Friday, February 27, 2009

Oil retreats after rally

Oil fell back on Friday from its three-day bull run, paring nearly $2 in morning trade, but otherwise remaining on course to end the month up more than 4% from January, its first monthly gain since June 2008.

OPEC production cuts and a bounce in U.S. demand for gasoline this week have pushed oil prices up, and analysts at JP Morgan said supply tightness meant "the crude market is finally in balance."

U.S. crude for April delivery was down 1.71 cents to $43.51 a barrel after closing at $45.22 on Thursday, a $2.72 jump.

"With the impact of OPEC production cuts clearly being felt in the markets, we anticipate continued bullishness in the coming week with refinery runs expected to rise sharply, resulting in a crude draw," JP Morgan analysts wrote in their Global Energy Strategy note.

OPEC has been implementing a 5% reduction in its share of global production since September, totaling 4.2 million barrels per day, in order to support falling oil prices.

Oil touched a record high of $147.27 in July, and in the course of six months fell more than $100 to $32.49 in December as the global economy shuddered into a rapid and deep recession.

Signs of recovery from the recession have been lacking, with leading industrialized and developing countries releasing economic data regularly that show slumping consumer demand, rising unemployment and frozen credit liquidity.

Geneva-based consultants Petrologistics track OPEC supply and earlier this week said the Organization of the Petroleum Exporting Countries are on track to deliver 89% compliance with the production cuts by the end of February.
Lightening gloom

A steep 3.4 million barrel drawdown in gasoline stocks announced earlier in the week sparked the rally that has lifted crude prices 13% in this week alone. NYMEX March RBOB registered its highest front-month settlement since November.

The United States will rack up the biggest budget deficit since World War Two, while jobless claims jumped to a record 5.1 million, and in Asia Japan factory output recorded a record monthly fall in January.

OPEC members continue to mull the possibility of another output cut at its meeting in March, with the United Arab Emirates cutting allocations for Asian refiners in April.

Venezuela said it wanted OPEC to agree on a new oil output cut, but relatively small member Ecuador said oil prices were stabilizing now, brushing off possibility it might urge a cut.

Market players are closely eyeing March heating oil and RBOB gasoline contracts that expire on Friday as well as key economic data, including euro zone January inflation and unemployment figures and U.S. fourth-quarter GDP.

The U.S. GDP figures are expected to show the world's largest economy had contracted at a 5.4% annual rate, the deepest slide since the first quarter of 1982.

U.S. durable goods orders, an important gauge of business activity, fell for a sixth month to a six-year low in January, suggesting that dried-up credit markets have had a severe impact on industries around the world.

Monday, February 23, 2009

Dow and S&P 500 at '97 lows

The Dow and S&P 500 tumbled to levels not seen in nearly 12 years Monday, as investors continue to worry that the government's efforts to slow the recession won't be sufficient.

The Dow Jones industrial average (INDU) lost 250 points, or 3.4%, ending at the lowest point since May 7, 1997.

The S&P 500 (SPX) index lost 26 points, or 3.5%, ending at the lowest point since April 11, 1997.

The Nasdaq composite (COMP) lost 53 points, or 3.7%. The tech-fueled index has held up better than the rest of the market so far this year, closing at the lowest points since Nov. 20, 2008.

"It's fear-based selling," said Dave Hinnenkamp, CEO at KDV Wealth Management. "The fact that we're touching these multi-year lows tells you we don't know where the bottom of this thing is."

Stocks gained in the morning on reports that the government may boost its stake in Citigroup as it briefly assuaged fears that the troubled bank would have to be nationalized. But the early advance quickly petered out, as the worries of the last few weeks returned.

"There is just nobody who wants to buy right now," said Ron Kiddoo, chief investment officer at Cozad Asset Management.

"The skepticism is back," Kiddoo said. "I think we need to hear some optimistic talk from our leaders and soon."

Stocks are now extra vulnerable with the major gauges at the multi-year lows, said Gary Webb, CEO at Webb Financial Group.

"Worries about how long it will take for the government programs to have an impact and worries about the health of the banks and the autos are all there," Webb said.

But there is also just the day-to-day reality that many investors are losing money and don't know when they are going to stop losing money, he said.

After the close of trade, JPMorgan Chase said it was cutting its divided to 5 cents per share from 38 cents per share currently.

Tuesday preview: Economic reports are due on home prices and consumer confidence.

The S&P/CaseShiller Home Price index, which is due before the market open, is expected to have fallen at a record 18.25% annual pace in December, according to a consensus of economists surveyed by The index tracks home prices in 20 major metropolitan areas.

The Conference Board's February Consumer Confidence index is expected to have fallen to 36.0 in February from 37.7 in January. That reading would be the lowest since the Conference Board began tracking the index in 1967.

A pair of retailers report quarterly earnings Tuesday morning. Dow component Home Depot (HD, Fortune 500) likely earned 15 cents per share versus 40 cents a year ago, according to a consensus of analysts surveyed by Thomson Reuters. Target (TGT, Fortune 500) is expected to have earned 83 cents versus $1.23 a year ago.

