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Market Archive

Market

News of the Competition (08/28/2008)

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MADISON, Wis. (8/29/08)
* Bank of America has agreed to buy back $43 million in auction-rate securities from government agencies in Massachusetts. In negotiations with William Galvin, secretary of the Commonwealth of Massachusetts and the state’s top securities regulator, Bank of America agreed to repay $18 million to the Massachusetts Turnpike Authority and $25 million to the Massachusetts Housing Partnership. A spokesman for Galvin said the agreement wasn’t a settlement. He said the securities division continues to negotiate with the bank about buying back auction-rate securities (ARS) from all retail investors. The market for ARS collapsed in February, when the firms stopped supporting the market by making bids. That failure left many investors unable to cash the securities (The Wall Street Journal Online Aug. 28) … * The Federal Reserve won’t accept auction-rate securities (ARS) issued by closed-end funds as collateral against loans from its discount window, according to a spokesman for the Federal Reserve Bank of New York. This eliminates a potential source of cash for banks that are buying back billions of dollars worth of ARS. They agreed to buy them back after being accused of misleading investors about their liquidity. This autumn banks will start buying back the ARS at par from investors, even though they are trading at discounts of 5% to 15% or more. UBS AG has agreed to buy back $18.6 billion of ARS. Other banks agreeing to buybacks include Merrill Lynch ($12 billion), Citigroup ($7.3 billion), Wachovia ($8.8 billion), Morgan Stanley ($4.5 billion), and JPMorgan Chase ($3 billion) (FT.com Aug. 28) … * Goldman Sachs, Lehman Brothers, and Morgan Stanley may report a smaller consecutive decline in writedowns for the third quarter--aided by hedging gains, according to Fox-Pitt Kelton Analyst David Trone. He forecasts that the three investment firms will write down $6.1 billion on their “problem assets,” down from $6.9 billion in writedowns for the second quarter. Trone also noted that the three firms face new challenges--including the plunge in global equity markets, seasonal weakness in customer flows for July and August, and settlements related to auction-rate securities (ARS). Morgan Stanley has agreed to pay a $35 million fine and buy back $4.5 billion of ARS debt by Dec. 11. Goldman Sachs has agreed to pay a $22.5 million fine and buy back about $1.5 billion of ARS debt by Nov. 12 (Reuters via Yahoo! News Aug. 28) … * MBIA Corp. has agreed to take control of $200 billion of municipal bonds backed by rival bond-insurer FGIC Corp., an action that could help FGIC avoid bankruptcy. New York Insurance Superintendent Eric R. Dinallo constructed the deal as part of his effort to help the $2.4 billion bond-insurance sector regain its financial strength. The credit agencies have downgraded FGIC to junk status, making it expensive for the firm to borrow funds. The move should help improve that status (Associated Press via Yahoo! News Aug. 28) …

Market News (08/28/2008)

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MADISON, Wis. (8/29/08)
* Mortgage rates were mixed this week, with long-term rates declining and short-term rates rising, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) fell 7 basis points to 6.40%, while the 15-year FRM dropped 7 basis points to 5.93%. The one-year, adjustable-rate mortgage (ARM) increased 4 basis points to 5.33%. “Interest rates for fixed-rate mortgages continue to drift down as reports of economic weakness persist,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “ARM rates, on the other hand, rose slightly after the Federal Reserve’s Open Market Committee hinted it might increase the overnight bank lending rate in its Aug. 5 minutes,” added Nothaft. However, he also noted that the housing market shows some “encouraging signs,” with home-price declines slowing and more consumers suggesting they may soon be ready to buy. Mortgage rates remain lower than year-ago levels. The 30-year FRM averaged 6.67% at this time last year, while the 15-year FRM stood at 6.12%, and the one-year ARM was at 5.84% (MarketWatch Aug. 28). For CUNA's Daily Financial Rates, use the link. … * Delinquencies and losses on the pools of loans backing U.S. residential mortgage-backed securities issued during the past two years continued to weaken through the first half of 2008, according to a report by Moody’s Investors Service. Falling home prices, weaker collateral, higher mortgage rates, and lower credit availability weakened the performance of first-lien and second-lien loans originated in 2006 and 2007. Moody’s also said deals backed by subprime, Alt-A, and jumbo loans have weakened. And the forecast for home-equity line of credit pools look grim--with losses of 24% expected for 2006 transactions and 26% for 2007 transactions (The Wall Street Journal Online Aug. 28) … * The U.S. economy expanded faster than previously estimated during the second quarter, the Commerce Department reported Thursday. Real gross domestic product (GDP)--the output of goods and services--rose at an annual rate of 3.3%, compared with an initial estimate of 1.9%. The gain followed an increase of 0.9% in the first quarter. The second-quarter revision mostly reflected a bigger decline in imports, an acceleration of exports, an acceleration of personal consumption expenditures, a smaller decline in residential fixed investment, and an upturn in state and local government spending. Exports probably will weaken as Europe and Japan head towards recessions, noted Bloomberg.com (Aug. 28). Consumer spending also will weaken as the impact of the rebate checks wane and wage gains slip. Wages and salaries rose by $52.5 billion in the first quarter, $20.2 billion less than previously estimated … * Real (inflation-adjusted) income declined for middle-class families from 2000 to 2007, as worker productivity surged. Worker productivity increased 18% during the 2000s despite two recessions, according to Jared Bernstein, an economist at the Economic Policy Institute and co-author of The State of Working America in 2008/2009. Yet the median real income for working-age, middle-class families declined by $2,000 between 2000 and 2007, according to Census Bureau data released Tuesday. In comparison, the median income for working-age, middle-class families rose 10% from 1989 to 2000. The middle class has lost ground because of the widening gap between rich and poor, said Bernstein. He noted that 90% of the growth in workers’ income from 1989 to 2007 went to the top 10% highest earners (CNNMoney.com Aug. 28) ... * Consumer pessimism about the job market is at the highest point since the 2001 recession. In a survey by Rutgers University’s John J. Heldrich Center for Workforce Development, 65% of respondents said this is a bad time to find a quality job--matching the percentage found during the 2001 recession. About one-third of workers polled said they don’t have enough money to make ends meet, and one-third said the amount they owe on credit cards exceeds their retirement savings. Only half said they are working the number of hours they want, and one-third said they have seen a change in the number of hours they work during the last three months. “This is a startling amount of change in a major areas of people’s lives over a very short period,” said the report (Associated Press via Yahoo! News Aug. 28) … * The job market remains weak, according to a Labor Department report issued Thursday. First-time claims for unemployment insurance declined by 10,000 during the week ending Aug. 23 to 425,000. However, continuing claims, the number of people still on the benefit rolls after an initial week of aid, jumped by 64,000 during the week ended Aug. 16 to 3.423 million. That’s the highest level since November 2003 (Bloomberg.com Aug. 38). Jobless claims have averaged 375,400 so far this year, compared with 321,000 for all of 2007 …

Thrifts lose ground in economy CUs well-positioned

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MADISON, Wis. (8/28/08)--The U.S. thrift industry posted its second-largest quarterly loss on record, announced regulators Wednesday. Meanwhile, the credit union model is well-positioned for the struggling economy, says Steve Rick, senior economist at the Credit Union National Association (CUNA). Thrifts, reeling from the housing crisis, lost $5.4 billion during second quarter, said the Office of Thrift Supervision (OTS). Only fourth-quarter 2007, when thrifts lost $8.8 billion, is higher in losses. They also set aside $14 billion--the most ever posted--to cover second-quarter loan losses, the agency said. "Problem" thrifts grew--to 17 from 12 at the end of March, OTS said. The thrifts are among the 117 problem banks reported Tuesday by the Federal Deposit Insurance Corp. "The credit union model--not-for-profit, member-owned, cooperative--is well-suited to ride out the current storm of falling home prices and a struggling economy, said Rick. "Credit unions have seven key advantages over other financial institutions in today's turbulent financial marketplace," Rick said:
* Most credit unions are very well-capitalized with the movement's average capital-to-asset ratio over 11%. * Most are reporting strong deposit growth, signaling that members have confidence in their credit union as a financial institution. * Credit unions are not hoarding liquidity as many banks that fund their balance sheet with short-term repos, commercial paper and interbanks lending are doing. * The typical credit union lending model of originating loans to hold them in portfolio is back in vogue, as compared with the alternative model of originating loans to sell them off into the secondary market is facing significant market turmoil, he said. * Banks are tightening their lending standards in the face of rising loan loss provisions. "Most credit unions retained sound underwriting policies over the last few years and therefore find it unnecessary to modify lending standards today. This is creating lending opportunities and faster loan growth at credit unions," Rick added. * Credit unions have much less credit risk exposure than other lenders, and hence lower loan loss provisions and higher return on assets. * As not-for-profit, member owned, cooperative financial institutions, credit unions do not face short-term earnings pressure that banks with stockholders who demand dividends may be facing.
"In the credit union world, we maximize service to members, not profits to stockholders. This allows credit unions to keep loan interest rates low, deposit interest rates high, and minimal fees to compete effectively in today's financial market environment," Rick said. Credit unions are gaining market share and reporting positive earnings as banks and thrifts struggle, he said. "Around 80% of credit unions reported positive earnings in the first half of the year, with an average return on assets of 0.52% compared to banks' 0.37%," he said. "Credit unions are not having to make the same kind of loan-loss provisioning as the banks and thrifts, and hence are reporting higher earnings." Rick noted that credit union first-mortgage delinquency rates rose to 0.78% at the end of June, from 0.64% in December and the highest since 1993. "While the delinquency rate increase is not welcomed, it is still relatively low and quite manageable for most credit unions," he said. Credit unions picked up market share in the second quarter as banks tightened their lending standards and households worried about the safety and soundness of their banking institution. Credit union deposit balances rose 1.33% in the second quarter versus 0.08% for banks. Credit union lending also outpaced banks, with loan balances increasing 2.52% at credit unions and 0.06% at banks, Rick added.

News of the Competition (08/27/2008)

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MADISON, Wis. (8/28/08)
* Citigroup has agreed to pay almost $18 million in refunds and settlement charges for taking $14 million from its customers’ credit-card accounts, California Attorney General Jerry Brown announced Tuesday. From 1992 to 2003, Citibank used a computer program to automatically remove positive balances from accounts without informing customers, said Brown. The bank will pay $3.5 million in damages and civil penalties to the state of California. Citibank also will pay 10% interest to California customers, who accounted for $1.6 million of the funds “swept” out of accounts during the period. “The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps,” said Brown. “When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice.” (Associated Press via Yahoo! News and Bloomberg.com Aug. 27) … * A borrower’s lawsuit against bankrupt-lender IndyMac Bancorp has been dismissed by a federal judge. The suit accused the firm of inflating home appraisal values and misleading borrowers into paying higher closing and financing costs. U.S. District Judge John Koeltl in Manhattan ruled that plaintiff Virgen Cedeno failed to state adequate claims. He also ruled that federal law pre-empted her state claims. The ruling is a victory for the Federal Deposit Insurance Corp., which took control of IndyMac on July 11, in the third-largest bank failure in U.S. history (Reuters via Yahoo! News Aug. 27) … * A computer purchased on eBay contained the personal information of at least 1 million customers of Royal Bank of Scotland, its Natwest unit, and American Express. The data included names, addresses, bank-account numbers, telephone numbers, and customer signatures. “ A professional organization holding this kind of data should have tested the disks to make sure (information) was destroyed,” said Andrew Chapman, an IT manager from Oxford. Data-archiving firm Graphic Data had used the computer to store the data for RBS and Natwest (Dow Jones Newswires and ZDNet.com via Yahoo! News Aug. 27) … * Fannie Mae announced Tuesday that it has elected Frederick B. “Bart” Harvey III to the last remaining vacancy on its 13-member board of directors. Harvey will serve on the Housing and Community Financial Committee, and the Technology and Operations Committee. He retired as chairman of the board of trustees of Enterprise Community Partners in March. Harvey was appointed to the Millennial Housing Commission by Congress in 2000 (/PRNewswire-FirstCall/ Aug. 26) …

Market News (08/27/2008)

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MADISON, Wis. (8/28/08)
* Hope Now has helped more than 2 million at-risk mortgage borrowers remain in their homes during the past 13 months, the coalition announced Wednesday. The alliance said it fixed more than 192,000 problem loans during July--up 6% from June and a monthly record. However, the group noted that 91,752 families still lost their homes during July--up 14% from the previous month. “Foreclosures have outpaced the efforts to combat them,” said Nicholas Retsinas, director of Harvard University’s Joint Center for Housing Studies. The coalition has started partnering with community groups to host events allowing at-risk borrowers to meet with foreclosure counselors. Twenty mortgage lenders and servicers--including Bank of America, JPMorgan Chase, Wells Fargo, and Washington Mutual--participated in such events in Florida. Almost 112,000 (58%) of the 192,000 workouts completed nationwide by Hope Now in July were repayment plans. The remaining (42%) involved permanently modifying loan terms (CNNMoney.com Aug. 27) … * Mortgage activity rose slightly last week, according to the Mortgage Bankers Association (mbaa.org Aug. 27). The trade group’s Market Composite Index edged up 0.5% during the week ending Aug. 22 to 421.6. The Refinance Index rose 0.3% to 1038, while the Purchase Index rose 0.6% to 315.9. Mortgage rates were mixed last week. The 30-year, fixed-rate mortgage (FRM) slipped 3 basis points to 6.44%, while the one-year, adjustable-rate mortgage (ARM) rose 8 basis points to 7.15%. The 30-year FRM is now 3 basis points higher than it was a year ago, while the one-year ARM is 63 basis points higher, noted Moody’s Economy.com (Aug. 27). Home prices may be close to bottoming out-- good news for the housing market, as are recent declines in oil and gasoline prices … * Oil prices rose for a third consecutive day on Wednesday amid fears about a Gulf Coast storm. Royal Dutch Shell said it has started evacuating 300 workers from its offshore oil rigs in the Gulf, which produces about one-fourth of the nation’s crude and much of its natural gas. Light, sweet crude for October delivery jumped $2.34 to $118.61 a barrel in morning trading Wednesday on the New York Mercantile Exchange. Also adding to investor worries, the Energy Department reported a surprise decline in crude supplies. Stockpiles fell by 100,000 barrels to 305.8 million barrels for the week ended Aug. 22 (Associated Press via Yahoo! News Aug. 27) … * Federal Reserve policymakers plan to raise interest rates to avert inflation, but haven’t yet agreed on when to make the move, according to minutes of the Fed’s early August meeting released this week. Several Fed members “worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets,” said the minutes. However, Fed policymakers also noted that economic activity remains weak. “The labor market continued to weaken significantly, financial conditions remained unfavorable, consumer and business confidence was downbeat, and manufacturing activity was contracting,” said the minutes (The New York Times Aug. 27) ... * Orders for big-ticket durable goods, items such as cars and computers that are manufactured to last three years or more, rose 1.3% in July following a 1.3% gain in June, the Commerce Department reported Wednesday. Demand for commercial aircraft jumped 28% in July, rebounding from a 21.3% decline in June. In another hopeful sign, non-defense capital goods orders excluding aircraft, a proxy for future business investment, increased by 2.6% in July--the largest gain since April (Associated Press via Yahoo! News Aug. 27) …

Market News (08/26/2008)

