NEW YORK - In the latest byproduct of the widening global financial crisis, Citigroup Inc. will acquire the banking operations of Wachovia Corp. in a deal facilitated by the Federal Deposit Insurance Corp.
Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.
The deal greatly expands Citigroup's retail outlets and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and J.P. Morgan Chase & Co. But it comes at a cost — Citigroup said Monday it will seek to sell $10 billion in common stock and slashed its quarterly dividend in half to 16 cents to shore up its capital position.
The agreement comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which suffers from mounting losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.
Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offer very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.
The FDIC asserted Monday that Wachovia did not fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.
Federal Reserve Chairman Ben Bernanke, in a statement Monday, said he supports the "timely actions" taken by the FDIC "which demonstrate our government's unwavering commitment to financial and economic stability."
Treasury Secretary Henry Paulson also welcomed the sale of Wachovia to Citigroup, saying it would "mitigate potential market disruptions." Paulson said he agreed with the FDIC and the Fed that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system.
"As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," Paulson said.
As details of its takeover unfolded, Wachovia shares plunged 91 percent to 94 cents. The stock had closed Friday at $10, down 74 percent for the year.
Now that a deal for Wachovia is complete, the most troubled of the nation's largest financial institutions have been dealt with. However, the FDIC estimated there were 117 banks and thrifts in trouble during the second quarter, the highest level since 2003. And that number is likely to have increased during the third quarter.
With the acquisition of Wachovia, Citigroup has reclaimed its title as the biggest U.S. bank by total assets. Including Wachovia, the bank now has assets of $2.91 trillion, as of June 30. That could change, however, as Citigroup shrinks its balance sheet, a decision Chief Executive Vikram Pandit made in May to rid the bank's books of risky debt.
In terms of current market capitalization, Bank of America Corp. remains the largest U.S. bank, followed by JPMorgan Chase & Co. in second and Citigroup in third place.
Just a short time ago, Citigroup was under the scrutiny of investors who worried about the possibility of its collapse given its massive exposure to mortgage-backed securities. The New York-based bank has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.
But the government's proposed $700 billion bailout plan could prove to be the deal's silver lining.
While the plan broadly aims to prevent banks from profiting on the sale of troubled assets to the government, there is an exception made for assets acquired in a merger or buyout, or from companies that have filed for bankruptcy.
This detail could allow Citigroup to sell toxic mortgages and other assets it gained from Wachovia for a higher price than the bank actually paid for them.
The Wachovia deal caps a wave of unprecedented upheaval in the financial sector in the past six months that has redefined the banking industry, starting with the government-led forced sale of Bear Stearns Cos. to JPMorgan in March.
The failure of IndyMac Bancorp in July reignited investors' fears about the stability of the financial sector, which led to the eventual takeover of struggling mortgage lenders Fannie Mae and Freddie Mac.
Earlier this month, officials seized both Fannie and Freddie, temporarily putting them in a government conservatorship, replacing their chief executives and taking a financial stake in the mortgage finance companies.
After U.S. regulators made it clear that they would not bail out struggling investment bank Lehman Brothers Holdings Inc., rival Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp. for $50 billion in stock.
Lehman Brothers was subsequently forced to declare bankruptcy, the largest ever in the United States. Investor concerns quickly turned to American International Group Inc., the nation's largest insurer. Staving off a failure that could have sent shock waves throughout the global markets, the federal government injected an $85 billion emergency loan into the insurer.
Just days later, the government seized Seattle-based Washington Mutual, marking the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by JPMorgan for $1.9 billion.
These events have now culminated in extraordinary moves by the federal government to try to fix the financial crisis that began more than a year ago. Lawmakers are to vote Monday on an unpopular $700 billion plan to rescue troubled financial companies.
Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.
Monday, September 29, 2008
Thursday, September 25, 2008
Historic Unemployment Rate
The chart to the left gives us some perspective on the current unemployment rate of 6.1%. My view is that 6.1% is too high. But leftist Democrats resist solutions that could create hundreds of thousands of jobs such as expanding US production of energy (oil, clean coal, and nuclear), lowering corporate taxes, and giving tax credits to companies that create jobs. (Tim)
Nike 1st Qtr 2009 Earnings Easily Beats The Street
Nike Reports First Quarter Earnings Per Share of $1.03
Revenue up 17 percent; Worldwide Futures Orders Up 10 Percent
BEAVERTON, Ore.--(BUSINESS WIRE)--Sept. 24, 2008--NIKE, Inc. (NYSE:NKE) today announced financial results for its fiscal 2009 first quarter ended August 31, 2008. Revenue grew 17 percent to $5.4 billion, compared to $4.7 billion for the same period last year. Changes in currency exchange rates increased revenue growth by 7 percentage points for the quarter. First quarter net income decreased 10 percent to $510.5 million, compared to $569.7 million in the prior year. Diluted earnings per share decreased 8 percent to $1.03, versus $1.12 last year. In the prior year's first quarter, the Company received a one-time tax benefit of $105.4 million, which contributed $0.20 per diluted share. Adjusted for this prior year benefit, net income and earnings per share would have grown 10% and 12%, respectively.
"Nike's first-quarter results reflect the strength of our brands and our global business," said NIKE, Inc. President and CEO Mark Parker. "Our relentless focus on product innovation and premium consumer experiences generated balanced growth across every region and market share gains in key categories."
Parker concluded, "Nike is able to connect with consumers and energize the market like nobody else. As we combine that with running a strong and smart business, we generate new growth, deliver strong cash flows, and create greater value for our shareholders."(1)
Futures Orders
The Company reported worldwide futures orders for athletic footwear and apparel, scheduled for delivery from September 2008 through January 2009, totaling $6.8 billion, 10 percent higher than such orders reported for the same period last year. Changes in currency exchange rates increased reported orders growth by 1 percentage point.(1)
By region, futures orders for the U.S. were up 3 percent; Europe (which includes the Middle East and Africa) increased 4 percent; and Asia Pacific and the Americas each grew 27 percent. Changes in currency exchange rates did not have a significant impact on reported futures orders growth in Europe, but did increase reported futures orders growth by 3 percentage points in the Asia Pacific and Americas regions.
Regional Highlights U.S.
During the first quarter, U.S. revenues increased 8 percent to $1.8 billion versus $1.6 billion for same period last year. U.S. athletic footwear revenues increased 9 percent to $1.2 billion. Apparel revenues increased 9 percent to $464.4 million. Equipment revenues were flat with last year at $97.7 million. U.S. pre-tax income increased 1 percent to $351.9 million.
Europe
First quarter revenues for the European region grew 20 percent to $1.8 billion from $1.5 billion for the same period last year. Changes in currency exchange rates increased revenue growth by 15 percentage points. Footwear revenues increased 24 percent to $982.4 million. Apparel revenues grew by 15 percent to $649.7 million and equipment revenues increased 20 percent to $146.6 million. Pre-tax income increased 17 percent to $442.4 million.
Asia Pacific
In the first quarter, revenues in the Asia Pacific region grew 36 percent to $860.6 million compared to $633.7 million a year ago. Changes in currency exchange rates increased revenue growth by 10 percentage points. Footwear revenues were up 37 percent to $454.0 million, apparel revenues increased 38 percent to $332.7 million and equipment revenues grew 21 percent to $73.9 million. Pre-tax income increased 15 percent to $185.5 million.
Americas
Revenues in the Americas region increased 26 percent to $355.7 million, an improvement from $282.0 million for the same period last year. Currency exchange rates contributed 7 percentage points to this growth rate. Footwear revenues were up 24 percent to $245.8 million, apparel revenues increased 36 percent to $79.4 million and equipment revenues grew 21 percent to $30.5 million. Pre-tax income was up 18 percent to $69.1 million.
Other Businesses
For the first quarter, Other business revenues, which include Cole Haan, Converse Inc., Hurley International LLC, NIKE Golf, and Umbro Ltd, which was acquired in the fourth quarter of last year, grew 7 percent to $655.3 million from $612.8 million last year and pre-tax income decreased 9 percent to $86.3 million.
Revenue up 17 percent; Worldwide Futures Orders Up 10 Percent
BEAVERTON, Ore.--(BUSINESS WIRE)--Sept. 24, 2008--NIKE, Inc. (NYSE:NKE) today announced financial results for its fiscal 2009 first quarter ended August 31, 2008. Revenue grew 17 percent to $5.4 billion, compared to $4.7 billion for the same period last year. Changes in currency exchange rates increased revenue growth by 7 percentage points for the quarter. First quarter net income decreased 10 percent to $510.5 million, compared to $569.7 million in the prior year. Diluted earnings per share decreased 8 percent to $1.03, versus $1.12 last year. In the prior year's first quarter, the Company received a one-time tax benefit of $105.4 million, which contributed $0.20 per diluted share. Adjusted for this prior year benefit, net income and earnings per share would have grown 10% and 12%, respectively.
"Nike's first-quarter results reflect the strength of our brands and our global business," said NIKE, Inc. President and CEO Mark Parker. "Our relentless focus on product innovation and premium consumer experiences generated balanced growth across every region and market share gains in key categories."
Parker concluded, "Nike is able to connect with consumers and energize the market like nobody else. As we combine that with running a strong and smart business, we generate new growth, deliver strong cash flows, and create greater value for our shareholders."(1)
Futures Orders
The Company reported worldwide futures orders for athletic footwear and apparel, scheduled for delivery from September 2008 through January 2009, totaling $6.8 billion, 10 percent higher than such orders reported for the same period last year. Changes in currency exchange rates increased reported orders growth by 1 percentage point.(1)
By region, futures orders for the U.S. were up 3 percent; Europe (which includes the Middle East and Africa) increased 4 percent; and Asia Pacific and the Americas each grew 27 percent. Changes in currency exchange rates did not have a significant impact on reported futures orders growth in Europe, but did increase reported futures orders growth by 3 percentage points in the Asia Pacific and Americas regions.
Regional Highlights U.S.
During the first quarter, U.S. revenues increased 8 percent to $1.8 billion versus $1.6 billion for same period last year. U.S. athletic footwear revenues increased 9 percent to $1.2 billion. Apparel revenues increased 9 percent to $464.4 million. Equipment revenues were flat with last year at $97.7 million. U.S. pre-tax income increased 1 percent to $351.9 million.
Europe
First quarter revenues for the European region grew 20 percent to $1.8 billion from $1.5 billion for the same period last year. Changes in currency exchange rates increased revenue growth by 15 percentage points. Footwear revenues increased 24 percent to $982.4 million. Apparel revenues grew by 15 percent to $649.7 million and equipment revenues increased 20 percent to $146.6 million. Pre-tax income increased 17 percent to $442.4 million.
Asia Pacific
In the first quarter, revenues in the Asia Pacific region grew 36 percent to $860.6 million compared to $633.7 million a year ago. Changes in currency exchange rates increased revenue growth by 10 percentage points. Footwear revenues were up 37 percent to $454.0 million, apparel revenues increased 38 percent to $332.7 million and equipment revenues grew 21 percent to $73.9 million. Pre-tax income increased 15 percent to $185.5 million.
Americas
Revenues in the Americas region increased 26 percent to $355.7 million, an improvement from $282.0 million for the same period last year. Currency exchange rates contributed 7 percentage points to this growth rate. Footwear revenues were up 24 percent to $245.8 million, apparel revenues increased 36 percent to $79.4 million and equipment revenues grew 21 percent to $30.5 million. Pre-tax income was up 18 percent to $69.1 million.
Other Businesses
For the first quarter, Other business revenues, which include Cole Haan, Converse Inc., Hurley International LLC, NIKE Golf, and Umbro Ltd, which was acquired in the fourth quarter of last year, grew 7 percent to $655.3 million from $612.8 million last year and pre-tax income decreased 9 percent to $86.3 million.