Federal Reserve Chairman Ben Bernanke begins the first day of his two-day semi-annual testimony before Congress on monetary policy. On Tuesday, he speaks at a Senate Banking Committee hearing and on Wednesday at a House Financial Services Committee hearing.

On Tuesday evening, President Obama addresses the joint session of Congress, with his speech due to start at 9:00 p.m. ET.

Financials: Stocks have tumbled over the last two weeks on worries that the government won't be able to slow the recession, despite announcing a series of programs. On Friday, stocks slipped on worries that Citigroup and Bank of America might have to be taken over by the government altogether.

Some of those worries were tempered Monday on reports that the government is looking to boost its stake in Citigroup (C, Fortune 500), something that would fall short of full nationalization but would enable it to avoid bankruptcy. Should Citigroup be fully nationalized by the federal government or forced to declare bankruptcy, that would wipe out all shareholder value. Citi gained 9.7%.

Separately, Treasury said in a joint statement with other departments that the government is ready to give more money to banks if they need it. The Capital Assistance Program begins Wednesday.

The program, previously announced by Treasury Secretary Timothy Geithner, involves giving banks "stress tests" to determine how they are doing and whether they need more money.

Company news: Meanwhile, the Treasury is also considering its options as General Motors (GM, Fortune 500) and Chrysler continue to flounder, despite having received billions in federal aid. According to a Wall Street Journal report Monday, the administration believes the possibility of Chapter 11 bankruptcy filings by the two companies must be seriously considered. GM shares ended unchanged.

Fellow automaker, Ford Motor (F, Fortune 500) has reached a tentative deal with its union on changed to retiree health care benefits, considered to be a critical concession on the part of the UAW. Shares rallied 9.5%.

A variety of big tech stocks slumped, including Intel (INTC, Fortune 500), Microsoft (MSFT, Fortune 500), Cisco Systems (CSCO, Fortune 500), Oracle (ORCL, Fortune 500), Dell (DELL, Fortune 500) and Apple (AAPL, Fortune 500).

Yahoo (YHOO, Fortune 500) could announce a major management reorganization as early as Wednesday, although more likely next week, according to a published report Monday. Yahoo shares fell 1.4%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost seven to one on volume of 1.61 billion shares. On the Nasdaq, decliners topped advancers by seven to two on volume of 2.07 billion shares.

Economists: A leading group of economists expect a deeper recession in the first half of the year followed by a modest recovery in the second half and a bigger recovery in 2010.

Reports are due later this week on housing, manufacturing and gross domestic product growth.

Bonds: Treasury prices inched higher, with the yield on the benchmark 10-year note falling to 2.77% from 2.79% Friday. Treasury prices and yields move in opposite directions.

Other markets: In global trading, most Asian markets ended mixed, while European shares ended lower.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for April delivery fell $1.59 to settle at $38.44 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $7.20 to settle at $995 an ounce.

The stock rally that wasn't

It looks like the government isn't going to let Citigroup fail. But that wasn't enough to save the market Monday.

At first, it looked like an explosive rally in Citi (C, Fortune 500) and other bank stocks was going to lead to a jubilant day for stocks, a Wall Street equivalent of the celebratory "Slumdog Millionaire" musical number on the Academy Awards. The Dow shot up about 75 points shortly after the market opened. Jai ho!

But the rally was short-lived. The overall market fell more than 3% by the end of the day, even though the S&P Bank Index had gained more than 2%, led by a 3% pop in Bank of America (BAC, Fortune 500) and 10% gain in shares of Citi.

What gives? Well, for one, the Citi news isn't really so great. The government may save Citi from complete collapse...but probably at the expense of existing shareholders.
Talkback: Would a government takeover of Citi be good or bad for the economy and markets?

And investors have plenty to be worried about beyond the banks.

In the tech sector, Hewlett-Packard (HPQ, Fortune 500) dove about 6%. The computer and printer maker cut its outlook for fiscal 2009 last week. Rival Dell (DELL, Fortune 500), which will report its latest quarterly results Thursday, fell about 5%.

Industrials and materials firms, two groups whose fortunes are closely tied to the economy, also sunk Monday. Dow components Alcoa (AA, Fortune 500), Caterpillar (CAT, Fortune 500) and DuPont (DD, Fortune 500) each fell about 6% to 8%.

"If it's not one thing, it's the other. Even though there may be more certainty about what's going to happen with banks, the focus is back on economic weakness," said Bill Stone, chief investment strategist with PNC Wealth Management in Philadelphia. "Industrials, materials and tech are three very cyclical groups."

It's a disturbing trend. I pointed out last week that even though bank stocks were getting kicked, there were some pockets of strength, particularly in the energy, healthcare and consumer staples sectors.

But now, it is starting to look like worries about how long the recession will last could weigh even on some of the "safer" areas. Companies across all sectors may have to cut back if there are no signs that the economy will at least stabilize, if not recover, soon.

"Investors are worried that economic deterioration will threaten capital spending," said Jack Ablin, chief investment officer with Harris Private Bank in Chicago.