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MADISON, Wis. (8/27/08)
* U.S. consumer sentiment in August about the economy rose to the highest level in two years amid declining gasoline prices and two other reports that indicate the worst could be over for the troubled U.S. housing market. A consumer confidence index rose Tuesday to 56.9 from a revised 51.9 in July, according to private research group The Conference Board. The gain is the largest uptick since August 2006, and it shot ahead of the 53 level expected by economists surveyed by Thomson/IFR. Although August is the second month in a row that consumer sentiment went up--on the heels of a six-month slide since January--it remains at a level roughly half of where it was one year ago. “Consumer confidence readings suggest that the economy remains stuck in neutral, but may be showing signs of improvement by early next year,” Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement (The New York Times Aug. 26) … * Sub-par July new-home sales, indicated by data from the U.S. Commerce Department, show median home prices are still declining, as high inventory is pushing the nation’s housing slump along, analysts said. Sales of single-family homes in July rose to a seasonally adjusted rate of 515,000--a 2.4% increase over June. A July sales rate of 520,000 had been forecast by economists. The Office of Federal Housing Enterprise Oversight released its report on mortgages issued by Fannie Mae and Freddie Mac and indicated a 4.8% drop in home prices in the second quarter, compared with a year earlier (The Wall Street Journal Aug. 26) … * Home prices in 20 metropolitan areas dramatically dropped again in June, according to the Case-Shiller national home price index, although the rate of decline moderated in June from May. Prices still are falling at record levels on an annual basis, according to the index. Home prices for June in the 20 cities in the index were 15.9% lower than their level in the same period a year ago. And the 10-city index, which had it inception in 1988, had its worst annual reading ever--off 17%. Year-over-year declines were reported by all 20 cities measured by the index. Seven cities are experiencing prices that are off by more than 20%. The biggest decline is in Las Vegas with a 28.6% annual rate, followed by Miami (28.3%), and Phoenix (27.9%). However, there were indications that the rate of decline in home values slowed in June, with nine cities recording an increase in home values, compared with seven cities in May. Boston, Denver and Minneapolis all had home values that rose at least 1% in June (The New York Times Aug. 27) … * Average U.S. income in 2006 rose for the first time since 2000--at the end of the last economic expansion, according to the most recent tax data. In 2006, reported adjusted gross income on tax returns averaged $58,029. That was an increase of $739 (1.2%) in 2006 dollars from the $57,289 average in 2000, according to Internal Revenue Service data. Total income increased 8.3% to $619.2 billion. All of the increase went to people making more than $75,000, and 42% of the increase went to the roughly one in 400 taxpayers who made more than $1 million in 2006 (The New York Times Aug. 26) …. * The number of people without health insurance fell by more than one million in 2007--constituting the first annual decline since the Bush administration took office in 2001, according to the U.S. Census Bureau. The bureau said 45.7 million people--15.3%--were uninsured in 2007, down from 47 million in 2006. The U.S. poverty rate held steady at 12.5%, statistically unchanged from the 12.3% in 2006. That translates to 37.3 million people living in poverty in 2007 (The Wall Street Journal Aug. 26) … * On the heels of a slowing global economy, the U.S. dollar rose to a six-month high against the euro. The dollar also has risen against all other major currencies in August, ranging from a 10.4% improvement against the Australian dollar, to a 1.4 % increase against the Mexican peso. A measure that compares the dollar against currencies of six U.S. trading partners--the ICE futures exchange’s Dollar Index--went up to 77.619--its highest level since Dec. 26 (Bloomberg.com Aug. 26) … * U.S. home prices fell in the second quarter of 2008. With few key regional markets rallying, the Office of Federal Housing Enterprise Oversight (OFHEO) Purchase-only house price index held steady in June (Moody’s Economy.com Aug. 26). The seasonally adjusted figure, based on data from home sales, was 1.4% lower on a seasonally-adjusted basis in the second quarter than in the first quarter. This decline was less steep than the 1.7% decline in the prior quarter. Over the past year, prices fell 4.8% between the second quarter of 2007and the second quarter of 2008. The decline is the largest in the purchase-only index’s 17-year history, but is much smaller than those of other indexes. OFHEO’s all-transactions House Price Index fell 1.4% in the latest quarter and was down 1.7% over the four-quarter period. The figures were released Tuesday by OFHEO Director James B. Lockhart, as part of the quarterly report analyzing housing price appreciation trends. “Tighter credit conditions and relatively high inventory levels led to some sharp price declines in the second quarter,” said Lockhart. “However, the majority of Metropolitan Statistical Areas posted positive four-quarter growth.” … * On Monday, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility, it said in a press release. The results of the auction are: stop-out rate--2.380%; total propositions submitted--$84.168 billion; total propositions accepted--$75.000 billion; Bid/cover ratio--1.12; and number of bidders--66. The awarded loans will settle on Thursday and will mature on Sept. 25. The stop-out rate will apply to all awarded loans. Institutions that submitted winning bids were contacted by their respective reserve banks Tuesday and had to inform their local reserve bank of any error on Tuesday …

News of the Competition (08/26/2008)

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MADISON, Wis. (8/27/08)
* American consumers’ trust in business fell in 13 of 15 industries measured, including the category of Banks, Financial Institutions and Stock Brokers, according to the second Better Business Bureau/Gallup Trust in Business Index survey. Nearly half of those surveyed (47%) said they have only “some, very little or no trust at all” in companies that they do business with every day. Least trusted are auto dealers and real estate brokers, but banks are quickly losing consumers’ trust, the Better Business Bureau said. Only the banks category has greater than 5% change--in consumer responses that declined for “most trusted” and increased in “least trusted” groups. Declining home prices, stock market turmoil and subprime mortgage defaults were some of the factors respondents cited for losing confidence in this sector. Increased regulation of banks and mortgage lenders, and a federal government rescue of subprime borrowers would help restore their confidence, a majority of the respondents said … * American Express Monday announced plans to sell unsecured bonds to retail investors in increments of $1,000 through InterNotes. InterNotes is a joint venture between Incapital LLC and Bank of America Corp.’s securities division. The notes will have maturities of nine months or longer, AmEx said, adding that the notes could also offer fixed or floating rates and several types of payment schedules. In the past, InterNotes has conducted similar debt offerings for other financial services companies, including Freddie Mac, HSBC Holdings PLC and CIT Group Inc. (American Banker Aug. 26) … * The mortgage portfolio growth rate for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac slowed down in July. The two GSEs bought mortgage securities and home loans at a slower pace because combined net losses of $14.9 billion over the past four quarters depleted their capital, analysts said. Freddie’s portfolio grew to $798.2 billion in July--a 9.8% annualized rate--the slowest since March. Fannie grew to $758 billion--an annualized rate of 14.4%--the smallest increase since April. After their losses caused concerns that they may require a government bailout, both GSEs said this month that they would limit their growth. The declining demand for the GSEs, who are the largest buyers of U.S. home loan securities, is sending mortgage prices downward and causing home loan rates to rise, analysts said (Bloomberg.com Aug. 26) … * A record $871 billion of bonds maturing in 2009 will pack an increased-credit-cost wallop for banks, security firms and lenders, according to JPMorgan Chase & Co. The increase in yields could cost as much as $23 billion more in annual interest, compared with a year ago, Merrill Lynch index data indicate. In what is already the slowest-growing economy since 2002, higher refinancing expenses will constrain the ability of bankers to borrow in capital markets and to lend, which will halt the flow of credit to businesses and consumers. That would further slow the economy, analysts said. Nearly half of the 50 highest-rated U.S. financial institutions as of June 30 now have a negative outlook placed on them by Standard & Poor’s--the highest proportion in 15 years (Bloomberg.com Aug. 26) …

Market News (08/25/2008)

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MADISON, Wis. (8/26/08)
* Although home sales have remained in a relatively narrow range the past 11 months, existing home sales in July rose to the highest level in five months, the National Association of Realtors (NAR) said in a press release. July sales increased 3.1% to a seasonally adjusted rate of five million units from a downwardly revised level of 4.85 million in June. However, existing-home sales--which include single-family, condominiums, co-ops and town homes--are 13.2% lower than the 5.76 million-unit pace of July 2007. The up-and-down pattern of home sales could change soon, said NAR President Richard F. Gaylord. “We hope the new tools in the hands of homebuyers from the recently enacted housing stimulus package will spark a sustained sales uptrend in the months ahead,” he said. “Buyers who’ve been on the sidelines should take a closer look at what’s available to them now in terms of financial incentives. Given some of the inventory on the market, we also strongly encourage buyers to get professional home inspections.” Lawrence Yun, NAR chief economist, said home prices in some regions such as California and Florida could soon increase, and that he expects “more balanced conditions in 2009 [that] will eventually return to normal long-term appreciation patterns.” … * The Federal Reserve Bank of Chicago’s national activity index dropped to -0.67 in July from an upwardly revised -0.59 in June--marking the 12th consecutive month that the index has been negative. The three-month moving average, which smooths out volatility, rose to -0.8 from -0.94. The economy will continue to struggle and the job market remains weak, analysts said. House prices will continue to drop, and financial conditions will remain a challenge, they added, saying that a longer recovery than previously expected will take place (Moody’s Economy.com Aug. 25) … * Uninsured Americans will spend about $30 billion on medical care this year, while others--mostly the government--will pay for another $56 billion in costs, according to a new report. The cost of covering all the uninsured U.S. people would be $208.6 billion--$122.6 billion above this year’s projected total--because people who have health insurance tend to use more health-care services, said a study conducted by researchers at George Mason University in Fairfax, Va., and the Urban Institute think tank in Washington, D.C. Analysts said the report could spur debate on escalating health care costs and health care reform. The amount of health care spending--which accounted for 16.3% of gross domestic product in 2007 or roughly $2.2 trillion--could almost double in the next 10 years, according to federal figures. More of that cost is expected to shift to the government, even while it is attempting to downsize large federal deficits, analysts said (The Wall Street Journal Aug. 25) … * A new drilling boom has increased American natural gas production at an increased rate that has not been seen the past half century, resulting in prices being forced downward and flying against the generally held opinion that domestic gas fields were in an irreversible decline, analysts said. New drilling technology allows access to gas trapped in gigantic shale beds found throughout North America--gas deposits that were long-believed to be inaccessible. Increased natural gas production over the next decade could keep the cost of utility bills down, lessen the need for gas imports, and make energy-intensive industries more competitive, analysts said (The New York Times Aug. 25) …

News of the Competition (08/25/2008)

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MADISON, Wis. (8/26/08)
* Monday the Federal Reserve offered $75 billion in 28-day credit through its Term Auction Facility, it said in a press release. The settlement date will be Thursday, and the maturity date will be Sept. 25. Minimum bids allowed were set at $5 million with bid increments at $100,000. Summary auction results will be published on the website of the Board of Governors of the Federal Reserve System at about 10 a.m. EDT today. Also today, reserve banks will notify individual institutions with winning bids in their districts. Participants have until 12:30 p.m. EDT today to inform their local reserve bank of any error … * The largest U.S. insurer fell to the lowest level in New York trading since 1995 after Credit Suisse Group said mortgage writedowns could cause a $2.41 billion third-quarter loss at American International Group Inc. (AIG). Citing potential losses on credit-default swaps, Thomas Gallagher, analyst for Credit Suisse, changed his estimate for AIG to an 86 cents-per-share deficit from a profit of 13 cents per share. Gallagher’s is the most pessimistic prediction of 15 analysts surveyed by Bloomberg. They averaged 65 cents per share in estimates. Owing to AIG selling credit-default swaps to fixed-income investors as insurance against price drops, its profit might be exhausted for the fourth straight quarter, analysts said. The move caused roughly $25 billion in writedowns on swaps over the past three quarters. Robert Willumstad, CEO of AIG, said he will announce the results of the company’s strategic overview Sept. 25 (Bloomberg.com Aug. 25) ... * Despite increased consumer incentives, U.S. automakers are expected to report significant drops in August domestic sales, according to J.D. Power & Associates. However, sales industrywide are expected to show slight improvement from July’s bleak rate. Because of General Motors 100th anniversary sales event, which features “employee pricing” on most vehicles and cash rebates on some light trucks, J.D. Power still expects sales in the closing days of August to improve. Based on sales through Aug. 17, the J.D. Power Report estimates sales for the month will be around 1.21 million vehicles, or 13.4 million vehicles on a seasonally adjusted rate. That estimate is down from the August 2007 seasonally adjusted rate of 16.2 million vehicles, but up 6.3% from July (The Wall Street Journal Aug. 25) … * Interest-rate derivatives indicate that banks are becoming more reluctant to lend, due to speculation that credit losses will rise as the global economic slowdown worsens, analysts said. Countries accounting for half of the world’s economy are facing recession, said Binit Patel, an economist at Goldman Sachs Group Inc. in London. Also, the premiums charged by banks for short-term cash could approach the record levels set in 2007, analysts said. They based their estimates on trading in the forward markets, in which financial instruments are sold for a future delivery date. Some suspect that banks are still hiding losses, and that they will have to refinance in $88 billion in December, which means the problems heading into the end of the year will worsen, said Stuart Thomson of Resolution Investment Management Ltd. (Bloomberg .com Aug. 25) …

Market News (08/22/2008)

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MADISON, Wis. (8/25/08)
* While saying he expects inflation to ease down toward the end of the year, Federal Reserve Chairman Ben Bernanke also warned at a conference held in Jackson Hole, Wyo., Friday that the economy would not reach its potential for awhile, and urged regulators to develop a more comprehensive approach to policing the financial industry. In his speech, Bernanke described the U.S. financial crisis as a “gale force” and said the nation was dealing with “one of the most challenging economic and policy environments in memory.” The Fed is not considering higher interest rates, despite a “jump” in inflation Bernanke said. Fed officials believe stable commodity prices along with slowing job growth and tethered inflation expectations will mitigate price pressures down the road, he added at the conference (The New York Times Aug. 23 and The Wall Street Journal Aug. 22) ... * Interest rates on U.S. home loans are rising due to a decline in mortgage bond prices. The rise is even affecting borrowers who are least prone to default. Average 30-year fixed-rate mortgages rose 7.37% last week--the highest level in roughly six years, and yields on bonds guaranteed by Fannie Mae and Freddie Mac went up almost to the highest level relative to treasuries since 1986. The two government-sponsored enterprises bought or guaranteed more than 70% of new home loans--making them mostly “prime mortgages,” analysts said. The higher rates for the safest borrowers could further drag down the worst U.S. housing market since the Great Depression, while also undermining efforts of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, analysts said. Some buyers already are shut out, and costs are increasing for consumers with sub-par credit scores or seeking to borrow with smaller down payments, analysts add (Bloomberg.com Aug. 21) … * Direct borrowing at the Federal Reserve’s discount window by U.S. banks lessened slightly in the latest week but remained at strong levels, which suggests that the strain in credit markets is still high, according to Fed data released Thursday. Discount window borrowings for banks averaged $17.61 billion per day in the week ended Wednesday, Aug. 20, compared with an average $17.81 billion per day the prior week. Primary credit borrowings averaged $17.51 billion per day in the latest week, compared with a record $17.70 billion per day the prior week. Dealers borrowed nothing the past two weeks from the Primary Dealer Credit Facility (PDCF), which is one of many Fed programs created to provide inexpensive financing to financial institutions negatively impacted by the credit crisis (Reuters Aug. 21) … * The number of mass layoffs in the U.S. fell in July. Incidents where at least 50 workers from a single organization were laid off totaled 1,512 in July, compared with 1,643 in June, marking the second straight month that mass layoffs have dropped, according to the Bureau of Labor Statistics. Although the number of mass layoffs reported declined, labor markets are still distressed, and employers are being more cautious when hiring during the most recent cyclical upswing, the bureau said (Moody’s Economy.com Aug. 22) ... * Many European workers are dealing with inflation better than their U.S. counterparts. That is partly because many laws and practices are more work-friendly due to stronger labor unions in the 15-nation euro zone, analysts said. Euro-zone wages and salaries were 3.4% higher in the first-quarter, compared with a year earlier. The 3.4% rate matched the first-quarter annual inflation rate. While Euro-zone inflation was 4% in July, many economists expect wages to keep going up this year. While U.S wages and benefits increased 3.3% in the first quarter, consumer prices were 4.1 % higher in the first quarter than a year ago. Since the first quarter, inflation has risen further, hitting 5.6% in July, while compensation growth has slowed (The Wall Street Journal Aug. 22) … * The Economic Cycle Research Institute (ECRI) Weekly Leading Index fell to 125.9 for the week ending Aug. 15 from an unrevised 126.4. The annualized growth rate dropped to -11.4% from a revised -10.7% (previously -10.8%). Recent growth rate declines indicate a more prolonged downturn, with the risk of a sharper downturn late in 2008 and early in 2009, said Moody’s Economy.com. The ECRI’s growth rate made a sharp turn more negative the past several months. Employment is contracting with nonfarm payrolls declining in seven consecutive months by an average of 66,000 per month (Moody’s Economy.com. Aug. 22) …

News of the Competition (08/22/2008)

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MADISON, Wis. (8/25/08)
* Visa and JPMorgan Chase & Co. announced a joint consumer pilot Thursday, using text messages on mobile devices to offer merchant discounts and specials to Chase credit and debit cardholders in the Phoenix metropolitan area. The offers--redeemable on the websites of more than 50 participating merchants or at the point of sale--are customized to match personal interests selected by Chase cardholders. This method allows consumers to see only the offers they are likely to want. It also allows merchants to target offers to consumers who are most likely to be interested, analysts said. Visa is delivering merchant offers to mobile devices, using short text message service--the same technology that allows individuals to send each other text messages (Businesswire.com Aug. 21) … * Federal Home Loan Banks are among the few financial institutions realizing significant profits, while Washington and Wall Street have growing concerns that government-sponsored enterprises Fannie Mae and Freddie Mac might flounder due to housing-related credit losses, analysts said. Second-quarter earnings reports revealed that 10 of 12 banks indicated their net income grew, while four said profits rose more than 50%. Combined profits of the Home Loan Bank system rose to $718 million--a 14.3% increase. Home Loan Banks continue to earn money by providing advances to members looking for something that is getting harder to find: quick, cheap liquidity, analysts said (American Banker Aug. 22) ... * Moody’s Investors Service downgraded the preferred stock of Fannie Mae and Freddie Mac to the lowest investment-grade rating last week. Moody’s said the downgrade was warranted because the increased likelihood of the U.S. Treasury’s “direct support” may devalue the shares. The ratings were lowered five steps to Baa3 from A1. Bank financial strength ratings, which indicate the odds of a government bailout, were cut four steps to D+ from B-, Moody’s said. The two government-sponsored enterprises likely will not be allowed to miss payments on their subordinated or senior debt, Moody’s added (Bloomberg.com Aug. 22) ... * Regulators have reached settlements with Deutsche Bank, Goldman Sachs and Merrill Lynch pertaining to their roles in selling risky auction-rate securities to investors. In accordance with the agreement, Merrill will buy back from investors about $10 billion to $12 billion of the investments by Jan. 2 and pay a fine of $125 million. Goldman Sachs must buy back $1.5 billion of the auction-rate securities and was fined $22.5 million. Deutsche Bank must pay back roughly $1 billion of the securities, and was fined $15 million (USA Today Aug. 22) …

