries (The New York Times May 5) …

News of the Competition (05/05/2008)

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MADISON, Wis. (5/6/08)
* Standard and Poor’s Corp. (S&P) unexpectedly cut the credit rating of Countrywide Financial Corp. to junk Friday, citing doubt about whether Bank of America Corp. will stand behind Countrywide’s debt after a pending takeover is finalized. The downgrade indicates “the new level of uncertainty as to the ultimate legal status of Countrywide’s creditors” subsequent to the lender’s sale to BofA, S&P said in a statement Friday. As a result, prices on some of Countrywide’s $97.2 million in debt fell, and instruments that protect investors from default made their largest jump in nearly four months, analysts said. Only two days after saying it might raise Countrywide’s ratings, S&P made the cut. The reversal squashed bond owners’ expectations that their holdings would be more stabilized after BofA buys Countrywide. The downgrade also renews analysts’ doubts as to whether the $4 billion stock swap will go through (Bloomberg.com May 2) … * Citigroup Inc. announced Friday that it is selling one of its joint venture operations--benefit servicing company CitiStreet LLC, which it jointly owns with State Street Corp.--to ING Group. The New York-based Citi said the all-cash transaction was valued at $900 million. Amsterdam-based ING will fund the acquisition from existing internal resources, said the Dutch company, which has substantial operations in the Americas, analysts said. The deal would make ING the third-largest defined-contribution manager in the U.S., with $351 billion in assets under management and assets under administration, the company said (International Herald Tribune May 2) … * The Office of Federal Housing Enterprise Oversight has updated the maximum conforming loan limits temporarily in effect as a result of the Economic Stimulus Act of 2008. The updates affect three specific areas and are a result of revisions in the U.S. Department of Housing and Urban Development’s (HUD) estimates of home prices in certain counties and local areas. Under the Economic Stimulus Act, temporary maximum conforming loan limits are determined by local median home prices. HUD’s revisions of estimated median prices are the result of valid public appeals accepted in the 30 days immediately following its initial determination of median prices. For an Updated List of New Maximum Conforming Loan Limits, use the link ...

Market News (05/05/2008)

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MADISON, Wis. (5/6/08)
* The U.S. service sector staged a surprising rebound in April. The Institute for Supply Management’s (ISM) non-manufacturing index, which includes banks and retailers, increased to 52--from 49.6 in March and above the 50 level that suggests expansion. In another encouraging sign, the employment index jumped 3.9 points to 50.8, following three consecutive months of decline. About 22% of service-sector companies said they were adding staff--up from 14% the previous month. Last week, the group reported that its manufacturing employment index fell 3.8 points to 45.5. The service sector has accounted for most of the job growth that has occurred in the U.S. during the past few years, as factories shut down and manufacturers shed jobs. In a negative sign, prices continued to surge in the service sector last month. The prices-paid index jumped to 72.1 from 70.8. “The inflationary pressures of rising fuel, energy and commodity prices are of major concern for members,” said Anthony Nieves, chairman of the ISM's service sector survey (CNNMoney.com May 5) … * Oil prices topped $120 a barrel on Monday before retreating, as an attack on an oil installation in Nigeria and a raid in Iraq prompted concern about supplies. Light, sweet crude for May delivery rose to a record-high $120.21 a barrel on the New York Mercantile Exchange. Adding to supply concerns, Iranian leader Ayatollah Ali Khamenei said Sunday that his country will not bow to international pressure that it relinquish its nuclear program. Iran is the second-largest producer in the Organization of Petroleum Exporting Countries oil cartel (Associated Press via CNNMoney.com May 5) … * Food prices have jumped more than 40% over the past year--pushing up inflation worldwide, said central bankers meeting at the Bank for International Settlements in Basel on Monday (Reuters via Yahoo! News May 5). They said the surge in food prices reflects rising living standards in developing nations, climate change, and speculation. The central bankers urged more market competition and free trade to tackle the problem. In other news, tens of thousands of people rioted over high food prices in Somalia on Monday (The Wall Street Journal Online May 5). Troops opened fire, killing at least two people. Prices for some staple foods in Africa have surged more than 50% in just the past few weeks … * Home-furnishing retailer Linens ’n Things filed for bankruptcy protection on Friday, the latest sign that the U.S. retail sector is weakening, as consumer spending falters. The company plans to close 120 under-performing stores, about one-fourth of them in California--which has been hit hard by the housing slump. The firm’s stores in Canada aren’t included in the bankruptcy filing. Linens ’n Things joins specialty retailers Sharper Image and Lillian Vernon in seeking bankruptcy protection. “There is going to be a record number of store closings through bankruptcy in the next 150 to 1500 days, as the retail recession becomes the worst the U.S. has seen in 30 years,” said Burt Flickinger II, managing director of consulting firm Strategic Resource Group. Consumers will lose out from the Linens ’n Things bankruptcy filing. Brian Riley, senior analyst at The TowerGroup research firm, estimates the filing will freeze about $42 million in consumer gift cards--affecting about 400,000 customers. Based on current trends, the research firm estimates U.S. consumers’ risk exposure through private-label gift cards at $250 million in 2008 (Associated Press via USATODAY.com May 2) … * Global business confidence is now at a record low--suggesting that the global economy probably contracted in April, according to the latest Moody’s Economy.com Survey of Business Confidence (May 5). Businesses’ views of current economic conditions continue to hit new record lows, and hiring plans have weakened significantly. Although pricing pressures have picked up recently, they remain fairly modest given soaring oil prices. Firms are holding prices firm because sales are weak. Financial institutions and business-service companies are the most pessimistic … * About 1,800 union workers at a General Motors assembly plant in Fairfax, Kan., went on strike Monday. The strike came after the United Auto Workers Local 31 union failed to reach an agreement on plant rules following a four-year national contract approved last year. Union workers also remain on strike at the automaker’s Lansing Delta Township plant in Michigan. In addition, about 30 GM facilities have been idled or partly idled because of a union strike against supplier American Axle & Manufacturing Holdings that has lasted for more than two months (Reuters via Yahoo! News May 5) …