Weekly Jobless Claims Up, Part Due To Hurricane Ike And Gustav
UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT
SEASONALLY ADJUSTED DATA
In the week ending Sept. 20, the advance figure for seasonally adjusted initial claims was 493,000, an increase of 32,000 from the previous week's revised figure of 461,000. It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 50,000 claims to the total. The 4-week moving average was 462,500, an increase of 16,000 from the previous week's revised average of 446,500.
The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending Sept. 13, unchanged from the prior week's unrevised rate of 2.6 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 13 was 3,542,000, an increase of 63,000 from the preceding week's revised level of 3,479,000. The 4-week moving average was 3,489,250, an increase of 28,250 from the preceding week's unrevised average of 3,461,000.
The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 3.042 million.
SEASONALLY ADJUSTED DATA
In the week ending Sept. 20, the advance figure for seasonally adjusted initial claims was 493,000, an increase of 32,000 from the previous week's revised figure of 461,000. It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 50,000 claims to the total. The 4-week moving average was 462,500, an increase of 16,000 from the previous week's revised average of 446,500.
The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending Sept. 13, unchanged from the prior week's unrevised rate of 2.6 percent.
The advance number for seasonally adjusted insured unemployment during the week ending Sept. 13 was 3,542,000, an increase of 63,000 from the preceding week's revised level of 3,479,000. The 4-week moving average was 3,489,250, an increase of 28,250 from the preceding week's unrevised average of 3,461,000.
The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 3.042 million.
Paychex 1st Qtr 2009 Earnings Meets The Street's Expectations
September 24, 2008
FIRST QUARTER FISCAL 2009 HIGHLIGHTS
• Diluted earnings per share increased 3% to $0.41 per share.
• Total service revenue increased 7% to $509.9 million.
• Total revenue increased 5% to $534.1 million.
• Operating income increased 5% to $221.6 million.
• Operating income, net of certain items, increased 11% to $197.4 million.
FIRST QUARTER FISCAL 2009 HIGHLIGHTS
• Diluted earnings per share increased 3% to $0.41 per share.
• Total service revenue increased 7% to $509.9 million.
• Total revenue increased 5% to $534.1 million.
• Operating income increased 5% to $221.6 million.
• Operating income, net of certain items, increased 11% to $197.4 million.
ROCHESTER, NY, September 24, 2008 -- Paychex, Inc. (“we,” “our,” or “us”) (NASDAQ:PAYX) today announced net income of $148.7 million for the three months ended August 31, 2008 (the “first quarter”), a 2% decrease from net income of $151.1 million for the same period last year. Diluted earnings per share was $0.41, an increase of 3% over $0.40 per share for the same period last year. Diluted earnings per share increased at a greater rate
than the net income change due to a lower number of weighted-average shares outstanding resulting from the stock repurchase program completed during the year ended May 31, 2008 (“fiscal 2008”). Total revenue was $534.1 million, a 5% increase over $507.1 million for the same period last year. “Despite ongoing, weak economic conditions, we were again pleased to generate record levels of revenue and earnings per share for the first quarter. We have been able to continue our practice of growing revenues at a faster rate than expenses,” commented Jonathan J. Judge, President and Chief Executive Officer of Paychex.
“Operating income, net of certain items, as a percent of service revenues improved to 39% for the first quarter from 38% for the same period last year.” Payroll service revenue increased 5% to $378.5 million for the first quarter from the same period last year due to client base growth, price increases, and growth in the utilization of ancillary services. Human Resource Services revenue increased 16% to $131.4 million for the first quarter from the same period last year. The growth was generated primarily from the following: comprehensive human resource outsourcing services client employees increased 17% to 446,000 client employees served; workers’ compensation insurance client base increased 15% to 74,000 clients; and retirement services client base increased 9% to 49,000 clients. The asset value of the retirement services client employees’ funds increased 7% to $9.4 billion. For the first quarter, our operating income was $221.6 million, an increase of 5% over the same period last year. Operating income, net of certain items (see Note 1) increased 11% to $197.4 million for the first quarter as compared to
$178.3 million for the same period last year.
$178.3 million for the same period last year.
We maintain a conservative investment strategy within our portfolio of available-for-sale securities to maximize liquidity and protect principal. Our exposure has been limited in the current investment environment as the result of our policies of investing in high credit quality securities with AAA and AA ratings and short-term securities with A-1/P-1 ratings and by limiting the amounts that can be invested in any single issuer. As of September 22, 2008, we have sold substantially all of our variable rate demand notes (“VRDNs”). The VRDNs are money market securities held at par. No losses have resulted from these sales. We expect to be fully
divested of VRDNs by the end of September 2008. Funds from the VRDNs are being reinvested in agency discount notes. We have no auction rate securities in our investment portfolio. We exited the auction rate market in the early fall of 2007 and have never experienced a failed auction. We have no exposure to any sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus
mutual funds, or structured investment vehicles (SIVs). We have not and do not utilize derivative financial instruments to manage interest rate risk. As of September 22, 2008, we do not have any position in prime money market funds.
divested of VRDNs by the end of September 2008. Funds from the VRDNs are being reinvested in agency discount notes. We have no auction rate securities in our investment portfolio. We exited the auction rate market in the early fall of 2007 and have never experienced a failed auction. We have no exposure to any sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus
mutual funds, or structured investment vehicles (SIVs). We have not and do not utilize derivative financial instruments to manage interest rate risk. As of September 22, 2008, we do not have any position in prime money market funds.
OUTLOOK
Our outlook for the fiscal year ending May 31, 2009 (“fiscal 2009”) is based upon current economic and interest rate conditions continuing with no significant changes. Consistent with our policy regarding guidance, our projections do not anticipate or speculate on future changes to interest rates. We estimate the earnings effect of a 25-basis-point increase or decrease in the Federal Funds rate at the present time would be approximately $4.5 million, after taxes, for the next twelve-month period.
Projected revenue and net income growth for fiscal 2009 are as follows:
Payroll service revenue-------------- 5% — 7%
Human Resource Services revenue-- 18% — 21%
Total service revenue---------------- 8% — 10%
Interest on funds held for clients---- (25%) — (20%)
Total revenue------------------------ 6% — 8%
Investment income, net-------------(55%) — (50%)
Net income-------------------------- 2% — 4%
Growth in operating income, net of certain items, is expected to approximate 11% to 13% for fiscal 2009. The effective income tax rate is expected to approximate 34% throughout fiscal 2009. The tax rate is higher than fiscal 2008 due to lower levels of tax-exempt income from securities held in our investment portfolios. Interest on funds held for clients and investment income are expected to be impacted by interest rate volatility. Based upon current interest rate and economic conditions, we expect interest on funds held for clients and investment income, net, to (decrease)/increase by the following amounts in the remaining respective quarters of fiscal 2009:
----------------------------------------------Interest on funds held--------Investment income
---------------------------------------------------for clients-----------------------net
Investment income, net
Second quarter.................................................... (30%) — (25%)----------- (60%) — (55%)
Third quarter....................................................... (30%) — (25%)----------- (20%) — (15%)
Fourth quarter..................................................... (20%) — (15%)------------ 0 — 5%
GE Adjusts Earnings Outlook
FAIRFIELD, Conn., September 25, 2008 - GE today revised its earnings guidance for the third quarter, to a range of $0.43 to $0.48 per share from $0.50 to $0.54, reflecting unprecedented weakness and volatility in the financial services markets. GE now expects that its financial services businesses will earn approximately $2 billion in the third quarter, which, while impacted by current market conditions, is expected to exceed the earnings of any financial services company. Industrial earnings are expected to continue to be strong in the quarter, led by excellent performance in the infrastructure and media businesses and are expected to increase approximately 10-15%, excluding Consumer & Industrial.
GE anticipates that difficult conditions in the financial services markets are not likely to improve in the near future, and as a result, is revising its earnings guidance for the full year to $19.5 to $21 billion ($1.95 to $2.10 per share) from $22 to $23 billion ($2.20 to $2.30 per share).
GE also reaffirmed its longstanding commitment to its Triple-A credit rating. While GE’s funding position is strong and GE has performed well during the recent market volatility, it is taking steps to strengthen its already strong capital and liquidity position, including:
GE anticipates that difficult conditions in the financial services markets are not likely to improve in the near future, and as a result, is revising its earnings guidance for the full year to $19.5 to $21 billion ($1.95 to $2.10 per share) from $22 to $23 billion ($2.20 to $2.30 per share).
GE also reaffirmed its longstanding commitment to its Triple-A credit rating. While GE’s funding position is strong and GE has performed well during the recent market volatility, it is taking steps to strengthen its already strong capital and liquidity position, including:
• Increasing capital in GE Capital to reduce leverage ratios through a reduction in the GE Capital dividend to GE from 40% to 10% of GE Capital’s earnings and by suspending the current GE stock buyback.
• With a strong liquidity position and having already completed $70 billion in long-term funding year-to-date, GE Capital does not need to raise any additional long-term debt for the remainder of 2008.
• Although demand remains strong, reducing GE Capital’s commercial paper to 10-15% of GE Capital’s total debt going forward.
• Resizing GE to deliver 60%/40% industrial-financial services earnings split by end of 2009.
GE also stated that its Board of Directors had approved management’s plan to maintain GE’s quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009.
• Although demand remains strong, reducing GE Capital’s commercial paper to 10-15% of GE Capital’s total debt going forward.
• Resizing GE to deliver 60%/40% industrial-financial services earnings split by end of 2009.
GE also stated that its Board of Directors had approved management’s plan to maintain GE’s quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009.
GE Chairman and CEO Jeff Immelt said: "We run the company for the long term and are taking the actions expected from a Triple-A-rated company. Given the recent dramatic developments in the financial markets, we have made some tough decisions to further reduce risk and strengthen our balance sheet while maintaining our dividend. We have suspended the stock buyback to reduce GE Capital leverage, while still being able to pursue opportunistic acquisitions. We remain fully committed to the Triple-A credit rating, which distinguishes GE.
"Our industrial business fundamentals remain very strong, with continued global strength in our core industries," Immelt said. "Long-cycle industrial and service orders are expected to be up double digits in the third quarter. In our media business, the Beijing Olympics were an unqualified success in all respects for NBCU, and cable ratings remain very positive. While the financial services markets remain challenging and require us to adapt quickly to the rapidly changing environment, we will continue to run GE Capital to be safe and secure, while earning high margins on conservatively underwritten business."
Since 2001, GE has been executing its strategic plan to invest in high-return, high-technology industrial businesses and to reduce its lower-growth, lower-yield financial services businesses. This includes $34 billion in financial services dispositions over the last seven years, such as the sale of reinsurance, bond insurance and some parts of its consumer finance business and this week, its Japanese consumer finance business for $5.4 billion.
Wednesday, September 24, 2008
More From Bill Gross
How Main Street Will Profit
Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining.
If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures.
And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.
In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a "best efforts" future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.
The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.
The writer is chief investment officer and founder of the investment management firm PIMCO.
Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining.
If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures.
And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.
In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a "best efforts" future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.
The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.
The writer is chief investment officer and founder of the investment management firm PIMCO.
Bill Gross On The Bailout
NEW YORK - The Treasury's proposed $700 billion bailout for financial firms could yield a profit of at least 7 percent to 8 percent and benefit taxpayers, Bill Gross, who manages the world's biggest bond fund, wrote in an opinion piece in The Washington Post on Wednesday.
Gross, the chief investment officer of Pacific Investment Management Co., or Pimco, estimates the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar. That will represent a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 percent to 15 percent to the Treasury, Gross said.
"Financed at 3 percent to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 percent to 8 percent," Gross argued. "The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic," Gross added.