Along those lines, investors seem to be flocking to other types of securities. The price of gold is hovering around $1,000 an ounce. And the yield on the U.S. 10-Year Treasury is now at about 2.78%, down from above 3% earlier this month. (Bond yields and prices move in opposite directions.

"Quite frankly, the worries are that business in general is so weak right now. So there shouldn't be much interest in stocks," said Subodh Kumar, an independent market strategist based in Toronto.

Ablin added that since fixing the banks could require so much attention from the government, investors may now be wondering how successful the broader stimulus bill -- signed into law last week -- will wind up being. In other words, the government may have too many balls in the air at once.

"There may be a perception that these bank bailouts are going to channel resources from broader stimulus," Ablin said. "It's one step forward, two steps back."

Add all that up and you have a decided lack of confidence. Kumar said that even corporate executives, known for being a bit more bullish than most, are starting to talk about how gloomy the economy is. And even though their pessimism is warranted, it's probably not helping the markets.

"Corporate titans are saying thing are getting worse and worse," said Kumar. "To be sure, CEOs are not the best judges of turning points. But they impact investor psychology. CEOs were ebullient a year ago and now in the past three months they have become particularly despondent."

So even though bank stocks are enjoying a moment in the sun -- for a day at least -- the rest of the economic headlines are too bleak to make anything else matter.

"Obviously, we need to get financials taken care of first, but right now, there's a complete lack of confidence," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala. "People don't see the light of the tunnel. It's a never-ending hit to the face and that is leading more and more to a bunker mentality."

Citi in talks over bigger U.S. stake - report

Citigroup Inc. is in discussions with regulators about a plan for the federal government to take a larger ownership stake in the bank, according to published reports.

The Wall Street Journal, citing sources familiar with the matter, reported that the government would convert a large portion of its preferred Citigroup shares to common shares.

The government received the preferred shares in return for investing $45 billion in Citi as part of the $700 billion bailout of the financial system.

According to the Journal, the talks involve Citi executives and regulators at the Federal Reserve and Office of the Comptroller of the Currency. Officials in the Obama administration have not said whether they support the plan, the Journal reported.

Citigroup spokesman Michael Hanretta declined to comment on the Journal report. On Friday, the bank issued a statement saying that its capital base is "very strong" and capital reserves were among the highest in the industry at the end of the fourth quarter.

"We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," Hanretta said.

The Treasury Department, which has spearheaded recovery efforts for the financial system, declined to comment on the report, noting it has a policy of not discussing conversations with specific banks.

Yet the department noted that it was open to allowing financial institutions to covert government's existing preferred shares into new convertible preferred stock - a move that would ultimately allow Citigroup to strengthen its capital levels.

In many ways, that is exactly what government officials are reportedly considering, according to the Journal.

"We've made clear that we will do what is necessary to strengthen and stabilize the financial system so that it can provide the credit necessary to support economic recovery," Treasury spokesman Isaac Baker said in a statement to CNN.

The report is sure to stoke speculation about whether the Obama administration may have to nationalize large banks to stabilize the financial system.

The question of nationalization has weighed on the minds of investors in the two weeks since Treasury Secretary Tim Geithner announced a comprehensive stability plan that fell flat.

The issue came to a head Friday when nationalization fears helped drag down shares of Citi (C, Fortune 500) and Bank of America (BAC, Fortune 500) as much as 36% at one point.

BofA recovered most of its losses to finish down just 3.6%. But Citi's stock closed with a 22% loss.

The Obama administration has said it wants to keep the banking system in private hands, which seems to suggest it isn't aiming to run the likes of Citi and BofA. But that leaves the door open to an "intervention" -- a takeover of a troubled bank for the purpose of breaking it up, bringing in new capital and finding new owners and management.

The term nationalization has been used to cover a range of very different outcomes. Most obviously, it refers to the outright takeover of troubled firms, such as when the Treasury Department put mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) into conservatorship.

But it has also been used by some people to cover sizable investments that give government officials considerable say in a firm's activities -- such as the loan guarantees extended in recent months to Citi and BofA.

Friday, February 13, 2009

Stimulus: Uncle Sam goes green

The economic stimulus bill aims to create millions of jobs around "shovel-ready" projects.

That's where Paul Prouty says he can help: He has 500 projects ready to go.

Prouty heads the U.S. General Services Administration, an under-the-radar government agency that owns or leases more than 352 million square feet of space in 8,600 federal buildings in 2,200 cities and towns.

Among other responsibilities, the agency is tasked with cutting costs and emissions in the buildings it controls. The stimulus bill provides GSA with $4.5 billion for energy efficiency.

"By investing in our backlog of well-planned, worthy and needed infrastructure projects, we can help stimulate jobs ... while stimulating long-term growth in energy efficient technologies, alternative energy solutions and green buildings," Prouty said in testimony Wednesday before a House committee.

The effort has long been at the top of President Obama's to-do list, dating back to his presidential campaign. It later became one of the key elements of his stimulus plan, as he promised to make 75% of federal buildings more energy efficient.

At a press conference last Monday night, Obama defended the measure from critics, saying it's money well-spent.

"We're creating jobs immediately by retrofitting these buildings. And we are saving taxpayers," Obama said. "Why wouldn't we want to make that kind of investment?"

