Saturday, October 17, 2009

Bank of America: $2.2 billion loss

Bank of America proved no match for the ongoing recession as the nation's biggest bank reported a steep loss Friday.

With Americans continuing to default on their credit cards and mortgages, the company said it lost $2.2 billion in the third quarter, which included several charges related to the government's move to rescue the firm over the past year.

Bank of America's results come at a particularly difficult time for the Charlotte, N.C.-based lender and its CEO Ken Lewis.

Last month, the company's embattled leader announced plans to step down amid ongoing scrutiny over his role in the company's controversial purchase of Merrill Lynch.

Friday's results also come just a day after Lewis agreed to a deal not to accept a salary or bonus in his final year as CEO in an effort to deflect some of scrutiny the firm faces.

During a conference call with analysts, Lewis thanked the investment community for its support over the years, adding that he felt confident that Bank of America's board would find a suitable replacement. The company has provided no indication when a new CEO might be named.

"I have no doubt that Bank of America will thrive in my absence," he said.
Credit fallout

Lewis' outlook, however, did little to soften the blow of the firm's latest results. During the quarter, the company said it lost 26 cents. Analysts were anticipating BofA to fare slightly better, expecting a loss of 21 cents a share, according to Thomson Reuters.

Experiencing the bulk of the quarter's losses was Bank of America's mortgage and credit card businesses. Both divisions lost more than $1 billion during the July-September period, as more and more Americans found themselves out of work and unable to keep up with their loan payments.

Loan troubles also intensified within Bank of America's commercial real estate portfolio, amid slower spending by both businesses and consumers.
0:00 /5:25Blankfein: Uneven recovery

Still, there were some encouraging signs. In the latest quarter, the company set $11.7 billion for bad loans, down from $13.4 billion in the previous quarter.

"If you look at underlying numbers, credit quality is improving," said Alan Villalon, a senior research analyst at Minneapolis-based First American Funds

Bank of America's Lewis acknowledged that credit issues remained the biggest challenge facing the company going forward, but added that the company may have reached a peak in loan losses.

One bright spot was its wealth management division, one of the key businesses that led Bank of America to complete its controversial deal with Merrill Lynch last year. Both revenues and profits within the division were more than double the previous year's levels and held steady from last quarter.
Challenges remain

One key question that continues to swirl around the company is when it might be able to get out from under the government's thumb.

In exchange for accepting $45 billion in bailout money over the past year, the company is required to make hefty dividend payments. In the latest quarter, it paid $1.2 billion in preferred share dividends, with much of it going to the government.

The company's pay practices for its top 100 highest paid employees are also currently under review by the Obama administration's so-called "pay czar". Kenneth Feinberg, the man charged with handling the task, is expected to rule on the matter by the end of the month.

And that's not including the numerous high-profile state and federal investigations the company is facing related to its controversial purchase of Merrill Lynch. It is also engaged in a legal battle with the Securities and Exchange Commission over its alleged failure to notify shareholders of its decision to pay Merrill executives outsized bonuses last year.

Hoping to deflect some of that scrutiny, Bank of America agreed earlier this week to share previously undisclosed information related to its purchase of Merrill Lynch with regulators.

The agreement would give regulators access to details concerning the bank's failure to disclose what it knew about pending losses at Merrill when it bought the troubled brokerage last year.

Bank of America (BAC, Fortune 500) shares fell more than 4% in late Friday trading.

Thursday, August 6, 2009

Deficit: What caused it, why it matters

When George Bush took office at the beginning of 2001, the federal government was running a substantial budget surplus and projected rising surpluses "as far as the eye could see." Now, the United States is facing massive current deficits -- as a share of the economy, the largest since World War II -- and an increasingly dire and unsustainable outlook over the next 10 years and beyond.

How did we get into this fiscal mess? To quote a character in Ernest Hemingway's classic novel, "The Sun Also Rises," when asked by another how he lost his wealth, "Two ways. Gradually and then suddenly."

The gradual part was a series of policy actions adopted during the Bush administration. In 2001, the Congressional Budget Office projected that the 2008 budget would show a surplus equal to 4.5% of gross domestic product. The actual 2008 budget ran a deficit of 3.2% of GDP. Almost all of the reversal was the result of policy changes -- tax cuts and spending increases.

Then, in 2009, the bottom fell out.

Financial markets collapsed and the economy went into a free fall. While the economy is beginning to show signs of stabilizing, the deficit has deepened and is on course to be roughly 13% of GDP this year. About two-thirds of the swing is due to the troubled economy and the other third due to policy responses to the downturn.