Job losses slow in April CUs will see impact

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MADISON, Wis. (5/5/08)--The economy lost just 20,000 jobs in April, following job losses that totaled a revised 240,000 during the first three months of the year, the Labor Department reported Friday (see chart). And credit unions are seeing the effects. The unemployment rate, which is based on a separate survey, edged down to 5% from 5.1% in March.
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Employment continued to decline in construction, manufacturing, and retail trade in April. The construction sector lost 61,000 jobs. Employment in that sector has plunged by 457,000 since peaking in September 2006. "The latest employment data confirm that the U.S. economy has stalled and that any growth in output is being generated by rising labor productivity and not an increase in the number of jobs," said Steve Rick, senior economist with the Credit Union National Association (CUNA). "The weak labor market has pushed consumer confidence levels down to the range normally associated with a recession. This led to a large drop in durable goods spending by consumers in the first quarter of 6.1%, the biggest drop in over two years," Rick said. "Credit unions are seeing the effects of this weak labor market and drop in spending in their auto loan portfolios which declined 3.4% in the first quarter," Rick added. "On a brighter note, credit union fixed-rate first mortgage loan balances rose 5.6% in the first quarter, more than twice the 2.3% pace set in the first quarter of 2007, as credit unions took advantage of tighter underwriting standards at other lending institutions," he said. Manufacturing employment fell by 46,000 last month and has fallen by 326,000 over the past 12 months. Employment in retail trade declined by 27,000 in April. The retail sector has lost 137,000 jobs since peaking in March 2007. Employment in health care continued to rise in April, with an increase of 37,000 jobs. The health care sector has added 365,000 jobs over the past 12 months. The average work week fell to 33.7 hours, from 33.8 hours in March. Workers’ average hourly earnings edged up just one cent to $17.88 in April.

News of the Competition (05/02/2008)