News of the Competition (08/21/2008)

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MADISON, Wis. (8/22/08)
* A unit of U.S. private-equity firm Lone Star Funds--Lone Star Germany--has agreed to buy a 90.8% stake in struggling German bank IKB Deutsche Industriebank AG. IKB is the first casualty of note from the U.S. subprime mortgage crisis that began last summer, analysts said. Although the price of the sale wasn’t disclosed, it was a low three-digit-million-euros amount, said Wolgang Kroh, KfW Bankengruppe chief executive. KFW is IKB’s largest shareholder. The deal is expected to close in October, analysts said (The Wall Street Journal Aug. 21) … * In an ongoing auction-rate securities scandal involving Bank of America, Deutsche Bank and Goldman Sachs, New York Attorney General Andrew Cuomo is increasing in his efforts to force the banks to agree to settlements. Cuomo’s office also has widened its investigation into the three firms by gathering more documents, interviewing more witnesses and assigning more lawyers to investigate auction-rate operations at the firms. Settlement talks with the firms and other regulators have escalated, sources said (Clusterstock.com Aug . 21) … * U.S. investment banks Goldman Sachs Group, Lehman Brother Holdings and Morgan Stanley are likely to record the biggest year-over-year drop in revenue in the third quarter, says BernsteinResearch Analyst Brad Hintz. Investment-banking revenue will drop 45% to 48% from the year-earlier period, Hintz forecast. The three banks will report their earnings in the middle of September. In addition to the fixed-income environment significantly diminishing this quarter, mortgage-related securities and ineffective hedges will cause further write-downs, Hintz said (The Wall Street Journal Aug. 21) … * Citigroup Inc, the largest credit card lender in the U.S, said it is seeking partners in Hong Kong to garner larger market share. With 31 card issuers in Hong Kong, some of the smaller issuers are thinking of obtaining partners since the credit card business is so expensive, said Neil Gardner, Citigroup director of cards for Hong Kong. Citigroup is attempting to increase revenues from the business outside North America. Net income for that division dropped 55% in the first half of the year, according to a regulatory filing on Aug. 1. The loss of jobs and higher gasoline and food prices have impacted consumers, resulting in more delinquencies on bill payments, analysts said. (American Banker Aug 21) …

Market News (08/21/2008)

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MADISON, Wis. (8/22/08)
* The index of leading economic indicators in the U.S. dropped in July by the most it has in almost a year, portending a grim outlook for economic growth, analysts said. The Conference Board’s gauge fell 0.7%--more than the 0.2% median forecast of 63 economists in a Bloomberg News survey. It was the largest drop since August 2007. The index indicates the direction of the economy for the next three to six months. The number indicates a weak economy that is probably in recession, said James O’Sullivan, a senior economist at UBS Securities (Bloomberg.com Aug. 21) … * For the second consecutive week, the number of workers filing new claims for unemployment benefits fell, after hitting a six-year high mark, the Labor Department said Thursday. For the week ended Aug. 16, initial claims for jobless benefits dropped 13,000 to a seasonally adjusted 432,000. Expectations were that claims would fall by 15,000, according to economists surveyed by Dow Jones Newswires. In its weekly report, the Labor Department also revised the prior week’s jobless claims number downward 5,000 to 445,000. A recent emergency extension of jobless benefits has brought with it a new surge in claims because applicants became aware they could file new claims. This is partly why the numbers remain elevated, the department said (The Wall Street Journal Aug. 21) … * A new Deloitte survey shows that 90% of consumers surveyed said they will change the way they shop for back-to-school supplies this year. Of those responding, 79% said they will buy more back-to-school items on sale; 70% will buy only what the family needs; 68% will buy more lower-priced items; 53% will use more store coupons; 46% will shop at different--less expensive--stores than usual; 45% will put off buying certain items for as long as possible; 33% will buy more private-label items; and 27% will research more products online to find the best price. The survey also indicated that the majority of consumers (88%) will do their back-to-school shopping at discount/value department stores this year (Center for Media Research Aug. 21) … * U.S. manufacturing is shrinking and a rebound is not imminent, says a manufacturing survey conducted by the Federal Reserve Bank of Philadelphia. The index for general business conditions increased to -12.7 for August, compared with -16.3 for July. Although the improvement meets the expectations of Moody’s Economy.com, the increase has been below its neutral threshold of zero for nine straight months, analysts said. A slowing global economy and lack of improvement in manufacturing will keep the Federal Open Market Committee from taking action this year, the survey report said (Moody’s Economy.com Aug. 20) … * Prices for crude oil rose more than $3 per barrel on speculation that increasing U.S./Russia political tensions could disrupt the flow of oil, while a weaker U.S. dollar enhances the appeal of commodities, analysts said. The Russian invasion of Georgia has stopped some export routes for Caspian Sea crude oil. Also, Russia, which is neck-and-neck with Saudi Arabia as the biggest oil producer in the world, criticized U.S. plans to create a missile shield in Poland. As the dollar fell to its lowest level in a week against the euro, prices for oil and gold rose (Bloomberg.com Aug. 21) …

Market News (08/20/2008)

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MADISON, Wis. (8/21/08)
* Success in repaying $223 billion of bonds due at the end of the second quarter likely will determine whether Fannie Mae and Freddie Mac can avoid a federal government bailout, analysts said. Fannie and Freddie dropped as much as 20% and 32% respectively on New York Stock Exchange composite trading Wednesday. This indicates that shareholders believe a federal rescue is unlikely, analysts said. Washington, D.C.-based Fannie has roughly $120 billion of debt maturing through Sept. 30, while McLean, Va.-based Freddie has $103 billion, according to figures provided by the government-sponsored enterprises (GSEs) and data compiled by Bloomberg. However, other investors believe that a bailout of the two housing behemoths is inevitable, even though the U.S. Treasury and the two GSEs say government intervention is not warranted. Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm, said he believes the markets are behaving as if a bailout is inevitable and that the Treasury will be forced to intervene within a couple of weeks (Bloomberg.com and The New York Times Aug. 20) … * Mostly due to refinancing contracts, mortgage demand fell again in the week ending Aug. 15 as the market composite index fell to 419.3, according to the Mortgage Bankers Association Weekly Mortgage Applications Survey. The 1.5% drop in the composite index was mostly due to a 3.7% decrease in the refinance index to 1034.5--the lowest level since 2000. The purchase index fell by 0.4% to 314. With falling home prices, and major lenders such as Fannie Mae and Freddie Mac accumulating asset losses, mortgage demand remains low, the survey indicated … * Commercial real estate markets will be affected in the upcoming months by the recent deteriorating economic conditions, according to the National Association of Realtors (NAR) forward-looking index for the commercial real estate sectors. As measured by net absorption and the completion of new commercial buildings, commercial real estate activity is projected to weaken over the next six to nine months, said Lawrence Yun, NAR chief economist. Job cuts and sluggish economic activity (especially in industries that require commercial building spaces) since the beginning of the year has increased the pace of decline, Yun said. As a result, NAR is expecting the weakest commercial brokerage activity in almost three years, he added (realtor.org Aug. 20) … * Based on estimates by the U.S. Energy Department that show a decline in gasoline supplies, crude oil prices rose for a second day Wednesday. Stockpiles of gasoline last week likely dropped three million barrels from 202.8 million barrels the previous week, according to the median of 14 responses to a Bloomberg News analyst survey. Because of emerging market demand, the price per barrel of oil will top last month’s record $147.27, according to Goldman Sachs Group Inc. Gasoline supplies are dwindling because refineries are operating at low levels, said Michael FitzPatrick, vice president for new energy risk management at New York-based MF Global Ltd. Gasoline supplies fell 6.39 million barrels in the week ended Aug. 8--the biggest drop since October 2002 when a Hurricane Lili and Tropical Storm Isadore disrupted output along the Gulf of Mexico. Pump prices have not gone up since July 19, according to the American Automobile Association (Bloomberg.com Aug. 20) … * Even though charge-off growth slowed down in the second quarter and delinquencies for June were “relatively flat,” overall credit card charge-offs continued to worsen in June, Standard & Poor’s Corp. (S&P) said Tuesday. Credit card charge-offs rose 10 basis points from May to June to 6.1%. While 30-day delinquencies went up 10 basis points to 4.4%, 60-day and 90-day delinquencies remained flat at 3.1% and 2.2% respectively. The slowing of charge-off growth is likely due to credit card issuers’ efforts to strengthen collections strategies and expand collection staffs, according to Kelly Luo, S&P credit analyst (American Banker Aug. 20) …

News of the Competition (08/20/2008)

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MADISON, Wis. (8/21/08)
* Wachovia Corp. is selling $40 million of land and construction loans to a joint venture created by Land Cap, a residential land company. This is an early indication that investors are eager to pick up billions of dollars of troubled land and construction loans, analysts said. Real estate veteran Jeffrey Gault created the joint venture to buy loans that have a book value of $75 million to $80 million, according to sources familiar with the deal. The loans, collateralized by 2,900 house lots in various stages of development in states such as Arizona, California, Florida and Illinois, were issued to home developers. Plummeting values of the collateral or delinquent payments put many of the loans in distress, analysts said. Wachovia--one of the largest U.S. construction lenders--will be a minority partner in the venture. The deal will allow the Charlotte, N.C.-based company to move problem loans off it books and raise capital, analysts said (The Wall Street Journal Aug. 20) ... * The largest Canadian lender has lured about 100 senior bankers from troubled U.S. rivals in the past year, as it expands its businesses. Royal Bank of Canada said it has increased its U.S. investment banking business by 7% to about 1,600 people in the past 12 months, recruiting talent from companies such as Citigroup Inc., UBS AG and the now-defunct Bear Stearns Cos. Since the meltdown of the U.S. subprime market a year ago, U.S. banks and security firms have cut more than 76,000 jobs and sustained about $240 billion in losses and writedowns. Canadian lenders--which have recorded $9.4 billion in writedowns--are turning the situation to their advantage by recruiting professionals and buying bank assets, analysts said (Bloomberg.com Aug. 20) ... * Citigroup Inc. will purchase up to $30 million in small enterprise loans, after entering into a five-year contract with Accion Texas, a development company that makes loans to existing and startup Texas businesses, in the so-called microfinance industry. The industry provides small loans to people looking to start their own business. The industry has grown in developing counties worldwide. With the deal, the San Antonio-based Accion Texas will handle collections, servicing and underwriting of the loans, and will share revenue and risk with New York-based Citigroup. Accion Texas is the biggest U.S. microenterprise loan fund, with an active microloan portfolio of more than $19 million. The deal should change the perception of microfinance in the U.S. and give Accion Texas the capital it needs to grow, Citigroup said in a news release (International Tribune Aug. 19) … * Freddie Mac Tuesday told $3 billion of new five-year reference notes, which are due Sept. 27, 2013. The notes were at their highest yield over benchmarks in at least 10 years, analysts said. Including the Tuesday offering, Freddie has issued $39 billion of reference notes to date in 2008. It has roughly $260 billion in reference notes and bonds outstanding. To manage the sale, Freddie hired Citigroup Global Markets, Deutsche Bank Securities and Merrill Lynch (Reuters Aug. 18 and American Banker Aug. 19) … * Government-backed home loan applications more than tripled last month compared with a year earlier, as funding from private lenders diminished, an industry group said Monday. The Mortgage Bankers Association (MBA) released data that indicates the growing popularity of mortgages insured by the Federal Housing Administration (FHA), analysts said. The FHA is a government agency that backs loans issued to borrowers with poor credit. Government-issued loans mostly backed by the FHA constituted more than 29% of loan applications in July, compared with 8.4 % a year earlier, the MBA said (CNNMoney.com Aug. 18) ...

Market News (08/19/2008)

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MADISON, Wis. (8/20/08)
* The U.S. Producer Price Index (PPI) for finished goods jumped an unexpected 1.2% in July--the highest annual rate in 27 years, reported the Labor Department Tuesday. Economists had expected a 0.5% increase in the overall index and a 0.2% core rise. The core index, which doesn't include energy and food, rose 0.7% in July and grew 3.5% from a year ago, a 17-year high. The jump was attributed to rising wholesale energy prices and their spread to other products such as automobiles, prescription drugs and capital equipment. Although energy and commodity prices are decreasing this month and the U.S. dollar has stabilized, it will be difficult for Federal Reserve officials to ignore the report, because it follows two other reports of rising import and consumer prices, said The Wall Street Journal and The New York Times (Aug. 19). Although the Fed is expected to keep the target federal funds rate at 2% into 2009, the rising prices will test the Fed's policy and may put rate hikes back on the table later this year, said analysts … * U.S. housing starts for July totaled a seasonally adjusted 965,000, a slightly less-than-expected 11% drop from June's 1.084 million units, the Commerce Department said Tuesday. Economists had expected the housing starts to drop 11.8% during July. July's housing starts are the lowest since March 1991, which had 921,000 starts, and are 32.4% below building permits started a year earlier (Economy.com Aug. 19). Housing completions for July totaled 1.035 million--8.7% below the revised June estimate of 1.134 million and 31.7% below July 2007. Single-family housing completions totaled 791,000, a 7.2% drop from June. The largest drop in permits was in the Northeast, with 108,000 or 63.4% below June's permits. In the West, housing starts fell 14.8%. However, permits in the Midwest and South increased by 4.1% and 1.4%, respectively. The statistics were attributed to high inventories of unsold homes … * The economy slump is taking its toll on retailers. Home Depot Inc., the nation's largest home-improvement retailer, posted a 24% decline in its net income for fiscal second-quarter, its seventh sales decline in eight quarters (Bloomberg.com and The Wall Street Journal Aug. 19). Minneapolis-based Target's second-quarter net income also declined, by 82 cents per share to $634 million. That compares with $686 million or 80 cents per share a year ago … * Chain store sales crept up 0.1% in the week ending Aug. 16, a slight reversal of the previous week's 1.1% decline, reported the International Council of Shopping Centers (ICSC) (Economy.com Aug. 19). Although sales are weak, they have declined only once in the past eight weeks. However, growth over a year ago was down, to 2.4%, the weakest since early July. Cool weather supported back-to-school and fall merchandise sales, but the Summer Olympics likely distracted consumers from shopping, said ICSC. ICSC's monthly survey of shoppers indicated that 64% of consumers surveyed say they had less discretionary spending the past month because of high gasoline prices. Also, 36% reported a considerable impact from gas prices--the smallest share since February … * A former chief economist of the International Monetary Fund (IMF) says the credit market woes and recession may bring failures among some large U.S. banks. Kenneth Rogoff told Bloomberg.com (Aug. 19) that things will get worse in the U.S. because the financial sector needs to shrink and a few medium and small bank failures won't do the job. Rogoff said the government should nationalize the mortgage-finance government sponsored enterprises Fannie Mae and Freddie Mac, which lost more than 80% of market value this year. Rogoff, who was IMF's chief economist from August 2001 to September 2003, said to expect consolidation even among major investment banks … * Oil production is starting to drop at all the major Western oil companies, which have lost their influence and ability to increase supplies at a time where the world will need more oil to satisfy developing nations like China. The companies are being squeezed out of resource-rich provinces and forced to renegotiate on less-favorable terms, reported The New York Times (Aug. 19). Amy Myers Jaffe, associate director of Rice University's energy program in Houston, said the industry is in a crisis. Much of its production is in mature regions on the decline. Oil production has not caught up with surging consumption and the scope of the supply problem surfaced in the last quarter when the five largest publicly traded oil companies, including Exxon Mobil, said their output declined by 614,000 barrels a day--the steepest decline in five consecutive quarters. Energy analysts don’t expect oil supplies to grow this year in countries outside the Organization of the Petroleum Exporting Countries. Western companies--Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total of France and Eni of Italy--produce just 13% of the world's oil production …

News of the Competition (08/19/2008)

