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News of the Competition (09/30/2008)

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MADISON, Wis. (10/1/08)
* Following the recent wave of mergers, the Big Three U.S. banks--Citigroup, Bank of America, and JPMorgan Chase--now have a combined 31.3% of all deposits in the U.S.--up sharply from 21.4% at year-end 2007. This rapid consolidation could mean less choice and higher fees for consumers because the Big Three now have more pricing power. And the consolidation wave will continue as many smaller banks fail to receive enough capital to remain independent. Consolidation already was accelerating before the current credit crisis began. There were 8,534 federally-insured banks and thrifts at year-end 2007--down from 10,924 at the end of 1997 and 17,345 at year-end 1987 (The Wall Street Journal Online Sept. 30) … * Investors have stopping pulling billions of dollars from money market funds, a week after the federal government said it would insure that fund shares don’t lose value. The Treasury Department is now guaranteeing that the value of participating money funds won’t decline below $1 a share. Fund companies must pay for the federal insurance. Most of the money flowing into funds now is going into funds that hold Treasuries, noted Connie Bugbee, managing editor of iMoneyNet. Peter Crane, head of Crane Data, said people are waiting to see how funds perform. “But you can’t hide in Treasuries forever,” noted Crane. “The fear of principal loss is dominating, but the loss of interest income will start to bite.” (CNNMoney.com Sept. 30) … * The credit crisis continued to hit European banks on Tuesday, and government response was swift. French-Belgian lender Dexia received a capital infusion of more than $9 billion from the government and other shareholders. “This decision was taken to guarantee the continued financing of the French local authorities, of which Dexia is the principal lender, and to contribute to the security and stability of the French and European financial systems,” said the French presidency in a statement. Meanwhile, Ireland’s Finance Ministry announced Tuesday that all deposits in the country’s banks will be guaranteed by the government in the event of a failure. “The government’s objective in taking this decisive action is to maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy,” said the Finance Ministry in a statement. The move followed a record 12.7% plunge in the Irish Stock Exchange on Monday, and rumors that millionaires were withdrawing money from Irish banks (The New York Times Sept. 30) … * Fannie Mae’s new policy requiring at-risk financial institutions to make daily transfers of mortgage payments could lower liquidity and boost administrative costs at a crucial time, say bankers. Fannie spokesman Brain Faith said the new policy is “a protective measure” to be sure funds aren’t lost in a bank failure. “Collecting on a daily basis and placing the funds in a trust is a safer option than holding these funds in deposit accounts that have an insurance ceiling,” said Faith. However, Scott Talbott, chief lobbyist for the Financial Services Roundtable, said the policy “moves in the opposite direction” from government efforts to re-establish liquidity in the banking system. “While we can certainly appreciate Fannie Mae’s concern, the timing of this change could not be worse and will result in even more stress on an already burdened banking system,” said Faith (American Banker Sept. 30) …

Market News (09/30/2008)

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MADISON, Wis. (10/1/08)
* The cost of borrowing overnight dollars on global money markets jumped Tuesday despite central banks worldwide injecting billions into the banking system following the U.S. House of Representatives’ rejection of the $700 billion bailout plan. The London interbank offered rate (Libor) surged by a record 430 basis points to a 7 ½-year high of 6.87%. The central banks of Britain, Australia, the euro zone, and Japan pumped liquidity into their banking systems Tuesday. Australia, Britain, and Europe are working together to urge U.S. lawmakers to pass a rescue package, said Australian Prime Minister Kevin Rudd on Tuesday (Reuters via msn.com Sept. 30) … * President Bush and Senate leaders of both the Democratic and Republican parties vowed to work for a quick approval of the financial bailout plan that the House of Representatives rejected on Monday. The Dow Jones Industrial Average, which plunged by a record 778 points on Monday, rebounded moderately on Tuesday. The Dow was up 280 points in late morning trading. Senate majority leader Harry Reid, D.-Nevada, noted that the stock-market plunge on Monday wiped out more than $1 trillion in investor value. “Most of that money doesn’t come from Wall Street titans, but from the pensions of people who have retired, who have worked for city government, county government, state government or some business, or people who frugally worked during their lifetimes to save a few dollars and put it in a retirement account,” said Reid. Presidential candidates John McCain and Barack Obama also urged Congress to make another attempt to pass a bailout package. In addition, both candidates proposed that the government boost insurance for consumer bank deposits to $250,000, from the current $100,000 level (The New York Times Sept. 30) ... * The finance units of the Big Three domestic automakers are selectively tightening credit to many dealers, a move that will make it tougher for consumers to obtain vehicle loans. “This will only exacerbate a bad market for new car sales,” noted Jerry Breen, a senior director at ABSNet. In the past, GMAC, Ford Motor Credit and Chrysler Financial have helped boost auto sales by offering dealers generous credit lines. But today the automakers and their finance units have suffered huge losses and are struggling to raise capital. In addition, GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management, and thus are now being operated to maximize profits, not vehicle sales (The Wall Street Journal Online Sept. 30) … * Autobuyers are being rejected for loans more often as the global credit crisis prompts lenders to tighten standards, according to a report by CNW Marketing Research. Through Sept. 20, 81% of the lowest-risk prime loans were approved--down from 91% a year earlier. “When you start seeing at least 15% of prime applications being rejected, there’s something going on--banks aren’t loaning,” said CNW President Art Spinella. Only 23% of subprime loans were approved--about one-third as many as in 2007. Banks approved 77% of near-prime loans, down from 86%. “The very tight restrictions on credit, the cost of credit going up, has significantly hurt a lot of people who might otherwise be buying,” said General Motors CEO Rick Wagoner (Bloomberg.com and suntimes.com Sept. 26) … * Consumer confidence unexpectedly rose in September in a survey taken before Monday’s stock-market plunge and the worsening credit crisis (Bloomberg.com Sept. 30). The Conference Board’s consumer confidence index rose to 59.8, from 58.5 in August and the third consecutive gain. Since the survey’s Sept. 23 cutoff date, Washington Mutual filed for bankruptcy, Citigroup acquired Wachovia Corp. to avert the firm’s collapse, and stocks posted their largest decline since 1987. “These results did not capture all of the tumultuous events in the financial sector this month,” said Lynn Franco, director of the Board’s confidence poll. A long list of negatives for consumer confidence remains, said Moody’s Economy.com (Sept. 30). These include the deteriorating job market, high food and energy prices, weakness in the stock markets, declining home prices, reduced credit availability, and weak household finances … * Home prices declined in July at the fastest pace on record, showing that the housing slump worsened, even before the credit crunch intensified in September. The S&P/Case-Shiller home-price index for 20 U.S. cities plunged 16.3% from a year earlier, following a 15.9% drop in June. The 10-city home price index fell 17.5% from a year ago in July, after a 17% drop in June. The Office of Federal Housing Enterprise Oversight’s repeat-purchase home-price index also showed a bigger decline in prices in July than during June. Price declines may intensify in coming months as more foreclosed homes come on the market and rising layoffs prompt rising mortgage-loan defaults (Moody’s Economy.com Sept. 30) …

News of the Competition (09/29/2008)

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MADISON, Wis. (9/30/08)
* In a deal facilitated by the Federal Deposit Insurance Corp. (FDIC), Citigroup has agreed to acquire the banking operations of Wachovia Corp. Citigroup will absorb up to $42 billion in losses from Wachovia’s loan portfolio. The FDIC will absorb any remaining losses. Wachovia was a large originator of option adjustable-rate mortgages. The FDIC emphasized Monday that Wachovia did not fail, and that there will be no cost to the Deposit Insurance Fund with the acquisition. In terms of assets, Citigroup becomes the nation’s largest bank with the Wachovia acquisition (Associated Press via Yahoo! News Sept. 29) … * Shares of regional banks plunged Monday after Citigroup’s takeover of Wachovia Corp. prompted investors to worry about which other banks will need a merger partner to survive. The S&P Financial index declined 5%, with shares of National City Corp. tumbling 52% and Fifth Third Bancorp shares plunging 20%. The financial landscape is changing quickly. Lehman Brothers filed for bankruptcy two weeks ago, and Merrill Lynch agreed to be acquired by Bank of America. Last week JPMorgan Chase agreed to acquire the assets of Washington Mutual as part of the largest failure of a U.S. bank. “I think it’s absolutely a crisis of confidence … but the larger issue is simply a paralysis of the economy or lack of confidence in financial institutions,” said Michael Sheldon, chief market strategist at RDM Financial Group (Reuters via Yahoo! News Sept. 29) … * In another sign of tightening credit, GE Capital ‘s franchise-finance unit, one of the biggest lenders to restaurant owners, said it has become more stringent in pricing and initiating loans for new franchises. “We are still active in the restaurant industry, and we continue to quote deals where it’s competitive and appropriate,” said GE Capital Spokesman Stephen White. Other big lenders to restaurant franchises include Wells Fargo and Wachovia Corp., which agreed to be acquired by Citigroup on Monday. Franchise lenders are now asking restaurant owners to put up about half of the loan amount in cash before going forward with a loan, compared with as little as 20% in required equity just six months ago, said one restaurant investor. Some analysts say tighter credit will help slow expansion and reduce the glut of restaurants nationwide (The Wall Street Journal Online Sept. 29) … * Lehman Brothers Holdings, which filed for bankruptcy two weeks ago, has agreed to sell its Neuberger Berman unit to private-equity firms Bain Capital and Hellman & Friedman. The $2.15 billion deal represents a big discount from what the unit would have fetched before Lehman’s bankruptcy. U.S. Bankruptcy Judge James Peck approved Barclays PLC’s acquisition Sept. 20 of a large percentage of Lehman’s U.S. assets (The Wall Street Journal Online Sept. 29) …

Market News (09/29/2008)

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MADISON, Wis. (9/30/08)
* The House of Representatives defeated the $700 billion bank-rescue plan Monday, despite urgent please from bipartisan congressional leaders and President Bush (Associated Press via Yahoo! News Sept. 29). The plan, which would have effectively nationalized many mortgages and mortgage-backed securities, was defeated by a vote of 228 to 205. Meanwhile, governments from Iceland to Germany announced major bank bailouts as fallout from the U.S. credit crisis spread throughout the globe (Associated Press via CNNMoney.com Sept. 29). The governments of Belgium, the Netherlands, and Luxembourg took partial control of beleaguered bank Fortis NV late Sunday, and Britain seized control of mortgage-lender Bradford & Bingley. Iceland’s government took control of Glitnir bank, the third-largest in the country. And Germany organized a credit lifeline for lender Hypo Real Estate Holding. “Despite the rescue packages in the U.S. and Europe, that doesn’t fully correct the problem,” said UniCredit Economist Alexander Koch. “I see the problem flowing until late next year” … * Responding to the deepest financial crisis since the Great Depression, the Federal Reserve is pumping another $630 billion into the global financial system. The Fed boosted its existing currency swaps with foreign central banks by $300 billion to $620 billion. Participating central banks include the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The Fed’s Term Auction Facility will expand by $300 billion to $450 billion. Stock markets worldwide tumbled the most since 1997 on Monday as the credit crisis spread. Banks have posted $586 billion in credit losses and writedowns since the mortgage crunch started last year. The U.S. bank-bailout plan would have given the Fed more power over short-term interest rates by giving the central bank authority to pay interest on the reserves held at the Fed by financial institutions (Bloomberg.com Sept. 29) … * Global confidence plunged last week as the financial crisis deepened, according to the latest Moody’s Economy.com Survey of Business Confidence. The survey indicates a contraction in the global economy, with hiring plans and plans to invest in equipment and software falling sharply. Pricing pressures also have plunged since peaking this summer. Confidence declined among all industries, with confidence among financial and business-service firms dropping to a record low. The survey shows the U.S. and European economies are in recession and much of the remainder of the global economy is quickly descending into recession … * A federal grand jury is investigating accounting, disclosure, and corporate-governance issues at Fannie Mae and Freddie Mac, the two firms announced Monday. Fannie and Freddie received subpoenas Friday from the U.S. Attorney’s office in Manhattan and requests from the Securities and Exchange Commission that they preserve documents. Fannie and Freddie have been in the conservatorship of the Federal Housing Finance Agency since the government seized the firms three weeks ago. Lehman Brothers Holdings and American International Group also are under investigation by federal prosecutors. The Federal Bureau of Investigation is currently investigating 26 companies. It also has more than 1,400 ongoing mortgage-fraud investigations (Associated Press via Yahoo! News and The Wall Street Journal Online Sept. 29) … * Freddie Mac said Friday that its portfolio of mortgage loans and mortgage bonds declined at a 56% annual pace in August, the month before the government seized control of the firm. The portfolio declined by $37.4 billion to $760.9 billion as Freddie sold off assets. The decline is part of the reason the government seized control of Freddie. Payments 90 days or more overdue on single-family mortgages that Freddie owns or guarantees jumped to 1.11% in August--from 0.46% a year earlier (Bloomberg News via American Banker Sept. 29) … * Consumer spending stalled in August as the impact of the federal government’s stimulus checks faded (Associated Press via Yahoo! News Sept. 29). Spending was unchanged last month following a meager 0.1% gain in July, the Commerce Department reported Monday. Personal income rose by 0.5%, rebounding from a 0.6% drop. Inflation accelerated last month. The core PCE deflator, an inflation measure closely tracked by Federal Reserve policymakers, increased by 2.6% over the 12 months ending in August--the largest increase since January 1995. The personal savings rate declined to 1% in August, from 1.9% in July. However, consumers probably will boost their savings in coming months, said Moody’s Economy.com (Sept. 29). That’s because declining wealth, falling home equity, less- available credit, and large debt burdens are pushing consumers away from borrowing and spending …

News of the Competition (09/26/2008)

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MADISON, Wis. (9/29/08)
* Shares of Wachovia Corp., National City Corp., and Downey Financial Corp. plunged Friday after regulators seized Washington Mutual late Thursday in the largest bank failure in U.S. history. Investors worried that financial contagion would spread. JPMorgan agreed to purchase most of WaMu, and said it would take a $31 billion writedown for the bad loans it acquired in the acquisition. Wachovia shares were down 27% in afternoon trading, while National City shares plunged 40%, and Downey shares fell 33%. “They’re the ones with a similar exposure to Washington Mutual,” said Bill Fitzpatrick, a portfolio manager at Milwaukee-based Optique Capital Management. “They are both mortgage finance companies at this point,” added Fitzpatrick. Charlotte, N.C.-based Wachovia expects losses of about 12% on its $122 billion portfolio of option, adjustable-rate mortgages. Cleveland-based National City has said it may face chargeoffs on about 20% of its $17.4 billion portfolio of businesses it has exited. Both banks maintain they’re not in serious trouble (Reuters via msn.com Sept. 26) … * In addition to pushing for the $700 billion bailout plan, banks want the government to change accounting rules so they don’t have to acknowledge losses on some securities. The American Bankers Association has asked the Securities and Exchange Commission to give banks more leeway in acknowledging losses, and in some cases to ignore market values. A bank’s capital is lowered when it recognizes a loss as permanent. Banks are pushing for more wiggle room in accounting standards ahead of third-quarter reporting (The Wall Street Journal Online Sept. 26) … * About 1% of all the notes guaranteed by Fannie Mae and Freddie Mac are 90 days or more overdue, placing them in the “seriously delinquent” category, Freddie Mac CEO David Moffett told the House Financial Services Committee on Thursday (National Mortgage News via American Banker Sept. 26). Federal Housing Finance Agency (FHFA) statistics show that 302,593 of the 30.4 million loans the two firms have in their guarantee portfolios are seriously delinquent. Also on Thursday, FHFA Director James Lockhart told the committee that he had no option but to seize control of Fannie Mae and Freddie Mac early this month because he found “significant and critical weaknesses across the board.” (Reuters via Yahoo! News Sept. 26). He said the firms were unable to bolster their capital positions without financing by the Treasury. Lockhart said the two firms could shed some of their mortgage securities under the government’s proposed $700 billion bailout plan … * A lawsuit has been filed against Bank of America, Citigroup, and other underwriters by Fogel Capital Management. The suit claims the firms misled investors in a $1.9 billion offering of Lehman Brothers securities in February. Lehman didn’t disclose that it had not set aside enough funds to cover losses on subprime mortgage-backed securities, said the law firm Wolf Haldenstein Adler Freeman & Herz, which represents Fogel Capital Management. Also named in the complaint are Merrill Lynch, a unit of UBS AG, and Lehman executives. Lehman itself isn’t named in the suit because it filed for bankruptcy protection two weeks ago, and is protected under the bankruptcy code (Bloomberg.com Sept. 26) … * The fallout from Lehman Brothers’ bankruptcy is spreading overseas. Shares of Swedbank dropped as much as 9% after one of Sweden’s largest banks said the collateral that backed a $1.35 billion loan it made to the U.S. investment bank was risky. The value of the collateral is adjusted periodically to market conditions, said Swedbank Spokesman Johannes Rudbeck. A spokesman for Lehman declined to comment (The Wall Street Journal Online Sept. 26) …

Market News (09/26/2008)