Experts say the investment could create up to 130,000 jobs, save the government more than $1 billion in annual energy costs and improve worker productivity.

That could help trim the enormous $6.5 billion in energy costs the government spent on its buildings in 2007. And it would cut back on pollution - federal buildings account for nearly 10% of global carbon dioxide emissions, according to the Department of Energy.

To lower those costs and emissions, Congress passed the Energy Independence and Security Act in 2007 to reduce federal buildings' energy consumption by 30% by 2015.

Experts say the stimulus plan could help the government make major strides toward that goal.

"We won't go beyond the 30% goal with this plan, but this stimulus will certainly help them go further to achieve it," said Harry Gordon, chairman of architecture firm Burt Hill. "We achieved it in the past, and this will help to considerably reduce our carbon footprint."
Ready-to-go, ready to work

GSA said many retrofits will be cheap and fast, as energy efficiency improvements can be as simple as placing thicker insulation, installing LED lights, replacing windows and installing water-saving toilets.

The agency also said it is identifying a number of bigger projects that can be quickly deployed in federal buildings, including installation of solar panels on roofs, installing high-tech energy meters and smart lighting systems that adjust to daylight.

"The government is going to go for projects that have a greater impact, which provide a very rapid return on taxpayers' investment," Gordon said. "It will result in substantial energy use reductions, which will benefit taxpayers and reduce climate impact. Improving energy efficiency in buildings is truly the 'low-hanging fruit'."

One example of the 500 ready-to-go projects is the Internal Revenue Service building in Andover, Mass. The building has a structure and location that make it a good candidate for solar roof panels, which GSA said will reduce heating and cooling loads and provide electricity for the building.

Experts say the plan is timely and necessary due to high levels of construction unemployment and historically low levels of construction projects in companies' pipelines. Construction unemployment has risen to 18.2% in the country, with 1.7 million out-of-a-job construction workers waiting for work, according to the Labor Department.

"As soon as these contracts are awarded, contractors are going to beef up their labor force," said Ken Simonson chief economist at the Associated General Contractors of America. "GSA will begin to roll out those contracts within 90 days, and you'll start to see construction workers back to work."
More can be done

But some say the plan does not go far enough. Obama pledged to modernize more than 75% of federal buildings, but the $4.5 billion to update those buildings may be spread too thinly.

"You can certainly change light bulbs in 75% of buildings, but there is an opportunity to do much deeper retrofits in many buildings," said Andrew Goldberg, director of federal relations at the American Institute of Architects. "The question is how deep will those retrofits be."

The original House bill had proposed $7.7 billion for the projects, but the Senate compromise bill knocked it down. Experts say that will result in nearly 60,000 fewer jobs created.

"This decision, made behind closed doors without public consultation or review is short-sighted and contrary to the stated goals of the [stimulus bill], including the primary goal: job creation," said Gordon.

Still, experts say the plan is a good start, but much more needs to be done.

"Overall, agencies have identified far more projects that need funding to restore things to condition they were in, let alone add capacity," said Simonson, who estimates the need exceeds what's in this bill by multiple of five to 10.

"This is a good down payment, and will put several hundred thousand construction workers back to work, but it is not by any means enough to meet our long term goals."

Treasury prices sit tight

Government debt prices traded in a narrow range Friday as investors assessed the Obama administration's economic rescue efforts and the volume of debt coming to market to fund the operations.

The House and Senate are slated to vote Friday on the $789.5 billion economic stimulus compromise reached earlier this week.

As the stimulus bill moves closer to passage, details were also emerging about President Obama's plan to help struggling homeowners by subsidizing mortgage debt in order to stem the tide of foreclosures. The plan has yet to be announced, but sources say the federal government would devote at least $50 billion to encourage banks to modify loans for struggling homeowners.

Earlier in the week, Treasury Secretary Tim Geithner outlined a rescue plan for the failing banking sector, but that announcement was shrugged off for its lack of clarity.

In order to fund the various rescue measures for the economy mired in recession, the government has had to bring a record volume of Treasurys to market. Treasury completed a record $67 billion quarterly refunding this week, which included the auction of 3-, 10- and 30-year issues.

Debt prices: The price of the newly 10-year note edged up 1/32 to 99-22/32 and its yield dipped to 2.79%. Bond prices and yields move in opposite directions.

The yield of the newly issued 30-year bond rose to 3.55% from 3.50% late Thursday. The 2-year note edged up 1/32 to 99-30/32 and its yield dipped to 0.91%.

The yield on the 3-month note fell to 0.25% from 0.30% the prior day. Demand for the shorter-term note has been seen as a gauge for investor confidence.

Lending rates: Bank-to-bank lending rates were almost unchanged. The 3-month Libor rate was 1.24% Friday, according to data on The overnight Libor rate, meanwhile, held steady at 0.30%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges were showed a decrease in confidence in the lending markets. The "TED" spread widened to 0.99 percentage point from 0.93 percentage point the previous day. The bigger the TED spread, the less willing investors are to take risks.