The last few weeks have been marked by the U.S. takeovers of mortgage companies Fannie Mae and Freddie Mac the government bailout of insurer American International Group Inc, the bankruptcy filing of Lehman Brothers Holdings Inc , and the pending sale of Merrill Lynch & Co Inc to Bank of America Corp .
U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben Bernanke are pushing Congress to approve a taxpayer-funded plan, estimated at roughly $700 billion, that would let the government buy illiquid assets from lenders.
Gross' estimate of double-digit returns in scooped up mortgage securities assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, "but the Treasury's program is, in fact, directed to prevent just that," he added. Gross manages the $133 billion Pimco Total Return Fund and helps oversee the more than $812 billion in assets at Pimco.
Gross, the chief investment officer of Pacific Investment Management Co., or Pimco, estimates the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar. That will represent a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 percent to 15 percent to the Treasury, Gross said.
"Financed at 3 percent to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 percent to 8 percent," Gross argued. "The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic," Gross added.
The last few weeks have been marked by the U.S. takeovers of mortgage companies Fannie Mae and Freddie Mac the government bailout of insurer American International Group Inc
U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben Bernanke are pushing Congress to approve a taxpayer-funded plan, estimated at roughly $700 billion, that would let the government buy illiquid assets from lenders.
Gross' estimate of double-digit returns in scooped up mortgage securities assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, "but the Treasury's program is, in fact, directed to prevent just that," he added. Gross manages the $133 billion Pimco Total Return Fund and helps oversee the more than $812 billion in assets at Pimco.
August 2008 Existing Home Sales
Released on 9/24/2008 10:00:00 AM For August, 2008
Existing Home Sales - Level - SAAR---Previous---Consensus---Consensus Range---Actual
-------------------------------------5.00 M-----4.92M-------4.80M to 5.15M----4.91M
Existing Home Sales - M/M Change----3.1%-------------------------------------- -2.2%
Existing Home Sale - Yr/Yr Change-- -13.2%------------------------------------ -10.7%
The descent of the housing sector may be slowing, at least in August before September's crunch hit. Existing home sales did fall 2.2 percent in August to a 4.910 million unit rate, but a rate still in line with this year's trend. Condo sales, at -8.2 percent, showed an unusually steep drop in the month with single-family sales down a less alarming but still sizable -1.4 percent. Differences in regions were narrow with the Northeast and West showing mid single digit percentage declines and the Midwest and South both showing fractional gains.The year-on-year rate, helped by ever easier comparisons, is less frightening, at -10.7 percent in August for the least severe dip since July last year. Existing home sales began their uninterrupted run of year-on-year decreases in December 2005 -- a numbing, nearly three-year stretch that has ended up gutting the financial markets.The year-on-year decline of 9.5 percent is the most severe yet for the median price, now at $203,100. The month-on-month drop, at 3.4 percent, is the steepest of the year. Prices are being pressed down by a tide of distressed properties, sales of which the report said make up 35 to 40 percent of total sales. Prices have been in nearly uninterrupted decline for two years, hit by swelling supply which is at 10.4 months. But supply, at 4.255 million units, has at least been edging back the last couple of months.This report is mixed at the very best, with slowing rates of decline in sales offset by rising rates of decline in sale prices, the latter factor one that is certain to add further pressure to the credit markets. Markets, focused on bail-out talks in Washington, showed no reaction to the report.
Existing Home Sales - Level - SAAR---Previous---Consensus---Consensus Range---Actual
-------------------------------------5.00 M-----4.92M-------4.80M to 5.15M----4.91M
Existing Home Sales - M/M Change----3.1%-------------------------------------- -2.2%
Existing Home Sale - Yr/Yr Change-- -13.2%------------------------------------ -10.7%
The descent of the housing sector may be slowing, at least in August before September's crunch hit. Existing home sales did fall 2.2 percent in August to a 4.910 million unit rate, but a rate still in line with this year's trend. Condo sales, at -8.2 percent, showed an unusually steep drop in the month with single-family sales down a less alarming but still sizable -1.4 percent. Differences in regions were narrow with the Northeast and West showing mid single digit percentage declines and the Midwest and South both showing fractional gains.The year-on-year rate, helped by ever easier comparisons, is less frightening, at -10.7 percent in August for the least severe dip since July last year. Existing home sales began their uninterrupted run of year-on-year decreases in December 2005 -- a numbing, nearly three-year stretch that has ended up gutting the financial markets.The year-on-year decline of 9.5 percent is the most severe yet for the median price, now at $203,100. The month-on-month drop, at 3.4 percent, is the steepest of the year. Prices are being pressed down by a tide of distressed properties, sales of which the report said make up 35 to 40 percent of total sales. Prices have been in nearly uninterrupted decline for two years, hit by swelling supply which is at 10.4 months. But supply, at 4.255 million units, has at least been edging back the last couple of months.This report is mixed at the very best, with slowing rates of decline in sales offset by rising rates of decline in sale prices, the latter factor one that is certain to add further pressure to the credit markets. Markets, focused on bail-out talks in Washington, showed no reaction to the report.
Hanesbrands Operational Consolidations
WINSTON-SALEM, N.C.--(BUSINESS WIRE)-- Hanesbrands Inc. (NYSE: HBI) announced today continued progress in executing its consolidation and globalization cost-reduction strategy, which includes increasing production in Asia.
The latest supply chain streamlining, expected to be completed by the end of summer 2009, will consolidate production through nine plant closures in five countries in the Western Hemisphere, affecting approximately 8,100 employees. It also will complete the migration of the company’s large knit-fabric textile production from the United States.
“We are making significant progress in expanding our supply chain production capability in Asia and consolidating into fewer, larger facilities located in lower-cost countries around the world,” Hanesbrands Chief Executive Officer Richard A. Noll said. “Globalizing our supply chain, and eventually balancing production between Asia and the Western Hemisphere, is a critical plank in our strategic efforts to reduce costs, improve product flow and increase our competitiveness.”
By the end of 2008, Hanesbrands is expected to substantially close seven plants – a sewing plant in El Salvador, affecting 2,600 employees; a sewing plant in Honduras, affecting 1,250 employees; a sewing plant in Costa Rica, affecting 1,250 employees; and two yarn plants, a knit-fabric textile plant and an inventory storage warehouse in the United States, affecting 745 employees.
By the end of summer 2009, the company expects to also close a sewing plant in Mexico, affecting 1,650 employees, and close its last large knit-fabric textile plant in the United States, affecting 600 employees.
Hanesbrands expects to incur restructuring and related charges for these nine plant actions, including severance and contract termination costs, accelerated depreciation of fixed assets and inventory write-offs, totaling approximately $76 million, of which approximately two-thirds are expected to be incurred in the third quarter of 2008. With these charges, Hanesbrands will have taken approximately $204 million out of the $250 million in restructuring charges the company has said it expects to incur in the three years following the spinoff.
“In addition to improving cost competitiveness, these moves will lay the foundation for completing our Asia build out and improve the alignment of our sewing operations with our end-state flow of textiles,” said Gerald Evans, Hanesbrands president, chief global supply chain officer. “We regret that employees will be affected by this production streamlining, but our supply chain globalization is necessary to strengthen our overall company and keep us competitive around the world.”
The textile production from the latest closings will be absorbed into existing textile plants in Central America. Hanesbrands has expanded its fabric production capability offshore in the Western Hemisphere. The company has reached planned fabric production levels at its textile facilities in the Dominican Republic and El Salvador, with further expansion planned in Central America.
Most of the sewing production from the Central American plants that will close will be moved to the company’s new Asian facilities. Hanesbrands has opened or acquired four sewing plants in the past two years – two in Thailand and two in Vietnam. Hanesbrands expects to increase its workforce in Asia from 4,000 today to 6,000 by the end of 2008.
“Our startup of supply chain operations in Asia is progressing very well,” Evans said. “Since acquiring our first sewing operation in Chonburi, Thailand, in 2006, we have doubled production at that plant with the same number of operators, as we bring to bear our production and plant operations expertise. Operations in Vietnam are starting very fast with excellent quality from a very capable workforce.”
The company is also constructing a textile fabric plant in Nanjing, China, which is expected to begin the ramp up of production in 2009 to supply fabric to the company’s expanding Asian sewing network.
The latest supply chain streamlining, expected to be completed by the end of summer 2009, will consolidate production through nine plant closures in five countries in the Western Hemisphere, affecting approximately 8,100 employees. It also will complete the migration of the company’s large knit-fabric textile production from the United States.
“We are making significant progress in expanding our supply chain production capability in Asia and consolidating into fewer, larger facilities located in lower-cost countries around the world,” Hanesbrands Chief Executive Officer Richard A. Noll said. “Globalizing our supply chain, and eventually balancing production between Asia and the Western Hemisphere, is a critical plank in our strategic efforts to reduce costs, improve product flow and increase our competitiveness.”
By the end of 2008, Hanesbrands is expected to substantially close seven plants – a sewing plant in El Salvador, affecting 2,600 employees; a sewing plant in Honduras, affecting 1,250 employees; a sewing plant in Costa Rica, affecting 1,250 employees; and two yarn plants, a knit-fabric textile plant and an inventory storage warehouse in the United States, affecting 745 employees.
By the end of summer 2009, the company expects to also close a sewing plant in Mexico, affecting 1,650 employees, and close its last large knit-fabric textile plant in the United States, affecting 600 employees.
Hanesbrands expects to incur restructuring and related charges for these nine plant actions, including severance and contract termination costs, accelerated depreciation of fixed assets and inventory write-offs, totaling approximately $76 million, of which approximately two-thirds are expected to be incurred in the third quarter of 2008. With these charges, Hanesbrands will have taken approximately $204 million out of the $250 million in restructuring charges the company has said it expects to incur in the three years following the spinoff.
“In addition to improving cost competitiveness, these moves will lay the foundation for completing our Asia build out and improve the alignment of our sewing operations with our end-state flow of textiles,” said Gerald Evans, Hanesbrands president, chief global supply chain officer. “We regret that employees will be affected by this production streamlining, but our supply chain globalization is necessary to strengthen our overall company and keep us competitive around the world.”
The textile production from the latest closings will be absorbed into existing textile plants in Central America. Hanesbrands has expanded its fabric production capability offshore in the Western Hemisphere. The company has reached planned fabric production levels at its textile facilities in the Dominican Republic and El Salvador, with further expansion planned in Central America.
Most of the sewing production from the Central American plants that will close will be moved to the company’s new Asian facilities. Hanesbrands has opened or acquired four sewing plants in the past two years – two in Thailand and two in Vietnam. Hanesbrands expects to increase its workforce in Asia from 4,000 today to 6,000 by the end of 2008.
“Our startup of supply chain operations in Asia is progressing very well,” Evans said. “Since acquiring our first sewing operation in Chonburi, Thailand, in 2006, we have doubled production at that plant with the same number of operators, as we bring to bear our production and plant operations expertise. Operations in Vietnam are starting very fast with excellent quality from a very capable workforce.”
The company is also constructing a textile fabric plant in Nanjing, China, which is expected to begin the ramp up of production in 2009 to supply fabric to the company’s expanding Asian sewing network.
Mortgage Loans And Yield Spread Premiums (aka Greed)
The YSP has caused part of the housing crisis. I will post further articles outlining this legalized abuse. (Tim)
Yield spread premium (YSP) is extra profit slipped into virtually every loan (calculated as percentage of your loan amount) which is created only by the loan originator locking and closing your loan at a higher than market rate.
For example, your loan amount is $200,000. The loan officer locks and closes you at 6.5% interest rate. The real market rate…the truthful rate…the rate you could have…should have had… was 6.0%. The spread between the rates yields a premium (another way of saying…money).
Hence the name Yield Spread Premium.