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MADISON, Wis. (8/20/08)
* Lehman Brothers Holdings Inc. has approached several bidders about the possibility of purchasing part of the company’s investment management business, as it attempts to put behind it the growing losses it incurred on mortgage-related assets that went south, according to sources familiar with the situation. Lehman is in the process of circulating a detailed book of financial information about the investment management unit to a group including private equity firms Carlyle Group, General Atlantic LLC, and Hellman & Friedman LLC. In recent weeks, Blackstone Group LP also has expressed interest, sources said. Specifics of the structure of the deal are still sketchy, analysts said. The Lehman unit includes hedge-fund, private-client and private-equity components, in addition to the company Neuberger Berman (The Wall Street Journal Aug. 19) … * American Home Mortgage Investment Corp. said it will pay no more than 5.9 cents on the dollar to unsecured creditors as it liquidates assets. The company was among the biggest U.S. home loan providers before it sought bankruptcy protection a year ago. American Home said many unsecured creditors will recover zero to 2.2 cents on the dollar on their claims, according to a disclosure statement filed Friday with the U.S. Bankruptcy Court in Wilmington, Del. While creditors whose claims are backed by collateral will recover all the money they are owed, shareholders will receive nothing, the company said. Several court filings indicate that American Home and seven affiliates estimated they had $210 million of cash as of June 30. American Home’s Chapter 11 liquidation plan will be voted on by creditors after they receive the disclosure statement being mailed to them (The New York Times Aug. 19) … * Discover Financial Services has introduced a supplemental loss-of-income offering, created to pay benefits directly to a customer to help defray monthly expenses. Discover Income Gap Protection helps cardmembers bolster their finances during unexpected life crises such as disability, unemployment, accidental death and family leave. Income Gap protection benefits can be used to pay credit cards, mortgages, utilities or anything else the insured may need. The benefit amount is directly paid to the cardmember, and because it is not a loan, there is no payback requirement (Trading Markets.com Aug. 19) … * Washington Mutual Inc. (WaMu) signed a branding deal with Cardtronics to put 70 WaMu-branded ATMs in CVS drugstores in Georgia. The ATMs will provide surcharge-free withdrawals, balance inquiries and account transfers from primary accounts to all WaMu customers. The ATMs are owned and operated by Cardtronics (ATMmarketplace.com Aug. 18) … * ChargeSmart LLC is a start-up company that allows customers to use credit cards for making loan payments to billers who don’t accept cards. Auto loans are the most popular use of its service, the company said. In June, the San Francisco-based company introduced its service. It charges users $4.95 per transaction plus 2.29% of the amount of the product or service being paid for. Many customers use the service to set up automated payments for their car loans--all the way up to a year, the company said. The service also can be used to keep current on mortgage payments or other loans in a month when a consumer is cash-strapped, the company added (American Banker Aug. 19) …

Bloomberg CU credit quality relatively good

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WASHINGTON (8/19/08)--Asked about stress on credit union balance sheets resulting from today's economy and mortgage market, Credit Union National Association (CUNA) Chief Economist Bill Hampel told Bloomberg Television yesterday credit unions "tend to be fairly conservative in their lending" but some credit unions, especially those in areas hardest by the downturn in the housing market, have seen some deterioration in credit quality. Still, he noted, the mortgage delinquency rate at CUs is only 0.6%, a figure that "still pales in comparison to some other lenders."
CUNA Chief Economist Bill Hampel. (Photo provided by CUNA)
Credit unions continue to experience "collateral damage" indirectly from troubles in the housing sector, he added. As a result credit unions are tightening standards and seeing lower volume in areas like new car loans, but first mortgages remain the fastest growing segment of their portfolios. "The fact we have this credit crunch and mortgage loans are more difficult to get from other lenders means people are coming to credit unions for their mortgage loans But for all other lending we're seeing much tighter credit." On credit union savings, Hampel explained less has been flowing in. "Quite a few financial institutions that used to rely heavily on securities markets to fund their lending are less able to do so due to the credit crunch," he explained. "They're paying up for deposits, and so we're seeing less money flowing into credit unions than we usually do because the retail deposit market has become quite competitive." Asked if falling gas prices will be much help to the economy, Hampel said "it takes a little bit of pressure off the household sector" but the U.S. consumer is "still facing other headwinds," including falling equity in their homes, job losses (half a million lost so far this year), still-high energy and food prices, tighter credit and--of greatest concern for the long-term--high debt exposure of the household sector, made worse by the fact that consumers aren't saving. "There's nothing for them to fall back on," Hampel told Bloomberg.

Market News (08/18/2008)

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MADISON, Wis. (8/19/08)
* Federal Reserve Chairman Ben Bernanke is attempting to define which financial institutions the Fed deems safe to let fail. The more time it takes to decide, the tougher the decision will be, analysts said. During the credit crisis of the past year, Bernanke has expanded the protective role of the central bank several times, by offering loans to investment banks and mortgage giants Fannie Mae and Freddie Mac through its discount window--among other moves. The Fed also has used its balance sheet to provide a haven for Wall Street’s hard-to-finance bonds, analysts said. A lack of clearly defined limits regarding the Fed’s role could put its independence in jeopardy, as Congress realizes that the Fed’s $900 billion portfolio can be used for emergency bailouts that might otherwise need appropriations that could have politically charged overtones, analysts add. The growing role of central banks will be of great interest when Bernanke addresses his cohorts from around the world at the Kansas City Fed’s Symposium Friday at Jackson Hole, Wyo., analysts said (Bloomberg.com Aug. 18) ... * The global economy is narrowly avoiding a recession, according to Moody’s Economy.com Survey of Business Confidence. The survey indicates consumer sentiment remains weak, and consistent with recession in the U.S., Europe and Japan. The Asian economy is showing growth that is close to its potential. Although global sentiment is not as negative as it was in the spring, businesses are still concerned about sales. Also, their general assessments of current conditions and the outlook into 2009 remain clearly negative. Pricing pressures remain quite elevated, as roughly 50% of businesses surveyed said they are raising prices (Moody’sEconomy.com Aug. 15) … * A steep plunge in prices of commodities is lifting hopes that inflation in many areas of the developing world--especially Asia--is peaking, which would provide relief for the fragile global economy, analysts said. High prices for food, oil and other essentials remain a substantial obstacle--particularly for developing countries such as Egypt, Haiti and India. Skyrocketing costs in these countries earlier this year triggered transport strikes, violence and other unrest. However, prices for oil, rice, palm oil, wheat, copper and many other commodities have fallen significantly, analysts noted. It is unlikely that the commodity market’s high prices seen earlier this year will be manifested again soon, because economic growth and demand for raw materials is easing throughout the world--including China, analysts said. This is a good development for developing nations because their economies are significantly more commodity-intensive than those of industrialized nations, and inflation rates are strongly influenced by the movement of commodity prices, analysts said (The Wall Street Journal Aug. 18) ...

News of the Competition (08/18/2008)

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MADISON, Wis. (8/19/08)
* The Neighborhood Assistance Corporation of America (NACA), a Boston-based housing advocacy group, is conducting workshops nationwide to help homeowners facing foreclosure. After a five-day event in Washington, D.C., the group had submitted workout plans for 10,000 homeowners. It expected to get 50% of the loans modified with two weeks. Those who have not received workout solutions are being urged by Bruce Marks, CEO of NACA, to contact their congressmen and senators, and to call CEOs of banks. Marks said NACA is giving out phone numbers and addresses of the CEOs. Modified loans are put on non-performing status and monitored for six months. After borrowers pay on time for six consecutive months, the loans are then generally moved to performing status. Although homeowners paying off their modified loans on a consistent basis can boost balance sheets, analysts are skeptical about how much this can positively impact financial institutions, and whether homeowners in financial distress can stay current with payments, even with the new terms (MarketWatch Aug. 12) … * Commercial and industrial loans at U.S. banks dropped $1.3 billion to about $1.518 trillion in the week ended Aug. 6, according to the Federal Reserve Board. The drop came after a $5.6 billion increase the previous week. Jumbo certificates of deposit increased $15.6 billion to roughly $2.135 trillion. This follows a drop of $19.2 billion the previous week. Revolving home equity loans went up $900 million to $525 billion after rising $600 million the previous week (American Banker Aug. 18) … * Actions taken to force Wall Street banks and brokers to buy back auction-rate securities may not help individual investors, analysts said. Andrew Cuomo, New York state attorney general, reached agreements in the past two weeks with Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, UBS AG, and Wachovia Corp. to start buying back $42 billion of debt that the companies sold directly to individuals. However, the agreements do not cover investors who hold most of the remaining $160 billion purchased through mutual fund firms, or brokers who didn’t underwrite the debt. That exception is a big oversight, according to Jonathan Kahn, a New York investor who holds auction-rate debt underwritten by Goldman Sachs Group that he bought from a different brokerage. Investors have been mired in the securities, which are long-term debt that interest rates usually set every seven, 28 or 35 days through periodic auctions--since that market collapsed in February, analysts said. Dealers who bought debt that went unsold at auctions for the past two decades, suddenly stopped because of widening credit-market losses, analysts added (Bloomberg.com Aug. 18) ... * One of Japan’s biggest banks agreed Monday to buy the remaining part of UnionBanCal Corp. that it doesn’t already own for roughly $3.5 billion. Mitsubishi UFJ Financial Group is attempting to broaden its stagnant home market, as Japanese companies look to expand their presence abroad and take advantage of a weak U.S. dollar, analysts said. The transaction puts the value of UnionBanCal--which owns UnionBanCal of California, one of the 25 largest U.S. banks--at about $10.1 billion. Mitsubishi upped its bid to $73.50 per share--from a $63 offer it made last week. In April, Mitsubishi made its first unsolicited offer of $58 per share, which was rejected by UnionBanCal as “not in the best interests of UnionBanCal’s minority stockholders.” (The New York Times Aug. 19) … * SLM Corporation, also known as Salle Mae--the top saving- and paying-for-college company in the U.S.--announced the promotion of five officers last week. Cecelia Dwyer, to vice president, school marketing; Brandon McBride, to vice president, private credit collection strategies; Doug St. Peters to vice president, portfolio management; Mike Walters to vice president, private collection operations; and Eric Watson, to vice president and associate general counsel. Also, Michael Maier joined Sallie Mae as vice president--a role in which he will help shape the company’s consumer lending businesses (MarketWatch Aug. 15) …

News of the Competition (08/15/2008)

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MADISON, Wis. (8/18/08)
* Merrill Lynch is facing a lawsuit over its sales of auction-rate securities. New York Attorney General Andrew Cuomo said Friday that he is sending a letter notifying the investment firm that his office will file suit. The attorney general said he hasn’t been able to reach a “satisfactory agreement” with Merrill. Cuomo said his office is investigating about 25 financial firms that sold the securities. Citigroup, UBS AG, JPMorganChase and Morgan Stanley recently agreed to repurchase a combined $32.6 billion worth of the auction-rate securities and pay $310 million in fines. Wachovia on Friday became the fifth bank to reach a settlement as part of the investigation by regulators (Associated Press via Yahoo! News Aug. 15) … * Wachovia Corp., the nation’s fourth largest bank, has agreed to buy back $9 billion of auction-rate securities and pay a $50 million fine to settle claims by Missouri, other states, and the Securities and Exchange Commission that it misled investors about the safety and liquidity of the debt. Missouri Secretary of State Robin Carnahan said the settlement covers about 40,000 investors, including individuals, charities, and small businesses. “Investors should not have to wait any longer for access to their money,” said Carnahan. “This nightmare is finished so they can get on with their lives.” The fine will be distributed among all 50 states. The market for the securities began to fail last September after Wall Street firms stopped supporting auctions for the securities. The firms had marketed the securities as safe and liquid (Bloomberg.com and Associated Press via Yahoo! News Aug. 15) … * Banks increased their borrowing from the Federal Reserve last week, while Wall Street investment firms abstained from borrowing for the seventh consecutive week, a possible sign that the credit crunch is easing. Commercial banks averaged $17.70 billion in daily borrowing over the latest week--up from $17.37 billion the previous week, according to Federal Reserve data. In an effort to soothe the financial markets, the Fed recently extended the newly-enacted privilege of borrowing by investment banks into 2009. The central bank also is letting Fannie Mae and Freddie Mac borrow from its emergency-loan program. However, there is no sign that the two institutions have done any borrowing (Associated Press via Yahoo! News and American Banker Aug. 15) … * Capital One Financial Corp., one of the largest issuers of MasterCard and Visa credit cards, said Friday that its loan-loss ratios for credit cards improved in July, while delinquencies continued to increase. The chargeoff rate for cards declined to 6.08% last month from 6.42% in June. The delinquency rate increased to 3.96% from 3.85%. Credit quality in the firm’s auto-loan portfolio continued to deteriorate in July. The net chargeoff rate jumped to 4.67% from 4.26%, while the delinquency rate surged to 8.33% from 7.62%. Capital One started as a credit-card lender but expanded into banking two years ago. “On the local banking side, I think what you see is very low charge-offs,” said Jeff Norris, head of investor relations at Capital One. “There are some increasing trends in the non-performing ratio… but we continue to feel that we’ve got a very strong book,” added Norris (Reuters and Dow Jones Newswires Aug. 15) … * Merrill Lynch, which is struggling to return to profitability following four consecutive quarterly losses, has frozen hiring for the remainder of the year. The freeze extends to previously-budgeted positions and replacements, but doesn’t apply to retail brokers. Merrill eliminated 4,200 jobs during the first half of this year. The investment bank has recorded more than $45 billion in writedowns since the credit crisis began last year (MarketWatch and Bloomberg.com Aug. 15) …

Market News (08/15/2008)

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MADISON, Wis. (8/18/08)
* Mortgage rates steadied again last week amid mixed economic reports, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) was unchanged at 6.52%, while the 15-year FRM edged down 3 basis points to 6.07%, and the one-year, adjustable-rate mortgage dipped 4 basis points to 5.18%. “Mortgage rates held relatively steady for the second week in a row amid offsetting economic data releases,” said Frank Nothaft, Freddie Mac vice president and chief economist. He noted that pending home sales unexpectedly increased in June, according to a National Association of Realtors report. However, the Federal Reserve reported that banks tightened lending standards in July. He said the tightening in lending standards could “dampen further home sales activity going forward.” Mortgage rates remain lower than a year ago. The 30-year FRM averaged 6.62% at this time last year, while the 15-year FRM stood at 6.3%, and the one-year ARM was at 5.67%. For CUNA's Daily Financial Rates, use the link. … * The global economy is slowing significantly as U.S. weakness spreads. Gross domestic product (GDP) in the euro zone contracted 0.2% in the second quarter, at a 0.8% annual rate of decline, according to a report by the European Union’s statistics agency. It was the first time since the early 1990s that GDP has declined overall in the 15 nations that use the euro. Four of the world’s five largest economies--the U.S., the euro zone, Japan, and the U.K--are now in or near recession. The global slowdown could have an upside as it helps temper rising commodity prices. The value of the U.S. dollar also has strengthened as other economies weaken. On the downside, U.S. exports could suffer as other economies struggle (The Wall Street Journal Online Aug. 15) ... * Industrial production posted a larger-than-expected gain in July as auto output rebounded modestly. Industrial production rose by 0.2% following a 0.4% advance in June, the Federal Reserve reported Friday. Output had declined during the previous four months. Manufacturing output gained 0.4% in July--boosted by a 3.6% jump in the production of motor vehicles and parts. Excluding that category, manufacturing rose 0.2%. The rebound in auto activity probably was temporary because it reflected the end of a strike at parts-supplier American Axle (Associated Press via Yahoo! News Aug. 15). Even with recent gains, production at auto plants was 10.4% lower than it was in July 2007. The output of mines increased 0.9% last month, while the output of utilities fell 1.9%. The drop in utilities production was weather-related. The nation’s factories, mines, and utilities operated at 79.9% of capacity in July--up slightly from 79.8% in Jun--but still 1.1 percentage points below the 81% average for 1972 through 2007 … * U.S. consumers spent more on gasoline than on vehicles and parts for the first time in 26 years during May and June, according to a report by the Commerce Department’s Bureau of Economic Analysis. Gasoline accounted for 4.4% of spending in June, compared with 3.9% for autos and motor parts. Both categories were about 4% in May. The last time spending on gasoline topped spending on autos and parts was in January 1982. “People are spending as much today on gasoline as they did in the 1970s and 1980s,” noted Global Insight auto analyst George Magliano (Bloomberg.com Aug. 15) … * Consumer confidence edged up in early August as gasoline prices retreated slightly. The Reuters/ University of Michigan Surveys of Consumers said its index of consumer confidence rose to 61.7, from 61.2 in late July. Consumers continue to worry about recession. The current conditions index fell to 69 from 73.1--the second-lowest reading since 1980. “There is little doubt among consumers about the likelihood of a recession,” said survey director Richard Curtin. In a hopeful sign, the expectations index increased to 56.8 from 53.5 (Reuters Aug. 15) … * Almost two-thirds of U.S. companies and 68% of foreign corporations pay no federal income taxes, according to a Government Accountability Office (GAO) report. An annual average of 1.3 million U.S. firms and 39,000 foreign companies conducting business in the U.S. paid no income taxes between 1998 and 2005--even though they had a combined $2.5 trillion in revenue. An estimated 28% of foreign companies and 25% of U.S. corporations with more than $250 million in assets or $50 million in sales paid no federal income taxes in 2005. Sens. Byron Dorgan (D-N.D.) and Carl Levin (D-Mich.) requested the GAO study (CNNMoney.com Aug. 13) …

News of the Competition (08/14/2008)