Another market indicator, the Libor-OIS spread, increased to 0.98 percentage points from 0.96 percentage point the previous day. The wider the spread, the less cash is available for lending.


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Wednesday, February 11, 2009

Bank CEOs flogged in Washington

Lawmakers grilled the top executives from eight of the nation's largest financial institutions Wednesday about their apparent lack of willingness to lend to consumers and businesses despite taking in billions of dollars in government aid.

At a closely-watched hearing before the House Financial Services Committee, members of Congress blasted the eight CEOs, including the heads of embattled firms Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), for their actions since the eight banks collectively received $165 billion in capital last fall.

"There is a great deal of anger in the country, much of it justified, about past practices," Barney Frank, D-Mass, the chairman of the House Financial Services Committee, noted in his opening remarks.

Public resentment for these banks has soared in recent weeks amid concerns that some financial institutions have used taxpayer money for purposes other than lending at a time when people across the country are struggling to stay in their homes or losing their jobs.

Wells Fargo (WFC, Fortune 500), for example, had planned a trip to Las Vegas for members of its mortgage team until news reports blasted it as a "junket" that wasted taxpayer money. And Citigroup was scheduled to take delivery of a new $50 million corporate jet before the White House convinced the bank otherwise.

Many of the CEOs at Wednesday's hearing defended their actions, noting that while credit standards have tightened, they were continuing to issue loans. Several of the CEOs added that without government assistance, credit would be even harder to obtain.

"We are still lending, and we are lending far more because of the TARP program," Bank of America Chairman and CEO Ken Lewis said in a copy of his prepared remarks.

Lewis, whose firm has received $45 billion in government assistance from the Troubled Asset Relief Program, or TARP, told lawmakers that his company extended more than $115 billion in new credit to consumers and businesses during the fourth quarter.

Those remarks were echoed by the seven other CEOs testifying Wednesday, including Citigroup chief Vikram Pandit, JPMorgan Chase's (JPM, Fortune 500) Jamie Dimon and John Stumpf of Wells Fargo (WFC, Fortune 500).

That trio, as well as BofA, were among the banks that received the bulk of the first round of capital injections. Wall Street firms Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) as well as Bank of New York Mellon (BK, Fortune 500) and State Street (STT, Fortune 500) rounded out the list.

Merrill Lynch, which was subsequently acquired by Bank of America, also received funding at that time.

Lawmakers hardly appeared convinced, citing anecdotes from local business owners who were unable to get access to credit as well as constituents facing stiffer terms on their credit card accounts and having their home equity lines suspended.

"Start loaning the money that we gave you. Get it on the street!" said Rep. Michael Capuano, D-Mass.
Bonuses under fire

Lawmakers were also quick to seize on the issue of compensation within the banking industry, particularly in light of recent reports that Wall Street firms paid out more than $18 billion in bonuses in 2008.

In addition, New York State Attorney General Andrew Cuomo accused Merrill Lynch Wednesday of "secretly" handing out bonuses before its merger with BofA closed.

But some of the executives that appeared before Congress Wednesday were quick to defend their position, pointing out that they gave up their annual bonus. Several even conceded that the way compensation is doled out in the industry needs to be fixed.

Calls for financial firms to change their compensation practices have grown increasingly louder during the crisis, including tying bonuses more to firms' overall performance as well as instituting so-called "clawback" provisions that reclaim pay from workers whose actions may damage the firm's long-term financial health.

President Obama has already instituted new limits on compensation for executives of banks requiring further assistance from the government. But those rules are not retroactive.

Citigroup's Pandit, who collected a salary of $1 million last year and no bonus, told lawmakers that he would accept pay of just $1 a year and no bonus until his firm returned to profitability. Citigroup has lost more than $20 billion in the past five quarters.

"We will hold ourselves accountable for what we do, and that starts with me," said Pandit.
Paying back the government sooner than expected?

The possibility of some of the eight banks paying back the government as soon as possible also came up during the hearing.

Several CEOs testifying Wednesday indicated they would like to repay the government ahead of schedule, partly out of fear of more regulation.

Under the current terms of TARP, banks can only buy out the government's stake as long as the money comes from an equity offering of a similar amount that meets government approval.

"That is a legal impediment at this point," said JPMorgan Chase's Dimon.

When Treasury first announced its capital injection plan in October, JPMorgan Chase and Wells Fargo reportedly scoffed at the idea that they should take government funds.

But they were given little choice as former Treasury Secretary Henry Paulson hoped that providing capital to all of the nation's top banks would keep credit flowing and prevent the economy from deteriorating any further.

Several lawmakers noted they were not opposed to banks returning the funds, adding that they would attempt to find a way that would allow them to pay the money back early, something that would probably require new legislation.

"For anyone who contends that you do not need the money and that you did not ask for it, please find a way to return that money to the Treasury Department before you leave town," said Paul Kanjorski, D-Penn.

Tuesday, February 10, 2009

UBS reports $7 billion loss

UBS posted the biggest ever annual loss for a Swiss firm on Tuesday, but said client withdrawals reversed in January and it will axe 2,000 more jobs as it restructures to focus on wealth management.