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MADISON, Wis. (5/5/08)
* Billionaire-investor Warren Buffett’s Berkshire Hathaway firm is being examined as part of a wide investigation by Connecticut Attorney General Richard Blumenthal into conflicts of interest in the credit-rating industry. He said Berkshire’s 19.5% ownership of Moody’s Investors Service, which gave Berkshire’s new bond-insurance business a top rating last week, “certainly creates an appearance of a conflict of interest.” However, he noted that the investigation isn’t “challenging any of the specific ratings.” Blumenthal said his investigation is centered on whether credit-rating agencies make demands on firms to gain more business and whether the agencies apply one standard for corporate debt and another for city and state debt--thus boosting the cost of borrowing for municipalities and states (FT.com May 1) … * Recent capital raisings by Citigroup, JPMorgan Chase, Bank of America, and other big banks suggest that the credit crunch still has far to go. The capital infusions are “an acknowledgment that the cycle has a way to go before it’s going to turn,” said Morgan Stanley Analyst Betsey Graseck. Delinquencies at the big banks are rising. At JPMorgan, prime mortgage loans that are 30 days or more delinquent have increased to more than 3% of such loans--compared with rates under 1% prior to 2007 and signaling that subprime problems may be spreading to prime portfolios (The Wall Street Journal Online May 2) ... * Overdue debt at the nation’s six largest credit-card lenders held steady in March, at the highest level since November 2004, according to statistics compiled by Bloomberg News (American Banker May 2). Payments 30 days or more overdue averaged 4.11% of loans outstanding, according to American Express, Bank of America, Capital One Financial, JPMorgan Chase, Citigroup, and Discover Financial Services. That’s up from 3.44% in March 2007. “Pressures on the consumer are increasing, with employment declining, home prices continuing to fall, and prices outpacing wages,” said Global Insight Research Director Nigel Gault. “I’d be surprised if we’re at the peak for late payments.” … * Bank of America said it may not guarantee $38.1 billion of Countrywide Financial’s debt after it acquires the Calabasas, Calif.-based lender, according to a regulatory filing. That amount would equal about 2.4% of the firm’s total liabilities at year-end 2007. Bond holders have been optimistic that the acquisition would put Bank of America’s AA credit rating behind Countrywide’s debt. Countrywide’s financial condition has weakened since the merger was announced. It reported an $893 million loss for the first quarter, as delinquencies and foreclosures surged (Bloomberg.com May 2) … * Two Bank of America units will pay almost $10 million to resolve Securities and Exchange Commission (SEC) allegations that they failed to disclose conflicts of interest and misled investors about a process that favored the bank’s proprietary mutual-fund products, the SEC announced Thursday. The agency said Boston-based Banc of America Investment Services violated federal advisory law with the help of Columbia Management Advisors. The SEC said customers with wrap-fee accounts were told that Bank of America Investment Services chose mutual funds using unbiased, objective research. Subjective factors instead favored two of the bank’s own mutual funds. The agency said the funds were added to the wrap-fee program despite having lower returns and higher expense ratios. The two units settled with the SEC without admitting or denying the allegations (Dow Jones Newswires May 2) …

Market News (05/02/2008)

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MADISON, Wis. (5/5/08)
* The Federal Reserve has teamed up with other central banks to increase funding for banks and--for the first time--will accept bonds backed by credit cards, auto loans, student loans, and home-equity loans, as long as they are highly rated. “In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve and the Swiss National Bank are announcing an expansion of their liquidity measures,” said the Fed. The central banks will increase an existing reciprocal currency arrangement under which they can obtain dollars in return for pledges of European currency. And beginning May 5, the Fed will increase the amount auctioned to depository institutions under its Term Auction Facility to $75 billion in each auction, from $50 billion. The Fed hopes to boost supply and lower short-term interest rates such as the London interbank offered rate (Libor), which has remained higher than the federal funds rate despite several Fed easings (MarketWatch and The New York Times May 2) … * Investment companies reduced their borrowing from the Federal Reserve last week, even as banks continued to borrow more. Big Wall Street investment firms averaged $18.6 billion in daily borrowing as of April 30--compared with $22.6 billion the previous week and the fourth consecutive week that investment firms borrowed less from the Fed. On March 16, the Fed decided to lend to investment banks through the discount window, a privilege previously reserved for commercial banks. The borrowing program for investment banks will continue for at least another six months. Commercial banks increased their borrowing from the Fed’s discount window last week--averaging $11.6 billion in daily borrowing--up from $10.7 billion the previous week (Associated Press via CNNMoney.com and The Wall Street Journal Online May 2) … * Mortgage rates steadied last week due to mixed news of a weakening housing market and higher inflation, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) edged up 3 basis points to 6.06%, while the 15-year FRM slipped 3 basis points to 5.59%. The one-year, adjustable-rate mortgage (ARM) was unchanged at 5.29%. “In its most recent policy committee statement on April 30, the Federal Reserve indicated it expects inflation to moderate in coming quarters but uncertainty about the outlook for inflation remains high,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “However, the Fed did note that financial markets remain under considerable stress and tight credit conditions, and along with the deepening housing contraction, are likely to weigh on economic growth.” Mortgage rates are lower than a year ago. This time last year, the 30-year FRM averaged 6.16%, while the 15-year FRM stood at 5.87%, and the one-year ARM was at 5.42% (MarketWatch May 1). For CUNA's Daily Financial Rates, use the link. … * Vehicle sales tumbled to an annual pace of 14.4 million units in April--down from a 15.1 million pace in March and the slowest pace since mid-1998. Consumers shunned gas-guzzling light trucks, which include sport-utility vehicles and pickups. Sales of light trucks declined to a 7 million-unit pace, from 7.6 million in March. Autos sold at a 7.4 million pace, down from 7.5 million. But with the decline in light-truck sales, autos accounted for most of the vehicles sold last month--for the first time since 2001. Vehicle sales could improve during the second half of the year, as tax-rebate checks give consumers more spending power (Economy.com May 1) … * Americans’ retirement assets increased to a record $17.8 trillion during the third quarter--up from $17.5 trillion in the second quarter, according to the Washington-based Investment Company Institute. Retirement savings now account for nearly 40% of all household financial assets. IRAs held $4.8 trillion at the end of September--up from $4.6 trillion at the end of June. Mutual funds manage 47% of all IRA assets. Mutual funds manage 53% of all defined contribution plans, which include 401(k)s and 403(b)s (ici.org April 25) …