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MADISON, Wis. (8/15/08)
* JPMorgan Chase and Morgan Stanley have agreed to buy back more than $7 billion in auction-rate securities as part of an agreement with New York Attorney General Andrew Cuomo. JPMorgan will buy back all illiquid auction-rate securities from retail clients, charities and small business by Nov. 12, said Cuomo. Morgan Stanley will do the same by Dec. 11. Morgan Stanley also has agreed to pay $35 million in civil penalties, and JPMorgan has agreed to pay $25 million in penalties. The penalties will be divided between the state of New York and the North American Securities Administrators Association. “The industry is taking responsibility for correcting a problem they helped create and that’s a good thing,” said Cuomo. In recent weeks, Citigroup, UBS AG, and Merrill Lynch announced agreements to buy back auction-rate securities from investors. The market for the securities began to fail last September after Wall Street firms stopped supporting auctions for the securities. The firms had marketed the securities as safe and liquid (Reuters and Dow Jones Newswires Aug. 14) … * New Hampshire securities regulators allege that UBS Securities LLC defrauded the state’s leading issuer of student loans. The state’s Bureau of Securities Regulation claims UBS Securities advised the New Hampshire Higher Education Loan Corp. to remain in the auction-securities market even as it advised larger clients to exit the market. The student lender shut down two loan programs in March after the market for auction-rate securities collapsed. “Our investigation revealed that UBS had knowledge that a market collapse was looming but did not disclose that information to the New Hampshire Higher Education Loan Corp., said Jeff Spill, deputy director at the bureau. UBS Securities denied any fraud in its actions. Parent company UBS AG last week announced a settlement to help investors who purchased auction-rate securities (Associated Press via Yahoo! News Aug. 14) … * United Community Financial Corp.’s shares plunged 38% on Wednesday after it agreed to cease-and-desist orders issued by federal and state regulators (Associated Press via Yahoo! News Aug. 13). The bank, which operates Ohio’s Home Savings & Loan Co., said regulators are requiring the firm to lower its exposure to high-risk commercial and construction loans, and to improve its risk-management practices. The firm reported a 31% drop in profit for the second quarter, compared with a year earlier, and cautioned that it expects profits to be weak for the remainder of the year. Analysts said the cease-and-desist orders could make it hard for the firm to raise capital in the current environment (American Banker Aug. 14). “The implication is that the bank could fail, which significantly increases the risk profile from an investor’s perspective,” said Joseph Lynyak, a partner at Venable LLP … * European lenders wrote off the largest amount of bad credit-card loans in a year during the second quarter, according to a Standard & Poor’s report. The chargeoff rate on card loans in the $56 billion of asset-backed bonds tracked by the ratings agency jumped to 6.9%, up 50 basis points from the first quarter. The delinquency rate rose one basis point to 5.88%. “Lenders are tightening their lending criteria, which include raising rates and lowering credit limits,” noted S&P analyst Laura Dray (American Banker Aug. 14) …

Market News (08/14/2008)

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MADISON, Wis. (8/15/08)
* Consumer prices surged last month amid soaring prices for energy and food, the Labor Department reported Thursday. The Consumer Price Index (CPI) rose 0.8% following a 1.1% gain in June. The CPI was up 5.6% over the 12 months ending in July—the largest gain since January 1991 (Bloomberg.com Aug. 14). Energy prices jumped 4% last month after a 6.6% gain in June. Energy prices were up a sharp 29.3% for the 12 months ended in July. Food prices rose 0.9% after a 0.8% increase. They rose 6% over a year earlier. Excluding the volatile food and energy categories, the core CPI rose 0.3% in July, the same as in June, and was up a modest 2.5% over the year ending in July. Prices for apparel and recreation increased more sharply in July than in June, while prices for shelter and medical care rose more slowly … * Workers saw their inflation-adjusted wages decline again last month as food and energy prices continued to surge. Real earnings fell 0.8% in July following a 0.9% drop in June, the Labor Department reported Thursday. It was the fourth consecutive monthly decline. Real earnings were down 3.1% over the past 12 months. That’s the largest year-over-year decline since 1990 (Bloomberg.com Aug. 14). Workers in the past have been able to push for wage increases as consumer prices rose. However, workers in the current labor market feel they have little clout as companies continue to outsource jobs … * Foreclosure filings continued to surge in July, according to a report issued Thursday by Irvine, Calif.-based RealtyTrac Inc. Nationwide, more than 272,000 homes received at least one foreclosure-related notice last month--up 8% from June and 55% from July 2007. That means one in every 464 households received at least one foreclosure filing in July. RealtyTrac said 77,295 homes were repossessed by lenders last month. More than 680,000 homes have been repossessed by lenders since the credit crunch began in early August 2007. “Bank repossessions (REOs) continued to be the fastest growing segment of foreclosure activity,” said RealtyTrac CEO James Saccacio. “The sharp rise in REOs, combined with slow sales, has resulted in a bloated inventory of bank-owned properties for sale,” added Saccacio (CNNMoney.com and Associated Press via Yahoo! News Aug. 14) … * Nevada, California, Florida, Arizona, Ohio, Georgia, and Michigan had the highest foreclosure rates in July, according to the RealtyTrac report. Foreclosure filings rose from a year earlier in all but eight states. Nevada saw the highest foreclosure rate, at one in every 106 households. Following were California (one of every 182 households); Florida (one in 186); and Arizona (one in 195). The worst-hit metropolitan area, out of the 230 regions covered by RealtyTrac, was Cape Coral, Fla., where one of every 64 households received a foreclosure filing during July—more than seven times the national average. Merced, Calif. was second, with one filing per 73 households, followed by Stockton and Modesto, which each had one filing for every 82 households. Almost 2.8 million households will either face foreclosure, turn over their homes to their lender, or sell their homes for less than their mortgage’s value by the end of 2009, predicts Moody’s Economy.com (CNNMoney.com and Associated Press via Yahoo! News Aug. 14) … * Homebuyers are responding to lower prices, according to a report by the National Association of Realtors (NAR). Almost one-fourth of metropolitan areas (35 out of 150) saw rising home prices in the second quarter, compared with a year earlier. NAR said 115 metro areas saw price declines. Foreclosures are distorting the price data, said NAR President Richard Gaylord. “In many areas with large concentrations of foreclosure sales, homes are being purchased below replacement cost values,” said Gaylord. Because foreclosures and short sales accounted for about a third of transactions during the second quarter, there’s downward pressure on the national median price--which declined by 7.6% from the second quarter of 2007, to $206,500 in the second quarter of this year. NAR also reported that sales of existing homes declined 16.3% to an annual pace of 4.913 million units in July, the slowest pace in 10 years. There were 4.49 million homes for sale at the end of June—the highest number in a year (realtor.org and Bloomberg.com Aug. 14) ... * The labor market remains weak, with long-term unemployment rising. First-time claims for unemployment insurance declined by 10,000 during the week ending Aug. 9 to 450,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, grew by 19,500 to 440,500. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, jumped by 114,000 during the week ended Aug. 2 to 3.417 million. That’s the highest level since November 2003 (Bloomberg.com Aug. 14). Rising unemployment, stagnant wages, and higher food and energy prices are expected to dampen consumer spending for the remainder of this year, despite the federal government’s tax rebates …

News of the Competition (08/13/2008)

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MADISON, Wis. (8/14/08)
* Accounting firms raised questions about the liquidity of auction-rate securities in 2005, three years before the market for the securities froze. In a May 2005 report, PricewaterhouseCoopers said the securities shouldn’t be considered a cash-alternative product. “The legal maturity of auction-rate securities is 20 to 30 years and, as such, the securities ordinarily should not be classified as cash equivalents, but rather as investments,” said the report. Wall Street firms hired attorneys to argue against that stance. In June 2005, the Association of Financial Professionals sent a letter to the Financial Accounting Standards Board, saying that auction-rate securities had been used as a cash tool since the 1980s, and that the Pricewaterhouse report had made the market unstable. The market for the securities began to fail last September, as Wall Street firms stopped supporting auctions for the securities. Last week, Citigroup, UBS AG and Merrill Lynch announced agreements to buy back some of the securities from investors (TheStreet.com via msn.com Aug. 13) … * West Virginia has filed a lawsuit against Countrywide Financial Corp., alleging that the Calabasas, Calif.-based mortgage lender made risky loans that exposed consumers to foreclosure. West Virginia Attorney General Darrell McGraw also claims the firm used unfair and deceptive practices to make and service mortgage loans. He notes that foreclosures affect the price of all homes in an area. “Therefore, while the consumers facing foreclosure are directly affected by Countrywide’s practices, all homeowners are indirectly affected,” said McGraw. State attorneys general in Florida, Illinois, and California also have filed suits against Countrywide, which was acquired by Bank of America in July (bizjournals.com via msn.com Aug. 13) … * JPMorgan Chase said turbulence in the credit markets prompted the firm to lose $1.5 billion, after hedges, in its mortgage-backed securities and loans in the third quarter. The disclosure prompted a 10% decline in the firm’s shares Tuesday as investors worried about the health of the overall financial sector. “Virtually every part of the capital markets business is suffering at the present time,” said Ladenburg Thalmann Analyst Dick Bove. He said weakness in the stock markets in eroding private-equity gains. At the same time, rising costs for basic necessities, higher unemployment, and declining household wealth is eroding consumer business. New York Attorney General Andrew Cuomo said Monday that he has expanded his investigation of the collapse of the auction-rate securities market to include JPMorgan, Morgan Stanley, and Wachovia. JPMorgan estimates that its customers hold about $5 billion in face value of auction-rate securities (Associated Press via Yahoo! News Aug. 13) … * The Federal Home Loan Bank of New York said Wednesday that the cost of its housing-related loans may increase after concerns about Fannie Mae and Freddie Mac raised its funding costs. Funding for housing from the Federal Home Loan Banking system, Fannie Mae, and Freddie Mac has become more important during the past year, as the credit crunch dried up other funding sources. The FHLB of New York said its third-quarter earnings may decline as the housing market continues to slow. “To the extent the FHLBanks receive sub-optimal funding, member institutions may, in turn, experience higher costs for advance borrowing,” said the FHLB of New York. Advances by the firm to its members jumped 10.6% to $90.8 billion in June, from year-end 2007 (Reuters via Yahoo! News Aug. 13) … * Downey Financial Corp. on Monday said its main regulator, the Office of Thrift Supervision, has imposed several restrictions on its activities--including limits on dividends, asset growth, and new borrowing. The firm also said it has seen “elevated” levels of deposit withdrawals after it reported a $218.9 million second-quarter net loss in late July. Downey said inflows have returned more recently, but the company cautioned that if outflows resume, it will have to raise new capital or borrow more funds to meet liquidity (MarketWatch Aug. 12) …

Market News (08/13/2008)

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MADISON, Wis. (8/14/08)
* The number of homes available for sale in 29 top metropolitan areas edged down 0.5% in July, compared with a month earlier, according to data from ZipRealty Inc. The supply of homes for sale has started to edge down, as sellers give up and withdraw their homes from the market, said the real-estate brokerage firm. The July inventory was down 3.8% from a year earlier in the 18 metro markets for which comparable statistics are available. However, home inventories remain high. According to the National Association of Realtors (NAR), there were 4.5 million previously-occupied homes listed for sale at the end of June--representing an 11-month supply at the current sales pace. Both the NAR and ZipRealty data probably underestimate the supply of homes because not all foreclosed homes are listed on multiple-listing services (The Wall Street Journal Online Aug. 13) … * Mortgage activity retreated slightly last week, according to a report by the Mortgage Bankers Association (mbaa.org Aug. 13). The trade group’s Mortgage Composite Index declined by 1.5% during the week ending Aug. 8 to 425.9. The Refinance Index fell 4.2% to 1074.6, while the Purchase Index was unchanged at 315.2. The average 30-year, fixed-rate mortgage (FRM) jumped 16 basis points to 6.57%, while the one-year, adjustable-rate mortgage (ARM) edged down 2 basis points to 7.15%. It’s a good sign that purchase applications at least held steady last week, noted Moody’s Economy.com (Aug. 13). However, the research firm said that trend probably won’t continue if 30-year FRMs continue to increase, an indication that banks are still tightening lending standards … * Retail sales edged down last month, as higher gasoline prices offset a plunge in auto sales. Sales fell by 0.1% in July after posting a modest 0.3% increase in June, the Commerce Department reported Wednesday. Excluding the 2.4% drop in vehicle sales, retail sales rose 0.4% in July. Excluding the 0.8% increase in gasoline sales, retail sales declined 0.2%. “The underlying trend in growth remains weak,” said Moody’s Economy.com Economist Scott Hoyt. “The lift from tax rebates began to fade” last month, added Hoyt. Consumers will continue to struggle with high prices for food and energy, stagnant wages, tighter credit, and declining home and stock prices for the remainder of the year (MarketWatch Aug. 13) … * China will surpass the U.S. as the world’s largest manufacturer--in nominal dollar terms--in 2009, as the U.S. economy continues to weaken, and the Chinese economy continues to surge, according to a report by consulting firm Global Insight. “The basic reason is that growth in the U.S. economy has essentially been zero over the last year and will continue to struggle over the next year,” said Global Insight Chief Economist Nariman Behravesh. The manufacturing sector accounts for just 12.5% of gross domestic product (GDP) in the U.S., compared with 36% in China. Worldwide, manufacturing accounts for 17% of GDP, while the service sector accounts for 65% (MarketWatch Aug. 13) … * Consumers will see their home-heating costs soar this winter, according to a report by the Energy Information Administration (EIA). Homeowners will pay an average $1,182 to heat their homes between October and March--an increase of almost 20% from the average $986 expenditure in 2007, said the EIA. “That increase will put additional pressure on household budgets already strained by high gasoline prices,” said EIA Senior Economist Tancred Lidderdale. Crude-oil prices are projected to average $124 a barrel in 2009. That’s down from the agency’s July projection of $133 a barrel. The lower forecast reflects slower consumption and planned increases in output by the Organization of Petroleum Exporting Countries. However, the EIA noted that the downward trend may be “minimal or short-lived” if demand rebounds or if the planned output increases don’t materialize (CNNMoney.com Aug. 13) … * Americans curbed their driving in June amid high gasoline prices. Consumers drove 12.2 billion fewer miles than in the same month last year, according to the Federal Highway Administration. People began to drive less in November, as gasoline prices soared. Americans drove 53.2 billion fewer miles from November through June, compared with the same period in 2007. “There is at least one silver lining in what’s otherwise fairly painful news and that is that less driving means less air pollution and fewer global warming emissions,” said Frank O’Donnell of Clean Air Watch (Associated Press via The New York Times Aug. 13) …

Market News (08/12/2008)

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MADISON, Wis. (8/13/08)
* The biggest jump in exports in more than four years far surpassed record oil imports, helping the U.S. trade deficit unexpectedly shrink in June. The gap narrowed 4.1% to $56.8 billion from a revised $59.2 billion in May, which is less than previously estimated, the Commerce Department said Tuesday. Rising international demand is helping some U.S. manufacturers--such as Caterpillar Inc.--weather a slowdown in U.S. sales, analysts said, adding that the trade boost may diminish later this year, as economic expansion in Japan and Europe diminish. While the balance of trade may continue to improve for the U.S., export growth has likely already peaked, said David Resler, chief U.S. economist at Nomura Securities International. American exports have been aided by a weak U.S. dollar, analysts said (Bloomberg.com Aug. 12) … * A June report indicated a weak but stable U.S. labor market. The hiring rate improved slightly in June to 3.1% from 3% in May. The number of people hired also improved, according to the June Job Openings and Labor Turnover Statistics release by the Bureau of Labor Statistics. The turnover rate remained the same at 3.1%, while the number of people leaving their jobs declined. In June, 4.33 million people took new jobs, while 4.25 million left their jobs. Job availability also remained the same. In the overall employment picture, industries that are most affected by the nationwide job downturn are concentrated in better-paying blue- collar jobs, while better-paying white collar jobs are holding steady (Moody’s Economy.com Aug. 12) … * Nearly one third of U.S. homeowners who purchased homes in the past five years owe more on their mortgages than their homes are worth, said Zillow.com, an Internet provider of home valuations. With second-quarter home prices falling 9.9% from a year earlier, 29% of homeowners now have negative equity, said the Seattle-based service, which offers values for more than 80 million homes. Of the consumers who bought at the 2006 peak of the housing market, 45% now owe more than they own, Zillow said. Homeowners are having a hard time selling their property for profit due to negative equity and declining prices. Nearly 25% of U.S. homeowners selling their properties in the past year took a loss, Zillow said (Bloomberg.com Aug. 12) … * Chain store sales experienced the first decline in seven weeks and the biggest decline since January, dropping 1.1% for the week ending Aug. 9, according to the International Council of Shopping Centers (ICSC). Year-over-year growth slid slightly to 2.6%. Although store traffic has improved, back-to-school shoppers appeared cautious, the ICSC said. It affirmed its initial projection for same store sales to grow about 2% this year. The slight ebbing of growth is the result of the diminishing push from rebates outweighing lower gasoline prices (Moody’s Economy.com Aug 9) … * Fiscal second-quarter net income more than tripled for TJX Cos., operator of TJ Maxx and Marshalls. TJX, the first major retailer to post second-quarter results, also raised its fiscal year earnings forecast. The company posted net income of $200.2 million, or 45 cents per share, for the quarter ended July 26, up from $59 million, or 13 cents per share, a year ago when TJX recorded a 25-cent charge-off from computer intrusions that resulted in the theft of credit card numbers. The company increased its expectations to 46 cents to 47 cents, excluding some items. The discount retailer said its sales rose to $4.62 billion--a 7% increase. Same store sales went up 4% (The Wall Street Journal Aug. 12) …

News of the Competition (08/12/2008)