UBS reported a $7 billion net loss in the fourth quarter, missing a Reuters poll forecast for $6.1 billion. UBS's loss for 2008 came in at $17 billion, above analysts' predictions for $16.2 billion.

The quarterly loss came on the back of a hefty $7.6 billion trading loss, as well as charges it made after selling billions in toxic assets to the Swiss National Bank when it was rescued by the state in October.

Chief Executive Officer Marcel Rohner told journalists that the world's biggest wealth manager was not paying a 2008 dividend but still aims to return to profit in 2009 after seeing some positive signs at the start of the year.

"While we leave a bad year behind us... we can nevertheless report substantial progress," Rohner said.

"Our businesses are well positioned for a challenging future. We had an encouraging start into the new year but the environment will remain difficult and volatile as the real economy has not seen (the) worst yet."

UBS continued to suffer massive outflows in the fourth quarter at its core wealth management business. But the Swiss bank said net new money had turned positive in both wealth management and asset management in January, the first time after a streak of negative quarters. It did not give details.

"In its outlook statement UBS indicates a strong start into 2009 and a reversal of the money flows. We remain skeptical as the clean-up of the mess will take several quarters," Dirk Becker, Kepler Capital Markets analyst, said in a note.

UBS stock swung sharply in early trade, rising as much as 7% before dipping 2% to trade at $10.93 by 4:10 am ET, broadly in line with a 2.3% weaker DJ Stoxx European banking index.

Vontobel analyst Marcel Staub said investors would continue to shun the stock as long as uncertainties remained: "We will have to wait-and-see if management's (overly) optimistic statement regarding the beginning of the year will be enough. Its comments three months ago were similarly positive."

UBS also announced structural changes to refocus the bank on its core Swiss businesses, its global wealth management operation and on the growth potential of its onshore business.

It is creating two new business divisions: Wealth Management & Swiss Bank under the leadership of Franco Morra and Juerg Zeltner, and Wealth Management Americas, led by Marten Hoekstra. All three are members of the board.

UBS said it was continuing to cut the size of its troubled investment bank, saying it aimed to bring its total staff to about 15,000 from 17,171 now.

Rohner, who said the fourth quarter had seen the "worst environment ever for investment banking", said the bank's total staff should fall to around 75,000 by mid-2009 from 77,000 now.

UBS said its Tier 1 capital ratio, a key measure of financial strength, rose to 11.5% at the end of 2008 from 10.8% at the end of the third quarter.

The Swiss bank giant, which made nearly $49 billion of writedowns in the credit crisis, said it had suffered new money outflows of $50.3 billion at its prized wealth management unit, compared to $42.4 billion the previous quarter.

It said it saw wealth management outflows in all regions, except the United States, where it hired nearly 400 financial advisers in the quarter. Source have told Reuters that UBS (UBS) is aggressively poaching advisers from rivals including Morgan Stanley (MS, Fortune 500), Merrill Lynch & Co and Citigroup Inc (C, Fortune 500)'s Smith Barney.

Outflows also continued from its global asset management business in the fourth quarter, but slowed to $23.9 billion from $29.7 billion the previous quarter.

UBS did not give details of whether it was inching towards a settlement in a high-profile U.S. investigation into possible tax fraud, in which the Swiss bank is accused of helping rich Americans hide untaxed money in offshore accounts.

The company decided to stop providing offshore banking services to U.S. citizens last year.

Separately, the Swiss National Bank said it had brought down the number of toxic assets eligible for transfer to a special central-bank run fund announced in October to help prop up UBS to $39.1 billion from $60 billion.

Dollar up as Obama plans move forward

The dollar got an early boost against most foreign currencies Tuesday before the Obama administration was set to unveil an overhaul of the financial rescue plan and the Senate appeared ready to pass its economic stimulus bill.

The euro fell to $1.2971, down 0.3% from $1.3003 late Monday.

The pound also fell against the dollar, buying $1.4798, down 0.7% from $1.49.

The dollar fell against the yen, however, dropping 0.2% to ¥91.284 from ¥91.47 late Monday.

The dollar has been in an upward trend against the euro and pound since the summer, though it has fallen against the yen during that period. Currency strategists say traders have been rewarding currencies of nations that are promoting the strongest economic recovery efforts.

Accordingly, the dollar fell slightly against the euro and pound Monday after both the stimulus and bank bailout plans faced delays. But traders supported the U.S. currency again Tuesday ahead of a vote and an announcement of two key elements to President Obama's recovery effort.

Treasury Secretary Tim Geithner is scheduled to detail a revision to the financial system rescue plan in an 11 a.m. ET speech Tuesday. President Obama said at a press conference Monday night that Geithner would provide "very clear and specific plans" for loosening up credit markets.

"There is some expectation of positive flows after the Geithner announcement, so traders are buying dollars in anticipation," said Dustin Reid, senior currency strategist at Royal Bank of Scotland.

Reid said traders are betting that Geithner's announcement will provide some relief to the credit markets. But the dollar could fall back if investors are unconvinced that the plan will succeed.

"In general, the theme should continue, but if the plan lacks a lot of detail and there is still some confusion, it might not necessarily work like it has in the past," he said.