News of the Competition (05/01/2008)

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MADISON, Wis. (5/2/08)
* A U.S. District Court in San Francisco has granted preliminary approval of a $33 million settlement in a gender class action lawsuit against Citigroup Inc.'s Smith Barney retail brokerage division, said the lawyers for the plaintiffs (Forbes.com May 1). The suit--which alleged Smith Barney discriminated against female financial advisers in compensation and opportunities--was filed on behalf of all women who worked as financial advisers at Smith Barney's branches in the U.S. any time between Aug. 24, 2003 and March 1, or in the California branches from June 25, 2003 through March 1 … * Losses suffered by banks on illiquid assets such as mortgage-backed securities probably won’t be as large as current market prices suggest, the Bank of England (BOE) said yesterday in its biannual Financial Stability Report. “Estimates of the ultimate losses to the financial system and real economy implied by current market prices are a significant overestimate,” said the central bank. The BOE cautioned that the overestimation of losses could erode confidence in financial institutions and become a self-fulfilling prophecy. The bank also noted that banks are becoming too cautious in their lending standards. Last month, the International Monetary Fund estimated that losses for financial firms totaled $945 billion as of March. Of that total, $565 billion was from the U.S. mortgage market, $240 billion from commercial real-estate securities, $120 billion from corporate loans, and $20 billion from consumer credit (AFP via Yahoo! News and The Wall Street Journal Online May 1) … * A federal bankruptcy judge has imposed a $250,000 fine against San Francisco-based Wells Fargo for failing to monitor a mortgage-servicing firm that the court said took improper actions in a consumer-bankruptcy case. Although Wells Fargo didn’t service the loan, Massachusetts federal bankruptcy judge Joel B. Rosenthal wrote in his decision that the bank “turned all responsibilities over” to the servicer but then “turned a blind eye” to the servicer’s mistakes. Wells Fargo acts as a trustee for trusts holding mortgages that were turned into securities and sold to investors. Trustees oversee the disbursement of loan payments to investors and work with loan servicers. While bankruptcy judges have faulted loan servicers for their treatment of borrowers at risk of losing their homes, this case is the first time a trustee has been hit with a fine. Wells Fargo said it plans to appeal the ruling (The Wall Street Journal Online April 30) … * A former loan officer at bankrupt subprime lender New Century Financial was sentenced to three years in prison on Tuesday and ordered to pay a $769,229 fine for withdrawing funds from borrowers’ escrow accounts and taking kickbacks. Prosecutors said that from 2000 to 2004, Renato Gonzales Quiazon processed loans using a mortgage broker’s name, gave 20% of the commission on the loans to the broker, and kept 80%. In December, he pleaded guilty to wire fraud, money laundering and filing false tax returns (Bloomberg.com April 30) … * European Union regulators have rejected a request by MasterCard Inc. to extend a June deadline to comply with an antitrust ruling prohibiting fees for cross-border purchases. The European Union has given the card association until June 21 to create a cross-border system that doesn’t harm consumers. The European Retail Round Table estimates that interchange fees boost the prices consumers pay by as much as $21 billion each year (Bloomberg.com via American Banker May 1) … * Wachovia Corp. of Charlotte, N.C., cautioned Wednesday that it expects to take a non-cash charge of $800 million to $1 billion in the second quarter, related to the tax treatment of some leveraged leasing transactions. The firm made the announcement following a ruling by the U.S. Court of Appeals for the Fourth Circuit that disallowed certain tax breaks on similar transactions for bank BB&T. Wachovia said the ruling and applicable accounting standards will require the firm to reassess transactions it entered into from 1999 to 2003. The ruling came just two weeks after Wachovia reported a big loss for the first quarter, as nonperforming assets in its $121.2 billion portfolio of option adjustable-rate mortgages quintupled to $4.62 billion. The nation’s fourth-largest bank also is facing an investigation by federal prosecutors about alleged laundering of drug profits by Columbian and Mexican money-transfer companies (TheStreet.com and Reuters via The New York Times April 30) …