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MADISON, Wis. (9/29/08)
* In a letter to congressional leaders, 166 economists said they oppose Treasury Secretary Henry Paulson’s $700 billion bailout plan. The economists, who represent a wide range of liberal and conservative views, argued that the plan was a “subsidy” for business that could adversely affect the markets in the long term. The letter was initiated by University of Chicago economists. The bailout plan is “a stunningly broad, aggressive government intervention without appropriate precedents,” said Harvard University Economist Jeffrey Miron. David K. Levine, an economist at Washington University in St. Louis, questioned the motivation behind the current lending freeze. “I suspect that part of what we’re seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,” said Levine. Princeton University Professor Alan S. Blinder said the government should purchase mortgage loans and then renegotiate their terms. “It will make mortgaged-backed securities worth more.” He said Treasury’s current plan “is a trickle-down approach from banks to Wall Street” (Bloomberg.com and washingtonpost.com Sept. 26) … * Federal regulators seized Seattle-based Washington Mutual on Thursday night--in the largest bank failure in U.S. history. Regulators brokered a sale of the nation’s largest thrift to JPMorgan Chase, which will take on about $31 billion in losses that would have gone to the Federal Deposit Insurance Corp. WaMu, which was plagued by a big portfolio of troubled mortgages and credit card loans, had sought bidders in the weeks before its collapse. Then the failure of Lehman Brothers prompted customers to begin withdrawing deposits, and regulators stepped up efforts to broker a deal. JPMorgan, which earlier acquired Bear Stearns, will become a powerhouse with its latest acquisition, rivaled only by Bank of America. JPMorgan plans to close at least 10% of the combined firm’s 5,400 branches in markets including New York and Chicago (The New York Times Sept. 26) … * In more bad news for potential homebuyers and refinancers, mortgage rates surged last week following several consecutive weeks of decline, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) jumped 31 basis points to 6.09%, while the 15-year FRM surged 42 basis points to 5.77%. The one-year, adjustable-rate mortgage (ARM) rose 13 basis points to 5.16%. “Mortgage rates followed Treasury bond yields higher this week amid market uncertainty over the current state of the economy,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Compared with last Thursday, 10-year Treasury yields are up about 0.3 percentage points, and 30-year, fixed-rate loans moved up about the same amount,” added Nothaft. However, he noted that the 30-year FRM still remains more than 50 basis points below the peak of 6.63% hit during the week of July 24. And rates are lower than a year ago. The 30-year FRM averaged 6.42% at this time last year, while the 15-year FRM stood at 6.09%, and the one-year ARM was at 5.60% (MarketWatch Sept. 25). For CUNA's Daily Financial Rates, use the link … * The Federal Reserve on Friday expanded deals with the European Central Bank and the Swiss National Bank to make an extra $13 billion available to banks in those countries. The Fed will receive a reciprocal amount of foreign currency in exchange. The amount is in addition to the $277 billion in swap deals that were previously announced. Banks concerned about their future reportedly are hoarding cash. This has prompted a freeze in the credit markets. In turn, the Treasury Department and the Fed are advocating a $700 billion bailout package that would have the government purchase distressed mortgage-backed securities. Such a bailout could offer some comfort to the financial markets, say analysts, but central banks probably would have to continue offering major liquidity injections (CNNMoney.com and MarketWatch Sept. 26) … * Direct borrowing from the Federal Reserve’s expanded discount window jumped to new highs last week. Borrowing more than doubled to a record $262.34 billion as of Sept. 24. Average daily borrowing surged to $187.75 billion from $47.97 billion the previous week. Lending via the primary dealer credit facility, which the Fed created for investment banks in March, jumped to a record $105.66 billion from $59.78 billion. Lending through the primary credit facility used by commercial banks increased to a record $39.32 billion from $33.4 billion. Also as of Sept. 24, a loan to insurer American International Group totaled $44.57 billion (The Wall Street Journal Online Sept. 26) … * Economic growth in the second quarter was weaker than previously reported. The economy expanded at a moderate 2.8% annual rate, down from a 3.3% previous estimate, according to final Commerce Department estimates. The nation’s gross domestic product (GDP) rose by 0.9% in the first quarter. The acceleration in GDP growth in the second quarter mostly reflected a bigger decline in imports than during the first quarter, an acceleration in exports, a smaller decline in residential fixed investment, an acceleration in nonresidential structures, a pickup in state and local government spending, and an acceleration in personal consumption expenditures (PCE), that were partly offset by bigger declines in inventory investment and in equipment and software. Excluding food and energy prices, the core PCE deflator (the Federal Reserve’s preferred inflation gauge) increased 2.2% in the second quarter, the same as in the first quarter. Economic growth may well sink into negative territory during the remainder of this year, as the credit crisis continues and job losses mount …

News of the Competition (09/25/2008)

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MADISON, Wis. (9/26/08)
* Japanese banks are becoming major players in the global market as they snap up the assets of troubled U.S. banks. Nomura Holdings said earlier this week that it will purchase the equities and investment-banking operations of bankrupt Lehman Brothers. Mitsubishi UFJ Financial Group, Japan’s largest bank, has agreed to take a stake of as much as 20% in Morgan Stanley. And Sumitomo Mitsui Financial Group is considered to be a potential bidder for a stake in Goldman Sachs Group. Japanese banks are in good shape to go asset shopping because they have a large deposit base. “They have suddenly emerged as the financial darlings of this brave new world which we have entered into, where the debt financed investment-banking model is no longer valid,” said Glenn Maguire, an Asia-Pacific economist at Societe Generale (MarketWatch Sept. 25) … * Private-equity firms are becoming even bigger players in the financial market as the crisis deepens. Citigroup is negotiating to sell its Primerica life-insurance unit to private-equity firm J.C. Flowers & Co. and insurer Protective Life Corp., according to people familiar with the matter (Bloomberg.com Sept. 25). Citigroup is seeking to unload assets after recording more than $55 billion in credit losses and writedowns since the subprime mortgage markets failed last year. In other news, Washington Mutual is talking with several private-equity firms--including Carlyle Group and Blackstone Group--about a potential takeover of the Seattle-based thrift, say people familiar with the situation (The Wall Street Journal Online Sept. 25). Worried about absorbing WaMu’s bad loans, several potential bank suitors backed away from an acquisition in recent weeks. The thrift’s shares have plunged by 80% so far this year. And on Wednesday, Standard & Poor’s cut ratings on its debt “due to the likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors.” … * TD Ameritrade Holding announced Wednesday that it plans to spend as much as $50 million to ensure its money-market fund customers suffer no losses. The move comes a week after its Primary Fund saw its value drop to 97 cents a share--the first large money-market fund in history to “break the buck.” The decline was prompted by Lehman Brothers debt in the portfolio, which initiated a $40 billion run on the fund. Ameriprise Financial is suing the company, claiming it tipped off some institutional clients about the fund’s financial problems. Ameriprise also has said it will commit as much as $33 billion to protect clients who invested in Primary Fund. After Primary Fund “broke the buck” last week, investors yanked a record amount of money from money-market mutual funds, according to Money Fund Report, a service of iMoneyNet. Investors pulled a record $120.5 billion from 1,860 taxable and tax-exempt funds during the week ending September 23 (MarketWatch Sept. 25) … * Gateway Financial Holdings of Virginia Beach, Va., has become the latest bank casualty in the government’s takeover of Fannie Mae and Freddie Mac. Despite its strong asset quality, the firm’s financial situation became precarious after the $40.4 million in Fannie and Freddie preferred stock it bought late last year became virtually worthless. Gateway has agreed to sell itself to Hampton Roads Bankshares at a $101 million bargain price. Stifel, Nicolaus & Co. Analyst Carter Bundy said the acquisition is “quite remarkable” because Gateway would be acquired by a much smaller bank. State of Franklin Bancshares of Johnson City, Tenn., also needed to sell itself after the falling value of its Fannie and Freddie holdings dried up its capital. More deals may be coming. Hundreds of banks and thrifts own Freddie and Fannie preferred shares--with a total exposure of $10 billion to $15 billion, according to the American Bankers Association (American Banker Sept. 25) …

Market News (09/25/2008)

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MADISON, Wis. (9/26/08)
* The stock markets rebounded in early afternoon trading Thursday after congressional leaders said they had made an agreement in principle on the government’s huge bailout plan to revive the nation’s financial system. Lawmakers plan to present the plan to the Bush administration and hope for a vote by both houses of Congress within days. The Dow Jones Industrial Average jumped 247.15, or 2.28%, to 11,072.32 in early afternoon trading. The Dow had fallen 563 points, or 4.95%, in its first three sessions of the week. However, weak readings on housing, employment and manufacturing emphasize the difficult problems that the economy continues to face (Associated Press via Yahoo! News Sept. 25) … * The housing market remained weak last month. Sales of new single-family homes plunged 11.5% to a seasonally adjusted annual rate of 460,000 in August, according to a report by the Census Bureau and the Department of Housing and Urban Development. The sales pace was down 34.5% from a year earlier. The median price of new homes sold in August was $221,900--down 5.5% from July and 6.2% from a year earlier. New-home sales remain weak because of the large inventory of discounted existing homes for sale, a trend that also is depressing sales prices, noted Moody’s Economy.com (Sept. 25). There was a 10.9-month supply of homes for sale at the current sales pace in August, up from 10.3 months’ worth in July … * The job market continued to soften last week, skewed by the impact of the hurricanes on the Gulf Coast. First-time claims for unemployment insurance jumped by 32,000 during the week ending Sept. 20 to 493,000, the Labor Department reported Thursday. The department estimates that the impact of Hurricane Gustav in Louisiana and Hurricane Ike in Texas added about 50,000 jobless claims to the total. The four-week moving average, which smoothes out weekly volatility, increased by 16,000 to 462,500. In another weak sign for the job market, continuing claims (the number of people still on the benefit rolls after an initial week of aid) rose by 63,000 during the week ended Sept. 13 to 3.542 million. The high level of continuing claims suggests people are having a tough time finding new jobs after they’ve been laid off. The economy has lost more than 600,000 jobs so far this year. Analysts say the current financial turmoil will result in continued job losses for the remainder of the year … * Workers continue to shoulder a mounting share of their health-care costs, according to a study by the Henry J. Kaiser Family Foundation. Health-care costs jumped another 5% this year, and workers paid more than one-fourth of the total cost, the study found. Employer-sponsored health insurance for a family now costs an average $12,680, and workers’ premiums average $3,354. The cost of employer-sponsored health insurance has more than doubled since 1999, noted the study, far outpacing the 34% gain in wages. People are having a tough time paying their medical bills as costs soar. In a report by the Center for Studying Health System Change, 19% of respondents said their families had problems paying their medical bills in 2007--up from 15% in 2003. In that study, 18% of those with health insurance had problems paying medial bills, as did 34% of those without health insurance. That’s up from 14% and 27%, respectively, in 2003. In the Kaiser study, more than 40% of companies said they are very or somewhat likely to increase workers’ premiums, deductibles, and copayments again next year (Bloomberg.com Sept. 24) … * A $25 billion loan package for U.S. automakers was passed Wednesday by the House of Representatives. The package was part of a spending bill needed to keep the government operating after the fiscal year ends Sept. 30. The bill sets aside $7.5 billion in taxpayer funds to guarantee $25 billion in low-interest loans for General Motors, Ford Motor, and Chrysler LLC to manufacture more energy-efficient vehicles. The bill also includes $23 billion in emergency aid to states hit by the recent hurricanes, and $488 billion for the Pentagon. It doesn’t include funding for an expansion of unemployment benefits and other measures Democrats pursued to help workers cope with the economic downturn (Reuters via Yahoo! News Sept. 25) … * The manufacturing sector weakened in August. Orders for big-ticket durable goods such as vehicles, aircraft, and computers plunged by 4.5%, or $9.9 billion, to $208.5 billion, the Commerce Department reported Thursday. The decline was the largest since January and followed three consecutive monthly gains. It was led by weak demand for commercial aircraft and autos, which tumbled by 38.1% and 8.1%, respectively. Excluding transportation, new orders declined by 3%. Orders for nondefense capital goods excluding aircraft--a proxy for future business spending--fell by 2%. Businesses are having a tough time borrowing money for expansion and consumers are reining in spending as the financial crisis deepens …

News of the Competition (09/24/2008)

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MADISON, Wis. (9/25/08)
* Treasury Secretary Henry Paulson has agreed to accept limits on compensation packages for executives whose firms will benefit from the proposed $700 billion bailout of the financial sector, said Republican officials Wednesday afternoon (Associated Press via Yahoo! News Sept. 24). Critics from both parties have demanded that such a provision be included in any bailout plan. In a second day of congressional testimony Wednesday, Federal Reserve Chairman Ben Bernanke reiterated his recommendation for fast action on the bailout plan (The Wall Street Journal Online Sept. 24). “Stabilization of our financial system is an essential precondition for economic recovery,” said Bernanke. Some critics of the plan also are calling for more oversight and for protections for homeowners and taxpayers. Critics say the government should purchase equity, not just bad debt, so taxpayers can benefit from any future profits … * Billionaire investor Warren Buffett announced late Tuesday that he is investing $5 billion in Goldman Sachs. Analysts said the move was designed to boost investor confidence. The Standard & Poor’s 500-stock index erased half its 1.6% loss in after-hours trading Tuesday evening after news of the investment. Also on Tuesday, Goldman announced that it plans to sell at least $2.5 billion in common stock to the public. Late Sunday, the Federal Reserve gave Goldman Sachs and Morgan Stanley permission to become bank holding companies, signaling the end of an era of giant investment banks. Last week, Lehman Brothers filed for the largest bankruptcy in U.S. history, and Merrill Lynch agreed to be acquired by Bank of America (The New York Times and Associated Press via Yahoo! News Sept. 24) … * AmSouth Bank and AmSouth Asset Management settled charges Tuesday by the Securities and Exchange Commission (SEC) that they defrauded mutual funds by secretly using a part of shareholders’ administrative fees for marketing. The SEC said the shareholder fees also were used to pay for the salary, bonus, benefits, and country-club membership of the president of the AmSouth funds. The two firms, which now are a part of Regions Financial Corp., will pay an $11.4 million fine. The fine will be distributed to the mutual funds, which now are operated by Pioneer Investments. The SEC “will not tolerate advisers that seek to hide their own marketing expenses in other types of fees charged to fund shareholders,” said SEC Enforcement Director Linda Thomsen (Dow Jones Newswires and Associated Press via Yahoo! News Sept. 23) … * Losses on guaranteeing residential mortgage-backed securities created from 2005 to 2007 “will continue to weigh on bond insurers for many years,” said Standard & Poor’s. S&P said insurance written on the securities has forced some firms into “hibernation” ---taking on no new business and canceling credit-default swaps for cash and equity stakes to stay in business. “We won’t know the full extent of structured finance losses for some time,” said S&P Analyst David Veno (Bloomberg.com Sept. 23) … * As part of its effort to raise cash, GMAC has agreed to sell its home-services unit to Canada’s Brookfield Asset Management, which will gain access to the U.S. GMAC is cutting its mortgage operations following seven consecutive weak quarters at Residential Capital. The firm has shut down all 200 of its GMAC Mortgage retail offices and eliminated 5,000 employees at Residential Capital (Bloomberg News via The New York Times Sept. 24) …

Market News (09/24/2008)

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MADISON, Wis. (9/25/08)
* The Federal Bureau of Investigation (FBI) has launched preliminary investigations of possible fraud involving the four financial powerhouses--Fannie Mae, Freddie Mac, Lehman Brothers and American International Group--at the heart of the financial crisis. The investigations center on whether fraud helped cause some of the financial problems at the companies. It is aimed at firms that “may have engaged in misstatements in the course of what transpired during this financial crisis,” FBI Director Robert Mueller III told the Senate Judiciary Committee. “The FBI will pursue these cases as far up the corporate chain as is necessary to ensure that those responsible receive the justice they deserve,” added Mueller. The FBI says it now has 26 companies under investigation, in addition to more than 1,400 mortgage-fraud cases (The Wall Street Journal Online and The New York Times Sept. 24) … * In an effort to increase dollar liquidity in the global markets, the Federal Reserve announced a deal Wednesday to provide funds to four central banks. The Fed has created new currency swap lines with the Reserve Bank of Australia, the Sveriges Riksbank of Sweden, Denmark’s Danmarks Nationalbank, and Norway’s Norges Bank. The Fed will make up to $30 billion available to the central banks. The move follows an announcement last week that the Fed will extend swap lines with the European Central Bank and the Swiss National Bank and add new dollar provisions to the Bank of Japan, the Bank of England, and the Bank of Canada. Economists said the move was part of a broader effort to restore some confidence in Wall Street. It suggests “the central bank has some depth to it, some ability to respond,” said Wachovia Chief Economist John Silvia (CNNMoney.com and The Wall Street Journal Online Sept. 24) … * Sales of existing homes fell last month and prices continued to decline as credit remained tight, the National Association of Realtors (NAR) reported Wednesday. Sales of single-family homes, townhomes, condominiums, and co-ops dropped 2.2% to a seasonally-adjusted annual rate of 4.91 million units. The decline followed a 3.5% gain in July. August sales were down 10.7% from a year earlier. The national median existing-home price was $203,100 in August--down 9.5% from a year earlier. The trade association expects housing conditions to improve. “August sales reflect higher interest rates before the government takeover of Freddie Mac and Fannie Mae, and the sudden drop in mortgage interest rates over the past couple weeks is improving housing affordability,” said NAR Chief Economist Lawrence Yun. “However, home sales will be constrained without a freer flow of credit into the mortgage market,” added Yun (realtor.org Sept. 24) … * Mortgage activity retreated last week as both refinancing and purchase applications declined, according to the Mortgage Bankers Association (mbaa.org Sept. 24). The trade group’s Market Composite Index fell 10.6% during the week ending Sept. 19 to 591.4. The Refinance Index plunged 11.2% to 2043.4, and the Purchase Index fell 10% to 342.2. The average 30-year, fixed-rate mortgage rose 26 basis points to 6.08%, while the one-year, adjustable-rate mortgage edged up 6 basis points to 7.01%. With the financial markets in their worst shape since the stock-market crash of 1929, the outlook for the housing market remains murky, said Moody’s Economy.com (Sept. 24). On the upside, the research firm predicts that home-price declines will continue to boost affordability and help clear excess inventory by mid-2009 … * The immigration boom slowed sharply last year along with the slowdown in economic growth and home construction, according to a Census Bureau report. The U.S. added an estimated half-million immigrants (both legal and illegal) in 2007--down from 1.8 million in 2006. Since 1990, the nation has taken in about one million immigrants per year. There now are more than 38 million immigrants in the U.S.--a record high. And immigrants represent 12.6% of the U.S. population--the highest level since 1920. About 12 million immigrants are in the country illegally, according to government and private estimates. More than half of all immigrants are from Latin America (Associated Press via Yahoo! News Sept. 23) … * U.S. retailers in 2008 could see the weakest holiday season in six years as the economic slowdown, rising unemployment, weak income gains, and higher energy and food costs pinch household budgets. Retail sales will increase just 2.2% to $470.4 billion this year--lower than the 10-year average of 4.4% and the weakest gain since 1.3% in 2002, according to a forecast by the National Retail Federation (NRF). “Current financial pressures and a lack of confidence in the economy will force shoppers to be very conservative with their holiday spending,” said NRF Chief Economist Rosalind Wells (CNNMoney.com Sept. 23) …

News of the Competition (09/23/2008)

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MADISON, Wis. (9/24/08)
* About one-fourth of the nation’s banks lost a combined $10 billion to $15 billion from the federal government’s takeover of Fannie Mae and Freddie Mac, according to a survey by the American Bankers Association. The ABA said 27% of the 8,500 U.S. banks held preferred shares in Fannie and Freddie. Community banks made up 85% of the affected institutions. ABA President Edward Yingling notes that each $1 in capital supports $7.60 worth of lending. The losses from Fannie and Freddie could prompt $76 billion to $114 billion worth of lending declines. The community banks say the losses on Fannie and Freddie are frustrating because they avoided most of the subprime lending that caused the crisis among big banks (The Wall Street Journal Online Sept. 23) … * The nation’s three largest residential-mortgage servicers could control more than 52% of the $9.6 trillion market when the merger boom ends, according to a study by National Mortgage News (via American Banker Sept. 22). Bank of America, which already owns Countrywide Financial and has made a deal to acquire Merrill Lynch (and its three mortgage servicers) would become the nation’s largest servicer. If JPMorgan Chase acquires Washington Mutual, Morgan’s mortgage unit will remain the nation’s third-largest servicer. Wells Fargo would be the second-largest servicer … * The Federal Reserve has increased the ceiling on securities lending, according to a posting on the central bank’s website Tuesday. Individual primary-dealer banks now can borrow as much as $4 billion in securities from the Fed, up from the $3 billion previous limit. “It’s one more incremental measure among many to address financial market stress,” said JPMorgan Chase Economist Michael Feroli. In March, the Fed announced new measures to let securities dealers obtain Treasuries at auction for 28 days and to let securities firms receive overnight loans (Associated Press via msn.com Sept. 23) … * The Federal Reserve relaxed some guidelines Monday on minority shareholder investments in banks, an action that could encourage investment in banks by private-equity firms. The major changes include letting an investor purchase as much as a 15% voting stake, up from the previous 9.9% threshold. Investors also can purchase as much as 33% total equity interest, up from 25%. The new guidelines also increase the number of board members a minority investor can have, noted Chip MacDonald, a mergers partner at the Jones Day attorney firm (Reuters via Yahoo! News Sept. 23) … * Recoveries on defaulted bank debt could total 60% or less--compared with the average 81% of the last 20 years--because of the larger number of bank-only deals in leveraged financings, according to Moody’s Investors Service. Bank debt was cushioned in the past because bonds incurred the first loss following default. However, many more firms today have all their debt in bank loans, instead of a combination of bank debt and unsecured bonds. At 81%, loans had the higher recovery rate from 1987 to 2008. In comparison, the rates were 64% for senior secured bonds, 49% for senior unsecured bonds, and 29% for subordinated debt. “The prevalence of loan-only structures in recent years has introduced a degree of exposure to losses that these investors in bank loans haven’t faced before,” said Moody’s (Dow Jones Newswires Sept. 23) …