A vote on final passage of the Senate stimulus bill - with an estimated pricetag of $838 billion - is scheduled for Tuesday. Negotiators from the Senate and the House of Representatives would then have to hammer out a single bill from their differing versions, but Senate Majority Leader Harry Reid, D-Nev., said he expected that could be done by Friday.

Saturday, February 7, 2009

Lawmakers reach tentative stimulus agreement

U.S. senators debated late into the night Friday on a massive economic-recovery package, after a coalition of Democrats and some Republicans reached a compromise that trimmed billions in spending from an earlier version.

Close to midnight Senate Majority Leader Harry Reid told his colleagues that debate would continue on Saturday and go into Monday. Reid said a vote could come on Tuesday on the plan, which is championed by President Barack Obama as a tonic for a badly battered economy.

The movement came after days of private meetings between centrist Democrats and Republicans -- who felt the price tag on the Senate's nearly $900 billion version of the package was too much.

"There is a winner tonight," said Sen. Joe Lieberman, an Independent from Connecticut and one of the moderates whose support was crucial in efforts to corral enough votes for the plan. "It's the American people and they deserve it."

Senators had trimmed the plan to $827 billion in tax cuts and spending on infrastructure, housing and other programs that would create or save jobs.

"We trimmed the fat, fried the bacon and milked the sacred cows," said Sen. Ben Nelson, a Democrat, as debate began.

According to several senators, the revised version of the plan axed money for school construction and nearly $90 million for fighting pandemic flu, among other things.

The remaining spending includes more than $76 billion for education -- including college Pell grants and help for states struggling to pay for their schools -- $43 billion in transportation infrastructure and more than $3 billion for job training, according to the office of a senator involved in negotiations.

Tax cuts include incentives for small businesses, a one-year fix of the unpopular alternative-minimum tax and tax cuts for low-and-middle-income families, said Sen. Susan Collins of Maine, who was the most prominent Republican negotiator in the bipartisan talks.

"Our country faces a grave economic crisis and the American people want us to work together," she said. "They don't want to see us dividing along partisan lines on the most serious crisis facing our country."

Putting more pressure on senators to act was news Friday that employers slashed another 598,000 jobs off U.S. payrolls in January, pushing the unemployment rate to 7.6 percent.

"On the day when we learned 3.6 million people have lost their jobs since this recession began, we are pleased the process is moving forward and we are closer to getting Americans a plan to create millions of jobs and get people back to work," said White House Press Secretary Robert Gibbs.

All or nearly all Democrats are expected to support the package. But 60 votes are needed in the 100-member Senate to bring the issue up for a vote.

There are 56 Democrats in the Senate and two independents who caucus with them. Results from Minnesota's senate election -- in which Democrat Al Franken appears to hold a 200-vote lead -- have not been certified amid court challenges.

Democratic Sen. Ted Kennedy, of Massachusetts, was expected to be at the Capitol to vote on the plan, Capitol Hill sources said. Kennedy, who has been diagnosed with brain cancer, has not been on the Senate floor since collapsing during a luncheon on Inauguration Day.

"I always need Senator Kennedy," Reid said when asked if the vote needed to be held off until the liberal icon could be present.

The Senate began considering amendments to the plan shortly before 10 p.m. Friday.

While Democrats appeared to believe they had enough Republican support to push the compromise plan through, most GOP members still were speaking out against the plan -- saying spending is not the answer to cure economic woes.

"This is not bipartisan," said Sen. John McCain, who lost the 2008 election to Obama. "If this legislation is passed, it'll be a very bad day for America."

Minority Leader Sen. Mitch McConnell compared the plan to President Franklin Delano Roosevelt's "New Deal" public works program -- which he said did not help the nation out of the Great Depression.

"We're talking about an extraordinarily large amount of money, and a crushing debt for our grandchildren," said McConnell of Kentucky. "Now, if most Republicans were convinced that this would work, there might be a greater willingness to support it. But all the historical evidence suggests that it's highly unlikely to work."

If the package passes the Senate, yet another compromise -- between the House and Senate versions -- must be hammered out before the legislation is sent to Obama to sign. Obama has said he would like to sign the stimulus by Presidents' Day on February 16.

Tuesday, February 3, 2009

Fed extends special lending programs

The U.S. Federal Reserve extended liquidity facilities for domestic financial institutions and currency swap lines with 13 central banks on Tuesday to keep money flowing in a banking system shattered by the worst financial crisis since the Great Depression.

"Continuing substantial strains in many financial markets" made the actions necessary, the Fed said in a statement.

The Fed said it would extend, through Oct. 30, facilities providing loans and liquidity to the commercial paper and money markets. The U.S. central bank is also keeping open through that date facilities providing loans and Treasuries to primary dealers.

The Fed further said it is extending currency swap lines with Australia, Brazil, Canada, Denmark, England, the euro zone, South Korea, Mexico, New Zealand, Norway, Singapore, Sweden and Switzerland. Japan will consider the extension at its next policy meeting, the Fed said.

The liquidity facilities - the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) - and the swap lines had been set to expire on April 30.