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MADISON, Wis. (8/13/08)
* New York Attorney General Andrew Cuomo wants to immediately begin settlement talks with three banks as part of his investigation into Wall Street sales of auction-rate securities to investors. Cuomo sent letters to JPMorgan Chase & Co., Morgan Stanley, and Wachovia Corp. Auction-rate securities have left tens of thousands of investors trapped with “cash-like” securities that cannot be cashed out, analysts said. State and federal regulators have investigated to see if banks and brokerages wrongly told their clients that the $330 billion market of these long-term debt instruments were as safe and liquid as cash. Auction-rate securities pay yields that reset through weekly or monthly auctions. In April, Cuomo’s office sent subpoenas to 18 brokerages and banks. At least seven other states also are looking into Wall Street’s actions regarding the securities (Reuters Aug. 11) … * International tourists at the Olympic Games in Beijing, China, spent nearly $10 million--about 11% more on Visa credit, debit and prepaid cards on the opening day of the Olympics, Aug. 8, compared with spending on the same date last year, Visa said. The biggest spenders on opening day by area were (in order) the U.S., Japan, Hong Kong, South Korea and the United Kingdom. Retail purchases and housing accommodations were the primary expenses. Tourists from these five countries/locations accounted for more than 50% of Visa spending that day (MarketWatch Aug. 11) … * In a move that may hinder Fannie Mae and Freddie Mac’s efforts to raise capital, Standard & Poor’s Ratings Services lowered its ratings on certain securities of the two government sponsored enterprises (GSEs). S&P cut ratings on subordinated debt and preferred stock for both GSEs to A-minus from AA-minus. The ratings firm maintained senior debt ratings at the GSEs at AAA, which indicates the belief that the U.S. government would have to back the senior debt of the two mortgage giants in a crisis, analysts said. Any new issues of preferred stock by the GSEs will feel “negative pressure” due to the downgrades, according to a report issued by Federal Financial Analytics Inc., a Washington, D.C. research firm. Congress chartered Fannie and Freddie to ensure a reliable flow of money for home mortgages. Over the past four quarters, the two GSEs have posted combined losses of roughly $14 billion, as a result of escalating defaults on home mortgages (The Wall Street Journal Aug. 12) ... * Emulating a hike Fannie Mae announced last week, Freddie Mac is doubling the “market condition delivery fee” it charges lenders to 0.5% of the loan amount. The fee hike will go into effect Nov. 7, with increases to other fees on specific products, including certain cash-out refinancings and land secured by investment properties, according to a Aug. 8 letter by Patricia J. McClung, Freddie’s vice president of customer outreach and offerings deployment. Freddie began charging the delivery fee in March. Fannie said its fee increase provides an avenue to improve its capital position (American Banker Aug. 12) ...

Market News (08/11/2008)

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MADISON, Wis. (8/12/08)
* Surging U.S. small car sales could hit the three million mark this year--a level not seen since the 1980s. Ford Motor and General Motors officials said they think that level, which would be a 10% increase compared with last year, could be reached. The shift to small-car sales is noteworthy because it indicates consumers are seriously responding to rising gasoline prices. The automakers added that the shift also raises questions on whether the small-car sales growth can be maintained if pump prices decrease with the price of oil. Ford, GM and Toyota are increasing small-car production mostly by adding factory shifts, analysts said. Demand for used small cars has lifted prices, particularly in wholesale markets, by 20%--especially for hybrid cars such as the Toyota Prius, analysts added. (USA Today Aug. 11) … * Staring at a weakening global economy and a consumer-spending slowdown, the U.S. economy in the second half of 2008 could be worse than the first half of the year, analysts said. In recent weeks, economists have downgraded U.S. growth forecasts. A renewed decline in growth will be manifested in decreased consumer spending over the second half of the year along with reduced foreign demand, according to Goldman Sachs economists. Falling home values, layoffs, stagnant wages and tighter credit are impacting households, and the federal government’s stimulus program may not have been sufficient to ward off a recession, analysts said (The Wall Street Journal Aug. 11) … * With the longest expansion in consumer spending on record coming to an end, the U.S. economic downturn will likely extend into 2009, according to a Bloomberg News survey. The U.S. economy--the world’s largest--will grow at an average 0.7% rate from July through December--half the gain of the first six months of 2008--according to the median forecast of 50 economists surveyed Aug. 1 to Aug 8. Household spending is expected to drop, and the jobless rate--currently at 5.7%--will reach a five-year high of 6% in early 2009, the survey said (Bloomberg.com Aug. 11) … * Although more upbeat than they were in the spring, global businesses are nervous and their confidence is low, according to a Survey of Business Confidence conducted by Moody’s Economy.com. The global economy is barely avoiding recession, the survey results indicate. While the European, Japanese and U.S. economies are contracting, the Asian economy is sustaining growth near its potential. With businesses worried about sales, the overall assessment of present economic conditions and outlook heading into 2009 remains negative. Although pricing pressures remain high, they have moderated slightly due to a recent drop in energy and commodity prices (Moody’s Economy.com Aug. 8) ... * Commercial and industrial (C&I) lending will be a key indicator of whether the economy has bottomed out this quarter, analysts said. While the C& I sector has avoided the troubles associated with the subprime mortgage imbroglio, several big banking companies have said, in reporting second-quarter results, that they have noticed signs that the subprime troubles could seep into the C&I sector this year, especially if the economy continues to struggle. “Several companies have begun to show signs of weakness in commercial and industrial loans ... We expect this trend of deterioration to continue through the end of 2008, reflecting further weakness in regional housing markets and general economic conditions,” James Abbot, an analyst at Friedman, Billings and Ramsey, wrote in a research note (American Banker Aug. 11) … * With the airline industry looking for ways to lower payment distribution costs, Bill Me Later Inc. announced a partnership with Universal Air Travel Plan (UATP)--the airline-owned corporate travel payment network. In the face of rising fuel costs, the partnership is seen as a way to help reduce online payment expenses for airlines by providing an alternative to credit cards, analysts said. Also, the partnership provides customers with a fast, easy and secure method to pay--whether online or on the phone, said John Reistrup, vice president of travel and specialty retail marketing for Bill Me later Inc. (MarketWatch July 28 and American Banker Aug. 11) …

News of the Competition (08/11/2008)

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MADISON, Wis. (8/12/08)
* Wachovia Corp. announced it will discontinue making mortgage loans through branch offices in 19 states, cutting 125 jobs as a result. The Charlotte, N.C.-based company, the fourth largest U.S. bank, still will offer mortgages nationwide through the Internet, direct mail and by telephone. Wachovia said it will cut 10,750 jobs--including 4,440 from the mortgage unit--and $2 billion of expenses by the end of 2009. Wachovia wants to concentrate on developing customer relationships, particularly through its retail offices, said company spokesman Don Vecchiarello. The bank will still offer mortgages through branches in 18 states, Wachovia said (Bloomberg.com Aug. 12) … * With oil prices dropping and the U.S. dollar surging, Wall Street rebounded last week as the Dow Jones industrial average shot up 302 points. All the major indexes saw their highest weekly gains since April, analysts said. The drop in oil prices should give a big push to the economy, because consumers can now spend more freely, investors said. The oil-price drop also is allowing investors to put aside fears about the financial sector, which is dealing with the year-old credit crisis, analysts said. Last week, the dollar reached its highest level against the euro since February, giving Wall Street a new boost of confidence, analysts said (courier-journal.com Aug. 9) … * Fannie Mae reported a second-quarter loss of $2.3 billion, which the government sponsored enterprise (GSE) said is larger than expected. It predicts more significant losses stemming from an uptick in home-mortgage defaults. Increasing losses at both Fannie and Freddie Mac--the two main providers for home mortgages--are putting constraints on their ability to purchase and guarantee home loans. This could mean increased interest costs for consumers, analysts said. Fannie cut its quarterly dividend five cents per common share of stock from 35 cents, but said it likely needs to raise more capital beyond the $7.4 billion it garnered from share offerings in May. Congress granted the authority last month to the Treasury to make loans to Fannie or Freddie or buy shares in them. The Treasury ultimately might have to acquire significant equity stakes in the two GSEs to shore them up, analysts said (The Wall Street Journal Aug. 9) … * The strain of eight bank failures thus far this year--including Indy Mac Bancorp Inc.--could wipe out as much as 17% of a government insurance fund and cause the Federal Deposit Insurance Corporation (FDIC) to raise its premiums for all banks, said FDIC Chairman Sheila Barr in a July 30 interview. A decision on an increase is due by the fourth quarter. Financial firms reported nearly $495 billion in writedowns and credit losses since 2007, and the pace of bank closings is increasing, analysts said. The “problem” bank list, maintained by the FDIC, grew 18% from the fourth quarter last year to the first quarter this year. The list names 90 banks with combined assets of $26.3 billion as of March 31. The insurance fund contained $52.8 billion as of March 31 (Bloomberg.com Aug. 11) …

News of the Competition (08/08/2008)

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MADISON, Wis. (8/11/08)
* Fannie Mae on Friday reported a $2.3 billion loss for the second quarter, as the housing slump and credit expenses continued to erode earnings. Fannie reported credit-related expenses of $5.3 billion for the quarter, offsetting revenue of $4 billion. The results “reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008,” said Fannie CEO Daniel Mudd. Fannie predicts that home prices will decline by 7% to 9% this year. Fannie also announced that it plans to withdraw from the Alt-A loan business by the end of the year. Earlier last week, Freddie Mac reported an $821 million loss for the second quarter. Freddie wrote down the value of $1 billion in securities. The company set aside $2.5 billion in provisions to cover loan losses--more than twice as much as during the first quarter (MarketWatch and CNNMoney.com Aug. 8) … * Fannie Mae has informed mortgage servicers that beginning Oct. 1 they will have to refer foreclosure and bankruptcy cases in 31 states to attorneys on an approved list. A letter to servicers said that “the new network will foster a more disciplined … approach to default management,” improve “management of fees, costs, quality, and reporting to Fannie Mae,” and enhance “loss mitigation efforts by network attorneys.” “Additional jurisdictions will be added over time” to the attorney list, said Fannie (American Banker Aug. 8) … * Mortgage-insurer PMI Group reported a $246.3 million loss for the second quarter, compared with net income of $83.8 million a year earlier. The firm said the loss reflected its exposure to the U.S. mortgage market. PMI shares have lost 50% of their value during the last three months, as conditions in the housing and mortgage markets deteriorated. Mortgage insurers pay out claims to mortgage investors when defaults or foreclosures occur. PMI also announced that it plans to shut down its Canadian mortgage-insurance business and bring $60 million of capital from it back to its U.S. operations during the second half of the year (MarketWatch and Associated Press via Yahoo! News Aug. 8) … * Two more banks announced settlements related to auction-rate securities after Citigroup agreed to buy back more than $7 billion worth of the securities under a settlement with New York on Thursday. Merrill Lynch said it would buy back about $10 billion of the securities beginning Jan. 15 (Reuters Aug. 8). Clients seeking access to their cash before then can borrow against the securities for no cost, or at a low cost, said Merrill Spokesman Mark Herr. Zurich-based UBS AG may repurchase auction-rate securities valued at $25 billion, said a person briefed on the bank’s negotiations with regulators (Bloomberg.com Aug. 8). In other news, Bank of America said it has received subpoenas and requests for information from state and federal regulators about its sale of auction-rate securities (Associated Press via The New York Times Aug. 8). In its filing with the Securities and Exchange Commission, Bank of America also revealed that four ostensible class-action lawsuits have been filed against the firm on behalf of purchasers of auction-rate securities. The market for the securities froze earlier this year, as Wall Street firms stopped supporting auctions for the securities … * The global default rate for corporate debt could jump 6.3% over the next 12 months, and an even-higher 10% if the U.S. sinks into a prolonged recession, according to Moody’s Investors Service. So far during the current downturn, default rates are lower than during past slumps. Moody’s default rate jumped to 10.4% in 2002 and to a record-high 11.9% in 1991 (FT.com Aug. 8) …

Market News (08/08/2008)

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MADISON, Wis. (8/11/08)
* Mortgages made during the first part of last year are turning sour at a much bigger pace than 2006-vintage loans, according to an analysis of LoanPerformance data prepared by the Federal Deposit Insurance Corp. for The Wall Street Journal (Aug. 7). An estimated 0.91% of prime mortgages from 2007 were seriously delinquent (either 90 days or more past due or in foreclosure) after 12 months--compared with only 0.33% of prime mortgages made in 2006. The results indicate that lenders didn’t tighten lending standards until at least July or August 2007. LoanPerformance tracks more than 95% of the mortgages that are bundled into securities, excluding those securitized by Freddie Mac and Fannie Mae. The government-sponsored enterprises have reported similar results. Freddie Mac said last week that 1.38% of the 2007-era loans it purchased were seriously delinquent after 18 months, compared with 0.38% of 2006 loans. Until these sour loans are fully absorbed, “foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter,” said Moody’s Economy.com Chief Economist Mark Zandi … * Consumers are turning to credit cards to cope with rising costs for food and energy as other sources of credit dry up. Consumer credit rose at an annual pace of 6.7% in June--accelerating from a 3.8% pace in May, the Federal Reserve reported last week. Growth was strong in both revolving and nonrevolving credit during the month. Revolving credit, which includes credit cards, rose at a 6.8% pace in June following a 7.6% gain the previous month. Nonrevolving credit, which includes loans for autos, vacations, and education, rose at a 6.6% pace after a mild 1.5% gain. The Fed data excludes mortgage and home-equity loans. Lenders have tightened standards on mortgage-related loans, as the credit crunch and housing slump continues. However, lenders also are beginning to tighten standards for credit cards, as job losses mount and delinquencies rise--a trend that will leave consumers with few alternatives to cope with soaring food and energy costs … * The nation’s food companies are rushing to pass along surging grain and transportation costs to consumers. Food firms are shrinking package sizes, and middlemen are shortening supply contracts so they can pass along costs faster. The Labor Department’s consumer-price index for food surged at an annual pace of 6.8% during the first half of this year--the highest six-month inflation rate in 18 years. Retail food prices will jump 7.5% in 2009, predicts Farm Sector Economics President Paul Prentice. The official Department of Agriculture forecast calls for food prices to rise another 4% to 5% next year. Even under this milder forecast, the average family of four will see annual food costs jump to $9,800 in 2009, or about $1,200 higher than in 2006 (The Wall Street Journal Online Aug. 8) … * Consumers facing soaring food and energy costs have also become more worried about the impact of falling home and stock prices on their finances, according to Discover Financial Services’ latest U.S. Spending Monitor. A record 55% of respondents said their personal finances are getting worse, and a record 54% said the economy is poor. In addition, the results revealed for the first time that falling home values and investment portfolios are affecting consumer spending. Almost 50% of respondents concerned about declining home values said they’ve cut back on spending. And 52% of respondents worried about declining investment portfolios have reduced their spending. “While the Monitor has shown the effect that rising energy and food prices can have on the economic and spending confidence of consumers, we are now learning that decreasing home and asset values may weigh just as heavily on their confidence,” said Margo Georgiadis, executive vice president and chief marketing officer at Discover (BUSINESS WIRE via Yahoo! Finance Aug. 7) … * Consumers now think it is more likely than ever that their stock holdings will decline in value over the next year, according to a Reuters/University of Michigan survey released Friday. Consumers see a 40.6% probability that their stock holdings will increase--down from 42.9% in the second quarter and the lowest number since the question was first asked in 2002. All income and age groups became more pessimistic in the latest poll. The median value of stock holdings by households is $59,136 this year, according to the survey. Almost two-thirds of households own stock. So far this year, both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index have declined about 14% (Reuters via Yahoo! News Aug. 8) … * Nonfarm productivity increased at an annual pace of 2.2% during the second quarter following a 2.6% gain in the previous quarter, the Labor Department reported Friday. Labor costs slowed to a 1.3% pace from a 2.5% rate. The statistics show that companies are doing a good job of matching labor with demand, despite the economic slowdown, said Moody’s Economy.com (Aug. 8). With strong productivity growth and a weak job market that is curbing wage demand, unit labor costs are under control--good news for inflation …

News of the Competition (08/07/2008)