Market News (09/23/2008)

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MADISON, Wis. (9/24/08)
* The economy is risking a recession, rising unemployment, and higher foreclosures if Congress doesn’t pass the Bush administration’s $700 billion bailout of the financial sector, said Federal Reserve Chairman Ben Bernanke. In testimony to the Senate Banking Committee Tuesday, the Fed chairman said not passing the plan would cost consumers jobs because companies would not be able to borrow money to expand. “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.” Some Democrats are insisting that any bailout of struggling financial firms be linked to top executives losing their “golden parachute” pay packages as they exit the firms (Associated Press via The New York Times Sept. 23) … * The Bush administration’s $700 billion bailout plan may push the national debt to the highest level since 1954. The debt level could rise to more than 70% of the nation’s gross domestic product. Treasury Secretary Henry Paulson, who introduced the plan, is asking lawmakers to boost the legal ceiling on the federal debt to a record $11.3 trillion, from the current $10.6 trillion limit. The Treasury already is borrowing heavily to fund the Federal Reserve’s measures to boost liquidity in the credit markets. Raising the debt limit to the level Paulson wants would mean that every adult and child in the nation would owe more than $37,000 each, compared with median income of $50,233 in 2007. “It’s an alarming level of debt given that we’re not fighting something like World War II,” said Concord Coalition Executive Director Robert Bixby (Bloomberg.com Sept. 23) … * Investors are yanking money from their 401(k) retirement plans or slashing contributions as the stock markets plummet and unemployment rises. Many recent withdrawals are for hardship, a move that comes with a 10% tax penalty for many investors. Some retirement advisers are urging older investors to shift to fixed income. Many younger investors are rebalancing their portfolios with fewer stock mutual funds. And some people are taking all their money out of 401(k)s and putting the money in FDIC-insured certificates of deposit. The total stock allocation of 401(k) plan participants fell to a five-year low of 62% in August--from 68% a year earlier, according to Hewitt Associates (The Wall Street Journal Online Sept. 23) ... * More than 7.5 million Americans--about 15% of all homeowners with a mortgage--are spending half of their income or more on housing costs, according to 2007 statistics reported by the Census Bureau on Tuesday. That’s up from about 7.1 million people in 2006. About 19 million people--38% of homeowners with mortgages--spend 30% or more of their income on housing costs. That threshold is considered to be financially burdensome to people, a point where a lost job or soaring gasoline prices can cause a homeowner to lose their home. More than 4 million people were overdue on their mortgages by at least one month at the end of June, according to the Mortgage Bankers Association (Associated Press via Yahoo! News Sept. 23) … * Home prices declined a record 5.3% over the 12 months ending in July, according to the Federal Housing Finance Agency. Prices were down 0.6% from June. Prices have fallen by 5.8% from the peak reached in April 2007 and are now at October 2005 levels. Agency Director James Lockhart said Fannie Mae and Freddie Mac should ease lending standards to help more people purchase homes. The agency’s data may understate home-price declines because it doesn’t include jumbo loans or subprime loans (MarketWatch and Associated Press via Yahoo! News Sept. 23) …

Market News (09/22/2008)

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MADISON, Wis. (9/23/08)
* The Wall Street era of investment banks has ended. The Federal Reserve on Sunday gave Goldman Sachs and Morgan Stanley permission to become bank holding companies. The decision comes 75 years after Congress separated investment banks from deposit-taking lenders. Last week investment banks Lehman Brothers Holdings filed for bankruptcy protection and Merrill Lynch agreed to sell itself to Bank of America. Bear Stearns was purchased by JPMorgan Chase in March. Goldman and Morgan made the decision after clients defected and their shares lost value. The two firms, which now will be regulated by the Fed, can build their deposit base instead of using money borrowed in the bond market. Their conversion to banks could mean that regional lenders will face more competition for deposits. The Treasury Department’s decision last week to insure money-market mutual funds also could siphon more depositors from banks (Bloomberg.com Sept. 22) … * Senate Democrats are pushing for new measures to the Treasury Department’s proposed bailout for financial firms that include limits on executive compensation, government help for homeowners, and a provision to let the government take shares of financial institutions that participate in the program. Democrats also are calling for an end to the program at the end of 2009, instead of creating a two-year program, as the Bush administration wants. They also want more layers of oversight for the program (Associated Press via Yahoo! News and The Wall Street Journal Online Sept. 22) … * Financial officials from the Group of Seven pledged Monday to help battle the global credit crisis. Officials said they welcomed the U.S. Treasury Department’s plan to purchase $700 billion worth of toxic assets to help stabilize the financial system. The Group of Seven is made up of the U.S., Japan, Britain, Germany, France, Italy, and Canada. “We affirm our strong and shared commitment to protect the integrity of the international financial system and facilitate liquid, smooth functioning markets, which are essential for supporting the health of the world economy,” said the finance officials in a statement. The U.S. Federal Reserve has joined with other central banks in recent weeks to pump billions into the financial markets (Associated Press via The New York Times Sept. 22) … * U.S. consumers are cutting back on health-care spending amid the economic downturn and escalating costs for food and energy. Higher co-payments and deductibles also are discouraging people from seeking health care. The number of physician-office visits declined by 1.2% over the 12 months ending in July, according to market researcher IMS Health. The number of filled prescriptions dropped 0.5% in the first quarter and 1.97% in the second quarter--the first negative quarters in at least 10 years. In a poll conducted by the National Association of Insurance Commissioners in August, 22% of respondents said economy-related problems were prompting them to go to the doctor less often, and 11% said they’d cut back on prescription drugs to save money. Medical experts say skipping needed drugs and office visits could result in more expensive treatment down the road as medical problems surface (The Wall Street Journal Online Sept. 22) … * Most elderly and disabled people participating in Medicare will see no increase in their monthly premiums next year. The premium for most participants will hold steady at $96.40 in 2009, the first time since 2000 that the premium hasn’t increased. It’s the sixth time in Medicare’s history that premiums didn’t rise. The deductible for Medicare Part B also will hold steady at $135 next year. However, the pause probably will be temporary. “In the future, we’re going to have to go back to raising the premiums to match the increase in expenditures,” noted Richard Foster, chief actuary at the Centers for Medicare and Medicaid Services. About 5% of the 44 million people in Medicare will see higher premiums next year, because they’re in higher income categories. Individuals earning more than $85,000 and couples earning more than $170,000 will pay more (Associated Press via Yahoo! News Sept. 19) …

News of the Competition (09/22/2008)

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MADISON, Wis. (9/23/08)
* Creditors of Lehman Brothers Holdings, which filed for bankruptcy protection last week, have legal grounds to retrieve pay given to CEO Richard Fuld, who received $34.4 million in compensation last week, say bankruptcy attorneys. “Bankruptcy law allows recovery of compensation paid to insiders if the company didn’t receive reasonable equivalent value,” said bankruptcy law professor Lynn LoPucki. “The value of the services of a CEO who runs a company into bankruptcy is less than $34 million.” U.S. bankruptcy law was amended in 2005 after Enron Corp. creditors failed to recover the more than $120 million paid to executives in the month prior to the firm’s collapse in 2001, noted LoPucki. Lehman’s top five executives received $81 million in pay last year (Bloomberg.com Sept. 20) … * Japan’s Nomura Holdings has agreed to acquire the Asian operations of bankrupt U.S. investment bank Lehman Brothers Holdings. The deal will include Lehman’s 3,000 employees in Asia. Last week Lehman filed for bankruptcy protection after it posted billions of dollars in losses from bad mortgage-related debt. It once was the fourth-largest investment bank in the U.S. Britain’s Barclays PLC has purchased Lehman units that employ about 9,000 employees in the U.S. (Associated Press via The New York Times Sept. 21) … * Investment bank Morgan Stanley announced Monday that it has signed a letter of intent to sell up to 20% of itself to Mitsubishi UFJ Financial Group. The deal came only hours after Morgan Stanley received regulatory approval to become a bank holding company. Morgan Stanley now will be regulated by the Federal Reserve instead of the Securities and Exchange Commission. Morgan Stanley Chairman/CEO John Mack said the partnership with Mitsubishi will help the firm transition to a commercial bank. The deal also will help Morgan Stanley shore up its capital base (Associated Press via Yahoo! News Sept. 22) … * Major shareholders are trying to pay off the federal government’s loan to insurer American International Group to avoid having the government take a 80% stake in the firm, according to a person familiar with the situation. The shareholder group could accomplish the payback via asset sales and through investments by large investors. Last week the government agreed to lend the insurer as much as $85 billion to help it avert bankruptcy. In exchange, the government can take a controlling stake in the firm (Dow Jones Newswires via American Banker Sept. 22) … * Bank of America’s acquisition of Merrill Lynch will offer the bank a small but profitable cards business with a high-end customer base. The deal could erode American Express’s strong dominance in the market. It will give Bank of America “a real tie-in to that high-end-net-worth market,” said Brian Riley, a research director in TowerGroup’s bank cards practice. He said Bank of America may adapt some unusual features of Merrill’s cards “to create a dominant card product for the high-end market.” Those features include significant rewards offerings and a deferred debit capability that lets debit cards function as credit cards (American Banker Sept. 19) …

News of the Competition (09/19/2008)

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MADISON, Wis. (9/22/08)
* Citigroup is considering making a bid to acquire Washington Mutual, say people familiar with the matter. Seattle-based WaMu has a large portfolio of shaky mortgages. Citigroup is in a strong position for a bid after it shed toxic mortgages and raised $40 billion in new capital. Other possible bidders include Wells Fargo and Spain’s Banco Santander. The Federal Deposit Insurance Cop. met with WaMu Chief Executive Alan Fishman earlier last week, according to people familiar with the situation, and encouraged the thrift’s decision to seek an acquirer (The Wall Street Journal Online Sept. 19) … * Morgan Stanley is in merger and investment discussions with Wachovia Corp., China Investment Bank, and other firms, according to a person familiar with the situation. Morgan Stanley “feels like it is operating from a position of strength, that it can slow down the timetable and figure out which is the right opportunity to pursue,” said the source. A series of measures announced by federal officials to remove toxic assets from banks and limit short sales prompted a stock rally Friday. Morgan’s stock jumped 25% early in the day. In other news, Freddie Mac announced Friday that it hasn’t yet received payments of more than $1.2 billion due from Lehman Brothers, which filed for bankruptcy protection last week. Freddie itself was taken over by the government two weeks ago (Reuters via The New York Times Sept. 19) … * The Securities and Exchange Commission (SEC) is expanding its investigation of the failed auction-rate securities market to include individuals, Linda Chatman Thomsen, director of the SEC’s enforcement division, told a Congressional hearing on Thursday. “Individual accountability provides an additional and powerful deterrent to others on Wall Street who might consider engaging in similar improper conduct,” cautioned Thomsen. Massachusetts also is expanding its investigation,” said William Francis Galvin, secretary of the commonwealth of Massachusetts. “My office is in discussions with certain downstream broker-dealers, and it is our expectation that those firms will ultimately make good on the point-of-sale promise of liquidity they made to their clients with respect to auction-rate securities,” said Galvin. Wall Street investment banks already have agreed to buy back billions of dollars worth of the securities and to pay millions in fines related to their marketing and sale of auction-rate securities (Reuters Sept. 18) … * Most people who use contactless cards like using them, but many online users are unfamiliar with the technology, according to a study commissioned by the Smart Card Alliance. In the poll conducted by Javelin Strategy and Research, 92% of respondents said the technology is fast and ease to use, and 22% said they make payments with their contactless cards more than six times each month. However, the research firm also polled people who are representative of the online population but don’t necessarily use contactless cards. In that survey, just 25% of respondents were familiar with contactless cards, up slightly from 15% in 2006. “Communicating and building awareness of contactless benefits to get consumers to try it is critical, and an important priority for all of the stakeholders,” said Randy Vanderhoof, executive director of Smart Card Alliance (finextra.com via Yahoo! News (Sept. 17) …

Market News (09/19/2008)

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MADISON, Wis. (9/22/08)
* Stock markets surged Friday as government officials confirmed plans to rescue banks from billions of dollars in toxic debt. The Dow Jones Industrial Average rose more than 375 points, and Treasuries declined as funds flowed into equities. Treasury Secretary Henry Paulson said he would work on the rescue plan with congressional leaders over the weekend. “The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” said Paulson. He acknowledged that the government may take on “hundreds of billions of dollars” in obligations and the plan would “involve a significant investment of taxpayer dollars.” One way under discussion for the plan is to set up auctions to purchase mortgage assets from companies. In other moves to shore up confidence, the Treasury Department announced a new guaranty program for money market funds, and the Securities and Exchange Commission announced a ban on short selling of financial stocks (Associated Press via Yahoo! News, CNNMoney.com, and MarketWatch Sept. 19) … * The Treasury Department announced the creation of a temporary guaranty program Friday for the money market mutual fund industry. The Treasury will insure the holdings of any publicly offered fund that pays a fee to participate in the program. Investors with a net asset value per share that declines to less than $1 will be informed that their fund triggered the guaranty program. “Money market funds play an important role as a savings and investment vehicle for many Americans; they also are a fundamental source of financing for our capital markets and financial institutions,” said the department in a release. “Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system.” A run on money funds began early last week when the Reserve Primary Fund closed due to soured Lehman Brothers securities (The Wall Street Journal Online Sept. 19). And on Wednesday, Putnam Prime Money Market Fund announced that it had shut down and would distribute assets due to “market-wide liquidity issues.” A run on money funds would affect corporations that rely on short-term funding such as commercial paper, noted the Journal … * The Securities and Exchange Commission (SEC), acting with the U.K. Financial Services Authority, has taken temporary emergency action to prohibit short selling in the securities of 799 financial companies. The agency said it enacted the measure “to protect the integrity and quality of the securities market and strengthen investor confidence.” The U.K.’s regulator took similar action. The SEC’s emergency order is immediately effective and will end on 11:59 p.m. ET on Oct. 2. The SEC may extend the order if considered necessary to the public interest. “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” said SEC Chairman Christopher Cox. “This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress.” Critics say some short sellers have spread rumors about firms while shorting the stock to drive prices down (CNNMoney.com Sept. 19). Short sellers borrow stock in order to sell it, then buy it back at a lower price, pocketing the difference. “…the relaxed regulation of the SEC has led to abuses of short selling that have destroyed many, many companies,” said Peter Cardillo, chief market economist at Avalon Partners … * The Federal Reserve lent $121 billion last week to investment firms, commercial banks, and insurer American International Group (AIG). As of Sept. 17, the Fed loaned commercial banks a record $33.4 billion, up from $23.5 billion a week earlier. The central bank also loaned investments firms $59.8 billion, and AIG received $28 billion. No investment banks had borrowed in previous weeks under the Fed’s primary dealer credit facility. Prior to last week, such borrowing had peaked at $37 billion in late March. With the financial system in disarray, both commercial banks and investment firms increasingly have looked to the Fed for liquidity. Although not listed by name, borrowing by investment banks may have included Lehman Brothers, which filed for bankruptcy protection on Monday (The Wall Street Journal Online Sept. 19) … * Domestic automakers may be the next beneficiaries of a government bailout. General Motors, Ford Motor, and Chrysler are pushing Congress to act by the end of September to guarantee $25 billion in loans to help them invest in fuel-efficient models. Both presidential candidates support the measure as a way to help workers in Detroit and help the nation shift away from foreign-oil dependence. The automakers reportedly are pushing privately for up to $50 billion in loan guarantees. Critics say the automakers are to blame for losing market share because they pushed gas-guzzling vehicles for years despite a looming fuel crisis (The New York Sun via Yahoo! News Sept. 19) … * Banks are dumping their commercial-property debt following the collapse of Lehman Brothers. The sell-off is battering the market and prompting financial firms to take additional losses on the estimated $150 billion in commercial real estate debt on their books. On Tuesday, Goldman Sachs said it was taking a $325 million loss and reducing its portfolio of commercial mortgages and securities by $2 billion to $14.7 billion. “Those assets are marked where they can be sold,” said Goldman Chief Financial Officer David Viniar. Prices in the commercial real estate market probably will soften going forward. “Every day that goes by there will be more pressure on pricing,” said UBS Real Estate Analyst Jeffrey Spector (The Wall Street Journal Online Sept. 18) …

Hampel to Bloomberg TV There are some positives

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WASHINGTON (9/19/08)—The effect on consumers of the turmoil caused by such events as the government takeover of Freddie Mac and Fannie Mae could easily be overstated, Bill Hampel, Credit Union National Association senior economist, stated during an interview on Bloomberg TV Thursday. “The typical consumer probably didn’t know until a couple of weeks
CUNA Chief Economist Bill Hampel appeared live on Bloomberg Television Thursday.
ago what a Freddie or a Fannie might be,” Hampel said, and added that consumers are more affected by drivers like high gas prices. The CUNA chief economist noted that there are even some consumer winners amid the lending crunch. He reiterated that credit unions are well capitalized, didn’t engage in the subprime mortgage practices that have gotten some lenders into trouble--and therefore credit unions have funds to lend. “If you are a consumer with a really good credit rating, you can get credit now. In fact, a first-time homebuyer with good credit and a down payment is in a good position to get a loan, he added. Hampel reiterated deposits in credit unions are safe and federally insured, with rules and coverage similar to that of the Federal Deposit Insurance Corp. “I’m not saying it’s happy days—but there are some positives to offset the negatives,” Hampel said.