The .5% rate spread on average creates 2.0% of your loan amount as the yield spread premium profit. That means the loan officer made an extra $4,000 (2% x $200,000 loan amount) on your loan in addition to any origination, processing, application, or underwriting fees they disclosed on the Good Faith Estimate or closing statement.
Professor Howell Jackson of Harvard Law School said in testimony before Congress,
“…borrowers are simply told that their loans will have a certain interest rate, and they never understand that the interest rate is higher than it needs to be.”
Yield spread premium (YSP) is extra profit slipped into virtually every loan (calculated as percentage of your loan amount) which is created only by the loan originator locking and closing your loan at a higher than market rate.
For example, your loan amount is $200,000. The loan officer locks and closes you at 6.5% interest rate. The real market rate…the truthful rate…the rate you could have…should have had… was 6.0%. The spread between the rates yields a premium (another way of saying…money).
Hence the name Yield Spread Premium.
The .5% rate spread on average creates 2.0% of your loan amount as the yield spread premium profit. That means the loan officer made an extra $4,000 (2% x $200,000 loan amount) on your loan in addition to any origination, processing, application, or underwriting fees they disclosed on the Good Faith Estimate or closing statement.
Professor Howell Jackson of Harvard Law School said in testimony before Congress,
“…borrowers are simply told that their loans will have a certain interest rate, and they never understand that the interest rate is higher than it needs to be.”
Buffett Bets On Goldman Sachs
Posted By:Alex Crippen
In a surprise return to Wall Street, Warren Buffett's Berkshire Hathaway has a deal to invest at least $5 billion in Goldman Sachs.
Up until now, he has rejected all pleas to come to Wall Street's aid during the current crisis.
Goldman revealed the vote of confidence from the man generally considered the world's greatest investor late this afternoon in a news release.
Berkshire will buy $5 in preferred Goldman stock with a dividend of 10 percent. It will also get warrants to buy another $5 in common stock over five years.
Buffett has avoided Wall Street since he came to Salomon Brothers' aid as a hands-on manager when it was hit by a trading scandal in 1991. He had bought a $700 million stake in the company four years before.
He eventually turned a profit on the investment, but it was a long and difficult experience for him, making tonight's news especially unexpected.
In a brief off-camera telephone conversation tonight, Buffett told CNBC's Becky Quick he loves the terms of the deal and he loves Goldman.
(It's important to note that Buffett got a much better deal than any individual investor could hope for.)
Even so, Becky tells me she's "stunned" by this development, and I am too. Neither of us can believe it just now.
Becky jokes she would have predicted that Buffett would buy a stake in Pepsi, arch-rival of his beloved Coca-Cola, before he put money into a Wall Street firm again.
She expects to speak extensively with Buffett live on the air tomorrow (Wednesday) morning just after 8a ET on Squawk Box.
They'll cover the Goldman investment as well as everything else that's happening in the financial world right now, including his support of the administration's increasingly controversial bailout plan.
While Buffett came to New York to help run Salomon years ago, its inconceivable that he would leave Omaha this time around to pitch in at Goldman's executive suite.
Buffett is quoted in the release with some very positive comments about Goldman, which recently converted from an investment bank to a bank holding company.
"Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Goldman CEO Lloyd Blankfein returns the favor in his quote. "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position."
Berkshire will also receive warrants to purchase $5 billion of common stock with a strike price of $115 a share. The warrants can be used at any time over a five year period.
In addition, Goldman will raise at least $2.5 billion in common equity through a public offering.
In a surprise return to Wall Street, Warren Buffett's Berkshire Hathaway has a deal to invest at least $5 billion in Goldman Sachs.
Up until now, he has rejected all pleas to come to Wall Street's aid during the current crisis.
Goldman revealed the vote of confidence from the man generally considered the world's greatest investor late this afternoon in a news release.
Berkshire will buy $5 in preferred Goldman stock with a dividend of 10 percent. It will also get warrants to buy another $5 in common stock over five years.
Buffett has avoided Wall Street since he came to Salomon Brothers' aid as a hands-on manager when it was hit by a trading scandal in 1991. He had bought a $700 million stake in the company four years before.
He eventually turned a profit on the investment, but it was a long and difficult experience for him, making tonight's news especially unexpected.
In a brief off-camera telephone conversation tonight, Buffett told CNBC's Becky Quick he loves the terms of the deal and he loves Goldman.
(It's important to note that Buffett got a much better deal than any individual investor could hope for.)
Even so, Becky tells me she's "stunned" by this development, and I am too. Neither of us can believe it just now.
Becky jokes she would have predicted that Buffett would buy a stake in Pepsi, arch-rival of his beloved Coca-Cola, before he put money into a Wall Street firm again.
She expects to speak extensively with Buffett live on the air tomorrow (Wednesday) morning just after 8a ET on Squawk Box.
They'll cover the Goldman investment as well as everything else that's happening in the financial world right now, including his support of the administration's increasingly controversial bailout plan.
While Buffett came to New York to help run Salomon years ago, its inconceivable that he would leave Omaha this time around to pitch in at Goldman's executive suite.
Buffett is quoted in the release with some very positive comments about Goldman, which recently converted from an investment bank to a bank holding company.
"Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Goldman CEO Lloyd Blankfein returns the favor in his quote. "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position."
Berkshire will also receive warrants to purchase $5 billion of common stock with a strike price of $115 a share. The warrants can be used at any time over a five year period.
In addition, Goldman will raise at least $2.5 billion in common equity through a public offering.
This Week's Market Movers - Earnings
September 24 - Paychex 1st Qtr (consensus $0.41)
----------------Nike 1st Qtr ($0.93)
September 25 - McCormick&Co ($0.48)
September 26 - KB Home ($-1.25)
----------------Nike 1st Qtr ($0.93)
September 25 - McCormick&Co ($0.48)
September 26 - KB Home ($-1.25)
Tuesday, September 23, 2008
This Week's Market Movers - Indicators
Released on 9/24/2008 10:00:00 AM For August, 2008
Existing Home Sales-----Previous---------Consensus---------Consensus Range
-------------------------5.00M-----------4.92M-------------4.80 to 5.15M
Market Consensus Before Announcement. Existing home sales rose 3.1 percent to a 5.0 million annual rate in July. But the rise did not make a dent in supply on the market, which was still severely bloated at 11.2 months and up from 11.1 months in June and 10.8 months in May. Unsold inventories continued to weigh on prices which fell 1.3 percent in the month to a median $212.4 million for a 7.1 percent year-on-year decline. There are mixed signals on whether sales will pick up further in August. The latest pending home sales index fell 3.2 percent in July while the Mortgage Bankers Association's purchase app
lications index was little changed over the month of August.
Released on 9/25/2008 8:30:00 AM For August, 2008
New Orders - M/M change-----Previous----------Consensus---------Consensus Range
---------------------------------1.3 %------------ -1.6%-------------- -5.9% to 0.6%
Market Consensus Before Announcement. Durable goods orders in July were surprisingly strong -- even after discounting a surge in aircraft orders. And businesses are looking past current weakness in the economy, continuing to invest in the economy. Durable goods orders advanced 1.4 percent in July and matching the 1.4 percent surge in June. Excluding the transportation component, new orders increased 0.7 percent, following a 2.6 percent jump in June. Strength was moderately widespread. July's gain was the largest since a 4.1 percent surge in December 2007. Apparently, exports are still providing support for the manufacturing sector along with a moderate uptrend in equipment investment in the U.S., despite a slowing in consumer spending. But the outlook is mixed, according to recent manufacturing surveys. The new orders index in the ISM manufacturing survey remained slightly negative in August while the same index in the Empire State Survey turned slightly positive in September (this report is based on responses from late August and early September). The Philly Fed's manufacturing survey for September showed a rise in new orders (also based on responses from late August and early September).
Released on 9/25/2008 10:00:00 AM For August, 2008
New Home Sales - Level- SAAR-----Previous----------Consensus---------Consensus Range
-------------------------------------515 K-------------510K--------------490K to 530K
Market Consensus Before Announcement. New home sales have been showing no sign of improvement while supply on the market is coming down. New home sales came in at a 515,000 annual unit rate in July and, importantly, sales for June and May were both revised lower by a combined 46,000 units. Year-on-year sales were down 35 percent. But homebuilders have been cutting back on construction as new homes on the market fell 23,000 in the month to 416,000, pulling down the months' supply to 10.1 from 10.7 in June and 10.8 in May. The median sales price rose 0.3 percent in the month but was down 6.3 percent on the year.
Existing Home Sales-----Previous---------Consensus---------Consensus Range
-------------------------5.00M-----------4.92M-------------4.80 to 5.15M
Market Consensus Before Announcement. Existing home sales rose 3.1 percent to a 5.0 million annual rate in July. But the rise did not make a dent in supply on the market, which was still severely bloated at 11.2 months and up from 11.1 months in June and 10.8 months in May. Unsold inventories continued to weigh on prices which fell 1.3 percent in the month to a median $212.4 million for a 7.1 percent year-on-year decline. There are mixed signals on whether sales will pick up further in August. The latest pending home sales index fell 3.2 percent in July while the Mortgage Bankers Association's purchase app
lications index was little changed over the month of August.Released on 9/25/2008 8:30:00 AM For August, 2008
New Orders - M/M change-----Previous----------Consensus---------Consensus Range
---------------------------------1.3 %------------ -1.6%-------------- -5.9% to 0.6%
Market Consensus Before Announcement. Durable goods orders in July were surprisingly strong -- even after discounting a surge in aircraft orders. And businesses are looking past current weakness in the economy, continuing to invest in the economy. Durable goods orders advanced 1.4 percent in July and matching the 1.4 percent surge in June. Excluding the transportation component, new orders increased 0.7 percent, following a 2.6 percent jump in June. Strength was moderately widespread. July's gain was the largest since a 4.1 percent surge in December 2007. Apparently, exports are still providing support for the manufacturing sector along with a moderate uptrend in equipment investment in the U.S., despite a slowing in consumer spending. But the outlook is mixed, according to recent manufacturing surveys. The new orders index in the ISM manufacturing survey remained slightly negative in August while the same index in the Empire State Survey turned slightly positive in September (this report is based on responses from late August and early September). The Philly Fed's manufacturing survey for September showed a rise in new orders (also based on responses from late August and early September).
Released on 9/25/2008 10:00:00 AM For August, 2008
New Home Sales - Level- SAAR-----Previous----------Consensus---------Consensus Range
-------------------------------------515 K-------------510K--------------490K to 530K
Market Consensus Before Announcement. New home sales have been showing no sign of improvement while supply on the market is coming down. New home sales came in at a 515,000 annual unit rate in July and, importantly, sales for June and May were both revised lower by a combined 46,000 units. Year-on-year sales were down 35 percent. But homebuilders have been cutting back on construction as new homes on the market fell 23,000 in the month to 416,000, pulling down the months' supply to 10.1 from 10.7 in June and 10.8 in May. The median sales price rose 0.3 percent in the month but was down 6.3 percent on the year.
The Housing And Credit Meltdown - How We got In This Mess
There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.
Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York's attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie.
It all starts, as the headlines of recent weeks do, with these two giant banks. But in the hubbub about their bailout, few have noticed that the only federal agency with the power to regulate what Cuomo has called "the gods of Washington" was HUD. Congress granted that power in 1992, so there were only four pre-crisis secretaries at the notoriously political agency that had the ability to rein in Fannie and Freddie: ex–Texas mayor Henry Cisneros and Bush confidante Alfonso Jackson, who were driven from office by criminal investigations; Mel Martinez, who left to chase a U.S. Senate seat in Florida; and Cuomo, who used the agency as a launching pad for his disastrous 2002 gubernatorial candidacy.
With that many pols at the helm, it's no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors.