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MADISON, Wis. (8/8/08)
* Citigroup has agreed to buy back more than $7 billion in illiquid auction-rate securities under a settlement with New York, the Office of Attorney General Andrew Cuomo announced Thursday (MarketWatch Aug. 7). Citigroup will have to buy back the securities no later than Nov. 5 to help about 40,000 customers who have been unable to sell them since mid-February. Citigroup also will pay the state of New York a $50 million civil penalty and another $50 million civil penalty to the North American Securities Administrators Association. The deal probably will prompt other Wall Street firms under government investigation to take similar measures to return money to investors who are saddled with more than $200 billion worth of auction-rate securities (The Wall Street Journal Online Aug. 7). Wall Street firms had touted the securities as safe, liquid, and cash-equivalent. But the market for the securities froze earlier this year, as Wall Street firms stopped supporting the auctions for the securities. UBS AG and Merrill Lynch have been charged with civil fraud related to their marketing and sales of the securities … * The Financial Industry Regulatory Authority (FINRA) announced Thursday that it has created a special process to resolve claims involving auction-rate securities. Qualifying investors now will have the option of having their claims heard by a three-person arbitration panel. The two public arbitrators and the one nonpublic arbitrator wouldn’t be affiliated with any companies that have recently sold the securities. More than 170 cases involving the securities have been filed with FINRA (Reuters via Yahoo! News Aug. 7) … * The Internal Revenue Service (IRS) is offering 45 firms, including banks, a chance to settle disputes about the use of a leasing tax shelter, known as “lease-in, lease-out,” or “service-in, lease-out.” The IRS has agreed to eliminate some penalties, contingent on banks’ agreeing to terminate the transactions. Wachovia, Bank of America, and Wells Fargo are among the banks that use the leasing tax shelters. The IRS settlement offer comes after the IRS won against BB&T Bank and Fifth Third Bancorp in district and appeals courts. After the BB&T ruling, Wachovia announced it was taking a $975 million charge (Bloomberg.com Aug. 7) … * The Federal Reserve has granted approval for Industrial & Commercial Bank of China (ICBC) to open its first branch in the U.S. Chinese officials have long complained that its banks are denied access to U.S. markets even as U.S. banks open dozens of branches in China. ICBC, China’s largest bank, already has branches or subsidiaries in London, Tokyo, and Hong Kong. The new branch will be located in New York, where the bank had operated a representative office (The Wall Street Journal Online Aug. 7) … * Wachovia Corp. of Charlotte, N.C., announced that it is no longer accepting applications for private, undergraduate student loans. The firm will continue to offer federal government-backed loans and loans for graduate and professional education. “We are constantly evaluating our organization in the current environment to ensure that we’re doing what’s best for our customers, our shareholders and our company, and at this time we thought it was prudent to stop accepting private undergraduate student loans,” said Wachovia Spokeswoman Ferris Morrison (bizjournals.com via msn.com Aug. 7) …

Market News (08/07/2008)

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MADISON, Wis. (8/8/08)
* Sales of previously owned homes should improve somewhat in the months ahead, especially in the fourth quarter, as buyers take advantage of provisions in the new housing bill, according to a report by the National Association of Realtors (NAR). The trade group’s Pending Home Sales Index rose 5.3% to 89 in June, but remains 12.3% lower than a year earlier. “The rise in pending home sales was broad-based with all four regions showing gains,” said NAR Chief Economist Lawrence Yun. “With a tax credit now available to first-time home buyers, increases in home sales could be sustained with the momentum carrying into 2009,” added Yun. The trade group predicts that sales of existing homes will increase 7% to 5.51 million next year, from a projected total of 5.15 million this year. New-home sales are expected to decline 8.8% to 464,000 next year, from 509,000 this year, as builders continue to work down inventory (realtor.org Aug. 17) … * Mortgage rates were little changed this week, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) held steady at 6.52%, while the 15-year FRM edged up 3 basis points to 6.10%, and the one-year, adjustable-rate mortgage (ARM) slipped 5 basis points to 5.22%. “The housing market is continuing to act as a drag on the economy,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Residential fixed investment subtracted 0.6 percentage points off second quarter growth in real GDP,” added Nothaft. He also noted that housing inventories remain “at historically high levels.” (MarketWatch Aug. 7). For CUNA's Daily Financial Rates, use the link. … * The Counterparty Risk Management Policy Group II, a group of Wall Street executives from top firms, released a report Wednesday explaining how the financial sector missed the impending financial meltdown that began last year. “Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis,” said E. Gerald Corrigan, chairman of the group and a managing director at Goldman Sachs. The report said the industry may be more “accident prone” due to new business products such as loan packaging. The ability to make bets against credit also was a possible source of market instability. Corrigan said he hoped the report’s suggestions--including new liquidity tests and the disclosure of risks in financial instruments--will be adopted by the industry within two years (The New York Times Aug. 6) … * Many homeowners think the value of their homes has increased, despite the reality of the market. In a second-quarter poll by Zillow.com, 62% of homeowners said they thought the value of their home increased over the past year. However, the Seattle-based firm said its statistics show that 77% of homes actually depreciated over the past year, while just 19% appreciated. Perhaps reflecting their optimism, about 56% of respondents said they planned to spend money on home improvements over the next six months. In another finding, 90% reported that foreclosures have occurred in their local market, and 80% said they expect the rate of foreclosures to remain steady over the next six months (The Wall Street Journal Online Aug. 7) … * First-time claims for unemployment insurance rose by 7,000 during the week ending Aug. 2 to 455,000, the Labor Department reported Thursday. The level of claims was the highest since March 2002 (Associated Press via The New York Times Aug. 7). A program to identify people eligible for jobless benefits played a role in the increase, said a Labor Department analyst. The four-week moving average, which smoothes out weekly volatility, jumped by 26,750 to 419,500 last week. Continuing claims, the number of people still on the benefits rolls after an initial week of aid, rose by 31,000 during the week ended July 26 to 3.3 million--the highest level since early December 2003 …

News of the Competition (08/06/2008)

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MADISON, Wis. (8/7/08)
* The state of Connecticut has filed a lawsuit against Countrywide Financial Corp., which was acquired by Bank of America in July. The suit alleges that Countrywide steered customers into unaffordable mortgages and charged excessive legal fees to borrowers in default. “Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American dream of homeownership into a nightmare,” said Connecticut Attorney General Richard Blumenthal. He alleges that Countrywide inflated borrowers’ income and misled them about loan terms. The suit is seeing borrower restitution and the modification of all mortgages that broke state laws. Countrywide made one in six mortgage loans in the U.S. as recently as 2007, according to Inside Mortgage Finance. California, Florida, and Illinois have also filed lawsuits against Countrywide (Reuters via Yahoo! News Aug. 6) … * Morgan Stanley, the nation’s second-largest securities firm, has informed thousands of its clients that they won’t be allowed to withdraw money from their home-equity credit lines, said a person familiar with the matter. Most of the clients have homes that have declined in value. The firm plans to review home-equity credit lines on a monthly basis. Other financial firms also have cut back on home-equity lending as the housing slump continues. JPMorgan Chase has notified 150,000 customers about changes in their home-equity lines since March, said JPMorgan Spokeswoman Christine Holevas. Bank of America and Washington Mutual have frozen home-equity credit lines this year (Bloomberg.com Aug. 6) … * FirstFed Financial Corp. is struggling with losses as more prime borrowers default on their option adjustable-rate mortgages (ARMs). As many as 45% of option ARMs originated in 2007 and 2006 could end up in default, according to Barclays Capital. UBS AG estimates that as many as 48% of option ARMs originated in 2007 could default. Option ARMs were “a very good loan for the borrower and the bank” for more than 20 years, said FirstFed Chief Executive Babette Heimbuch. She said that changed when investment banks entered the industry and set lower lending standards, which were then followed by FirstFed and other banks worried about losing business. The gap between the introductory rate on option ARMs and the actual interest rate on the loan began soaring, to as much as 7.5 percentage points, as the Federal Reserve boosted interest rates. Now the company is struggling to modify loan terms, as defaults mount (The Wall Street Journal Online Aug. 6) … * Banker Elizabeth Duke was sworn in as a member of the Federal Reserve Board on Tuesday. Before joining the Fed, Duke was senior executive vice president and chief operating officer of Virginia-based TowneBank. She also served in executive positions at Wachovia, SouthTrust Bank, and Bank of Tidewater in Virginia Beach, Va. She spent six years on the board of the American Bankers Association and was the group’s chairman in 2004-2005. She is the only banker among the six sitting Fed Board members (Associated Press via Yahoo! News and American Banker Aug. 6) …

Market News (08/06/2008)

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MADISON, Wis. (8/7/08)
* Heating bills will soar this winter, say experts. Even after falling from its early-July peak, the price of natural gas is 11% higher than it was last winter. Heating oil is up 36%. “The cost of energy is getting out of reach,” said Mark Wolfe, executive director of the National Energy Assistance Directors’ Association. “It’s not just going to affect poor people, but also moderate- to middle-class households. People are going to become more impoverished to pay for heating this winter,” said Wolfe. At the same time, heating-oil companies are having trouble building inventory because credit is tight, said Dan Gilligan, president of the Petroleum Marketers Association of America. Soaring prices would affect the elections this fall, noted Daniel J. Weiss, a senior fellow at the Center for American Progress. “Remember, it is much easier for people to drive less than it is to heat less.” (The New York Times Aug. 6) … * Mortgage activity rebounded last week, the Mortgage Bankers Association reported Wednesday (mbaa.org Aug. 6). The trade group’s Market Composite Index rose by 2.8% during the week ending Aug. 1 to 432.6. The Refinance Index jumped 4.4% to 1121.8, while the Purchase Index rose 1.8% to 315.2. Mortgage rates fell slightly last week. The average 30-year, fixed-rate mortgage (FRM) edged down 5 basis points to 6.41%, while the one-year, adjustable-rate mortgage (ARM) declined 8 basis points to 7.17%. The 30-year FRM is unchanged from a year earlier, while the one-year ARM is 147 basis points higher, noted Moody’s Economy.com (Aug. 6). It will be awhile longer, said the research firm, before lower interest rates, reduced downward home-price pressure, and possibly fiscal stimulus will boost mortgage demand more robustly … * Freddie Mac on Wednesday reported an $821 million loss for the second quarter, compared with net income of $729 million a year earlier. Freddie wrote down the value of $1 billion in securities. The company also set aside $2.5 billion in provisions to cover loan losses--more than twice as much as during the first quarter. Freddie said it has capital that’s 20% above required levels. However, the firm said it is considering selling a “substantial” amount of new stock to boost capital, a measure that could dilute shareholder value. Freddie also said it has requested board approval for a cut in its dividend for the third quarter to “five cents or less” a share, from 25 cents a share in the second quarter. In an effort to stem mortgage-default losses, Freddie is doubling the financial incentives it offers mortgage servicers that help borrowers with Freddie-owned loans avoid foreclosure (The Wall Street Journal Online and MarketWatch Aug. 6) … * The Treasury Department announced Tuesday that it has hired Morgan Stanley to advise it on whether Freddie Mac and Fannie Mae are adequately capitalized. The housing legislation enacted last week gives the Treasury temporary authority to offer equity and loans to the two government-sponsored enterprises to help support their roles as providers of housing finance. Morgan Stanley will be paid no fees for the project, but will receive $95,000 to cover its expenses. Morgan Stanley will not underwrite securities for Fannie Mae and Freddie Mac while it is advising the Treasury, said a company spokeswoman (Reuters via Yahoo! News Aug. 6) … * The European Commission on Wednesday granted approval for Delta Air Lines to acquire Northwest Airlines Corp. “After examining the operation, the commission concluded that the transaction would not significantly impede effective competition in the European Economic Area or any substantial part of it,” said the regulator. The $3 billion deal will create a new airline, to be operated under Delta’s name. It will be headquartered in Atlanta (Reuters via Yahoo! News Aug. 6) … * Factory orders jumped by 1.7% in June, the largest increase since December, as petroleum prices soared and demand for military equipment rose. Orders for defense capital goods increased by 16.9%, according to the Commerce Department report. The surge reflected strong demand for military hardware for the wars in Iraq and Afghanistan. Demand for durable goods rose 0.8%, while demand for nondurable goods jumped 2.5%, reflecting higher petroleum prices (Associated Press via Yahoo! News Aug. 6) …

Hampel Fed unlikely to change rates before December

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MADISON, Wis. (8/6/08)--As expected, Federal Reserve policymakers Tuesday left the target for the fed funds rate unchanged at 2%. That means credit unions should not expect to see another rate adjustment until December and maybe into 2009, said Credit Union National Association Chief Economist Bill Hampel. "Because economic conditions are unlikely to change much before the Fed's next meeting in mid-September, and the following meeting is the week before the election, the first time we are likely to see a change in the Fed Funds rate will be in December," Hampel told News Now. "Even then, CUNA's economists expect that by December both economic growth and inflation will have softened enough that the next change in the fed funds rate won't occur until well into 2009," Hampel added. Tuesday's decision to leave steady the rates, at which banks borrow from each other, was the second consecutive meeting with no change in the target. The decision leaves the rate at the lowest level since late 2004. “Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee,” said the Federal Open Market Committee in a statement following the meeting. The Fed also noted that job markets have weakened further and the “financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.” Fed policymakers also took no action Tuesday on the discount rate, at which banks borrow from the Fed, leaving it at 2.25%. Only Dallas Fed President Richard Fisher voted against Wednesday’s decision, instead preferring an increase in the target for the fed funds rate.

News of the Competition (08/05/2008)

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MADISON, Wis. (8/6/08)
* Wachovia Corp and its affiliates have been sued by investors who allege the firms “incorrectly” valued and sold shares of the now-defunct Evergreen Ultra Short Opportunities Fund “at an artificially inflated price” between August 2007 and June 2008. “As shareholders redeemed their shares, the selling shareholders were overpaid, depleting the fund’s reserves and harming the plaintiffs,” said the investors in their complaint. The fund invested in asset- and mortgage-backed securities. It was liquidated in June after its net asset value tumbled 20%. The suit, which is seeking class-action status, also names Dennis Ferro, CEO of Evergreen Investments, and Kasey Philips, principal financial officer of the trust (Reuters Aug. 5) … * Orson Benn, a former vice president of subprime-lender Argent Mortgage Co., faces up to 105 years in prison after being convicted of mortgage fraud, racketeering, and grand theft. Complaints about inferior construction by firms affiliated with Argent prompted a three-year investigation. A jury convicted Benn in connection with 130 loans worth $13 million. Five other defendants have pleaded guilty. One will serve 10 years in prison. The other four haven’t yet been sentenced. Citigroup acquired Argent Mortgage in September (Associated Press via Yahoo! News and American Banker Aug. 5) … * The U.S. is in the second stage of a recession that will last at least 18 months and prompt hundreds of banks to fail, New York University Professor Nouriel Roubini told Barron’s in the Sunday edition. The economist said taxpayers will pay at least $1 trillion and probably $2 trillion to bail out the remainder of the financial-services industry. Roubini criticized regulators for bailing out Bear Stearns, Fannie Mae, and Freddie Mac. “It is privatizing the gains and profits, and socializing the losses as usual,” said Roubini. “This is socialism for Wall Street and the rich.” (Reuters Aug. 3) … * London-based HSBC Holdings PLC posted a large profit decline for the first half of the year, as steeper losses in the U.S. mortgage market offset growth in its Asian operations. The U.K.’s largest bank posted net profit of $7.7 billion--down 29% from a year earlier. HSBC reported $3.9 billion in writedowns on credit trading and related businesses. The firm added $10.1 billion to its loan-loss provisions--up 58% from a year earlier. HSBC is retreating from its personal-finance services in the U.S., another sign that American consumers will find it tougher to obtain credit (The Wall Street Journal Online Aug. 5) …

Market News (08/05/2008)

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MADISON, Wis. (8/6/08)
* Vehicle sales plunged in July, reflecting the soft economy, tight credit, and rising gasoline prices. Vehicles sold at a 12.5-million unit pace--the weakest July pace since the early 1990s recession. Light-truck sales fell to a 5.6-million unit pace--down 25% from a year earlier and the weakest since the mid-1990s. Auto sales fell to a 6.9-million unit pace, about even with the year-earlier pace. Domestic automakers have lost market share as consumers turned away from gas guzzlers. The Big Three share of sales fell to a record-low 43.2% in July--down 23% from a year earlier. Expecting high gasoline prices, consumers probably will continue to embrace more fuel-efficient cars (Economy.com August 1) … * One of the nation’s three largest automakers is almost certain to default within the next five years, according to an analysis of the market for credit-default swaps by UniCredit SpA, Europe’s fourth-largest bank. “The costs imply there is close to 100% probability that one of the big three will file for Chapter 11 bankruptcy,” said Jochen Felsenheimer, head of credit strategy at UniCredit. The cost of credit-default swaps has increased so much that sellers of protection on all three firms would profit even if two of the nation’s three largest automakers failed, noted Felsenheimer. Contracts to insure $10 million worth of General Motors debt cost a record-high $4.7 million upfront plus $500,000 a year, suggesting an 84% chance of default. The chief executives of GM, Ford Motor, and Chrysler say their biggest need is access to capital so they can retool their plants to manufacture fuel-efficient vehicles, according to a Detroit Free Press (Aug. 5) report. The Big Three are seeking as much as $40 billion in low-cost loans over the next two to three years, say people familiar with the situation (Bloomberg.com Aug. 5) … * Investors are becoming nervous about bonds backed by credit-card payments as defaults rise, making it harder for more Americans to tap credit. Issuance of credit-card, asset-backed securities declined to $4.4 billion in July--from $5.26 billion in June and $10.08 billion in March, according to JPMorgan Securities. Weak demand in the asset-backed market translates into higher consumer rates and lower credit lines, as companies are forced to retain more loans on their balance sheets. “Another shoe is dropping for the U.S. consumer,” said Christian Menegatti, lead analyst at RGEMonitor.com. “Credit cards are the last resort for the consumer who can no longer use the value of his home to sustain spending,” added Menegatti (The Wall Street Journal Online Aug. 5) … * The service sector contracted for a second consecutive month in July, although at a slower pace (CNNMoney.com Aug. 5). The Institute for Supply Management’s non-manufacturing index-- which includes real estate, construction, mining, agriculture, health care, and finance--rose to 49.5, from 48.2 in June, but still below the 50 level that indicates expansion. “Members’ comments in July indicate concern about inflationary pressures and the effect on the economy,” said Anthony Nieves, chairman of the group’s non-manufacturing survey. Just 4% of respondents reported lower prices. A drop in new orders and new-export orders indicates weaker activity in the service sector ahead, said Moody’s Economy.com (Aug. 5). The new-orders index declined to 47.9 in July--from 48.6 in June and the lowest reading since January. New export orders fell to 47.5 from 52 … * D.R. Horton, the largest homebuilder in the U.S., posted a loss of $339.3 million for its fiscal third quarter, compared with an $823.8 million loss a year earlier. The firm posted pretax charges of $330.4 million to write down the value of its inventory, down from $852 million in charges a year earlier. “Although market conditions in the homebuilding industry remain challenging, we continue to focus on reducing our inventory and generating cash flow from operations,” said Chairman Donald R. Horton. The supply of unsold homes nationwide is about 10 months’ worth, or about twice the level indicating a healthy balance between supply and demand (Associated Press via Yahoo! News Aug. 5) …

Schenk cautions paper on area economic report

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MILWAUKEE (8/5/08)--Foreclosures in southeastern Wisconsin fell to a 13-month low in July, sparking hope, but a Credit Union National Association (CUNA) economist says it would be dangerous to declare a new trend based on a single set of numbers. Mike Schenk, CUNA senior economist, told The Milwaukee Journal Sentinel (Aug. 2), "I would always be fairly cautious about trying to come to a real significant conclusion based on a one-period change. I would also look to see that that trend might be extended." The paper noted that 689 foreclosures were started in courts in the seven-county Milwaukee area in July, down 14.1% from June. The number is the lowest number of foreclosures there since 638 foreclosures were filed in June 2007. Overall foreclosure actions dropped 7.9% in the seven counties near Milwaukee--but the results were mixed: they rose in four of those counties and dropped in the other three. The numbers might reflect mortgage companies holding off on foreclosures until a bill regulating the housing industry worked its way through Congress. Some trade associations counseled their members to "hold off and work things out with borrowers" while the bill was pending, Schenk said. The bill allows homeowners facing foreclosure to negotiate a new loan. President Bush signed it on Wednesday.