News of the Competition (09/18/2008)

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MADISON, Wis. (9/19/08)
* Morgan Stanley moved to find a merger partner Thursday as confidence in the traditional brokerage model waned. Wachovia Corp. was a top candidate to purchase Morgan, according to media reports. Other banks also have reportedly expressed interest in acquiring the firm. Morgan on Wednesday reported third-quarter results that were above expectations. However, its stock still declined amid merger speculation. Morgan and Goldman Sachs are the last two independent brokerages. Earlier this year, Bear Stearns collapsed. And this week Lehman Brothers filed for bankruptcy, while Merrill Lynch agreed to be acquired by Bank of America. In other news, U.K. bank Lloyds TSB announced Thursday that it has agreed to acquire HBOS for $22.2 billion in a transaction backed by British authorities as a way to help stabilize the financial markets. HBOS heavily depends on the wholesale markets to finance its lending, and investors feared financial turmoil could leave the firm unable to find financing (MarketWatch Sept. 18) ... * Putnam Funds closed its $15 billion institutional Putnam Prime Money Market Fund on Thursday after a surge of redemption requests. “The trustees’ action was not related to the portfolio’s credit quality, but was instead a reaction to marketwide liquidity issues,” said the company in a statement. The move came only days after the Reserve Primary Fund, one of the largest money-market funds in the nation, said about a dozen big investors yanked $40 billion of their money and caused the fund to “break the buck,” or fall below the standard of $1 a share. Its holdings in Lehman Brothers, which filed for bankruptcy on Monday, prompted the withdrawals. Putnam noted that the fund’s net asset value was $1 a share as of Tuesday (Dow Jones Newswires and Reuters Sept. 18) … * Thornburg Mortgage said it may be facing another liquidity crisis because of a series of “unanticipated” margin calls from lenders. The Santa Fe., N.M.-based lender said the margin calls were “in direct conflict” with a lending agreement made in March. Thornburg barely avoided a bankruptcy in April through a fund-raising plan from a group of investors led by MatlinPatterson Global Advisers. Thornburg said the problem with its banks could put the offer’s completion in jeopardy. Analysts have tracked Thornburg’s problems because its loans were mostly made to creditworthy, not subprime, borrowers (The Wall Street Journal Online Sept. 17) … * Visa International has grabbed Royal Bank of Scotland’s debit-card business in the U.S. and U.K. from competitor MasterCard Inc. Royal Bank is one of the biggest debit-card issuers in both countries. The switch from MasterCard will start at mid-2009 and will result in “improved service for our customers,” said a bank spokeswoman. Debit cards have become increasingly important to the card networks as credit-card growth has slowed. U.S. consumers charged almost $1.4 trillion in more than 28 billion debit-card transactions last year, according to the research firm Packaged Facts (The Wall Street Journal Online Sept. 17) …

Market News (09/18/2008)

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MADISON, Wis. (9/19/08)
* The Federal Reserve coordinated with other central banks Thursday in an effort to ease the credit crisis by almost quadrupling the amount of dollars central banks can auction worldwide to $247 billion. The Fed joined with the European Central Bank (ECB), the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank in the coordinated effort “to address the continued elevated pressures in U.S. dollar short-term funding markets.” The New York Federal Reserve Bank Thursday also pumped $55 billion into the nation's financial system, on top of the $70 billion it pumped into the system Tuesday. The ECB doubled the limit of dollars it can obtain from the Fed to $110 billion. Swiss National Bank can offer $27 billion, or $15 billion more. The new swap facilities with the Bank of Japan was increased to $60 billion. Amounts are $40 billion at the Bank of England and $10 billion at the Bank of Canada. “The central banks continue to work together closely and will take appropriate steps to address the ongoing pressure,” said the Fed (fed.gov and Bloomberg.com Sept. 18) … * With stocks plummeting, the Securities and Exchange Commission (SEC) has launched an effort to make it more difficult for traders to improperly dampen stock prices. The agency banned naked short-selling in all publicly-traded companies. The SEC adopted a rule requiring short-sellers and their broker dealers to deliver securities by the close of business on the settlement date. The agency is seeking approval for an emergency rule to require hedge funds and other big investors to publicly disclose their short positions daily. Declining stock prices have made it more difficult for banks to raise money, and manipulative trading may have contributed to the failure of investment banks Bear Stearns and Lehman Brothers. The SEC also is tightening requirements on market makers that trade options, and making it illegal for a customer to mislead a broker about having located stocks and then failing to deliver them (The Wall Street Journal Online Sept. 18) ... * Mortgage rates declined for a fifth consecutive week and are now at their lowest levels since February, Freddie Mac reported Thursday. The 30-year, fixed-rate mortgage (FRM) fell 15 basis points to 5.78%, while the 15-year FRM dropped 19 basis points to 5.35%, and the one-year, adjustable-rate mortgage (ARM) fell 18 basis points to 5.03%. The average 30-year FRM is down about 75 basis points since its decline started last month, said Freddie Mac Vice President and Chief Economist Frank Nothaft. “As a result, mortgage applications surged nearly 58% since August 15, largely led by a 122% gain in applications for refinancing, according to the Mortgage Bankers Association,” added Nothaft. He said the trade association also reported that FRMs are the current choice of most homebuyers and those seeking to refinance. FRMs made up 95% of new applications during the first two weeks of September (MarketWatch and UPI via Yahoo! News Sept. 18). For CUNA's Daily Financial Rates, use the link … * Household net worth declined in the second quarter while debt growth slowed to the weakest pace in at least 56 years--another sign of the widening credit squeeze. The net worth of households edged down 0.8% to $55.99 trillion, the Federal Reserve reported Thursday. It was the third consecutive quarterly decline. Net worth is total assets such as homes and pensions minus total liabilities such as mortgage- and credit-card debt. Household debt rose at a 1.4% annual pace--down from a 2.6% pace and the slowest growth since at least 1952, when the Fed first starting collecting the data. Growth in home-mortgage debt rose at a 0.8% annual rate, down from a 2.6% pace and also the lowest since record keeping began. The sharp slowdown reflects weak housing demand and tight lending standards. Consumer credit increased at a 4.4% pace, down from a 5.2% rate (MarketWatch and The Wall Street Journal Online Sept. 18) … * The job market continued to soften last week, according to a Labor Department report. First-time claims for unemployment insurance rose by 10,000 during the week ending Sept. 13 to 455,000. The four-week moving average, which smoothes out weekly volatility, increased by 5,000 to 445,000. The week’s data was the first to include claims stemming from Hurricane Gustav, which slammed into the Louisiana coast over the Labor Day weekend, said a Labor Department analyst (Associated Press via The New York Times Sept. 18). In a hopeful sign, continuing claims--the number of people still on the benefit rolls after an initial week of aid--fell by 55,000 to 3.478 million. However, continuing claims remain on a clear upward trend,” said Moody’s Economy.com (Sept. 18). The research firm also noted that risks remain for a more severe or sustained downturn as uncertainty in the financial markets continues … * The Conference Board’s index of leading economic indicators declined by 0.5% in August following a 0.7% drop in July. Last month’s decline largely reflected a drop in building permits and an increase in jobless claims. “The indicators show little reason to expect better economic conditions over the next few months,” said Conference Board Labor Economist Ken Goldstein. “We may not see any signs of improvement until well into the second half of 2009. Until then, a very slow economy is the most positive expectation” (Associated Press via Yahoo! News and CNNMoney.com Sept. 18) …

News of the Competition (09/17/2008)

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MADISON, Wis. (9/18/08)
* In an unprecedented action, the Federal Reserve Board late Tuesday provided $85 billion to rescue insurer American International Group (AIG). The federal government will receive a 79.9% stake in AIG in return for the loan. Fed officials said an eventual liquidation of AIG is probable. “[A} disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” said the central bank in a statement. The government will retain veto power over the sale of AIG assets and dividend payments to shareholders. An AIG failure would ripple throughout the globe, said Robert Bolton, managing director at Mendon Capital Advisors Corp. The firm is a significant player in the market for credit-default swaps, and a big provider of life and other types of insurance. “If AIG fails and can’t make good on its obligations, forget it. It’s as big a wave as you’re going to see.” said Bolton (CNNMoney.com Sept. 17) … * Barclays PLC announced Wednesday that it may acquire some of Lehman Brothers assets and employees in Europe and Asia, on top of the bank’s deal to purchase key U.S. operations from the failed investment bank. The British bank on Tuesday took advantage of the firm’s bankruptcy reorganization to reach a deal to acquire Lehman’s North American operations for a modest $250 million. “This transaction delivers the strategic benefits of a combination with Lehman Brothers core franchise, whilst meeting Barclays’ strict financial criteria, and strengthening our capital ratios,” said Barclays Group Chief Executive John Varley (Associated Press via Yahoo! News Sept. 17) … * The federal government is reaching out to large banks in an effort to organize a buyout of Washington Mutual, according to a person briefed on the negotiations. Citing unnamed sources, The New York Post reported that regulators have contacted various institutions, including Wells Fargo, JPMorgan Chase, and HSBC Holdings. During the second quarter, WaMu lost $3.33 billion and its net chargeoffs totaled $2.17 billion. Its shares have plunged 49% over the past month and are down 83% for the year (Associated Press via Yahoo! News Sept. 17) … * Goldman Sachs Group, the larger of the remaining two independent U.S. securities firms, said its third-quarter profits plunged a record 70% from a year earlier to $845 million (Bloomberg.com Sept. 17). Goldman downplayed the possibility that it may merge with a bank. “Right now, we think our business model works because our business works,” said Chief Financial Officer David Viniar. In other news, Morgan Stanley, the only other remaining independent brokerage, reported third-quarter results that were just above expectations (Dow Jones Newswires Sept. 17). Morgan Stanley reported net income of $1.43 billion, down 7% from a year earlier. Goldman and Morgan Stanley are the last two independent securities firms after Lehman Brothers filed for bankruptcy on Monday, and Merrill Lynch agreed to be acquired by Bank of America … * Credit Suisse Group will buy back an estimated $550 million in auction-rate securities (ARS) in an agreement with New York state regulators investigating how the securities were marketed. The Swiss bank will repurchase by Dec. 11 all illiquid ARS at par value that had been bought by individuals, charities, and small businesses with $10 million or less in their accounts, said New York Attorney General Andrew Cuomo’s office. Credit Suisse also will pay a $15 million civil penalty to the state and other members of the North American Securities Administrators Association. The company agreed to participate in Financial Industry Regulatory Authority arbitration to resolve disputes with individual investors. The market for ARS began to fail in February, leaving investors with illiquid investments that companies had marketed as safe and liquid (Dow Jones Newswires Sept. 16) …

Market News (09/17/2008)

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MADISON, Wis. (9/18/08)
* At the request of the Federal Reserve, the Treasury Department on Wednesday announced a Supplementary Financing Program designed to provide cash for the central bank to use in tackling liquidity problems in the financial system. “The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives,” said the department in announcing the new program. “Treasury will provide as much advance notification as possible regarding the timing, size and maturity of any bills auctioned for Supplementary Financing program purposes.” The program will ease concerns that the Fed’s extraordinary efforts to shore up liquidity in the market won’t squeeze the central bank’s balance sheet too much (The Wall Street Journal Online Sept. 17) … * In a new sign of market disruption, managers of the money market fund Primary Fund announced that customers may lose money because the value of some investments had declined, leaving customers with just 97 cents for each invested dollar. It’s only the second time in history that a money market fund has “broken the buck.” The fund’s management said that its stake in debt securities issued by Lehman Brothers, which filed for bankruptcy protection on Monday, were basically worthless. The markets could be stressed further if money market funds have to sell holdings to meet redemption demands. The Investment Company Institute, an industry trade group, sought to soothe investors, saying that “the fundamental structure of money market funds remains sound” (The New York Times Sept. 17) … * Lending between banks seized up Tuesday, even after central banks worldwide pumped billions of dollars into the financial system to shore up confidence. The Federal Reserve Bank of New York injected $70 billion into the banking system. The Fed left interest rates steady at its Tuesday meeting, but said it will “act as needed” to address tight credit and the housing crisis. Nevertheless, in a major sign of falling confidence, the overnight London interbank offered rate (Libor), a benchmark at which banks lend to each other, more than doubled to 6.4375%--the largest increase on record. If the trend continues, payments on mortgages and commercial loans linked to the Libor will increase. Global banks, including Bank of America, Credit Suisse, and UBS, reported overnight borrowing costs of 6% or more, up from just 3% the day before (The Wall Street Journal Online Sept. 17) … * Housing starts plunged 6.2% to a 17-year low of 895,000 at an annual rate in August, the Commerce Department reported Wednesday. The pace was the lowest since January 1991. The decline followed a 12.4% drop in July. Housing starts were down 33% from a year earlier. Construction starts of single-family homes declined 1.9% to 630,000--also the lowest since the beginning of 1991. New applications for building permits fell 8.0% to 854,000 last month, and were down 36% from a year earlier--suggesting further weakness ahead. Builders anticipate a sustained slump as foreclosed homes continue to come on the market and home prices keep posting declines (Reuters Sept. 17) … * Mortgage activity surged last week as mortgage rates tumbled and refinancings rebounded, according to a report by the Mortgage Bankers Association (mbaa.org Sept. 17). The trade group’s Market Composite Index jumped 33.4% during the week ending Sept. 12 to 661.7. The Refinance Index soared 88.1% to 2300, while the Purchase Index rose 2.4% to 380.4. The average 30-year, fixed-rate mortgage (FRM) fell 24 basis points to 5.82%, and the one-year, adjustable-rate mortgage (ARM) dropped 5 basis points to 6.95%. “The drop in mortgage rates reflected the Treasury’s announcement that Fannie Mae and Freddie Mac were placed under conservatorship of the Federal Housing Finance Agency,” said Orawin Velz, associate vice president of economic forecasting at the trade association. The group predicts large gains in both refinancing and purchase applications in coming weeks. However, a big portion of the refinancing applications may be rejected because lenders are wary about credit, noted Moody’s Economy.com (Sept. 17). In a good sign for the housing market, home-price declines are slowing and consumer prices are moderating … * The nation’s current account deficit (the combined balances on trade in goods and services, income, and net unilateral current transfers) widened to $183.1 billion in the second quarter, the Commerce Department reported Wednesday. The increase was more than accounted for by a decline in the surplus on income and an increase in the deficit on goods. However, the surplus on services rose, and net unilateral current transfers to foreigners declined. The current account deficit made up 5.1% of the nation’s gross domestic product (GDP) in the second quarter (MarketWatch Sept. 17). However, the deficit has narrowed during the past year, and was as high as 6.6% of GDP a year ago. Most economists believe a deficit of 5% or more of GDP is unsustainable …

Hampel CUs should ride out the economy

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WASHINGTON (9/17/08)--Economic news that's bad for households will translate to pressure on credit unions, but most credit unions should "ride it out," according to Bill Hampel, Credit Union National Association chief economist. He noted that the government's intervention with Fannie Mae and Freddie Mac is a good thing for the economy and households: "It removed a huge negative regarding the credit crunch, and removed some uncertainty. "This is not to say that the economy is in for bright sailing. We are still looking for a weak economy well into next year. But, the government's intervention with Fannie Mae and Freddie Mac at least removes one of the heavy weights on the housing market." With a weak economy and falling home prices, "credit unions are under enormous pressure, with the lowest earnings or net income that many boards have ever seen," he said. "But our message is: If you make a mistake, fix it. If it’s outside economic factors, ride it out," he said. "For most credit unions, the recent bad numbers are the result of external factors, not bad decisions by the credit union." Credit unions have become collateral damage in the housing crisis. "Decent credit unions making decent lending decisions with decent policies can run into problems. That does not necessarily mean the policies have to change." In the "big game of chicken between Wall Street and banks" as to who pays for the Lehman Brothers' problems, the Treasury didn't blink, he said. "It's way too early to see what will happen. However, investors and consumers are more nervous, he said. "It's important for credit unions to explain deposit insurance. It's really important to explain that NCUA insurance works just like FDIC insurance. Credit unions without federal deposit insurance will have to make the case as to why they are safe," he added. "Credit unions are still in very good shape. The economic environment is not pleasant, but credit unions are well-capitalized. Still, even though credit unions aren't responsible for the credit crunch, the low ROAs (return on assets) will be wrenching." Credit unions have seen increases in loan demand--almost all in mortgages, largely because the securities market, which funds the housing market, is paralyzed, he said. "Credit unions have incredibly low delinquency rates. Charge-offs for the first half of the year tripled, but they are still low. Last year they were 0.02%--essentially zero. This year, they are three times that, at 0.06%, but that is still very, very low zero," Hampel noted.

News of the Competition (09/16/2008)

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MADISON, Wis. (9/17/08)
* Standard & Poor’s has downgraded the ratings of Washington Mutual (WAMU) and Washington Mutual Bank to junk status due to rising market turmoil. The ratings agency downgraded WAMU to BB-/B from BBB-/A-3, and the rating on Washington Mutual Bank to BBB-/A-3 from BBB/A-2. “Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade of WAMU,” said S&P Credit Analyst Victoria Wagner. “The company’s weak equity pricing in the markets is also a concern, and it increasingly appears that market conditions would overtake credit fundamentals and leave the company with greatly diminished financial flexibility,” added Wagner (MarketWatch Sept. 16) … * Goldman Sachs on Tuesday reported a 70% drop in its profits, to $845 million, for the third quarter ending in August. That compares with a profit of $2.85 billion a year earlier. Still, the results beat analyst projections. Investors and analysts were carefully watching the data after Monday’s news that Lehman Brothers had filed for bankruptcy and Merrill Lynch was being acquired by Bank of America. Goldman chairman and CEO Lloyd Blankfein said his firm is “well positioned” to cope with today’s financial challenges. “Despite the deteriorating market conditions, the focus of our people and strength and breadth of our client franchise produced a solid performance in a tough environment,” said Blankfein. The company said its Tier 1 capital ratio stood at 11.6% in the latest period, up from 10.8% in the second quarter (CNNMoney.com Sept. 16) … * Wal-Mart Stores has applied with Canada’s Department of Finance for permission to establish a bank in Canada under the name Wal-Mart Canada Bank. The move comes about a year after Wal-Mart withdrew its application to charter an industrial loan company in the U.S. Wal-Mart’s two competitors in Canada, Loblaw Co., and Canadian Tire Corp., both received charters from the government to operate banks there. Wal-Mart may offer its own credit card and low-interest loans, which require a banking license, said Kevin Groh, a spokesman for Wal-Mart’s Canadian unit. “It’s a natural evolution of our business because retailers and banking are a common combination in Canada,” said Groh. The Office of the Superintendent of Financial Institutions will accept written objections to Wal-Mart’s application until Nov. 3 (Bloomberg.com Sept. 15) … * British bank Barclays was in negotiations Tuesday to acquire some assets of the investment bank Lehman Brothers, which filed for bankruptcy protection on Monday. The negotiations came only days after Barclays retreated from a possible Lehman rescue because the investment bank failed to obtain government guarantees. The new talks center on Lehman’s broker-dealer business, which are separate from its mortgage assets. An acquisition wouldn’t immediately transform Barclays into a universal bank. Lehman has a much smaller banking presence in the U.S. compared with Merrill Lynch and Morgan Stanley (The New York Times Sept. 16) …

Market News (09/16/2008)