In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks—known collectively as Government Sponsored Enterprises—would have to buy. The GSEs don't actually sell mortgages to borrowers. They buy them from banks and mortgage companies, allowing lenders to replenish their capital and make more loans. They also purchase mortgage-backed securities, which are pools of mortgages regularly acquired by the GSEs from investment firms. The government chartered these banks to pump money into the mortgage market and, while they did it, to make a strong enough profit to attract shareholders. That created a tug-of-war between their efforts to maximize shareholder value, which drove them toward high-end mortgages, and their congressionally mandated obligation to finance loans for those who needed help. The 1992 law required HUD's secretary to make sure housing goals were being met and, every four years, set new goals for Fannie and Freddie.
But raising the affordable-housing goals was only half the Cuomo story.
The HUD secretary is also required to produce voluminous rules that govern how the GSEs meet those goals, and the 187-page rules Cuomo issued opened the door to abuse.
The rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were.
HUD conceded in the rules that many consumer groups had urged it to insist that the GSEs provide "loan-level data" revealing how many of their loans contained high interest rates, prepayment penalties, or other requirements that presaged bad loans.
Indeed, in March 2000, HUD had acknowledged that the new goal-driven pressure on the GSEs might "warrant increased monitoring and additional reporting." But when the final rules were adopted in October, that momentary caution had been abandoned: "HUD is not establishing any requirements for additional data to carry out this rule." The report explained that the GSEs "objected" to information mandates "related to their purchases of high-cost mortgages," so HUD decided against imposing "an undue additional burden." HUD would have no way of telling how abusive the low-income mortgages it was mandating might be.
Follow this link for the complete story.
http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/
Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York's attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie.
It all starts, as the headlines of recent weeks do, with these two giant banks. But in the hubbub about their bailout, few have noticed that the only federal agency with the power to regulate what Cuomo has called "the gods of Washington" was HUD. Congress granted that power in 1992, so there were only four pre-crisis secretaries at the notoriously political agency that had the ability to rein in Fannie and Freddie: ex–Texas mayor Henry Cisneros and Bush confidante Alfonso Jackson, who were driven from office by criminal investigations; Mel Martinez, who left to chase a U.S. Senate seat in Florida; and Cuomo, who used the agency as a launching pad for his disastrous 2002 gubernatorial candidacy.
With that many pols at the helm, it's no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors.
In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks—known collectively as Government Sponsored Enterprises—would have to buy. The GSEs don't actually sell mortgages to borrowers. They buy them from banks and mortgage companies, allowing lenders to replenish their capital and make more loans. They also purchase mortgage-backed securities, which are pools of mortgages regularly acquired by the GSEs from investment firms. The government chartered these banks to pump money into the mortgage market and, while they did it, to make a strong enough profit to attract shareholders. That created a tug-of-war between their efforts to maximize shareholder value, which drove them toward high-end mortgages, and their congressionally mandated obligation to finance loans for those who needed help. The 1992 law required HUD's secretary to make sure housing goals were being met and, every four years, set new goals for Fannie and Freddie.
But raising the affordable-housing goals was only half the Cuomo story.
The HUD secretary is also required to produce voluminous rules that govern how the GSEs meet those goals, and the 187-page rules Cuomo issued opened the door to abuse.
The rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were.
HUD conceded in the rules that many consumer groups had urged it to insist that the GSEs provide "loan-level data" revealing how many of their loans contained high interest rates, prepayment penalties, or other requirements that presaged bad loans.
Indeed, in March 2000, HUD had acknowledged that the new goal-driven pressure on the GSEs might "warrant increased monitoring and additional reporting." But when the final rules were adopted in October, that momentary caution had been abandoned: "HUD is not establishing any requirements for additional data to carry out this rule." The report explained that the GSEs "objected" to information mandates "related to their purchases of high-cost mortgages," so HUD decided against imposing "an undue additional burden." HUD would have no way of telling how abusive the low-income mortgages it was mandating might be.
Follow this link for the complete story.
http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/
Thursday, September 11, 2008
Tanker Deal In Limbo For Boeing, Northrop
DoD Announces Termination of KC-X Tanker Solicitation
Today, the Department of Defense notified the Congress and the two competing contractors, Boeing and Northrop Grumman, that it is terminating the current competition for a U.S. Air Force airborne tanker replacement.
Secretary Gates, in consultation with senior Defense and Air Force officials, has determined that the solicitation and award cannot be accomplished by January. Rather than hand the next Administration an incomplete and possibly contested process, Secretary Gates decided that the best course of action is to provide the next Administration with full flexibility regarding the requirements, evaluation criteria and the appropriate allocation of defense budget to this mission.
Secretary Gates stated, “Over the past seven years the process has become enormously complex and emotional – in no small part because of mistakes and missteps along the way by the Department of Defense. It is my judgment that in the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment. The resulting “cooling off” period will allow the next Administration to review objectively the military requirements and craft a new acquisition strategy for the KC-X.”
In making this decision, it was concluded that the current KC-135 fleet can be adequately maintained to satisfy Air Force missions for the near future. Sufficient funds will be recommended in the FY09 and follow-on budgets to maintain the KC-135 at high-mission capable rates. In addition, the Department will recommend to the Congress the disposition of the pending FY09 funding for the tanker program and plans to continue funding the KC-X program in the FY10 to FY15 budget presently under review.
Today, the Department of Defense notified the Congress and the two competing contractors, Boeing and Northrop Grumman, that it is terminating the current competition for a U.S. Air Force airborne tanker replacement.
Secretary Gates, in consultation with senior Defense and Air Force officials, has determined that the solicitation and award cannot be accomplished by January. Rather than hand the next Administration an incomplete and possibly contested process, Secretary Gates decided that the best course of action is to provide the next Administration with full flexibility regarding the requirements, evaluation criteria and the appropriate allocation of defense budget to this mission.
Secretary Gates stated, “Over the past seven years the process has become enormously complex and emotional – in no small part because of mistakes and missteps along the way by the Department of Defense. It is my judgment that in the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment. The resulting “cooling off” period will allow the next Administration to review objectively the military requirements and craft a new acquisition strategy for the KC-X.”
In making this decision, it was concluded that the current KC-135 fleet can be adequately maintained to satisfy Air Force missions for the near future. Sufficient funds will be recommended in the FY09 and follow-on budgets to maintain the KC-135 at high-mission capable rates. In addition, the Department will recommend to the Congress the disposition of the pending FY09 funding for the tanker program and plans to continue funding the KC-X program in the FY10 to FY15 budget presently under review.
Wednesday, September 10, 2008
Federal Subsidies For Energy - How Much?
The Federal Government spent an estimated $16.6 billion in energy-specific subsidies and support programs in Fiscal Year (FY) 2007. Energy-specific subsidies have more than doubled since FY 1999...
Another Reason To Drill, Drill, Drill
EIA estimates that members of the Organization of the Petroleum Exporting Countries (OPEC) earned $671 billion in net oil export revenues in 2007, a 10 percent increase from 2006. Saudi Arabia earned the largest share of these earnings, $194 billion, representing 29 percent of total OPEC revenues. On a per-capita basis, OPEC net oil export earning reached $1,137, a 8 percent increase from 2006. Through August, OPEC had earned an estimated $740 billion in net oil export earnings in 2008. Based on projections from the EIA September 2008 Short Term Energy Outlook (STEO), OPEC net oil export revenues could be $1,116 billion (1.1 trillion) in 2008 and $1,226 billion (1.2 trillion) in 2009.
To put that into context; Exxon (so called big oil) earned $40.0 billion in 2007.
Mobile Life Takes Visa
By Marin Perez InformationWeek September 4, 2008 01:21 PM
Visa is continuing its push toward the mobile space with the launch this week of two new commercial mobile payment services.
In Brazil, the company introduced a service that allows Banco do Brasil cardholders to pay with their mobile banking program that gives users more options to keep track of their spending with a cell phone.
"Today we again see how far Visa and our partners have come in the development of mobile financial services," said Elizabeth Buse, global head of product at Visa, in a statement. "As the payments ecosystem has expanded, so has Visa's opportunity to deliver innovative products and services to a diverse set of stakeholders."
As more and more customers adopt cell phones, the mobile banking and payment will become an increasingly lucrative market. Because of this, Visa's credit card rival MasterCard has also been aggressively targeting this space.
MasterCard's initiatives include trying to get its contactless payment chips into cell phones, enabling users to bank from the mobile Web, and pushing forward person-to-person payments via text messages.
Visa is continuing its push toward the mobile space with the launch this week of two new commercial mobile payment services.
In Brazil, the company introduced a service that allows Banco do Brasil cardholders to pay with their mobile banking program that gives users more options to keep track of their spending with a cell phone.
"Today we again see how far Visa and our partners have come in the development of mobile financial services," said Elizabeth Buse, global head of product at Visa, in a statement. "As the payments ecosystem has expanded, so has Visa's opportunity to deliver innovative products and services to a diverse set of stakeholders."
As more and more customers adopt cell phones, the mobile banking and payment will become an increasingly lucrative market. Because of this, Visa's credit card rival MasterCard has also been aggressively targeting this space.
MasterCard's initiatives include trying to get its contactless payment chips into cell phones, enabling users to bank from the mobile Web, and pushing forward person-to-person payments via text messages.
Fannie Mae Primer
Both Fannie Mae and Freddie Mac are US government "sponsored" home loan banks. Each of them have formal names, but are primarily known by their nicknames.
In fact, both these institutions prefer to go by their nicknames rather than their official names. That's like the US government going by "Uncle Sam" all the time.
Fannie Mae was created by the government in 1938 to guarantee mortgage loans made by private banks.
After the Great Depression, which was characterised by bank failures on the one hand, and substantial losses of income on the part of large number of households on the other, the private mortgage market was providing mortgage loans to too few households.
The objective of the Roosevelt Administration was to restore widespread homeownership, which had become almost an ideology in the United States from early on in the twentieth century.
Thirty years later, in 1968, the government freed Fannie Mae from its control and privatized it with a Congressional charter. It became just like any other bank, except that it still did not make mortgage loans directly to the public. Instead, it bought up what is called the "secondary" market - the mortgages which had already been made by the private banks.
Two years later, in 1970, the US government created Freddie Mac, an exact duplicate of Fannie Mae. The reason behind a second institution was that high economic growth of the 1960s had led to rising incomes and the resulting widespread homeownership made just one government sponsored mortgage institution, namely Fannie Mae, unappealingly, if not scarily, large.
Both Fannie Mae and Freddie Mac have been private enterprises since then, up until September 7, 2008.
They have stockholders who provide the equity capital, they both sell bonds to raise funds, and they both pay for their operations out of their profits. There has been no money paid by the American taxpayers to these two institutions.
The two were "sponsored" banks, meaning that there was an implicit guarantee from the US government that it would not allow these two institutions to fail.
In fact, both these institutions prefer to go by their nicknames rather than their official names. That's like the US government going by "Uncle Sam" all the time.
Fannie Mae was created by the government in 1938 to guarantee mortgage loans made by private banks.
After the Great Depression, which was characterised by bank failures on the one hand, and substantial losses of income on the part of large number of households on the other, the private mortgage market was providing mortgage loans to too few households.
The objective of the Roosevelt Administration was to restore widespread homeownership, which had become almost an ideology in the United States from early on in the twentieth century.
Thirty years later, in 1968, the government freed Fannie Mae from its control and privatized it with a Congressional charter. It became just like any other bank, except that it still did not make mortgage loans directly to the public. Instead, it bought up what is called the "secondary" market - the mortgages which had already been made by the private banks.
Two years later, in 1970, the US government created Freddie Mac, an exact duplicate of Fannie Mae. The reason behind a second institution was that high economic growth of the 1960s had led to rising incomes and the resulting widespread homeownership made just one government sponsored mortgage institution, namely Fannie Mae, unappealingly, if not scarily, large.