News of the Competition (08/04/2008)

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MADISON, Wis. (8/5/08)
* CitiGroup Inc. is shutting down a $400 million convertible arbitrage fund--which is the final step in closing its $2 billion Tribeca Global Investments group, according to people familiar with the plans. They added that Tribeca Convertible LP has been negatively affected by investor redemptions. Convertible arbitrage entails buying a company’s bonds that can be converted into common stock while at the same time shorting its shares, analysts said. Tribeca Global was started in 2004 with a goal of attracting as much as $20 billion. Its closing occurs as Citigroup is struggling with its alternative-asset management unit. Most recently, the bank shut down a hedge fund--Old Lane Partners--co-founded and sold to the bank last year by Vikram Pandit, the hedge fund’s CEO. In March, Citigroup started to close its Falcon Strategies hedge funds after suspending redemptions (Bloomberg.com Aug. 4) … * Saying it is better positioned than rivals Master Card Inc. and American Express Co., a Fox-Pitt Kelton analyst raised his full-year profit estimate Monday on Visa Inc. Due to the company’s robust quarterly results and higher-than-expected margin, Analyst Howard Shapiro said he now expects earnings of $2.20 per share, up from a previous estimate of $2.01 per share. Visa is better positioned than MasterCard because of its strong U.S. debit volume, and better positioned than American Express because of a high component of nondiscretionary spending, Shapiro said. However, he expressed concern over cross- border transaction growth--which he said is Visa’s most profitable revenue line--because cross-border transaction growth slowed during the quarter (CNNMoney.com Aug. 4) ... * On Friday, American Express Co. sold $1 billion worth of securities backed by card payments, according to a person familiar with the deal. The triple-A portion of the securities was priced to yield 82 basis points over the benchmark rates, the source said. The securities will mature in 1.525 years (American Banker Aug. 4) …

Market News (08/04/2008)

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MADISON, Wis. (8/5/08)
* At today’s meeting, Federal Reserve policymakers are expected to maintain the target for short-term interest rates at 2%--a rate that has remained steady since April, analysts said. Short-term interest rates influence borrowing costs throughout the economy. While lower interest rates normally would be warranted by a weak economy, upward price pressures are forcing the Fed to stand pat. If there is no change in interest rates, more attention will be given to the post-meeting statements for indications of when the Fed may next target rates and in which direction they would go, analysts said (USA Today Aug. 4) … * The biggest price increases in nearly three decades caused consumer spending to fall in June. Consumer spending dipped 0.2% for the month after taking into account the effect of higher prices, the Commerce Department reported Monday. Higher prices were the result of a big increase in gasoline costs, which helped push an inflation indicator tied to consumer spending up by 0.8% in June--the largest increase since a 1% rise in February 1981. The large jump in inflation consumed part of the billions of dollars in stimulus payments delivered to Americans by the federal government in June, analysts said. After a 1.8% increase in May, personal income rose 0.1% in June (Associated Press via The New York Times Aug. 4) … * After jumping 1.8% in May, personal income crawled up 0.1% in June, according to a report by the Bureau of Economic Analysis. Personal income rose 0.3% in June, up from 0.4% in May--excluding the tax rebate effect. Spending growth slid to 0.6% in June from 0.8% the previous month. With prices dramatically rising, real spending fell 0.2% in June. The savings rate fell to 2.5% in June from 4.9% in May, but was buoyed somewhat by the federal government tax rebates. In addition to the tax rebates, other key factors affecting personal income were soaring energy prices and inflation. Rated on a monthly basis, prices posted their biggest increase in almost three years, and annual inflation was at its highest mark in 17 years (Economy.com Aug. 4) … * After trending higher in recent months, job-cut announcements hit 103,312 in July--a level twice as high as one year ago, according to Challenger, Gray and Christmas Inc. Over the past three months, job cuts have averaged 96,196--which is 70% higher than one year ago. The last time the numbers were at current levels was 2005. Financial services and transportation accounted for the greatest number of job cuts during July. Year to date, financial services led all other sectors in cuts. The compilation of job-cutting announcements indicates the challenges facing the economy, said Challenger, Gray & Christmas. Because the economy is expected to struggle through the end of the year, job cut announcements are likely to remain near the levels of recent months. Other weaknesses in the economy caused by severe contractions in the housing market and the impact of higher energy prices also are indicated by the report (Economy.com Aug. 4) ... * In efforts to prevent foreclosures, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are attempting to rein in mortgage-default losses. However, in some instances, these actions may only delay the inevitable--easing short-term pressure on companies’ finances without solving their overall troubles--analysts said. The two GSE guarantors of home loans said they will increase fees they pay loan-servicing companies for “workouts” that prevent foreclosures. The loan service companies collect loan payments and perform other administrative tasks. Freddie added that it would allow servicers more time to pursue workouts (The Wall Street Journal Aug. 4) … * New orders for factory goods grew 1.7% in June--a greater than expected boost due to a 2.5% increase in orders at nondurable manufacturers, according to the U.S. Census Bureau. The biggest portion of the increase occurred at petroleum refineries and chemical factories. The news regarding capital spending also was good, although capital goods orders were revised down slightly, according to the report. Strong growth in domestic capital spending this quarter will be needed to offset a projected downturn in exports, as the global economy softens, analysts said (economy.com Aug. 4) … * Failing to reach its goal of $30 billion in renewed funding, Chrysler Financial may further restrict its capabilities to support auto sales to Chrysler LLC customers and dealers, analysts said. Chrysler Financial raised $24 billion from a group of lenders--20% below its goal. The shortfall is attributed to “conditions in the credit markets and change in the company’s retail strategy,” said the Farmington Hills, Mich.-based lender. Due to rising borrowing costs, the finance unit ceased offering leases on Aug. 1 (Bloomberg.com Aug. 4) …

Expect weak spending rest of 08 CUNA tells IBloombergI

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WASHINGTON (8/5/08)--Consumer spending likely will be down for the rest of the year, a Credit Union National Association (CUNA) economist told Bloomberg Monday. “Consumer spending still has tremendous headwinds and it will no longer be fueled by the tax rebates,” said Bill Hampel, CUNA chief economist. “Consumer spending will be weak at least through the middle of the year.” The uplift from tax rebates is waning and likely caused consumer spending to slow in June, analysts said, adding that near-record gas prices and a declining labor market also hurt households. A forecast by 67 economists surveyed by Bloomberg News indicated that the boost from rebates will fade during the second half of 2008. June saw a 0.4% increase in spending, following a 0.8% increase in May. Confronted with falling home prices, $4-per-gallon gasoline, and rising job losses, Americans got only temporary relief from tax rebates issued as part of the federal government’s stimulus, analysts said.

News of the Competition (08/01/2008)

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MADISON, Wis. (8/4/08)
* The rising unemployment rate may prompt many prime-mortgage borrowers to fall behind on their mortgage payments, say analysts. The jobless rate jumped to 5.7% in July, from 5.5% the previous month, the Labor Department reported Friday. That rate will prompt a 56% jump in the average default rate of prime borrowers--to almost 2% of all loans by March 2009, from 1.6% in March 2008, according to FBR Investment Management. Barclays Capital estimates a 35% jump in mortgage losses for each percentage increase in unemployment. The unemployment rate also tends to be higher in regions that have seen the largest declines in home prices, notes Bank of America Chief Economist Mickey Levy. For example, California’s unemployment rate was 6.8% in June, compared with the national average of 5.5% (Dow Jones Newswires Aug. 1) … * Domestic automakers are boosting their sales incentives, even as they pull back on leasing deals because of low residual values. Chrysler announced Friday that it is offering an additional $2,000 cash back on its vehicles. The company also is extending its discounted six-year financing to more products. “This is an unprecedented shift to make owning as affordable as renting,” said Chrysler Spokesman Stuart Schorr. General Motors also is expanding its offers on trucks and sport-utility vehicles, and on two new autos and its Corvette sports car (Dow Jones Newswires Aug. 1) … * IndyMac Bancorp announced Friday that it had filed for bankruptcy protection. The action comes less than three weeks after the firm was seized by the Federal Deposit Insurance Corp. (FDIC) following a bank run by depositors. The filing doesn’t include IndyMac Federal Bank, which is now operated by the FDIC. The collapse of IndyMac was the largest bank failure in two decades and the third-largest in U.S. history. IndyMac specialized in Alt-A and low-documentation loans. Seven bank failures have occurred so far this year (Reuters via The New York Times Aug. 1) … * Citigroup has received subpoenas from the Securities and Exchange Commission and other regulators related to its sale of auction-rate securities, the bank disclosed Friday in a regulatory filing. Citigroup said regulators are investigating whether securities laws were violated in its sales of the securities. Citigroup said it also is facing several lawsuits related to its marketing and sale of auction-rate securities. The market for the securities collapsed earlier this year (Associated Press via The New York Times Aug. 1) … * Banks decreased their borrowing from the Federal Reserve’s discount window last week. About $17.3 billion in primary credit was outstanding as of July 30, down from $17.7 billion the previous week. Primary dealers, which recently gained access to the discount window, had no outstanding borrowing as of July 30, the same as the previous week (Thomson Financial via Yahoo! News July 31) … * Defaults on commercial mortgage-backed securities (CMBS) issued at the height of the credit bubble will increase more than four times from their current levels, according to a report by Fitch Ratings. Borrowers could default on an average of 17.2% of securitized commercial mortgages, compared with current default rates of 4%, said the report. CMBS will be affected by inflated property values and weaker underwriting standards at the height of the property boom (FT.com Aug. 1) …

Market News (08/01/2008)

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MADISON, Wis. (8/4/08)
* Most unemployed Americans don’t receive jobless benefits. Just 37% of the nation’s unemployed received benefits in 2007--down from 44% in 2001 and 55% in 1958, according to Labor Department data. The rest of the unemployed either have exhausted their benefits, haven’t applied for them, or don’t qualify. Those not qualifying for jobless benefits include many part-time workers, people who quit or were fired, and those who didn’t earn enough wages on a one-year base period, which excludes the last three to six months of employment. Worker advocates say the 1930s-era benefits program hasn’t been updated to reflect the current economy, in which people change jobs more frequently and many people work part time because they can’t find full-time work. The requirements affect women and low-income workers disproportionately. Less than 15% of low-wage workers receive unemployment benefits, according to the Government Accountability Office. Legislation that would give $7 billion worth of incentives for states to let part-time workers receive jobless benefits and for workers’ most recent earnings to be counted in their base period passed the House in October. The Senate may take up the bill this fall (The Wall Street Journal Online July 30) … * The number of workers who have seen their full-time employment reduced to part time because of the weak economy has increased to more than 3.7 million--the largest number since the government started tracking the data 50 years ago. Altogether, people the Labor Department classifies as working part time involuntarily (both those who have lost hours and those who can’t find full-time work) jumped to 5.3 million in June, up more than 1 million over the past year. Such workers now make up 3.7% of all employed people--up from 3% a year earlier and the highest number since 1995. Employers can save on health-care costs by hiring more part-time workers and fewer full-time workers. Labor analysts say the nation’s 5.5% (June) unemployment rate doesn’t really capture the pain of many workers who have seen their hours cut or have been forced to accept part-time work after losing full-time jobs. “The unemployment rate is giving you a misleading impression of some of the adjustments that are taking place,” said Wachovia Chief Economist John Silvia. Workers whose hours have been cut often turn to credit cards to cope with soaring costs for food, energy, and health care (The New York Times July 31) … * Home prices declined in 23 of the nation’s 25 top metropolitan areas in May, compared with a year earlier, according to a report by Radar Logic Inc. Sales increased in 22 areas. Foreclosures prompted increased sales in some areas where prices fell and “people began to bargain hunt,” said Radar Logic President Michael Feder. Five of the top 10 price declines from a year earlier were in metropolitan areas in California. Milwaukee and Columbus, Ohio, were the only cities to show price gains (Bloomberg.com Aug. 1) … * Construction spending declined by 0.4% in June, the Commerce Department reported Friday. It was the 11th decline in the past 13 months. Home building tumbled by 1.8%, the 15th consecutive decline, as the housing market remained weak. Construction of new single-family homes has fallen almost 60% from its peak in early 2006. Nonresidential activity rose 0.8% in June (Associated Press via CNNMoney.com Aug. 1) … * Manufacturing business was flat in July amid higher prices, tight credit, and the weak economy. The Institute for Supply Management’s factory index edged down to 50, from 50.2 in June. New orders declined to 45--from 49.6 and the lowest level since October 2001. About 88.5% of manufacturers said prices were higher in July. Exports remained a bright spot in the report. New export orders edged down by 4.5 percentage points to 54 in July, remaining above the 50 level that indicates expansion. It was the 68th consecutive month of growth in new export orders (Associated Press via CNNMoney.com and Industryweek.com Aug. 1) …

CUNA economist Jobs impact loan growth quality

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MADISON, Wis. (8/4/08)--Payroll employment declined by 51,000 in July--the seventh consecutive decline, the Labor Department reported Friday (see chart). The economy has lost 463,000 jobs so far this year. And the decline will have adverse effects on credit unions, says a Credit Union National Association economist.
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The unemployment rate jumped to 5.7% last month, from 5.5% in June and the highest rate since March 2004, according to the Labor Department. The jobless rate rose by one percentage point over the past 12 months. The number of unemployed people increased by 1.6 million during the period, to 8.8 million in July. "The softening labor market will have adverse effects on credit union loan growth and loan quality," said CUNA Senior Economist Steve Rick. "We typically see a reduction in loan demand of big ticket purchases like cars and homes due to members' worrying about their employment status as companies around the country downsize their payrolls," he told News Now. "Credit unions are, however, picking up some loan market share as many banks tighten their lending underwriting standards in response to the credit crisis," he said. "Credit union loan delinquency and chargeoff rates are expected to rise over the next 1 1/2 years as the employment situation worsens," he said, adding this would lead to lower incomes and additional household financial stress. "Credit union net loan chargeoffs as a percent of all loans are expected to rise to 0.75% in 2009, up from 0.48% in 2007 and an expected 0.68% this year." The 5.7% unemployment rate doesn’t include those who have become discouraged from seeking work, or those who have accepted part-time jobs but wanted full-time work (CNNMoney.com Aug. 1). Counting those people, the jobless rate is 10.3%. Employment continued to decline in construction, manufacturing, and several service-producing sectors in July, while health care and mining continued to add jobs. Average hourly earnings increased by six cents over the month, to $18.06. Manufacturing employment dropped by 35,000 in July, bringing total losses in that sector to 383,000 over the past 12 months. Construction employment fell by 22,000 last month, and has declined by 557,000 since peaking in September 2006. Employment in the health-care sector rose by 33,000 in July and has grown by 368,000 over the past year. Mining employment rose by 10,000 in July and has expanded by 220,000 since hitting a low in April 2003.