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MADISON, Wis. (9/17/08)
* Central banks worldwide took steps Tuesday for a second day to help ease the credit crunch. The Federal Reserve Bank of New York pumped $50 billion into the U.S. financial system though overnight repurchase agreements (repos). The action came in addition to its regular market operations to inject $20 billion into the system. In a statement, the bank said it “stands ready to arrange further operations later in the day, as needed.” The move came as Fed policymakers met to decide the direction of interest-rate policy. The European Central Bank, the Bank of England, and the Bank of Japan each also announced actions to add liquidity to the money markets. The central banks injected more than $160 billion into their financial systems. Liquidity provisions are a more important priority than rate cuts for the financial markets,” said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development (Associated Press via CNNMoney.com, MarketWatch and Bloomberg.com Sept. 16) … * Consumer prices eased in August as energy prices retreated, the Labor Department reported Tuesday. The Consumer Price Index (CPI) fell by 0.1% following a 0.8% increase in July. The index for energy declined 3.1% in August after three consecutive sharp increases. The food index rose 0.6% following a 0.9% gain. Excluding the volatile food and energy categories, the core CPI rose 0.2% in August after a 0.3% gain in July. Over the 12 months ending in August, the core CPI was up 2.5% compared with a 5.4% increase in the overall CPI. The slowdown in inflation gives the Federal Reserve room to ease monetary policy. However, the extent of damage to U.S. oil refineries from Hurricane Ike has yet to be evaluated, noted Moody’s Economy.com (Sept. 16). In addition, the Organization of Petroleum Exporting Countries may decide to stick to its decision to curb production now that oil prices are retreating … * The slowdown in inflation last month helped workers get ahead slightly. Real (inflation-adjusted) weekly earnings increased by 0.6% in August following declines during the previous four months, the Labor Department reported Tuesday. However, real earnings were down 2.5% over the 12 months ended in August. Workers have little power to push for higher wages as firms continue to downsize and outsource, and as unions continue to lose influence in the workplace … * The percentage of people who were delinquent on their credit-card payments edged up in the second quarter, compared with a year earlier, while average debt per borrower soared by 8.6%, according to a report by credit agency TransUnion LLC. In the second quarter, 1.04% of credit card holders were delinquent by 90 days or more--up from 0.91% in the second quarter of last year but down from 1.19% in the first quarter of this year. The quarterly decline probably reflected tax-refund checks, said Ezra Becker, principal consultant in the company’s financial-services group. He said tighter lending standards and lower credit-card limits probably also contributed to the decline. “A lot of people who would have gone delinquent in the past are no longer getting new credit cards or those higher limits,” said Becker. The firm also reported that average debt per borrower was $1,717 in the second quarter--up 8.9% from the second quarter of last year. The increase probably reflects the economic slowdown and soaring gasoline prices, said Becker (Associated Press via CNNMoney.com Sept. 15) … * Holiday sales will increase only 2.5% to 3% in 2008, according to a forecast by Deloitte & Touche. If that projection holds, it would be the weakest holiday season since a 2% gain in 1991. Holiday sales rose 3.4% in 2007. Rising food and energy prices and the mortgage crunch are partly to blame for the weak sales forecast, said Deloitte Research Chief Economist Carl Steidtmann. “In addition … rising unemployment claims and a volatile stock market are negatively affecting consumers’ perceptions of the economy, their wealth, and their ability to spend,” added Steidtmann (CNNMoney.com Sept. 16) …

Feds next move could cut costs for CUs

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MADISON, Wis. (9/17/08)--Federal Reserve policymakers left the target for the federal funds rate, at which banks borrow from each other, unchanged at 2% Tuesday. It was the third consecutive meeting with no change in the target. The Fed’s next move could lower costs for credit unions, a Credit Union National Association (CUNA) economist said. “The Fed's next move may be to cut their fed funds interest rate target to help stimulate a weakening economy,” Steve Rick, CUNA senior economist told News Now. “Inflation pressures should begin to ebb over the next few months as the dollar strengthens, commodity prices fall, and consumer spending remains weak. Lower inflation will allow the Fed to lower the fed funds rate to stimulate a stagnant economy. “If the Fed does lower interest rates, this will basically lower credit unions’ cost of funds as they lower their money market and certificate of deposit rates,” he continued. The financial markets had put strong odds on a rate cut following Lehman Brothers’ bankruptcy filing on Monday and Merrill Lynch’s decision to sell itself to Bank of America. The Fed decision leaves the rate at the lowest level since 2004. The vote was unanimous. “The inflation outlook remains highly uncertain,” said the Federal Open Market Committee in a statement after the meeting. The Fed also acknowledged downside risks to growth. “Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending.” “Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.” The Fed said it will keep track of developments in the economy and “will act as needed to promote sustainable economic growth and price stability.”

News of the Competition (09/15/2008)

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MADISON, Wis. (9/16/08)
* Stocks markets plunged Monday after news that Lehman Brothers Holdings had filed for bankruptcy protection (Associated Press via Yahoo! News Sept. 15). The 158-year-old investment bank said it will try to sell off its main business units. In a meeting with federal officials late Friday, Lehman learned that it wouldn’t be receiving any emergency funding, said chief financial officer Ian Lowitt. And on Sunday Barclays PLC withdrew its bid to acquire the firm. In its bankruptcy filing, Lehman listed Citigroup as one of its largest unsecured creditors--with about $138 billion worth of bonds. Citigroup sought to reassure investors Monday that its exposure to bankrupt Lehman Brothers wouldn’t excessively damage its capital position (Reuters via The New York Times Sept. 15). Citi has raised almost $50 billion this year by reducing assets and leveraging, said Chief Financial Officer Gary Crittenden. He said the bank’s Tier-1 capital was 8.7%, “well in excess of the ‘well-capitalized’ regulatory minimums.” * Merrill Lynch agreed on Sunday to sell itself to Bank of America. The $50 billion deal is subject to shareholder and regulatory approvals. Federal officials made it clear over the weekend that they would approve the acquisition as a way for Merrill to avoid bankruptcy. Bank of America has made dozens of acquisitions this year, including the purchase of Countrywide Financial Corp. With its Merrill Lynch acquisition, the bank will control the largest stock-broker force in the U.S. Bank of America had considered a bid for Lehman Brothers, but decided Merrill was a better match. Merrill is being sold at about two-thirds of its year-ago value. The acquisition is expected to close during the first quarter (Dow Jones Newswires Sept. 15) … * Investors waited Monday for a survival plan to be announced by American International Group (AIG). News reports said AIG had asked the Federal Reserve for a $40 billion bridge loan this weekend. Shares of AIG, which once was the most valuable insurer in the world by market value, tumbled more than 40% on Monday. Its shares have declined by more than 90% so far this year. In an effort to help AIG, the New York State Insurance Department said Monday that it will let the firm access $20 billion of its subsidiaries’ assets, which it can use as collateral to borrow cash for daily operations. New York Governor David Patterson stressed that no taxpayer money is involved in the action. AIG reportedly is considering selling off part of its business to raise cash and boost investor confidence. The firm has lost more than $18 billion during the last nine months (Reuters via The New York Times and CNNMoney.com Sept. 15) … * The Federal Housing Finance Agency announced Sunday that it won’t allow Fannie Mae and Freddie Mac to make “golden parachute” severance payments to the firms’ ousted financial officers. Until last weekend, Daniel Mudd served as CEO of Fannie, and Richard Syron was chairman/CEO of Freddie. The regulator seized control of the two firms a week ago. News reports that Mudd and Syron would receive millions of dollars in severance payments prompted a public outcry. The regulator said the two men won’t receive such payments, despite their contracts (The Wall Street Journal Online Sept. 15) … * Standard & Poor’s announced Friday that it now expects bigger losses than previously forecast for U.S. securities backed by closed-end, second-lien home mortgages issued form 2005 to 2007. In revising its projection, the ratings agency cited continued pessimism about the housing market. It now anticipates losses of an average 21% on 2005-vintage securities, 43% on the 2006 vintage, and 59% on the 2007 vintage. Delinquencies have increased 42% for the 2006 vintage, and 55% for the 2007 vintage (Dow Jones Newswires Sept. 15) …

Market News (09/15/2008)

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MADISON, Wis. (9/16/08)
* The Federal Reserve on Monday expanded its emergency tools to avert panic as the credit crisis deepens. The central bank is expanding its loan program and will accept a wider range of collateral for its loans. The Fed said the collateral that can be pledged at the Primary Dealer Credit Facility “has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks.” Collateral for the Term Securities Lending Facility also was expanded. And Schedule 2 Term Securities Lending Facility auctions will be conducted weekly instead of every two weeks. The initiatives are designed “to mitigate the potential risks and disruptions to markets,” said Fed Chairman Ben Bernanke. The stock markets plunged Monday after news that Lehman Brothers Holdings had filed for bankruptcy and Merrill Lynch had agreed to be acquired by Bank of America. Interest-rate futures are now indicating a rate cut by the Federal Reserve when it meets on Tuesday (MarketWatch Sept. 15) … * A group of global banks and securities firms, including JPMorgan Chase and Goldman Sachs, on Sunday announced a $70 billion loan program that financial firms can use to help ease the credit crunch. The 10 banks are committing $7 billion each for the loan pool. Participating banks can receive a cash infusion up to a maximum of one-third the overall size of the pool. The banks said the size of the pool may increase as “other banks are permitted to join.” Other banks in the group are Bank of America, Barclays PLC, Citigroup, Credit Suisse Group, Deutsche Bank, Merrill Lynch, Morgan Stanley, and UBS (Associated Press via The New York Times Sept. 15) … * Foreclosure filings (default notices, auction-sale notices, and bank repossessions) totaled 303,879 in August--up 12% from July and 27% from a year earlier, according to RealtyTrac Inc. One in every 416 households in the U.S. received a foreclosure filing last month. RealtyTrac CEO James Saccacio noted that the 27% annual increase “was actually substantially lower than in previous months this year, when it was hovering around 50% to 60%.” But he said the lower percentage for this August was “due to a big spike in activity last August--particularly in default activity.” Last month Nevada, California, and Arizona posted the largest foreclosure rates. Nevada led, with one foreclosure filing for every 91 households, followed by California (130), and Arizona (182). Other states with high foreclosure rates were Florida, Michigan, Georgia, Ohio, Colorado, Illinois and Indiana (/PRNewswire/ Sept. 12) … * Industrial production plunged by 1.1% in August, the Federal Reserve reported Monday. The decline--the largest since Hurricane Katrina slammed into the Gulf Coast three years ago--reflected a big drop in auto output and atypical weather patterns. Production of motor vehicles and parts tumbled 11.9% last month and was down 20.7% over the past year. Utilities output dropped 3.2% because of unseasonably mild weather. Mining output edged down by 0.4%. Capacity utilization fell to 78.7%, from 79.7% in July. The 1972-2007 average was 81%. “Precautionary shutdowns in the Gulf of Mexico in advance of Hurricane Gustav partly curtailed refinery activity, petrochemical production, and the extraction of crude oil and natural gas,” said the Fed in its report. “However, the estimated effect in August of disruptions due to the hurricane on total industrial production is estimated to have been less than 0.1 percentage point.” Overall industrial production was down 1.5% over the past 12 months (The Wall Street Journal Online and MarketWatch Sept. 15) … * Almost one-third of the nation’s top chief executives plan to cut payrolls over the next few months as the economy continues to weaken. In a survey by the Business Roundtable, 32% of CEOs said they expect to cut jobs at their firms, up from 31% in a June poll. At the same time, 92% of respondents said they expect sales at their companies to hold steady or increase. The results show that firms are striving to produce more with fewer workers. Companies have benefited from strong export growth, even as domestic spending has slowed. About half the revenue of Business Roundtable companies comes from foreign sales. However, export growth is expected to slow. “Europe is clearly slowing down … Japan as well,” said Business Roundtable Chairman Harold McGraw III (Associated Press via Yahoo! News Sept. 12) … * Ford Motor wants to cut its blue-collar workforce by another 4,200 employees, according to a person familiar with the matter. The troubled automaker will offer buyout and early-retirement packages at its plants in Ohio, Michigan, Kentucky, and Indiana. About 4,200 hourly workers accepted such packages in April, a smaller number than Ford’s goal of about 8,000. Ford has become less competitive as the market has shifted from profitable light trucks to smaller, fuel-efficient autos. Ford had only a 12.4% share of the U.S. vehicle market in August--down from 26% in the early 1990s. The company has cut its blue-collar workforce by about 38,000 since 2006. In other news, Chrysler LLC announced Friday that it plans to make another round of buyout and early-retirement offers to factory workers in the Detroit area. It wasn’t immediately known how many workers will be eligible for the offers (Associated Press via Yahoo! News Sept. 12) …

Market News (09/12/2008)

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MADISON, Wis. (9/15/08)
* Reported mortgage applications plunged 22% to 21.4 million in 2007 amid declining home prices and tighter credit conditions, according to a report by the Federal Financial Institutions Examination Council. The report was based on bank data required by the Home Mortgage Disclosure Act. Reported loan originations fell by 25% to 10.4 million. Blacks and Hispanic whites saw the largest declines in loan originations. Home purchase loans to Hispanic white and black borrowers declined 49% and 35%, respectively. Home purchase loans to non-Hispanic white borrowers fell 22% over the period. Lenders also made fewer loans to borrowers with undocumented income in 2007. Lending to borrowers with “missing income” tumbled 69% last year. The use of “piggyback” loans also fell sharply. Piggybacking involves a junior-lien loan that lets a first-lien loan conform to Fannie Mae and Freddie Mac. Lenders reported just 600,000 junior-lien loans to purchase homes in 2007--down 58% from 1.43 million in 2006 (Dow Jones Newswires and Reuters via Yahoo! News Sept. 12) … * Shares in Lehman Brothers continued to plunge Friday amid rumors that the venerable Wall Street firm will need to find a buyer to avoid collapse. The Wall Street Journal reported that Bank of America was a top candidate for a takeover. The Financial Times said Bank of America, JC Flowers & Co., China Investment Co., and Barclays PLC all were interested. The Federal Reserve reportedly is helping facilitate a sale. “The central bank’s rumored involvement will again raise concerns about moral hazard,” said Moody’s Economy.com Economist Ryan Sweet. “Many view the Bear Stearns takeover and the recent seizure of mortgage giants Fannie Mae and Freddie Mac as bailouts. That said, a failure of any major financial institution will send borrowing costs higher and hurt business and investor sentiment.” (AFP via Yahoo! News Sept. 12) … * Fixed-mortgage rates plunged to a five-month low last week after the federal government’s takeover of troubled mortgage firms Fannie Mae and Freddie Mac. The average 30-year, fixed-rate mortgage (FRM) tumbled 42 basis points to 5.93% for the week ended Sept. 11--the lowest level since 5.88% during the week of April 17, according to Freddie Mac. The 15-year FRM, a popular choice for refinancing, plunged 36 basis points to 5.54%. “Interest rates for 30-year, fixed-rate mortgages are down almost 0.6 percentage points over the past four weeks, which will help to spur home purchases and loan refinancing in coming weeks,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “This means that the monthly principal and interest payment on a new $200,000 loan is over $76 lower than a month ago,” added Nothaft (CNNMoney.com and Associated Press via Yahoo! News Sept. 11) For CUNA's Daily Financial Rates, use the link. … * Fannie Mae announced last week that it has won approval from its conservator to pay previously announced dividends on Sept. 30 (American Banker Sept. 11). The Federal Housing Finance Agency barred dividend payments on common and preferred stock when it placed Fannie and Freddie Mac into conservatorship on Sept. 7. In other news, Fannie raised $7 billion in its biggest individual sale of senior debt on Sept. 10, after the takeover of the firm prompted a record decline in yields relative to benchmarks (Bloomberg.com Sept. 11). The two-year benchmark notes were priced to yield 2.896%--70 basis points higher than Treasuries of like maturity … * Banks are stepping up their credit-card offers to small businesses as they pull back on lines of credit. While both products offer liquidity to small firms, lines of credit typically have low fixed rates while credit-card rates can vary unpredictably. A record-low 28% of small- and medium-size businesses used bank loans during the previous year, according to survey conducted by the National Small Business Association. In the February poll, 44% of respondents said they had used credit cards to meet their capital needs during the prior six months, and 57% said their card terms had worsened over the past year. There isn’t much hard data on business card chargeoffs. However, Advanta, which says it is one of the largest small-business card issuers in the U.S., reported second-quarter chargeoffs of 8.38%--up sharply from 3.48% a year earlier (The New York Times Sept. 11) … * Companies are expected to flood the bond market with debt sales in September to replace maturing debt and fund acquisitions, even as borrowing costs surge to record highs. Firms will sell $82 billion to $125 billion, according to Informa Global Markets. The extra yield demanded by investors to own corporate debt instead of Treasuries hit 324 basis points (3.24 percentage points), according to a Merrill Lynch index. That’s the highest level in the 20 years of the index. Cushioning the blow somewhat, the Treasury yields on which spreads are based have declined (MarketWatch Sept. 11) … * Retail sales remained weak in August while inflation retreated, according to two government reports. Retail sales edged down by 0.3% last month following a 0.5% drop in July, the Commerce Department reported Friday. Year-over-year growth was variable across retail segments. Sales at gasoline stations were up more than 20% from last year despite a decline in August, reflecting rising prices. Sales at auto dealers were down almost 15%. The Producer Price Index (PPI) declined by 0.9% in August following a 1.2% jump in July, according to the Labor Department. The decline in August largely reflected a retreat in energy prices. The PPI was up 9.6% over the 12 months ended in August. Excluding the volatile food and energy categories, the core PPI rose 0.2% in August and was up 3.6% from a year earlier--the largest year-over-year increase since May 1991 (Economy.com and Bloomberg.com Sept. 12) …

News of the Competition (09/12/2008)

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MADISON, Wis. (9/15/08)
* Deutsche Bank announced Friday that it will purchase a controlling interest in Frankfurt, Germany-based Postbank, a modest-sized but profitable financial institution, analysts said. Postbank is worth roughly $14.8 billion. Its falling share price in the past month helped create a better climate for acquisition, which supercedes concerns that its less wealthy client base would not make for a good fit with Deutsche Bank’s German retail operations, analysts add. Deutsche Bank’s move appears to be precipitated by the prospect that another big European competitor might make a deal with Postbank. Banco Santander of Madrid confirmed Thursday that it was preparing to negotiate a purchase of all of Postbank (The New York Times Sept. 12) … * Washington Mutual (WaMu), the troubled U.S. savings and loan, which is the largest in the nation, provided an early update on its third-quarter performance Thursday in what analysts said was a move designed to persuade customers and investors that its capital was sound and its financial condition is stabilizing. WaMu said Thursday that it expects its charge-off rates to rise in the quarter, although at a slower rate than in previous periods. WaMu marked down Fannie Mae and Freddie Mac preferred stock holdings to $282 million--a 90% reduction--but did not give any write-off estimates. The bank said there is a possibility that its third-quarter earnings could be lowered by a good-will impairment, which would not affect its financial condition. WaMu intends to report its earnings Oct. 22 (The New York Times Sept. 12) … * Because it has guaranteed complex financial instruments attached to home loans whose value has nosedived, investors are afraid that troubled insurance company American International Group (AIG) will become afflicted with billions of dollars in additional losses. If this is the case, AIG would have to raise more capital--a daunting task in the current market as evidenced by Freddie Mac, Fannie Mae and Lehman Brothers, analysts said. Robert Willumstad, AIG CEO, is scheduled to unveil a master plan Sept. 25 to turn the company around. Shortly after the market opened Friday, AIG’s stock price fell almost 20% (The New York Times Sept. 12) … * KPMG LLP and Cairn Capital Ltd. will auction off the assets of defaulted $1.5 billion structured investment vehicle (SIV) Mainsail II Ltd, according to sources with knowledge of the sale. Cairn and KPMG are seeking bids for the SIV’s subprime mortgage notes, asset-backed bonds, and collateralized debt obligations, said the source. Mainsail creditors will decide how much of their assets to sell at a Sept. 18 auction, the source said, while the rest will be transferred to a new company that will be created by Goldman Sachs Group Inc. Created in 2006, Mansail was forced to begin closing down after investors eschewed the short-term notes it issued to buy higher yielding U.S. mortgage-backed securities, analysts said (American Banker Sept. 12) …

Market News (09/11/2008)