Both Fannie Mae and Freddie Mac have been private enterprises since then, up until September 7, 2008.
They have stockholders who provide the equity capital, they both sell bonds to raise funds, and they both pay for their operations out of their profits. There has been no money paid by the American taxpayers to these two institutions.
The two were "sponsored" banks, meaning that there was an implicit guarantee from the US government that it would not allow these two institutions to fail.
What is it exactly that Fannie Mae and Freddie Mac do?
As stated above, the principal act that Fannie Mae and Freddie Mac are mandated to do, is to buy mortgages from private banks. The private banks, meanwhile, make mortgage loans with the comfort of knowing that they will be able turn around and sell those loans to Fannie Mae and Freddie Mac.
This "comfort" has two aspects. First, the banks which make the initial loans in the primary market get their liquidity back when they sell off their mortgages in the secondary market to Fannie Mae and Freddie Mac.
They can, therefore, make fresh mortgages to new customers with the funds they received from selling the previous mortgages, thereby making it possible for greater homeownership.
The second benefit that private banks get from the existence of Fannie Mae and Freddie Mac is that they can offer mortgages to middle class and low income households at affordable interest rates with the sure knowledge that Fannie Mae and Freddie Mac will take those mortgages over.
Where do Fannie Mae and Freddie Mac get the funds to buy these mortgages from the private banks? They raise funds first by issuing bonds on Wall Street just like any private company.
Then, in addition, they sell some of their mortgage holdings in the "tertiary" markets. They pool together a lot of mortgages and create a marketable security. These are called mortgage backed securities (MBS). If any household, whose mortgage is part of a MBS, fails to pay its mortgage obligation for, say, a month, then Fannie Mae or Freddie Mac, whoever is the relevant party, will make good the payment to the MBS holder.
Similarly, if there is a foreclosure and the sale price of the distress sale ends up being less than the value of the mortgage, then Fannie Mae and Freddie Mac will make up the difference.
A lot of these MBS are sold in foreign markets, especially to central banks with large US dollar holdings. The central bank of China is reputed to be holding $340 billion worth of MBS.
That is why Fannie Mae and Freddie Mac cannot be allowed to fail. The mortgage defaults and foreclosures in the US will hit the Asian central banks among others. The defaults on MBS backed by Fannie Mae and Freddie Mac will be looked upon the world as almost equivalent to a default by the US government on US treasury bonds. Even the thought of such a possibility is too scary.
Freddie Mac Primer
The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), commonly known as Freddie Mac, is a privately-owned and run government sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation, authorized to make loans and loan guarantees.
The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. The name "Freddie Mac" is a creative acronym of the company's full name that has been adopted officially for ease of identification (see "GSEs" below for other examples).
On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac). The action is "one of the most sweeping government interventions in private financial markets in decades".[1][2][3]
Moody's gave Freddie Mac securities an investment grade rating of A1 until August 22, 2008 when Warren Buffett said publicly that both Freddie Mac and Fannie Mae had tried to attract him and others. Moody's changed the rating that day to Baa3 high-yield junk bonds.[4] As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10 percent a year, and the total investment may subsequently rise to as much as US$ 100 billion.[5]
Home loan interest rates may go down as a result, and owners of Freddie Mac debt and the Asian central banks who had increased their holdings in these bonds may be protected. Shares of Freddie Mac stock, however, on September 8, 2008 were worth about one U.S. dollar. On the same day the U.S dollar increased in value compared to yen and euros. The yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.[6]
Freddie Mac's primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac's guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.
Officially, Freddie Mac is not given any backing, insurance, or statutory support by the US Government. Unofficially, it has long been assumed that the corporation, along with its sister GSE, the Federal National Mortgage Association (Fannie Mae), were "too big to fail". Both companies often benefited from an implied guarantee of fitness equivalent to truly federally-backed financial groups.
As of 2008, the Federal National Mortgage Association and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.[15] This made both corporations highly susceptible to the subprime mortgage crisis of that year. Ultimately, in July of that year, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The Treasury Department and the Federal Reserve took several steps to bolster confidence in the corporations, including extending credit limits, granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks), and potentially allowing the Treasury Department to own stock.[16] This event also renewed calls for stronger regulation of GSEs by the government.
The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. The name "Freddie Mac" is a creative acronym of the company's full name that has been adopted officially for ease of identification (see "GSEs" below for other examples).
On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac). The action is "one of the most sweeping government interventions in private financial markets in decades".[1][2][3]
Moody's gave Freddie Mac securities an investment grade rating of A1 until August 22, 2008 when Warren Buffett said publicly that both Freddie Mac and Fannie Mae had tried to attract him and others. Moody's changed the rating that day to Baa3 high-yield junk bonds.[4] As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10 percent a year, and the total investment may subsequently rise to as much as US$ 100 billion.[5]
Home loan interest rates may go down as a result, and owners of Freddie Mac debt and the Asian central banks who had increased their holdings in these bonds may be protected. Shares of Freddie Mac stock, however, on September 8, 2008 were worth about one U.S. dollar. On the same day the U.S dollar increased in value compared to yen and euros. The yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.[6]
Freddie Mac's primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac's guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.
Officially, Freddie Mac is not given any backing, insurance, or statutory support by the US Government. Unofficially, it has long been assumed that the corporation, along with its sister GSE, the Federal National Mortgage Association (Fannie Mae), were "too big to fail". Both companies often benefited from an implied guarantee of fitness equivalent to truly federally-backed financial groups.
As of 2008, the Federal National Mortgage Association and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.[15] This made both corporations highly susceptible to the subprime mortgage crisis of that year. Ultimately, in July of that year, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The Treasury Department and the Federal Reserve took several steps to bolster confidence in the corporations, including extending credit limits, granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks), and potentially allowing the Treasury Department to own stock.[16] This event also renewed calls for stronger regulation of GSEs by the government.
Tuesday, September 9, 2008
Gang Of 16 (Senators) Comprise Energy Plan
Compromise energy plan deserves support
Editorial
Athens Banner-Herald Story updated at 5:34 pm on 8/28/2008
Yes, it's an election year, and yes, that often means policy debates are driven more by public-opinion polling than practical reasoning. But that doesn't mean an effort in the U.S. Senate to put a national energy policy in place - an effort in which Georgia Republican U.S. Sen. Saxby Chambliss is playing a leading role - should be written off.
Earlier this month, Chambliss and Democratic U.S. Sen. Kent Conrad of North Dakota began assembling a bipartisan coalition of senators behind a proposal that would combine increased drilling for oil with the allocation of billions of dollars in funding for the development of petroleum-free vehicles and tax credits for renewable energy, according to media reports.
However improbable it may be in today's intensely partisan political climate, Chambliss and Conrad have reached across the aisle and built considerable support for the two-pronged approach to addressing the energy conundrum that now has Americans facing gasoline prices in the neighborhood of $4 per gallon. The two senators' approach is the very essence of how politics - often defined as the art of compromise - is supposed to work.
Since the beginning of their initiative, Chambliss and Conrad have assembled a bipartisan group of 16 senators - a group that, by design, comprises an equal number of Democrats and Republicans, and already includes Georgia's other U.S. senator, Republican Johnny Isakson - who are working to implement a sensible approach to the energy issue, balancing the need to increase the supply of fossil fuels with the need to develop alternative sources of energy.
Initially, Chambliss' and Conrad's bipartisan group comprised 10 senators. The group's rapid growth to the current count of 16 is an indication there may be a critical mass of senators in place for action on the compromise energy policy proposal when Congress' summer recess ends next month.
Briefly, on the supply side, the proposal calls for lifting a ban on oil drilling in the eastern Gulf of Mexico and along the southeastern U.S. coast. It also would open the Arctic National Wildlife Refuge to drilling, and facilitate construction of oil refineries and nuclear plants. In opting for this approach, the Republican members of the Gang of 16 are splitting from the GOP majority view that drilling should be allowed along the entire Atlantic and Pacific U.S. coastlines. Democratic members of the Gang of 16, in signing on to the proposal, are breaking from their party's bias against any expansion of oil drilling.
Obviously, if the proposal does make it through the legislative process unscathed, neither side will get everything it wants. Republicans will have to settle for less drilling than they might want, and Democrats will have to settle for a less-than-complete focus on alternative energy development, although they would get $20 billion in funding for such initiatives.
What the compromise will do for both sides, though, is to bring them in line with what the American people want them to do. According to an Aug. 11 report from Rasmussen Reports on its recent telephone survey, "(n)early two-thirds of Americans (64 percent) support going ahead with offshore drilling" while "(f)orty-eight percent favor (Democratic presidential contender Barack) Obama's proposal to give $4 billion in federal aid to the troubled auto industry to build fuel efficient cars ... ."
The plan will need 60 votes to get through the Senate. If the senators who haven't yet signed on are smart, and the American people are lucky, the Gang of 16's proposal will get far more than 60 votes.
Editorial
Athens Banner-Herald Story updated at 5:34 pm on 8/28/2008
Yes, it's an election year, and yes, that often means policy debates are driven more by public-opinion polling than practical reasoning. But that doesn't mean an effort in the U.S. Senate to put a national energy policy in place - an effort in which Georgia Republican U.S. Sen. Saxby Chambliss is playing a leading role - should be written off.
Earlier this month, Chambliss and Democratic U.S. Sen. Kent Conrad of North Dakota began assembling a bipartisan coalition of senators behind a proposal that would combine increased drilling for oil with the allocation of billions of dollars in funding for the development of petroleum-free vehicles and tax credits for renewable energy, according to media reports.
However improbable it may be in today's intensely partisan political climate, Chambliss and Conrad have reached across the aisle and built considerable support for the two-pronged approach to addressing the energy conundrum that now has Americans facing gasoline prices in the neighborhood of $4 per gallon. The two senators' approach is the very essence of how politics - often defined as the art of compromise - is supposed to work.
Since the beginning of their initiative, Chambliss and Conrad have assembled a bipartisan group of 16 senators - a group that, by design, comprises an equal number of Democrats and Republicans, and already includes Georgia's other U.S. senator, Republican Johnny Isakson - who are working to implement a sensible approach to the energy issue, balancing the need to increase the supply of fossil fuels with the need to develop alternative sources of energy.
Initially, Chambliss' and Conrad's bipartisan group comprised 10 senators. The group's rapid growth to the current count of 16 is an indication there may be a critical mass of senators in place for action on the compromise energy policy proposal when Congress' summer recess ends next month.
Briefly, on the supply side, the proposal calls for lifting a ban on oil drilling in the eastern Gulf of Mexico and along the southeastern U.S. coast. It also would open the Arctic National Wildlife Refuge to drilling, and facilitate construction of oil refineries and nuclear plants. In opting for this approach, the Republican members of the Gang of 16 are splitting from the GOP majority view that drilling should be allowed along the entire Atlantic and Pacific U.S. coastlines. Democratic members of the Gang of 16, in signing on to the proposal, are breaking from their party's bias against any expansion of oil drilling.
Obviously, if the proposal does make it through the legislative process unscathed, neither side will get everything it wants. Republicans will have to settle for less drilling than they might want, and Democrats will have to settle for a less-than-complete focus on alternative energy development, although they would get $20 billion in funding for such initiatives.
What the compromise will do for both sides, though, is to bring them in line with what the American people want them to do. According to an Aug. 11 report from Rasmussen Reports on its recent telephone survey, "(n)early two-thirds of Americans (64 percent) support going ahead with offshore drilling" while "(f)orty-eight percent favor (Democratic presidential contender Barack) Obama's proposal to give $4 billion in federal aid to the troubled auto industry to build fuel efficient cars ... ."
The plan will need 60 votes to get through the Senate. If the senators who haven't yet signed on are smart, and the American people are lucky, the Gang of 16's proposal will get far more than 60 votes.