Market News (05/01/2008)

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MADISON, Wis. (5/2/08)
* Surging prices for food, gasoline, and other necessities pushed consumer spending up in March. Personal consumption expenditures rose by 0.4%, the Commerce Department reported Thursday. Adjusted for inflation, spending rose only 0.1% in March and 2% over the past 12 months. Most spending went toward necessities such as medical care and food, while spending on big-ticket items such as autos and washing machines declined. During the first quarter, durable-goods sales plunged 6.1%. “About half of all consumption is not really discretionary, it’s things like food, energy, medical costs, over which people have very little control in the short run,” noted Ian Shepherdson, chief U.S. economist at High Frequency Economics. Consumers have cut back spending as much as possible amid sluggish wage growth. Personal income increased 0.3% in March, slowing from a 0.5% gain the previous month. Price gains, slow wage growth, and accelerating layoffs are making it tough for consumers to cope (The New York Times and Associated Press via Yahoo! News May 1). * Layoffs surged to a 19-month high in April, according to a report by the outplacement firm Challenger, Gray & Christmas. Major corporations announced 90,015 job cuts--up 68% from March and the largest number since September 2006. At 23,106, financial firms accounted for the largest share of layoffs in April, as the housing slump continued. Rising energy prices also prompted large cuts in transportation, manufacturing, agriculture, and services, noted John Challenger, CEO of the Chicago-based firm. Because it only covers large companies, the Challenger survey represents just a small percentage of the workers who lose their jobs each month. For example, about 1.35 million workers were laid off in February, according to Labor Department data (MarketWatch May 1) … * First-time claims for unemployment insurance jumped by 35,000 during the week ending April 26 to 380,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, declined by 6,500 to 363,750. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, increased by 74,000 during the week ending April 19 to 3.019 million--suggesting that people are having a hard time finding new jobs after they’ve been laid off. Initial jobless claims have averaged 354,400 so far this year--up from an average of 321,000 per week last year, noted Bloomberg.com (May 1). Last year, the economy generated an average 91,000 new jobs per month. During this year’s first quarter, the job market shed 232,000 jobs … * The manufacturing sector contracted in April, for the third consecutive month--even as inflationary pressures mounted, according to a report by the Institute for Supply Management. The ISM index held steady at 48.6 last month, below the 50-level that indicates expansion. “Manufacturers are in a situation where both new orders and production are slowly declining, but prices continue to rise at highly inflationary rates,” said the ISM. The prices paid index increased to 84.5 from 83.5. And 71% of companies reported paying higher prices--the biggest percentage in four years. One bright spot in the report was exports, which were buoyed by strong foreign demand and the weak dollar. New export orders rose to 57.5, from 56.5 in March. In other news, the Commerce Department reported Thursday that construction spending plunged by 1.1% in March--the largest decline in 26 years. Construction spending is expected to continue declining this year, as the credit crunch persists (MarketWatch and Economy.com May 1) … * An estimated three million Latin American immigrants living in the U.S. stopped sending money home to their families during the last two years, as the economy slowed and immigrants became more uncertain about their future, according to a report by the Washington-based Inter-American Development Bank. Just 50% of the 18.9 million Latin American immigrants living in the U.S. send money regularly to their families--down sharply from 73% two years ago. Of those interviewed by the bank, 81% said it was more difficult to find good-paying jobs, and 40% said they were earning less income this year. The largest group of respondents (18%) said they were construction workers--an industry hit hard by the housing slump. Almost half of those surveyed said they didn’t have legal status, and most said they had encountered hostility because of government efforts to curb illegal immigration. Almost one-third of respondents said they are thinking about leaving the U.S. That’s up from 20% in 2001, the last time that question was asked (The New York Times April 30) … * The collapse of accounting firm Arthur Andersen in 2002 prompted consolidation in the accounting industry, leading to higher fees for companies having their accounts verified, according to a study conducted by the London School of Economics for BDO Stoy Hayward. The research found that the collapse of Arthur Anderson, which left only four large firms in the accounting world, prompted an average 2.4% increase in the fees paid for audits. The study excluded the effects of other factors including regulation. The Big Four accounting firms--Pricewaterhouse Coopers, Deloitte, KPMG, and Ernst & Young--between them audit all of the FTSE 100 firms and almost all of the FTSE 350 companies. The study found no evidence of a correlation between concentration and fees before Anderson’s collapse. “There is a difference between five firms and four at the top, and it does change the competition dynamic,” said BDO Managing Partner Jeremy Newman (FT.com April 29) …