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MADISON, Wis. (9/12/08)
* Employees of the Interior Department’s Minerals Management Service (MMS), the federal agency in charge of collecting royalties from oil and gas firms that drill on public land, accepted gifts from industry representatives and engaged in “sexual relationships with industry contacts” while socializing with company representatives, according to a report by Interior Department Inspector General Earl Devaney. A report from Devaney’s office earlier this year found that the MMS program frequently let firms that purchase oil and gas from the service revise their bids downward after they were awarded contracts. The report documented 118 such occasions that cost taxpayers an estimated $4.4 million. The MMS is a huge source of revenue for the federal government. In recent years, it has been the second-largest source of revenue--only behind the Internal Revenue Service. The report claims that MMS employees accepted expensive gifts from energy firms. It also concluded that several officials “frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives” (The Wall Street Journal Online and The New York Times Sept. 10) … * Saudi Arabia officials sought to calm global markets on Wednesday by assuring industry analysts and journalists that they planned to ignore the Organization of Petroleum Exporting Countries’ (OPEC) decision to cut global production. Oil prices had soared following the oil cartel’s surprise announcement yesterday, but edged down after Saudi officials’ pronouncement. OPEC President Chakib Khelil said the group was worried that weaker demand for oil amid the global economic slowdown might produce a collapse in oil prices. Energy Analyst Greg Priddy said Saudi’s announcement might lead other OPEC oil producers to keep output levels steady (The New York Times Sept. 10) … * The nation’s trade deficit jumped to a 16-month high in July as oil prices soared to record levels. The U.S. imported $62.2 billion more in goods and services than it exported during the month--up 5.7% from June, the Commerce Department reported Thursday. Imports jumped 3.9% to $230.3 billion, mostly reflecting surging costs of foreign petroleum. Exports rose 3.3% to $168.1 billion. The weak value of the U.S. dollar has helped boost exports this year, offsetting some of the weakness in domestic consumer spending for U.S. firms (The New York Times Sept. 11) … * Workers with professional degrees were the only educational group to enjoy an increase in their inflation-adjusted earning from 2000 to 2007, according to Census Bureau statistics. Every other educational group saw their earnings decline over the period. Analysts say several factors are behind the decline in inflation-adjusted earnings for most workers. Those factors include outsourcing and immigration, a weaker economic expansion compared to the 1990s, and soaring health-care costs. Real (inflation-adjusted) median wages for workers with professional degrees (including doctors and lawyers) rose 3% from 2000--to $80,602 in 2007. All other groups saw their earnings decline. Real median earnings for someone with a bachelor’s degree declined by 3% to $47,240. The median for someone with a master’s degree dropped 4% to $56,707. Real median earnings for high-school graduates fell 3% to $28,290 over the period (The Wall Street Journal Online Sept. 11) … * First-time claims for unemployment insurance edged down by 6,000 during the week ending Sept. 6 to 445,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, rose by 250 to 440,000. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, increased by 122,000 to 3.525 million. That’s the highest level since October 2003 (Bloomberg.com Sept. 11). “Rising joblessness will hurt [consumer] spending further and threatens to magnify the troubles in financial and housing markets,” said Moody’s Economy.com Senior Economist Ryan Sweet. The economy has lost an average of 77,000 jobs per month so far this year … * Chief financial officers (CFOs) have become more upbeat about the U.S. economy, but are still worried about consumer spending and the credit markets. That’s according to the results of the latest Duke University/CFO Magazine survey. In the latest quarterly poll, 28.5% of respondents said they were more optimistic about the U.S. economy, up 7 percentage points from the previous survey. Almost 42% said they were less optimistic, down from about 50%. “These are signs that we are bottoming out,” said survey director John Graham. However, many CFOs still are curbing capital-spending plans, and 43% said the credit crisis is directly harming their business. The survey indicates that employment will decline by 1.6% over the next year (Reuters via The New York Times Sept. 10) …

News of the Competition (09/11/2008)

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MADISON, Wis. (9/12/08)
* Wachovia Corp. Tuesday is still maintaining its forecast for losses on an embroiled $122 billion mortgage portfolio. The company said it wants to refinance a significant portion of the portfolio of option adjustable-rate mortgages (ARMs) into conforming loans insured by the Federal Housing Administration (FHA). Wachovia is actively engaged in seeking a subset of [the] portfolio to refinance a full risk transfer to the government, Robert Steel, Wachovia’s new chief executive, said. When Steel’s predecessor, Ken Thompson, paid $24.2 billion to buy California lender Golden West Financial Corp. in 2006, the Charlotte, N.C.-based bank inherited the loans. Wachovia is handling the portfolio as a “distressed investment manager” and is treating it as a “separate project” from its other mortgage operations, Steel said. Option ARMs allow borrowers to pay less principal and interest due for monthly payments. With rapidly rising delinquencies, many borrowers now owe more than their homes are worth, analysts said. Wachovia no longer offers option ARMs (Reuters and American Banker Sept. 9) … * Georgia bank Newnan Coweta Bancshares entered into an agreement with federal and state regulators to improve the bank’s financial condition, internal oversight and lending practices. The regulatory agreement was signed Sept. 2 with the Georgia Department of Banking and Finance, and the Federal Reserve Bank of Atlanta. Newnan Coweta--the holding company for the $240 million-asset Neighborhood Community Bank--has 60 days to submit a conflict of interest policy that focuses on granting credit to insiders. For three consecutive quarters, Neighborhood Community has lost money, dropping $809,000 in the second quarter of this year. The regulators’ agreement also requires the bank to reconstitute its lending policies to preclude undue concentration of commercial real estate loans and to maintain core capital equal to at least 7% of its assets (The Atlanta Journal Constitution and American Banker Sept. 11) … * Washington Mutual (WaMu), the largest U.S. savings and loan and one of the most impacted by the nation’s housing crisis, saw its shares drop 30% Wednesday to below $3 for the first time since 1991. The share price continued its descent Thursday, falling another 16% to under $2. Investors are becoming more concerned that WaMu, like Lehman Brothers, might be running out of options and time to recover, analysts said. With credit card and subprime mortgage losses growing, investors are becoming more concerned that WaMu will not be able to raise new capital or find another institution to take it over. Potential acquirers also may be deterred by a new accounting rule that forces potential buyers to write down assets of target companies to current market value, analysts add (The New York Times Sept. 11) …

Market News (09/10/2008)

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MADISON, Wis. (9/11/08)
* Mortgage activity picked up last week as mortgage rates declined, according to a report by the Mortgage Bankers Association (MBA) (mbaa.org Sep. 10). The trade group’s Market Composite Index rose 9.5% during the week ending Sept. 5 to 496.2. The Refinance Index jumped 15.4% to 1222.9, while the Purchase Index increased 6.4% to 371.5. The average 30-year, fixed-rate mortgage (FRM) dropped 33 basis points to 6.06% last week, and the one-year, adjustable-rate mortgage (ARM) fell 11 basis points to 7%. Large consecutive gains in mortgage activity suggest that borrowers are beginning to believe home prices have bottomed out, said Moody’s Economy.com (Sept. 10). The research firm also noted that one-year ARMs are declining in importance. The MBA reported that ARMs made up just 6.4% of overall applications last week, compared with 6.6% the previous week and 13% a year earlier … * The number of collateralized debt obligations (CDOs) linked to U.S. home-mortgage loans that saw default events in August quadrupled from July to 16, as ratings were lowered on more securities, according to a report by Morgan Stanley analysts (Bloomberg.com Sept. 9). More than $236 billion worth of CDOs have hit a default –bringing the total to 229 debt offerings. So far this year, sales of CDOs have tumbled 76.2% to $89.4 billion. In other news, Standard & Poor’s has downgraded $31.5 billion of residential mortgage-backed securities backed by subprime and Alt-A mortgage issued in 2006 and 2007 (Dow Jones Newswires Sept. 10). Three-fourths of the classes downgraded had previously seen ratings cuts. The ratings agency said it is reviewing the ratings for 1,948 classes from 246 Alt-A transactions … * New York Attorney General Andrew Cuomo said he has reached settlements with seven student lenders related to the methods they allegedly used to market student loans to consumers. The lenders agreed to pay $1.4 million into a fund to educate students and their families about the loan process. They also agreed to use “strict new standards” to market their loans. The lenders are Nelnet Inc., Campus Door Inc., GMAC Bank, NextStudent Inc., Zanthus Financial Services, EduCap Inc., and Graduate Loan Associates (Dow Jones Newswires Sept. 10) … * The Organization of Petroleum Exporting Countries (OPEC) oil cartel announced Wednesday that it plans to cut oil output by about half a million barrels a day to stem the recent drop in oil prices (The New York Times Sept. 10). Oil prices surged by $2 a barrel following the unexpected decision. OPEC countries pump about 40% of the world’s oil. In other news, an independent study of the oil market concluded that speculation by big investors was the main reason for the jump in oil prices during the first half of the year and for price declines since then (Associated Press via CNNMoney.com Sept. 10). The study, which was conducted by Masters Capital Management, said money flows--not big changes in supply and demand--have prompted oil-price volatility. Lawmakers in the Senate and House plan to introduce bills designed to curb speculation … * The federal budget deficit will surge by $246 billion to $407 billion this year, according to a report issued Tuesday by the Congressional Budget Office. The CBO said the deficit will surge because of “a substantial increase in spending and a halt in the growth of tax revenues.” The spending increase partly reflects government measures “to cover the insured deposits of insolvent financial institutions,” said the report. The Federal Deposit Insurance Corp. has seized 11 banks so far this year. The latest CBO estimate doesn’t reflect the government’s decision to temporarily take over Fannie Mae and Freddie Mac. However, CBO Director Peter Orszag said the agency will start incorporating the activities of Fannie and Freddie in its baseline budget beginning in January (CNNMoney.com Sept. 10) …

News of the Competition (09/10/2008)

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MADISON, Wis. (9/11/08)
* Lehman Brothers, a U.S. investment bank, said Wednesday it is expecting a $3.9 billion--$5.92 per share--loss in the third quarter after taking $5.6 billion in write-downs. The bank is in an intense battle to keep itself afloat, analysts said. The bank also indicated it will spin off the majority of its remaining commercial real estate holdings into a new public company. And Lehman intends to sell a majority of its investment management division, which would garner about $3 billion for the bank. With investors afraid that Lehman will run out of ways to raise capital and bolster its battered balance sheet, the bank’s stock lost almost half its value Tuesday--prompting the announcement. Since hitting its peak last year before the subprime mortgage meltdown, Lehman--a main underwriter of mortgage-related securities during the credit boom--has seen its shares decline more than 90%. It hopes to finish the spinoff of about $32 billion in commercial mortgage assets by early 2009, Lehman said Wednesday (The New York Times Sept. 10) … * Settling a probe into it sales practices, Bank of America Corp. (BofA) agreed to buy back auction-rate securities it sold to it clients, William Galvin, Massachusetts secretary of state, said Wednesday. Charlotte, N.C.-based BofA will offer to repurchase the securities from its customers--which include small businesses and nonprofits--between Oct. 1 and Dec. 31 at 100 cents on the dollar, with the bank expecting to redeem about $4.8 billion, Galvin added. Regulators have alleged that BofA and eight other large investment banks misled customers into thinking that the securities were safe, cash-like investments. The $330 billion auction-rate securities market fell apart in February, resulting in tens of thousands of investors nationwide getting stuck with damaged illiquid securities, analysts said. The Securities and Exchange Commission, along with New York Attorney General Andrew Cuomo and several state regulators, have conducted extensive probes into banks' marketing of the securities (Bloomberg.com Sept. 10, Associated Press Sept. 6, and Reuters Sept. 5) … * Kansas Bankers Surety Co., a Topeka, Kan.-based company, which is part of Warren Buffett’s business empire, has stopped selling private bank deposit insurance. In coming months, it also will cancel existing policies. The company gave no reason for leaving the business of privately insuring bank deposits beyond the $100,000 limit of the Federal Deposit Insurance Corp. The company’s decision was made amid an increasing number of bank failures nationwide, including many in which uninsured depositors have recouped a portion or none of their uninsured funds immediately, analysts said. (KansasCity.com Sept. 9) … * One day after MasterCard Inc. said it had not experienced any drop-off in its processed volume growth rate in August, two analysts upgraded the payments network’s shares to “outperform” on Tuesday. Analyst Howard Shapiro at Fox-Pitt Kelton Cochran Caronia Waller raised his rating to “outperform” from “in line” based on favorable remarks by Chris A. McWilton, president of global accounts for MasterCard. McWilton said the rate of growth decline seems to have subsided. Timothy W. Willi, senior research analyst at Avondale Partners LLC, raised his MasterCard rating to “outperform” from “market perform,” writing in a note to investors that the current valuation of the company reflected in the decline in share price “overly discounts the long-term fundamental value of MasterCard’s business model and market opportunity” (American Banker Sept. 10) …

Market News (09/09/2008)

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MADISON, Wis. (9/10/08)
* With problems in the U.S. housing market continuing, July pending home sales dropped more than expected, the National Association of Realtors (NAR) said. The NAR said its seasonally adjusted index of pending sales of exiting homes declined 3.2% to 86.5 from an upwardly revised 89.4 in June. The index was 6.8% below levels a year ago. Pending home sales refer to homes where a seller has accepted an offer, but the transaction has not been closed. There typically is a one- to two-month lag before a sale is completed. Home sales are on pace to drop 11% from last year to just above five million in 2008, forecasts Lawrence Yun, NAR chief economist. Tight lending criteria by Fannie Mae and Freddie Mac--mortgage giants taken over by the government Sunday--reined in sales activity, Yun said. With Fannie and Freddie under government control, many in the real estate industry believe the lending standards will be loosened, analysts said (The New York Times Sept. 10) … * Reflecting a decline in demand for car loans, consumer borrowing dropped in July to the slowest pace in seven months. Consumer borrowing grew at an annual rate of 2.1% in July--the slowest pace since a 1.9% rise in December, a Monday Federal Reserve report indicated. With banks tightening lending standards, consumers have been forced to charge more of their purchases on credit cards. This has dampened consumers’ use of home-equity loans to finance their spending, analysts said. The overall concern for consumer spending is that it will significantly decline as the boost from the $106.7 billion in economic stimulus payments wanes (The New York Times Sept. 9) … * The continuing deterioration of the U.S. labor market is evident from the Job Openings and Labor Turnover Survey (JOLTS) conducted by the Bureau of Labor Statistics of the U.S. Department of Labor. The July report indicates 4.1 million U.S. workers were hired, while 4.3 million workers left their jobs. The hire rate dropped to 3% from 3.2%. The separations rate (made up of voluntary separations and retirements, as well as layoffs) also fell to 3.1% from 3.2%. Job openings declined to 3.4 million in July from 3.5 million in June. While separations remain low, employers are becoming increasingly hesitant to take on new workers, the survey indicated (Moody’s Economy.com Sept. 9) … * Chain store sales dipped 0.1% in the week ended Sept. 6--the first decline in four weeks, according to the International Council of Shopping Centers (ICSC). Year-over- year growth slid to 1.9%, the weakest in three months. The fading spark from tax rebates is offsetting small drops in gasoline prices. The array of other constraints on consumer budgets remains large, and with the exception of energy prices, show few indications of declining. The constraints include the loss of jobs and resulting slow growth in wage income, declining house prices and wealth, sharply rising food prices, imposing debt and financial burdens, the lack of a savings cushion, and more restrictive lending standards across all types of loans, which crimp household borrowing and cash flow (Moody’s Economy.com Sept. 9) … * Wholesale inventories rose 1.4% in July--surpassing expectations--following a downwardly revised 0.9% gain in June, according to the Census Bureau. Most of the increase in inventories was concentrated in durable goods, but nondurable inventories also went up. Sales declined 0.3% in July, compared with an upwardly revised 3% in June. The inventory-to-sales ratio rose to 1.07 in July from 1.06 in June (Moody’s Economy.com Sept. 9) ... * Keying off signals from the Saudi Arabian and Venezuelan oil ministers that the Organization of the Petroleum Exporting Countries (OPEC) intended to maintain current production levels when it met Tuesday in Vienna, crude oil prices fell to a five-month low. The group should leave production unchanged, said Rafael Ramirez, Venezuela’s oil and energy minister. Saudi Oil Minister Ali al-Naimi said Tuesday he believes the market is “well-balanced.” OPEC is expected to keep output unchanged, according to most analysts surveyed by Bloomberg News. Oil prices also fell when Hurricane Ike weakened and veered away from oil platforms, analysts said (Bloomberg News Sept. 9) … * To help stressed banks cope with credit problems, the Federal Reserve has auctioned another $25 billion in loans and released the results Tuesday of its most recent auction--part of a continuing program begun in December to help mitigate financial turmoil and tight credit. The Fed announced in mid-December it was creating an auction program that would offer a new way for banks to obtain short-term loans from the central bank and help them contend with the credit crunch. The Fed expanded the program in July, making 84-day loans available to complement the exiting 28-day loans. In the most recent auction held Monday, commercial banks paid a 2.67% interest rate for the 84-day loans. The Fed received bids for $31.64 billion from 38 bidders (The New York Times Sept. 9) …

News of the Competition (09/09/2008)

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MADISON, Wis. (9/10/08)
* SunTrust Banks Inc. Monday said it might repurchase $500 million in auction-rate securities from investors. This is a result of continuing negotiations with regulators about sales of those securities to investors and the bank’s underwriting procedures, outlined in a Sept. 8 Securities and Exchange Commission (SEC) filing. SunTrust said it is prepared to raise additional capital as credit quality continues to deteriorate in the third quarter. The announcement precedes the bank’s investor presentation today in New York at the Lehman Bros. Financial Services Conference. In August, the SEC entered into settlement agreements with the largest U.S. banks, including Citigroup, JPMorgan Chase, Merrill Lynch, Morgan Stanley and UBS. The amount repurchased by SunTrust will be determined in a similar agreement. Currently SunTrust investors hold $500 million worth of securities. Auction-rate securities are long-term debt, similar to municipal or corporate bonds, whose interest rate is reset at regular intervals though an auction process. The auction-rate securities market started to fail in February because the banks that sold the securities to investors refused to buy them back when the market evaporated during the credit crunch, analysts said (Orlando Business Journal Sept. 9) … * How much community bank and thrifts that have to write down soured investments in government-sponsored enterprises (GSEs) Fannie Mae’s and Freddie Mac’s preferred stock will suffer is unclear at present, but other-than-temporary impairment charges are coming from banks and thrifts that hold the shares, analysts said. Some companies will have to raise capital, while others could be forced to find buyers to bail them out, industry insiders said. Franklin Banchares Inc., Johnson City, Tenn., said it was forced to sell itself three days before the government takeover of the two GSEs, as a result of depleted capital from bad investments in the GSEs. Federal regulators said Sunday--without getting specific--that they intend to work with a limited number of institutions having significant holdings--compared with their capital--on capital restoration plans (American Banker Sept. 9) … * Banks that cut tens of thousands of jobs nationwide are not renewing leases for commercial spaces, resulting in a glut of commercial office spaces. Banks also are trying to sublease empty cubicles to avoid paying rent on them. Office vacancy rates in U.S. cities--such as Boston, Chicago, San Francisco, New York and Charlotte, N.C.--with a significant number of financial services jobs have seen vacancy rates rise the past year. With banks in the throes of layoffs and office consolidation down the road, office dumping will get worse, according to commercial real estate sources (American Banker Sept. 9) …

Bailout may affect CU mortgage demand slightly CUNA

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MADISON, Wis. (9/9/08)--The government's bailout of mortgage giants Fannie Mae and Freddie Mac may impact credit unions' mortgage portfolios with a slight slowdown, according to Bill Hampel, chief economist at the Credit Union National Association (CUNA). On Sunday, the U.S. Treasury announced it would place Fannie and Freddie into a government conservatorship because failure of either would be chaotic to the market "The Treasury's action will restore some normalcy to the conforming segment of the mortgage securities market," Hampel said. "In particular, conforming mortgages will become more available than they have been in the past several weeks. "The rates at which credit unions will be able to sell loans to Freddie or Fannie will come down a bit, and other lenders will become more active than they have been recently," Hampel told News Now. "This might slow the demand for mortgage loans slightly at credit unions," he said. Fannie and Freddie own or guarantee nearly half of the $12 trillion in U.S. mortgages. (USA Today Sept. 8).