Energy Rhetoric vs. Reality
Energy Rhetoric vs. Reality
Rhetoric: We can't drill our way out of this problem because the United States only has three percent of the world’s oil reserves.
Reality: America has vast resources of oil and natural gas – enough oil to power more than 60 million cars for the next six decades and enough natural gas to heat 60 million homes for 160 years, according to government estimates. We may have considerably more resources, since the government conducted their last true inventory in the early 1980s using old data from now-outdated seismic equipment.
Rhetoric: We can't drill our way out of this problem because the United States only has three percent of the world’s oil reserves.
Reality: America has vast resources of oil and natural gas – enough oil to power more than 60 million cars for the next six decades and enough natural gas to heat 60 million homes for 160 years, according to government estimates. We may have considerably more resources, since the government conducted their last true inventory in the early 1980s using old data from now-outdated seismic equipment.
IBM A Buy?
Is IBM a stock buy at around $117.00, I think so. Consistant growth and aa good buy in price make this an attractive addition to anyone's portfolio.
From Valueline
IBM is off to a good start in 2008. So far, it appears that economic weakness in the U.S. won’t prevent the computing giant from posting good sales and earnings gains. That’s not too surprising, since most of the company’s sales come from outside the U.S.—65% in the first quarter of the year. The weaker dollar also played a big role in the company’s 11% top-line growth. In fact, adjusted for currency, the company’s revenues only increased by 4%. But Big Blue is doing well in the U.S., too. Even in the face of economic difficulties, businesses are willing to spend for products and services, such as IBM provides, that will help them save money and energy, increase security, and manage risk. Importantly, the company booked $12.6 billion of services contracts in the first quarter, and had services backlogs of $118 billion, which augurs well for the future. Factoring in lower pension costs, and a reduced share count, we look for share net to rise some 15%-20% this year. The company appears poised to post further good sales and earnings gains in the years ahead. We think domestic economic weakness will linger into 2009, and European economies aren’t likely to show much strength next year, either. But
IBM is focusing much of its marketing efforts on the fast-growing BRIC (Brazil, Russia, India, and China) markets, and other rapidly expending regions, such as Southeast Asia, Eastern Europe, the Middle East, and Latin America. And the need to decrease energy consumption isn’t likely to disappear, so the company’s products and services to reduce space and energy
requirements are likely to be in demand. What’s more, roughly half of IBM’s revenues are derived from annuity-like sources, such as long-term services contracts, which provides stability to the top and bottom lines. Finally, ongoing cost control efforts should lead to wider margins,
while additional share buybacks ought to further enhance share net. All told, earnings likely will near the $14.00-a-share mark by 2011-2013. IBM shares have a good deal of appeal. They carry high ranks for Timeliness and Safety. What’s more, the issue has attractive 3- to 5-year risk-adjusted total return potential.
George A. Niemond July 11, 2008
2011-13 PROJECTIONS
---------------------------------------------------Ann’l Total
----------------------------Price------- Gain------- Return
High -----------------------240------ (+100%)----- 20%
Low----------------------- 200------ (+70%)------- 15%
From Valueline
IBM is off to a good start in 2008. So far, it appears that economic weakness in the U.S. won’t prevent the computing giant from posting good sales and earnings gains. That’s not too surprising, since most of the company’s sales come from outside the U.S.—65% in the first quarter of the year. The weaker dollar also played a big role in the company’s 11% top-line growth. In fact, adjusted for currency, the company’s revenues only increased by 4%. But Big Blue is doing well in the U.S., too. Even in the face of economic difficulties, businesses are willing to spend for products and services, such as IBM provides, that will help them save money and energy, increase security, and manage risk. Importantly, the company booked $12.6 billion of services contracts in the first quarter, and had services backlogs of $118 billion, which augurs well for the future. Factoring in lower pension costs, and a reduced share count, we look for share net to rise some 15%-20% this year. The company appears poised to post further good sales and earnings gains in the years ahead. We think domestic economic weakness will linger into 2009, and European economies aren’t likely to show much strength next year, either. But
IBM is focusing much of its marketing efforts on the fast-growing BRIC (Brazil, Russia, India, and China) markets, and other rapidly expending regions, such as Southeast Asia, Eastern Europe, the Middle East, and Latin America. And the need to decrease energy consumption isn’t likely to disappear, so the company’s products and services to reduce space and energy
requirements are likely to be in demand. What’s more, roughly half of IBM’s revenues are derived from annuity-like sources, such as long-term services contracts, which provides stability to the top and bottom lines. Finally, ongoing cost control efforts should lead to wider margins,
while additional share buybacks ought to further enhance share net. All told, earnings likely will near the $14.00-a-share mark by 2011-2013. IBM shares have a good deal of appeal. They carry high ranks for Timeliness and Safety. What’s more, the issue has attractive 3- to 5-year risk-adjusted total return potential.
George A. Niemond July 11, 2008
2011-13 PROJECTIONS
---------------------------------------------------Ann’l Total
----------------------------Price------- Gain------- Return
High -----------------------240------ (+100%)----- 20%
Low----------------------- 200------ (+70%)------- 15%
Ford's Fiesta ECOnetic - The Car The U.S. Can't Have
The ECOnetic will go on sale in Europe in November
by David Kiley
If ever there was a car made for the times, this would seem to be it: a sporty subcompact that seats five, offers a navigation system, and gets a whopping 65 miles to the gallon. Oh yes, and the car is made by Ford Motor (F), known widely for lumbering gas hogs.
by David Kiley
If ever there was a car made for the times, this would seem to be it: a sporty subcompact that seats five, offers a navigation system, and gets a whopping 65 miles to the gallon. Oh yes, and the car is made by Ford Motor (F), known widely for lumbering gas hogs.
Ford's 2009 Fiesta ECOnetic goes on sale in November. But here's the catch: Despite the car's potential to transform Ford's image and help it compete with Toyota Motor (TM) and Honda Motor (HMC) in its home market, the company will sell the little fuel sipper only in Europe. "We know it's an awesome vehicle," says Ford America President Mark Fields. "But there are business reasons why we can't sell it in the U.S." The main one: The Fiesta ECOnetic runs on diesel.
Automakers such as Volkswagen (VLKAY) and Mercedes-Benz (DAI) have predicted for years that a technology called "clean diesel" would overcome many Americans' antipathy to a fuel still often thought of as the smelly stuff that powers tractor trailers. Diesel vehicles now hitting the market with pollution-fighting technology are as clean or cleaner than gasoline and at least 30% more fuel-efficient.
Yet while half of all cars sold in Europe last year ran on diesel, the U.S. market remains relatively unfriendly to the fuel. Taxes aimed at commercial trucks mean diesel costs anywhere from 40 cents to $1 more per gallon than gasoline. Add to this the success of the Toyota Prius, and you can see why only 3% of cars in the U.S. use diesel. "Americans see hybrids as the darling," says Global Insight auto analyst Philip Gott, "and diesel as old-tech."
None of this is stopping European and Japanese automakers, which are betting they can jump-start the U.S. market with new diesel models. Mercedes-Benz by next year will have three cars it markets as "BlueTec." Even Nissan (NSANY) and Honda, which long opposed building diesel cars in Europe, plan to introduce them in the U.S. in 2010. But Ford, whose Fiesta ECOnetic compares favorably with European diesels, can't make a business case for bringing the car to the U.S.
TOO PRICEY TO IMPORT
First of all, the engines are built in Britain, so labor costs are high. Plus the pound remains stronger than the greenback. At prevailing exchange rates, the Fiesta ECOnetic would sell for about $25,700 in the U.S. By contrast, the Prius typically goes for about $24,000. A $1,300 tax deduction available to buyers of new diesel cars could bring the price of the Fiesta to around $24,400. But Ford doesn't believe it could charge enough to make money on an imported ECOnetic.
Ford plans to make a gas-powered version of the Fiesta in Mexico for the U.S. So why not manufacture diesel engines there, too? Building a plant would cost at least $350 million at a time when Ford has been burning through more than $1 billion a month in cash reserves. Besides, the automaker would have to produce at least 350,000 engines a year to make such a venture profitable. "We just don't think North and South America would buy that many diesel cars," says Fields.
The question, of course, is whether the U.S. ever will embrace diesel fuel and allow automakers to achieve sufficient scale to make money on such vehicles. California certified VW and Mercedes diesel cars earlier this year, after a four-year ban. James N. Hall, of auto researcher 293 Analysts, says that bellwether state and the Northeast remain "hostile to diesel." But the risk to Ford is that the fuel takes off, and the carmaker finds itself playing catch-up—despite having a serious diesel contender in its arsenal.
Monday, September 8, 2008
This Week's Market MOVER - Fannie and Freddie Takeover
By Jay Hancock
September 8, 2008
The government bailed out mortgage giants Fannie Mae and Freddie Mac yesterday, belying dozens of Fannie and Freddie executives who said year after year that such a thing would never - could never - happen."The U.S. government does not guarantee, directly or indirectly, our securities or other obligations," Fannie said in its last annual report. "We are a stockholder-owned organization, and our business is self-sustaining and funded exclusively with private capital."The companies are about to receive what we can conservatively estimate will be tens of billions in taxpayer dollars. That's not private capital.But whatever the total bill, however maddening it may be to lose again in Wall Street's "heads I win, tails taxpayers lose" version of capitalism, the price is worth it.
What's happening THE TAKEOVER:
The government is taking control of mortgage finance companies Fannie Mae and Freddie Mac, injecting money into them and installing new chief executives. The government may buy up to $100 billion of preferred stock in each company, making the investments when needed. It also plans to make an initial purchase of $5 billion in mortgage-backed securities and will receive warrants representing ownership stakes of nearly 80 percent of each company.
THE REASON:
Treasury Secretary Henry M. Paulson Jr. says the action is needed to stabilize the housing market and prevent the financial system from being thrown into chaos if either company collapses. That's critical because Fannie and Freddie own or guarantee about $5 trillion in mortgage loans.
THE COST:
It will largely depend on how far home prices fall and how many more borrowers wind up defaulting. The Congressional Budget Office estimated earlier this year that such an intervention could cost about $25 billion but conceded that its projections were hazy. The cost of doing nothing would have been higher.
Yesterday, Treasury Secretary Henry M. Paulson Jr. announced a plan to replace Fannie's and Freddie's leadership and inject unlimited amounts of government cash to keep them above water.Washington will take large ownership stakes in the companies, lend them money and also start buying Fannie and Freddie mortgage bonds trading in the open market. The rescue should lower mortgage interest rates and rekindle the courage of the home buyers and home sellers who make the whole thing work. The government's effective new role as national mortgage lender may - may - finally slow the dangerous spiral of defaults, declining home prices and dwindling home sales. Together Fannie and Freddie guarantee mortgages worth $5 trillion, an amount bigger than every economy in the world except that of the United States. One way or another, they must reimburse nearly half of U.S. mortgage holders in the event homeowners don't pay. As mortgage losses depleted Fannie's and Freddie's reserves in recent months, their ability to do so eroded and soon would have disappeared. That would have been catastrophic. Investors everywhere own Fannie- and Freddie-backed mortgages. China alone holds more than $300 billion worth. You're probably a Fannie- and Freddie-guaranteed lender if you're part of a pension plan or have bonds in your 401(k) plan.Default would trigger a diplomatic crisis and a worldwide bond-market plunge. "Conservative" mutual funds would get creamed. The dollar would crash. Banks would go under, requiring bailouts from the Federal Deposit Insurance Corp. And hardly anybody would have lent money to buy a house for a long, long time.