Government debt prices fall

The Treasury market wasn't able to turn its attention away from the avalanche of supply clogging up the pipelines.

Government debt prices rallied Friday and Monday, but by Tuesday, the potential volume of supply headed to market weighed on debt prices.

The Senate added $64 billion to the tab of the stimulus package and the Treasury announced Monday that its estimates of how much debt would be headed to market in the first quarter were low to the tune of $125 billion.

The Treasury is due to announce its quarterly refunding Wednesday. "The upcoming supply with the refunding announcement is going to be so large that the market needs to prepare to digest that," said Craig Ziegler, Treasury agency trader at Broadpoint Securities Group. "A lot of bonds are coming to market, and to make room for that supply, the market can be very hesitant to rally too much ahead of that."

Supply headed to market: Four times a year, the Treasury department makes an announcement outlining the government's plan for brining debt to market in the quarter. The quarterly refinance, which announces specific debt auctions with amounts and maturities, was due out Wednesday at 9 am ET.

On Monday, the Treasury said that it expects to borrow $493 billion of "marketable debt" in the first three months of the year - $125 billion more than it had originally expected.

In the April to June quarter, the Treasury said it expects to borrow $165 billion of "marketable debt." The release Monday said that Treasury borrowed $569 billion worth of marketable debt in the last three months of 2008.

In a statement for the Treasury Borrowing Advisory Committee, acting assistant secretary for economic policy Ralph M. Monaco said "measures to support the economy coupled with lower revenues as a consequence of the deficit are raising the deficit."

"The budget deficit will continue to grow in FY2009 as expenditures rise sharply and receipts are depressed by falling employment and income and declining asset values," said Monaco. "Outlays to support financial markets and stimulate the economy are expected to push the federal deficit to a record level in FY2009, both in absolute terms and as a share of GDP."

Senate's stimulus plan: The Obama administration has been lobbying hard to get a economic rescue package passed. The stimulus package is intended to spur the economy by building infrastructure and creating jobs.

The House of Representatives passed an $819 billion version of the bill last week, but when the stimulus proposal went to the Senate, it ballooned to $885 billion, according to an analysis released Monday by the Congressional Budget Office.

The federal budget deficit was already projected to top $1 trillion in fiscal 2009, and the Treasury market knows that the more the government looks to spend, the more debt will have to come to market.

Ziegler said that the stimulus bill was a longer term concern for the Treasury market than the refunding announcement. "It is overhanging, and it periodically has an affect, but there is a lot of back and forth in the Senate."

Another $64 billion worth of short term debt was set to go on the block this week, including $34 billion worth of 4-week bills Tuesday and $30 billion worth of 49-day cash management bills Wednesday. The government has already auctioned $58 billion worth of debt this week. Last week, the government sold $135 billion worth of debt, coming on the heels of $120 billion worth of debt brought to market the week before last.

Debt prices: The 10-year benchmark Treasury fell 21/32 to 108-5/32 and its yield rose to 2.79% from 2.72%. Bond prices and yields move in opposite directions.

The 30-year bond declined 1-20/32 to 117-4/32 and its yield rose to 3.56% from 3.48%. Meanwhile, the 2-year note dipped less than 1/32 to 99-31/32 and its yield rose to 0.90%.

The yield on the 3-month Treasury bill rose to 0.28%, just higher than 0.26% the day before. The 3-month bill has been used as a short-term gauge of confidence in the marketplace, because investors tend to shuffle funds in and out of the bill as they assess risk in other places - the lower the yield, the more risk they see.

The Federal Reserve has become caught as its goals push debt prices, and yields, in opposite directions. Pumping the economy with stimulus, which is funded by issuing massive amounts of supply, pushes prices lower and yields higher. Meanwhile, conventional mortgage rates, among other borrowing rates, are tied to the yield on the 10-year Treasury note and so the Fed wants to keep yields low.

"It is definitely a battle," said Ziegler.

Lending: The Federal Reserve released a survey of the nation's banks Monday that showed that while the credit markets were still pretty tight, there were fewer banks that were ramping up their lending restrictions.

Nearly two thirds of the banks surveyed showed that they tightened lending standards on commercial and industrial loans in the last three months of the year, but that was down from 85% in the previous quarter, according to the Fed's report.

The 3-month Libor rate ticked up to 1.23% Tuesday from 1.22% the day prior, according to data available on The overnight Libor rate rose to 0.31% from 0.28% Monday.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London, and it is used to calculate adjustable-rate mortgages. More than $350 billion in assets are tied to Libor.

Two credit market gauges were mixed. The "TED" spread narrowed to 0.95 percentage points Tuesday from 0.96 percentage point Monday. The bigger the TED spread, the less willing investors are to take risks. The rate surged as the credit crisis gripped the economy, but it has since fallen off as central banks around the world have lowered interest rates and pumped liquidity into the economy.

Another market indicator, the Libor-OIS spread, widened to 0.98 percentage point Tuesday from 0.94 percentage point. The Libor-OIS spread measures how much cash is available for lending between banks and is used for determining lending rates. The bigger the spread, the less cash is available for lending.

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