Market News (09/08/2008)

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MADISON, Wis. (9/9/08)
* In response to the U.S. federal government takeover of mortgage giants Freddie Mac and Fannie Mae, the Dow Jones industrial average spiked more than 340 points within minutes of the Monday opening bell. Also, the blue-chip index was up about 300 points by mid-morning, and the Standard & Poor’s 500-stock index rose by roughly 2.2%. With investors hoping that the Treasury Department’s decisions to place Fannie and Freddie into conservatorship would herald a turning point in the U.S. credit crisis that afflicted investment banks for the past year, financial stocks led the uptick, analysts said. Also, as a result of the takeover, investors may have to settle contracts protecting more than $1.4 trillion of Fannie and Freddie bonds--known as credit-default swaps--against default. Thirteen major dealers of credit-default swaps unanimously agreed that the Treasury intervention constitutes a credit event triggering payment or delivery of the companies’ bonds, according to a memo written by the International Swaps and Derivatives Association, obtained by Bloomberg News Monday (The New York Times Sept. 9 and Bloomberg.com Sept. 8) … * The delinquency rate for mortgage loans on one-to-four-unit residential properties at the end of the second quarter of 2008 was 6.41% of all loans outstanding--a rise of six basis points from the first quarter of 2008, and up 129 basis points from one year ago on a seasonally adjusted basis, according to the National Delinquency Survey conducted by the Mortgage Bankers Association (MBA). The delinquency rate includes loans that are at least one payment past due, but it does not include loans somewhere in the process of foreclosure, the MBA said in a press release. The percentage of loans in the foreclosure process at the end of the second quarter was 2.75%, an increase of 28 basis points from the first quarter of 2008 and 135 basis points from one year ago. The percentage of loans on which foreclosure actions were started during the second quarter was 1.08%, up seven basis points from last quarter and up 49 basis points from one year ago on a non-seasonally adjusted basis … * Due to the latest in a series of system problems, the London Stock Exchange was forced to suspend trading for several hours into Monday while a connectivity problem left traders unable to trade. By noon, people were able to begin to reconnect, a spokeswoman for the exchange said. The exchange did not disclose any details on what caused the problem (The New York Times Sept. 9) … * There has been no significant change in the down mood of global businesses in the more-than-a year period since the subprime mortgage crisis hit, according the September Moody’s Economy.com Survey of Business Confidence. The confidence level remains consistent with a global economy on the verge of recession, the survey found. Businesses in the U.S., Europe and Japan remain the most pessimistic, and businesses in the rest of Asia remain the most upbeat. The survey found a moderating of pricing pressures, which--while still high--are well below where they were a few weeks ago. However, sales strength remains solidly negative, which means that more businesses think sales are weakening, rather than strengthening (Moody’s Economy.com Sept. 5) … * The Federal Reserve offered $25 billion in 84-day credit yesterday through its Term Auction Facility. Participants had to submit bids by phone to their local reserve banks during the hour-and-a-half bid submission time. Summary auction results will be published today on the website of the Board of Governors of the Federal Reserve System. The minimum bid amount was $5 million, and the maximum bid amount was $2.5 billion. Bid increments were $100,000 …

News of the Competition (09/08/2008)

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MADISON, Wis. (9/9/08)
* Bank of America Corp. said Friday it is ready and willing to settle federal and state probes into its sales of risky auction-rate securities. BofA joins eight other large investment banks that have reached agreements to buy back more than $50 billion of the securities. BofA, the second-biggest U.S. bank by assets, said it has been in discussions with Massachusetts and New York regulators and the U.S. Securities and Exchange Commission (SEC) for nearly a month to reach a settlement to buy back the bond-like securities for investors after the $330 billion market fell apart in February. As a result, tens of thousands of investors nationwide--including small businesses, charities, cities and towns, individual and institutional investors--were stuck with damaged illiquid securities, analysts said. The SEC, along with New York Attorney General Andrew Cuomo and several state regulators, have been conducting extensive probes into banks’ marketing of auction-rate securities. The banks misled customers into thinking that the securities were safe, cash-like investments, regulators alleged (Associated Press Sept. 6 and Reuters Sept. 5) … * Citing to overexposure to risky real estate loans, state and federal regulators have closed down Nevada’s Silver State Bank. The bank had nearly $2 billion in assets and 17 branches in Arizona and Nevada. Andrew McCain, son of Republican presidential nominee Sen. John McCain of Arizona, was a member of the bank’s board and its three-member audit committee until six weeks ago. After serving five months on the board, Andrew McCain--Sen. McCain’s adopted son from his first marriage--left the Henderson, Nev., bank, citing “personal reasons.” There is no evidence of wrongdoing by Andrew McCain, nor any indications that Sen. McCain knew about or was involved in Silver State’s financial problems, analysts said (MarketWatch Sept. 7) … * Washington Mutual Inc. (WaMu) has forced out its CEO, Kerry Killinger, as a result of WaMu’s financial problems related to the U.S. mortgage crisis. WaMu also has entered into a memorandum of understanding with the Office of Thrift Supervision (OTS), which means it is now on probation, analysts said. WaMu said the OTS regulatory warning is in regard to aspects of its risk management and compliance operations. Killinger had helped build WaMu into the largest U.S. thrift and managed the company during its rapid decline, analysts said (The Wall Street Journal Sept. 8) … * Amazon.com Inc. Friday launched an electronic gift card product--Amazon Gift Codes on Demand (AGC on Demand)--a Web service application programming interface that integrates Amazon’s proprietary gift-card technology directly into customer loyalty, employee incentive and payment disbursement platforms. AGC on Demand allows companies to reduce physical gift-card fulfillment overhead, while providing gift card recipients with a customized experience, the company said. Previously, gift card values were fixed and management of inventory for active gift cards and gift codes purchased in bulk required secure facilities. With AGC On Demand, gift codes are created individually in any denomination and can be immediately issued in almost any format--based on the client's preference--including e-mail, HTML, customized/co-branded cards and paper receipts, the company said (PR-inside.com Sept. 5) ... * So far this year--with three weeks left in the third quarter--more bank and thrift mergers have been cancelled than in the past two years combined. The latest deal to be called off was Capitol Bancorps Ltd.’s plan to sell four Western Michigan banks to NorthStar Financial Group Inc. It was the 26th bank or thrift deal to break up in 2008, compared with 12 in each of the last two years, according to SNL Financial LC. Acquisitions and mergers have crumbled for many reasons--all related to weakening credit markets, analysts said (American Banker Sept.8) …

Market News (09/05/2008)

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MADISON, Wis. (9/8/08)
* With employment falling for the eighth straight month, the U.S. jobless rate unexpectedly spiked in August to a nearly five-year high. This raises the specter of recession as households have to contend with a stressed labor market and high inflation. Along with a slight rise in wages, the data suggest that Federal Reserve officials will keep interest rates steady when they meet later this month and at meetings throughout the end of the year, analysts said. Nonfarm payrolls--determined by a survey of establishments-- dropped by 84,000 in August, the Labor Department said Friday. The unemployment rate---calculated by conducting a separate survey of households--shot up 0.4 percentage point to 6.1%--the highest level since September 2003. Ian Shepherdson, chief U.S. economist at High Frequency Economics, called the report “grim” (The Wall Street Journal Sept. 5) … * With interest rates increasing and home values falling, U.S. mortgage foreclosures increased in the second quarter to the fastest pace in almost three decades, as more consumers had to abandon homes they couldn’t refinance or sell. New foreclosures rose above 1% for the first time in the survey’s 29 years, to 1.19%, the Mortgage Bankers Association said in a report Friday. The total inventory of homes in foreclosure is now 2.75%, almost triple the amount of 2005, when the five-year housing boom ended. The three-year-old housing slump has slowed the growth of the world’s largest economy, caused more than a half trillion dollars of bank losses, and reduced earnings at companies such as Home Depot Inc. and Lowe’s Cos., analysts said (Bloomberg.com Sept. 5) … * The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) increased to 126.3 for the week ending Aug. 29, from a downwardly revised 125.4 (previously 125.5). The smoothed, annualized growth rate went up to -11.7% from -11.8%. Despite the slight increase, the index remains at a low level, which indicates the economy is not beginning to accelerate, analysts said. Financial, equity and labor markets all are down. The trajectory of the ECRI WLI since July 2007 has been consistent with periods during or prior to past recessions, ECRI said (Moody’s Economy.com Sept. 5) … * Commercial banks set a new record in the latest week for average daily borrowing at the U.S. Federal Reserve discount window. Total borrowing--which includes primary dealers and depository institutions--rose to $19.09 billion Wednesday from $19 billion the previous week, according to the Federal Reserve’s weekly report. Total average daily borrowing went up to $19.07 billion in the week of Sept. 3 from $18.57 billion the previous week (Dow Jones Newswires Sept. 4) …

News of the Competition (09/05/2008)

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MADISON, Wis. (9/8/08)
* Bank of America Corp. said it is set to join eight other companies that have reached agreements with regulators regarding probes into the marketing of auction-rate securities. BofA has been is discussions with the U.S. Securities and Exchange Commission and regulators in Massachusetts and New York for almost a month in attempts to reach a resolution to provide “liquidity relief” to customers affected by the $330 billion crisis that gripped the auction-rate securities market in February. “We are ready and willing to enter into an agreement that follows the same basic terms of previously announced settlements,” BofA spokeswoman Shirley Norton said in an industry statement. “We understand that we had reached an agreement in principle nearly two weeks ago.” New York Attorney General Andrew Cuomo’s office said Friday that no deal had been reached. Cuomo was expected to serve several BofA officials with subpoenas last week, a source familiar with the situation said (Reuters Sept. 5) … * After Lehman Brothers Holdings Inc. cut its 2009 profit estimates for American Express Co. due to rising defaults, Amex--the biggest U.S. credit card company, measured by purchases--saw its shares drop the most in six weeks. Next year, Amex uncollectible credit card debts may reach 8.5% of loans, compared with a previous 7.6% estimate, a research note written by Lehman analyst Bruce Harting revealed. Amex may earn $2.55 per share next year--which is 12% less than the previous target, Harting said. He lowered his target price to $37 from a previous $42. With consumers struggling to repay debt, which contributed to a larger-than-expected $600 million loss to second-quarter reserves, Amex could see a downgrade of its credit ratings, analysts said (Bloomberg.com Sept. 4) … * Lehman Brothers Holdings Inc. is contemplating spinning off a new real estate company, Bloomberg reported on its website Thursday. The plan would involve Lehman putting $32 billion of its commercial real estate and mortgage assets into the spin-off. Lehman would put about $8 billion of equity into the new company, Bloomberg said, citing unnamed sources. The remaining $24 billion will be lent to the spin-off by Lehman or outside investors. Current Lehman shareholders would own shares of the new company. The plan is among several being considered. Another plan would involve Lehman setting up a company funded and operated by outside investors to buy some of the assets. Lehman did not comment on the matter (Reuters Sept. 4) … * A new proposal aimed at persuading a federal judge to resolve claims of abusive lending practices was submitted Wednesday with the Federal Bankruptcy Court in Pittsburgh by mortgage lender Countrywide Financial Corp.--which is owned by Bank of America--and a federal bankruptcy trustee. The court is overseeing nearly 300 cases involving Countrywide borrowers in foreclosure in western Pennsylvania. Wednesday’s filing came on the heels of an Aug. 14 rejection of a settlement agreement by Judge Thomas P. Agresti, who said there had been “no real impetus” to complete the process. Chapter 13 trustee Ronda J. Winnecour, who oversees the bankruptcy process in the Pittsburgh area, has accused Countrywide of losing or destroying more than $500,000 in checks from homeowners in foreclosure. She also alleges Countrywide made inaccurate claims, filed needless paperwork, and demanded improper charges and fees. The settlement, filed jointly by Countrywide and Winnecour, now stipulates that the trustee audit borrower accounts, and ensure that Countrywide is cashing checks properly and not assessing improper fees (The New York Times Sept. 5) … * New York Attorney General Andrew Cuomo is ramping up a lawsuit against San Diego-based student loan company Goal Financial. The suit charges that the lender lured borrowers with iPods, cash and other gifts, which is against state and federal laws, said a senior official in the office. The suit also alleges the company misled consumers about loan terms and benefits. Cuomo has been investigating the student loan industry since early last year. His office is close to agreements with about a dozen loan companies on what marketing tactics are appropriate, according to an unnamed source (The New York Times Sept. 5) …

News of the Competition (09/04/2008)

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MADISON, Wis. (9/5/08)
* JPMorgan Chase said Thursday that it plans to shut down a unit that structured interest-rate swaps for municipal borrowers. At least several former JPMorgan bankers are under investigation in a Justice Department probe of whether banks conspired to overcharge local governments on swaps and other derivatives. JPMorgan also is engaged in negotiations about how to resolve a debt crisis with Jefferson County, Ala., which claims a group of companies led by JPMorgan overcharged it by as much as $100 million for financing a new sewer system. Banks marketed derivates as a way that municipalities could save money. However, such financing imploded this year, as the credit crisis spread (Bloomberg.com and Reuters Sept. 4) … * Cleveland-based National City Corp. is trying to lower its exposure to home-equity-lines-of-credit by offering customers cash to shut down their untapped lines. The bank is waiving fees for closing the loans and giving customers a $200 check. Fees for closing the credit lines typically are about $350. “We are giving customers an opportunity to close their lines without incurring termination fees, and then we give them a reward to thank them for their business,” said the bank in a statement. On Wednesday, Standard & Poor’s lowered National City’s credit rating, citing its exposure to the mortgage sector. National City recorded a loss of $1.76 billion for the second quarter, as it set aside $1.6 billion for future loan losses (FT.com Sept. 4) … * Student lenders plan to finance a large percentage of their federally guaranteed loans during this academic year by using two new programs that the Department of Education launched in July to boost liquidity in the market. The department purchases the loans from lenders in one of the programs. It advances funds to lenders by purchasing participating interest in their student loans in the other program. So far, the department has purchased $1.97 billion worth of student loans and provided $2.1 billion of funding in the other program. The funding program was criticized by Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Offices. He said the program is “disturbing” because lenders can borrow money from the department and then lend the money to students at higher rates. He also noted that lenders can service the loans without engaging in competitive bidding (American Banker Sept. 3) … * BlackRock Inc., the largest publicly-traded U.S. asset manager, is seeking $3 billion for a fund to purchase loans that banks are selling at losses, said two investors familiar with the situation. The Oregon State Treasury plans to place $100 million in the new BlackRock Credit Investors II fund. “When the economy is in a downturn, these investments perform extraordinarily well,” said Jay Fewel, a senior equities investment officer at the Oregon State Treasury. Black Rock raised $3 billion for its first such fund last year (Bloomberg.com Sept. 4) …

Market News (09/04/2008)

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MADISON, Wis. (9/5/08)
* Mortgage rates declined this week amid news that suggests consumer spending may slow, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) fell 5 basis points to 6.35%, while the 15-year FRM edged down 3 basis points to 5.90%. The one-year, adjustable-rate mortgage (ARM) tumbled 18 basis points to 5.15%. “Mortgage rates eased a bit over the holiday-shortened week following release of economic data that suggest consumer spending may slow,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He noted that a 0.7% drop in personal income during July “will likely slow consumer spending in the third quarter.” Mortgage rates remain below year-ago levels. The 30-year FRM averaged 6.46% a year ago, while the 15-year FRM stood at 6.15%, and the one-year ARM was at 5.74% (MarketWatch and UPI Sept. 4). For CUNA's Daily Financial Rates, use the link … * Single-family home prices continued to decline in the second quarter--though at a slower pace than in the first quarter, according to a study by Global Insight and National City Corp. Home prices fell at an annual pace of 5.3% in the second quarter, compared with a 6.6% drop in the previous quarter. In the second quarter, prices dropped in 152 of the 330 metropolitan areas studied. In comparison, prices fell in 267 of the 330 areas in the first quarter. The study suggests that the nation’s housing bubble has popped. However, “though the fundamental overvaluation has largely been removed, downward pressures on home prices remain strong,” noted James Diffley, group managing director at Global Insight (/PRNewswire/ Sept. 4) … * Vehicle sales rebounded modestly last month but remained at a weak level. Autos and light trucks sold at an annual pace of 13.7 million units in August following a dismal 12.5 million-unit pace in July. Sales were down 16% from August 2007. Light-truck sales accounted for all of the monthly improvement. Light trucks sold at a 7 million-unit pace, up from a 5.7 million-unit pace, as gasoline prices moderated and automakers offered steeper incentives. With its “employee pricing for everyone,” General Motors accounted for most of that gain. Vehicles sales are expected to remain weak for the remainder of this year amid declining wages, falling employment, and deteriorating home prices and credit conditions (Economy.com Sept. 4) … * Worker productivity soared during the second quarter and labor costs declined, the Labor Department reported Thursday. Nonfarm productivity, the amount of output for each hour of work, increased at a 4.3% annual pace following a 2.6% gain in the first quarter. Labor costs declined by 0.5% after a 1.2% increase. The report eased concern about inflation from wages. Workers have little clout to ask for higher wages when the job market is weak. In another report, the Labor Department said first-time claims for unemployment insurance jumped by 15,000 during the week ending Aug. 30 to 444,000. That compares with a much lower level of 320,000 a year earlier. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, rose by 6,000 during the week ended Aug. 23 to 3.435 million. The high level of continuing claims suggests people are having a tough time finding new jobs after they’ve been laid off … * Workers will have to pay even more for their health care next year, according to a study by the Mercer consulting firm. In the survey, 59% of companies said they plan to curb their health-care costs by raising workers’ deductibles, copays, and out-of-pocket spending limits. Health-care costs are expected to increase by 5.7% in 2009 for both workers and their employers. Costs rose 5.7% this year and 6.1% in 2007. The average deductible for an individual jumped to $400 last year, from $250 in 2003. The average deductible for a family increased to $1,500 from $1,000 over the period. “It’s not something to cheer about, especially since costs are getting passed on to employees,” said survey author Blaine Bos (Associated Press via Yahoo! News Sept. 4) … * Employment remained weak, even as the service sector expanded in August. The Institute for Supply Management’s (ISM) index of non-manufacturing activity rose to 50.6, from 49.5 in July. A reading above 50 suggests expansion in the sector, which includes retailers and banks. The new orders index rose to 49.7 from 47.9. However, hiring declined at an accelerated pace last month. The employment index fell to 45.4 from 47.1. Inflationary pressures continued. The prices index fell to 72.9 from 80.8. “Respondents’ comments remain mixed about business conditions and reflect concern about the uncertainty of the economy,” said Anthony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee …

News of the Competition (09/03/2008)

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MADISON, Wis. (9/4/08)
* Two former brokers at Credit Suisse Group have been indicted for securities fraud, conspiracy, and wire fraud for allegedly defrauding customers by making unauthorized purchases of securities linked to subprime mortgages. Federal regulators allege that Julian Tzolov and Eric Butler led corporate customers to think that the auction-rate securities purchased for their accounts were backed by federally guaranteed student loans when they actually were backed by subprime mortgage, collateralized debt obligations, and other risky investments. “The defendants’ fraudulent misrepresentations and ‘bait-and-switch’ tactics saddled investors with unknown risks they did not bargain for,” said U.S. Attorney Benton Campbell. The two men also have been separately charged in a civil suit brought by the Securities and Exchange Commission (Associated Press via Yahoo! News and The Wall Street Journal Online Sept. 3) … * GMAC Financial Services and its Residential Capital subsidiary plan to shut down all 200 GMAC Mortgage retail offices and slash ResCap’s workforce by 60%, or 5,000 employees, to cut costs and refocus on strategic lending and servicing. ResCap, which posted a loss of $4.3 billion last year, is one of the largest subprime-mortgage lenders in the U.S. “Conditions in the mortgage and credit markets have not abated and, therefore, we need to respond aggressively by further reducing both operating costs and business risk,” said ResCap Chairman/CEO Tom Marano. ResCap plans to continue originating loans where there is a secondary market for them, and to continue servicing loans (The Wall Street Journal Online Sept. 3) … * Comstock Homebuilding of Reston, Va., announced Tuesday that it has reached a deal with lender BB&T Corp. to eliminate $32.7 million worth of troubled development loans from its books. Under the deal, BB&T foreclosed on four Comstock properties in the Atlanta area. “We are working to restructure a significant portion of our debt to ensure our ability to survive what has turned out to be the worst cyclical market downturn in a generation,” said Comstock Chairman/CEO Christopher Clemente. Analyst Richard Bove of Ladenburg Thalmann said BB&T probably will face more losses from its mortgage portfolio, especially in the Atlanta market (washingtonpost.com Sept. 3) … * Under a memorandum of understanding with the Office of the Comptroller of the Currency, First National Bank of Greencastle has agreed to monitor its lending more closely. Parent firm Tower Bancorp disclosed the agreement Friday in a Securities and Exchange Commission filing. The agreement requires the Pennsylvania bank to develop and implement a system of loan review, ensure that regulatory reports accurately reflect its condition, revise its internal audit system to include certain steps, refrain from unsecured loans without acquiring current information from borrowers, and take actions to protect criticized assets (American Banker Sept. 3) … * Citing losses related to the housing slump, Standard & Poor’s lowered its ratings or outlooks Wednesday for at least 10 regional banks. Most of the lenders have large exposure to residential and construction loans in one or more of the states hardest-hit by the housing downturn: California, Florida, Michigan and Ohio. Credit downgrades typically boost borrowing costs for the affected firms. The regionals include National City Corp., First Horizon National Corp., Fifth Third Bancorp, Citizens Republic, Zions Bancorp., Comerica, Wilmington Trust, Synovus Financial, Regions Financial and Colonial BancGroup (Reuters via Yahoo! News Sept. 3) …

Market News (09/03/2008)

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MADISON, Wis. (9/4/08)
* Mortgage activity rebounded last week, the Mortgage Bankers Association reported Wednesday (mbaa.org Sept. 3). The trade group’s Market Composite Index rose 7.5% during the week ending Aug. 29 to 453.1. The Purchase Index jumped 10.5% to 349, while the Refinance Index rose 2.1% to 1059.7. The average 30-year, fixed-rate mortgage (FRM) edged down 5 basis points to 6.39% last week, and the one-year, adjustable-rate mortgage (ARM) slipped 4 basis points to 7.11%. Both refinancing and ARM applications accounted for a smaller share of overall applications last week---a potential signal of stronger housing demand, as borrowers chose 30-year FRMs for home purchases, said Moody’s Economy.com (Sept. 3). The research firm also noted that stimulus legislation and assurances that Fannie Mae and Freddie Mac won’t see any large investor losses have helped boost expectations for improved credit conditions … * Layoffs this summer hit the highest level since 2002, the outplacement firm Challenger, Gray & Christmas reported Wednesday. Employers announced 377,324 job cuts from May through August--almost 30% more than during the first four months of this year and the highest level since 378,777 layoffs announced during the summer of 2002. Businesses moved to cut positions this summer after they were hit by “the double whammy of limited access to credit and the high price of oil,” said John Challenger, CEO of the Chicago-based firm. In a hopeful sign, layoffs slowed in August, compared with the previous month. Announced job cuts dropped to 88,736 in August from 103,312 in July. Planned layoffs in the financial sector totaled just 2,182 last month. “It is too early to say that the decline in financial job cuts last month marks the start of a turnaround for the industry,” said Challenger. “Many firms are still experiencing major losses in earnings and could make more workforce reductions as 2008 comes to a close.” (CNNMoney.com Sept.3) … * The economy struggled with weak growth and high prices during July and August, according to the Federal Reserve’s latest Beige Book survey of the economy, released Wednesday. Many consumers and businesses faced high prices for food, energy, and other items. “Business contacts in a number of districts indicated that they had increased selling prices in response to the high costs” of many commodities, said the report. Still, workers’ wage gains remained “modest” because of a general pullback in hiring, so wages didn’t contribute to inflation. The Fed said the manufacturing sector was “weak or declining” in most regions. Exports helped boost factory activity, but the Fed also noted some slowing in exports (Associated Press and Reuters via Yahoo! News Sept. 3) … * Factory orders increased by 1.3% in July following a 2.1% gain in June, the Commerce Department reported Wednesday. July’s gain was led by a 28.1% surge in orders for commercial aircraft, which followed at 21.3% drop the previous month. Export growth also prompted demand for metals and machinery. The weak value of the U.S. dollar and stronger overseas economies have helped spur demand for U.S. exports. In another hopeful sign for business demand, nondefense capital goods orders, excluding aircraft, a proxy for future business investment, rose by 2.5% in July after a 1.6% increase in June (Associated Press via CNNMoney.com and The Wall Street Journal Online Sept. 3) … * Global merger and acquisition activity (M&A) plunged 27% in the first eight months of the year as the credit crunch continued, according to a report by Dealogic. The value of the M&A market hit $2.5 trillion on Sept. 1, compared with $3.46 trillion as of the same date last year. Only the mining and consumer-products industries saw higher activity this year compared with 2007. The volume of mining deals totaled $149.6 as of Sept. 1--up from $63.1 billion in the same period last year. Consumer products rose to $178.9 billion from $61.9 billion, led by the $111.3 billion spinoff of Philip Morris (The Wall Street Journal Online Sept. 3) …

News of the Competition (09/02/2008)

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MADISON, Wis. (9/3/08)
* Initial insured losses for Hurricane Gustav may top out at $10 billion, according to Wall Street insurance analysts. That’s much lower than the $41 billion in property losses prompted by Hurricane Katrina three years ago. The government’s flood insurance program also paid out $18 billion after that storm. Crude-oil prices plunged Tuesday after Gustav failed to cause the damage many had predicted. Light, sweet crude for October delivery dropped $6.83 to $108.63 a barrel on the New York Mercantile Exchange, after earlier falling as low as $105.46. It was the lowest trading level since April 4, just before oil began surging (The New York Times and Associated Press via Yahoo! News Sept. 2) … * Fitch Ratings on Tuesday lowered its ratings on the preferred stock of Fannie Mae and Freddie Mac amid concern about a lack of access to new capital that could prompt the two housing-finance firms to suspend dividend payments. Fitch cut Fannie’s rating to BBB-minus from A-plus. The ratings agency lowered Freddie’s rating to BBB-minus from A. “The lack of reliable access to the public equity markets appears to be more permanent than Fitch had anticipated,” said the agency. “It now appears that Fannie Mae’s and Freddie Mac’s ability to access equity markets may need to be precipitated or replaced by more tangible forms of government support,” added Fitch. The common stock of Fannie and Freddie have plunged about 80% since early May, but have rebounded modestly since Aug. 20 (Reuters via Yahoo! News Sept. 2) … * Standard & Poor’s Ratings Services has lowered its ratings on $17.8 billion worth of residential mortgage-backed securities (RMBS) backed by U.S. subprime mortgages issued in 2006. Many of the rate cuts took the RMBS further towards junk status. S&P said some transactions are seeing much higher foreclosures and delinquencies than were projected. The ratings agency said it is adjusting loss projections based on “our belief that continued foreclosures, distressed sales, increased carrying costs and a further decline in home sales will continue to depress prices and push loss severities higher than we previously assumed.” (Dow Jones Newswires Sept. 2) … * Shares of Lehman Brothers rose as much as 5% on Tuesday after Korea Development Bank confirmed that it is in negotiations to purchase a stake in the company as part of a consortium of banks (MarketWatch Sept. 2). JPMorgan analysts predict that Lehman will post writedowns of about $4 billion for the third quarter. In other news, Lehman Brothers is creating a structure that will let the firm offload billions of dollars in real-estate loans from its books in an effort to shore up its balance sheet (The Wall Street Journal Online Sept. 2). Lehman also is reportedly trying to sell its Neuberger Berman investment-banking unit. Lehman’s stock has plunged 75% this year …

Market News (09/02/2008)

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MADISON, Wis. (9/3/08)
* An estimated $96 billion worth of risky mortgage loans with flexible payment options will reset over the next two yeas--boosting borrowers’ monthly payments by more than 60%, according to a report by Fitch Ratings. Rising payments could more than double the number of borrowers becoming delinquent on option adjustable-rate mortgages (ARMs) issued between 2004 and 2007, said the report. The ratings agency predicts that about $29 billion of option ARMs will reset to higher monthly payments by year-end 2009. Another $67 billion will reset in 2010. “The combined impact of payment shock … declining home prices and restricted availability of mortgage credit may leave many option ARM borrowers unwilling to continue paying their mortgage,” said Fitch Analyst Huxley Somerville. “The current severe environment has left borrowers with few alternatives to foreclosure.” (FT.com Sept. 2) … * The construction sector remains weak, according to a Commerce Department report. Construction spending declined by 0.6% in July to a seasonally-adjusted annual rate of $1,084.4 billion. The July pace was 4.8% below the year-earlier rate. During the first seven months of this year, construction spending totaled $614.2 billion, 5.4% lower than during the same period in 2007. In July, housing construction declined for a 16th consecutive month--falling 2.3% to an annual pace of $357.8 billion, the lowest level since March 2001 (Associated Press via CNNMoney.com Sept. 2). Nonresidential building also has begun to decline, as banks curb lending standards for nonresidential projects. Nonresidential activity fell 0.7% to an annual pace of $416.8 billion in July--the first decline in that sector since December ... * The manufacturing sector shank for the first time in three months, as firms cut production and employment in the face of softer consumer spending. The Institute for Supply Management’s factory index dropped to 49.9 in August, from 50 in July. The production index fell to 52.1 from 52.9, while the employment index declined to 49.7 from 51.9. “It’s a consistent story of slow contraction that’s been going on for quite some time,” said ISM Survey Chairman Norbert Ore. In a hopeful sign, inflation moderated in August. The prices paid index tumbled to 77 from 88.5--the largest monthly decline since 2006. And exports surged, as the weaker value of the U.S. dollar made U.S. goods attractive. The export index jumped to 57 from 54. However, slower economic growth worldwide could erode U.S. exports in the months ahead (Bloomberg.com and Economy.com Sept. 2) … * Central banks worldwide should leave interest rates unchanged as they balance rising inflation with weak economic growth, the Organization for Economic Cooperation and Development (OECD) said Tuesday. The European Central Bank should keep its key rate at 4.25%, said the agency, and the Bank of Japan should maintain its key rate at 0.5%. The U.S. Federal Reserve kept the target for the fed funds rate at 2% at its early August meeting. The OECD predicts worldwide economic growth of just 1.8% this year, and said financial-market turmoil, downturns in housing markets, and high commodity prices will “continue to bear down on global growth.” The agency noted that Britain’s economy may be entering a recession this year. “The picture for the major economies is for a pretty weak second half,” said OECD Chief Economist Jorgen Elmeskov (Bloomberg.com and Associated Press via CNNMoney.com Sept. 2) … * Labor Day 2008 found American workers in worse shape than they’ve been in years, according to a labor scorecard created by the Rutgers School of Management and Labor Relations. More than 10% of people are either officially unemployed, discouraged from seeking jobs, or underemployed--up 25% from a year earlier. About 4% of workers want to work full time, but are working part time because they can’t find full-time jobs. In other statistics, workers’ weekly median earnings haven’t increased in real (inflation-adjusted) terms over the past eight years. And at $6.55, the federal minimum wage (inflation-adjusted) is worth 40 cents less per hour than it was 10 years ago (Associated Press via The New York Times Sept. 2) …

News of the Competition (09/01/2008)

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MADISON, Wis. (9/2/08)
* Bank of New York Mellon Corp announced Thursday that a security breach involving the loss of personal data is much larger than previously reported. The firm said the breach affects about 12.5 million people--or about 8 million more than the 4.5 million people it previously estimated in May. Connecticut Governor Jodi Rell said the number of affected people rose after she ordered subpoenas. “The vast dimensions of this data breach affect not only hundreds of thousands of individuals and businesses in Connecticut, but millions across our nation,” said Rell. Bank of New York Mellon is the largest custodial bank in the world (Reuters via Yahoo! News Aug. 28) … * Merrill Lynch’s losses during the past 18 months equal about one-fourth of the profits it made during its 36 years as a listed company, according to an analysis by Financial Times (Aug. 29). Merrill has seen after-tax losses of more than $14 billion as it faced nearly $52 billion in writedowns and credit-related losses. The firm’s inflation-adjusted profits from its listing in 1971 through 2006 was about $56 billion. Merrill had the largest ratio of credit losses to historical profits among the 10 U.S. and European firms analyzed. “The mammoth writedowns suffered by investment banks across the globe show that their business model needs to change,” said Robert Gach, head of Accenture’s global capital markets practice … * Lehman Brothers Holdings Inc. is preparing to lay off up to 1,500 employees in its fourth round of job cuts this year. The new round of cuts amounts to about 6% of its workforce. The firm already has cut more than 6,000 employees since June 2007. Analysts expect Lehman to face writedowns of as much as $4 billion for the third quarter. The firm plans to announce its results in mid-September. Lehman shares have lost 73% of their value so far this year. Banks and securities firms have eliminated more than 101,000 jobs this year, according to Bloomberg News (The New York Times Aug. 29) … * JPMorgan Chase has introduced a prepaid debit card that helped law-enforcement officials collect more than 7,500 firearms in Chicago and Brooklyn this year. Officials offered people the prepaid cards in exchange for working guns, with no questions asked. In Chicago, police collected more than 6,800 firearms. People dropping off guns received a $100 prepaid card. In Brooklyn, police netted almost 700 guns. People there were given a $200 card. In an event in Buffalo last year, officials distributed more than $42,000 worth of the cards in exchange for more than 800 guns (finextra.com via Yahoo! News and American Banker Aug. 28) … * In an effort to reduce its exposure to the U.S. mortgage markets, Puerto Rican bank Popular Inc. announced Friday that it is selling $1.17 billion in mortgage and servicing assets from its U.S. mortgage unit Popular Financial Holdings to affiliates of Goldman Sachs. The bank will receive more than $700 million from the Goldman affiliates, taking a loss of about $450 million (Associated Press via Yahoo! News Aug. 29) …

Market News (09/01/2008)

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MADISON, Wis. (9/2/08)
* Consumers saw a large decline in income in July as the tax-rebate program wound down. Personal income fell 0.7%, or $89.9 billion, during the month, the Commerce Department reported Friday. The decline followed a 0.1 increase, of $7.4 billion, in June. The government said the changes in income reflected the pattern of payments associated with the federal stimulus plan. Personal consumption expenditures (PCE) rose 0.2% or $21.1 billion in July following a 0.6% increase of $65.5 billion in June. The core PCE deflator, the Federal Reserve’s preferred inflation measure, rose 2.4% over the year ending in July. That’s above the Fed’s preferred range of 1% to 2%. Inflation has eroded consumers’ buying power, forcing them to cut back on big-ticket items such as vehicles and furniture, noted Bloomberg.com (Aug. 29). The Fed expects weaker grown in PCE during the second half of this year---reflecting rising unemployment, declining stock and home prices, and stricter lending standards, according to the minutes of the Fed’s Aug. 5 meeting released last week … * Consumer sentiment improved in August but remained below year-ago levels, with most consumers saying the economy is in recession. The Reuters/ University of Michigan Surveys of Consumers rose to 63 in August--from 61.2 in July. The index hit a 28-year low of 56.4 in June. The July increase in confidence probably doesn’t suggest a shift towards “renewed optimism,” said Survey Director Richard Curtin. The August reading is lower than the 83.4 level a year earlier and well below the peak of 96.9 reached in January 2007. In the August poll, 90% of respondents said the economy is currently in recession, and consumers expressed the weakest buying plans in 30 years (MarketWatch Aug. 29) … * In a hopeful sign for the economy, a measure of business activity posted the largest increase in more than a year. The National Association of Purchasing Management-Chicago’s business index increased to 57.9 in August--from 50.8 in July and the highest level since June 2007. A weak dollar has helped boost exports this year, offsetting domestic weakness. The index of new orders rose to 60.2 last month--from 53.5 in July and the highest level since September. However, the employment index fell to 39.2 from 45.9. The index of prices paid fell to 80.6 from 90.7, which was the highest level since March 1980 (Bloomberg.com Aug. 29) … * General Motors is offering about 9,000 of its salaried employees in the U.S., 28% of the workforce, early-retirement incentives, say people familiar with the situation. GM Spokeswoman Deborah Silverman confirmed that the company is discussing the retirement packages with eligible employees. GM Chief Executive Rick Wagoner already has convinced 53,000 union workers to accept early retirement or buyouts. The firm also plans to shut down more than a dozen plants in North America. GM lost $15.5 billion in the second quarter as it faced the weakest U.S. vehicle market in 15 years (Bloomberg.com Aug. 29) … * Oil prices surged Friday as Tropical Storm Gustav threatened oil facilities along the Gulf Coast (Reuters via The New York Times Aug. 29). Crude oil for October delivery jumped $2.12 to $117.71 a barrel in early trading Friday. Tropical Storm Gustav is expected to strengthen to hurricane status as it nears the Gulf, which is home to about one-fourth of U.S. crude-oil output and 15% of its natural gas. Gasoline prices also rose Friday (Associated Press via Yahoo! News Aug. 29). A gallon of regular gasoline increased about a penny overnight to a national average of $3.669, according to AAA, the Oil Price Information Service, and Wright Express. That’s the first increase since prices peaked at $4.114 a gallon on July 27 …