The rescue doesn't include shareholders. This is painful for people who own stock in Fannie Mae and Freddie Mac and for years enjoyed supersized returns.The takeover is more terrible news in a miserable year for Baltimore mutual-fund house Legg Mason and Bill Miller, its well-known mutual fund manager. At the end of July, Legg Mason Capital Management Inc. and its affiliates reported owning 79.9 million Freddie Mac common shares. The 12.4 percent stake made Legg Mason the mortgage company's largest shareholder. Fannie's and Freddie's shares had already fallen more than 80 percent from highs reached last year. Under yesterday's plan the government would eliminate the common-stock dividends, which in Fannie's case had already sunk to a measly nickel a share per fiscal quarter. More ominously, Washington will begin to take over Fannie's and Freddie's ownership. Every time the companies need taxpayer cash to pay off a dubious loan that probably never should have been issued, the government will get new ownership stakes or options in return. Thus Fannie's and Freddie's present shareholders will own smaller and smaller portions of companies with very iffy long-term prospects. Future profits will reimburse taxpayers for the bailout.
Starting in 2010 the companies must steadily shrink their holdings, limiting the long-term upside. Paulson was quite gracious yesterday as he fired both companies' CEOs and every single one of their board members. Maybe that's because previous managers bear much of the blame for the present disaster.Institutionally, however, the companies have much to answer for. They cooked their books for years. As recently as last week, government accountants found that Freddie was overstating its capital cushion, several newspapers reported yesterday. In an attempt to pump up profits, they loaded up on riskier loans even as the housing market cratered. A Fannie staffer once threatened "criminal proceedings" against Congress if it disclosed information about Fannie's executive pay. Blessed with below-market borrowing costs thanks to implicit government backing, the companies were supposed to pass along the savings to middle-class homeowners. Instead they spent most of the dough on executive salaries, shareholder profits and lavish lobbying and public relations campaigns, the Congressional Budget Office found a few years ago. Yesterday Paulson silenced Fannie's and Freddie's lobbying operations.The bailout probably dooms Fannie's "We're in the American dream business!" slogan forever. It should also prove crucial in ending what has become a dark American nightmare.
September 8, 2008
The government bailed out mortgage giants Fannie Mae and Freddie Mac yesterday, belying dozens of Fannie and Freddie executives who said year after year that such a thing would never - could never - happen."The U.S. government does not guarantee, directly or indirectly, our securities or other obligations," Fannie said in its last annual report. "We are a stockholder-owned organization, and our business is self-sustaining and funded exclusively with private capital."The companies are about to receive what we can conservatively estimate will be tens of billions in taxpayer dollars. That's not private capital.But whatever the total bill, however maddening it may be to lose again in Wall Street's "heads I win, tails taxpayers lose" version of capitalism, the price is worth it.
What's happening THE TAKEOVER:
The government is taking control of mortgage finance companies Fannie Mae and Freddie Mac, injecting money into them and installing new chief executives. The government may buy up to $100 billion of preferred stock in each company, making the investments when needed. It also plans to make an initial purchase of $5 billion in mortgage-backed securities and will receive warrants representing ownership stakes of nearly 80 percent of each company.
THE REASON:
Treasury Secretary Henry M. Paulson Jr. says the action is needed to stabilize the housing market and prevent the financial system from being thrown into chaos if either company collapses. That's critical because Fannie and Freddie own or guarantee about $5 trillion in mortgage loans.
THE COST:
It will largely depend on how far home prices fall and how many more borrowers wind up defaulting. The Congressional Budget Office estimated earlier this year that such an intervention could cost about $25 billion but conceded that its projections were hazy. The cost of doing nothing would have been higher.
Yesterday, Treasury Secretary Henry M. Paulson Jr. announced a plan to replace Fannie's and Freddie's leadership and inject unlimited amounts of government cash to keep them above water.Washington will take large ownership stakes in the companies, lend them money and also start buying Fannie and Freddie mortgage bonds trading in the open market. The rescue should lower mortgage interest rates and rekindle the courage of the home buyers and home sellers who make the whole thing work. The government's effective new role as national mortgage lender may - may - finally slow the dangerous spiral of defaults, declining home prices and dwindling home sales. Together Fannie and Freddie guarantee mortgages worth $5 trillion, an amount bigger than every economy in the world except that of the United States. One way or another, they must reimburse nearly half of U.S. mortgage holders in the event homeowners don't pay. As mortgage losses depleted Fannie's and Freddie's reserves in recent months, their ability to do so eroded and soon would have disappeared. That would have been catastrophic. Investors everywhere own Fannie- and Freddie-backed mortgages. China alone holds more than $300 billion worth. You're probably a Fannie- and Freddie-guaranteed lender if you're part of a pension plan or have bonds in your 401(k) plan.Default would trigger a diplomatic crisis and a worldwide bond-market plunge. "Conservative" mutual funds would get creamed. The dollar would crash. Banks would go under, requiring bailouts from the Federal Deposit Insurance Corp. And hardly anybody would have lent money to buy a house for a long, long time.
The rescue doesn't include shareholders. This is painful for people who own stock in Fannie Mae and Freddie Mac and for years enjoyed supersized returns.The takeover is more terrible news in a miserable year for Baltimore mutual-fund house Legg Mason and Bill Miller, its well-known mutual fund manager. At the end of July, Legg Mason Capital Management Inc. and its affiliates reported owning 79.9 million Freddie Mac common shares. The 12.4 percent stake made Legg Mason the mortgage company's largest shareholder. Fannie's and Freddie's shares had already fallen more than 80 percent from highs reached last year. Under yesterday's plan the government would eliminate the common-stock dividends, which in Fannie's case had already sunk to a measly nickel a share per fiscal quarter. More ominously, Washington will begin to take over Fannie's and Freddie's ownership. Every time the companies need taxpayer cash to pay off a dubious loan that probably never should have been issued, the government will get new ownership stakes or options in return. Thus Fannie's and Freddie's present shareholders will own smaller and smaller portions of companies with very iffy long-term prospects. Future profits will reimburse taxpayers for the bailout.
Starting in 2010 the companies must steadily shrink their holdings, limiting the long-term upside. Paulson was quite gracious yesterday as he fired both companies' CEOs and every single one of their board members. Maybe that's because previous managers bear much of the blame for the present disaster.Institutionally, however, the companies have much to answer for. They cooked their books for years. As recently as last week, government accountants found that Freddie was overstating its capital cushion, several newspapers reported yesterday. In an attempt to pump up profits, they loaded up on riskier loans even as the housing market cratered. A Fannie staffer once threatened "criminal proceedings" against Congress if it disclosed information about Fannie's executive pay. Blessed with below-market borrowing costs thanks to implicit government backing, the companies were supposed to pass along the savings to middle-class homeowners. Instead they spent most of the dough on executive salaries, shareholder profits and lavish lobbying and public relations campaigns, the Congressional Budget Office found a few years ago. Yesterday Paulson silenced Fannie's and Freddie's lobbying operations.The bailout probably dooms Fannie's "We're in the American dream business!" slogan forever. It should also prove crucial in ending what has become a dark American nightmare.
This Week's Market Movers - Indicators
Sept. 8 - Consumer Credit (consensus $8.8B)
Sept. 11 - Initial Jobless Claims (440K)
----------International Trade (-$58.0B)
Sept. 12 - PPI (-0.5%, ex food and energy 0.2%)
----------Retail Sales (0.3%, ex autos -0.2%)
----------Business Inventories (0.5%)
----------Consumer Sentiment (64.0%)
Sept. 11 - Initial Jobless Claims (440K)
----------International Trade (-$58.0B)
Sept. 12 - PPI (-0.5%, ex food and energy 0.2%)
----------Retail Sales (0.3%, ex autos -0.2%)
----------Business Inventories (0.5%)
----------Consumer Sentiment (64.0%)
Friday, September 5, 2008
August 2008 Unemployment Rate Jumps
THE EMPLOYMENT SITUATION: AUGUST 2008
The unemployment rate rose from 5.7 to 6.1 (consensus was 5.8%) percent in August, and non-farm payroll employment continued to trend down (-84,000 consensus was -75,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. In August, employment fell in manufacturing and employment services, while mining and health care continued to add jobs. Average hourly earnings rose by 7 cents, or 0.4 percent, over the month. Unemployment (Household Survey Data)
The number of unemployed persons rose by 592,000 to 9.4 million in August, and the unemployment rate increased by 0.4 percentage point to 6.1 percent. Over the past 12 months, the number of unemployed persons has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points, with most of the increase occurring over the past 4 months. In August, the unemployment rates for adult men (5.6 percent), adult women (5.3 percent), whites (5.4 percent), blacks (10.6 percent), and Hispanics (8.0 percent) rose, while the jobless rate for teenagers was little changed at 18.9 percent. The unemployment rate for Asians was 4.4 percent in August, not seasonally adjusted. Among the unemployed, the number of persons who lost their last job rose by 417,000 to 4.8 million in August, with increases occurring among those on tem-porary layoff and those who do not expect to be recalled to work. Over the last 4 months, the number of unemployed job losers has increased by 810,000. In August, the number of long-term unemployed (those jobless for 27 weeks or more) rose by 163,000 to 1.8 million, an increase of 589,000 over the past 12 months.
The newly unemployed--those who were jobless fewer than 5 weeks--increased by 400,000 over the month.
Total Employment and the Labor Force (Household Survey Data)
The civilian labor force, at 154.9 million, was about unchanged in August, and the labor force participation rate remained at 66.1 percent. Total employment, at 145.5 million, was little changed from July. The employment-population ratio fell over the month to 62.1 percent in August, down 1.3 percentage points from its most recent high of 63.4 percent in December 2006. In August, the number of persons who worked part time for economic reasons was essentially unchanged at 5.7 million. This category includes persons who indicated that they would like to work full time but were working part time because their hours had been cut back or they were unable to find full-time jobs. The number of multiple jobholders increased by 298,000 in August to 8.1 million, accounting for 5.5 percent of total employed.
The unemployment rate rose from 5.7 to 6.1 (consensus was 5.8%) percent in August, and non-farm payroll employment continued to trend down (-84,000 consensus was -75,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. In August, employment fell in manufacturing and employment services, while mining and health care continued to add jobs. Average hourly earnings rose by 7 cents, or 0.4 percent, over the month. Unemployment (Household Survey Data)
The number of unemployed persons rose by 592,000 to 9.4 million in August, and the unemployment rate increased by 0.4 percentage point to 6.1 percent. Over the past 12 months, the number of unemployed persons has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points, with most of the increase occurring over the past 4 months. In August, the unemployment rates for adult men (5.6 percent), adult women (5.3 percent), whites (5.4 percent), blacks (10.6 percent), and Hispanics (8.0 percent) rose, while the jobless rate for teenagers was little changed at 18.9 percent. The unemployment rate for Asians was 4.4 percent in August, not seasonally adjusted. Among the unemployed, the number of persons who lost their last job rose by 417,000 to 4.8 million in August, with increases occurring among those on tem-porary layoff and those who do not expect to be recalled to work. Over the last 4 months, the number of unemployed job losers has increased by 810,000. In August, the number of long-term unemployed (those jobless for 27 weeks or more) rose by 163,000 to 1.8 million, an increase of 589,000 over the past 12 months.
The newly unemployed--those who were jobless fewer than 5 weeks--increased by 400,000 over the month.
Total Employment and the Labor Force (Household Survey Data)
The civilian labor force, at 154.9 million, was about unchanged in August, and the labor force participation rate remained at 66.1 percent. Total employment, at 145.5 million, was little changed from July. The employment-population ratio fell over the month to 62.1 percent in August, down 1.3 percentage points from its most recent high of 63.4 percent in December 2006. In August, the number of persons who worked part time for economic reasons was essentially unchanged at 5.7 million. This category includes persons who indicated that they would like to work full time but were working part time because their hours had been cut back or they were unable to find full-time jobs. The number of multiple jobholders increased by 298,000 in August to 8.1 million, accounting for 5.5 percent of total employed.
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