During a strong cyclical downturn, big deficits are not just a necessary evil but can actually do a fair amount of good. So, while the current deficit is striking, it is not a problem in and of itself, especially if it falls to more typical levels in the next few years.
Looking into the future, it ain't pretty

The real problem is the medium- and long-term outlook.

Analysts have long emphasized that the country faces a long-term budget problem as a consequence of our rapidly growing old-age entitlement programs.

But now even the 10-year outlook is unsustainable. By 2019, even if everything goes the way the Obama administration wants, and the economy recovers and grows steadily over the next decade, the deficit will be 5.5% of GDP, an extremely high figure in good times, and the debt-to-GDP ratio will hit 82%, its highest level since just after World War II, and will keep rising.

And things aren't as likely to go as well as President Obama hopes. The economy has already performed worse than was assumed in the budget projections, and the projections are based on heroically optimistic assumptions about the political discipline Congress will impose on itself. And, of course, the problem will deepen, continually and inexorably, after 2019, as spending on Medicare, Medicaid and Social Security will grow rapidly.

Large chronic deficits are a serious economic problem. While much attention is given to the effect of deficits on interest rates, that effect is a symptom of a problem, not the problem itself.

If they are financed domestically, deficits will gradually divert capital from productive domestic uses, through a rise in interest rates. This diversion reduces the amount of capital available to U.S. workers, lowering their wages and hence their living standards. If our deficits are financed from abroad, interest rates may not rise as much, but interest payments on these deficits will flow back abroad.

In either case, the future national income of the United States and its citizens is reduced, businesses will find it harder to expand and homeowners will find it tougher to get credit.

Deficits can also affect the economy more suddenly. The prospect of large or out-of-control deficits can spark investors' fears and cause a run on the dollar and a sharp rise in interest rates.
Time to act, but it won't be easy

President Obama and Congress need to address these looming fiscal shortfalls. But it's not that simple. The economy's health must be their primary concern, particularly with most projections seemingly pointing toward a slow, muted recovery after the current recession ends.

And this continuing economic weakness creates a difficult balancing act. Fiscal stimulus can help the economy in the short run, but fiscal discipline is needed in the long run.

So when should policymakers make the switch?

Imposing fiscal discipline too late risks precipitating a crisis in financial markets. Imposing fiscal discipline too soon risks weakening the recovery or worsening the recession, as actually happened in the United States in the 1930s.

The Great Depression actually consisted of two severe downturns, the second starting in 1937 when the federal government imposed fiscal restraint.

Policymakers can thread this needle by committing now to future spending cuts and tax increases, while at the same time being careful not to undo the current stimulus or hurt economic prospects right now. Getting this mix right will require luck, discipline, imagination and leadership.

Friday, July 17, 2009

Obama turns up heat on mortgage servicers

As complaints mount about President Obama's foreclosure prevention program, the administration is ratcheting up the pressure on mortgage servicers.

Financial executives will meet with Treasury Department and administration housing officials on July 28 to discuss how the loan modification and refinancing plan has been implemented. The administration plans to grill servicers that have done few modifications or have had many complaints.

Officials also want financial institutions to hire more people and train them better, expand their call centers, and send more mailings to eligible borrowers, according to a letter sent to servicers last week. The government also said servicers need to establish a way for borrowers to contest their treatment or denial.

"There is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share," according to the letter, signed by Treasury Secretary Tim Geithner and Housing Secretary Shaun Donovan. "We are asking all servicers expand their servicing capacity and improve the execution quality of loan modifications."

Loan servicers' efforts will be made public on Aug. 4, when the Obama administration plans to start issuing monthly progress reports.

The updates will include data for each servicer participating Obama's $75 billion program. Specifically, they will feature the number of trial modification offers extended and underway by each institution, as well as the number of final modifications and the success of those adjustments.

So far, participating servicers have extended 325,000 loan modification offers and have 160,000 three-month trial adjustments underway, said Herbert Allison, who heads Treasury's financial stability efforts, at a Senate Banking Committee hearing Thursday.

Under the plan, eligible borrowers who are in or at risk of default may be able to lower their monthly payments to no more than 31% of their pre-tax income through a loan modification. The modifications are made permanent after the homeowner makes three on-time payments.

Servicers have also refinanced 43,000 loans under the administration's program that allows people with little or no equity in their home to refinance and take advantage of today's low mortgage rates. People can participate even if they have loans of up to 125% of the value of their property, as long as they meet other criteria.

"Even though we are making rapid progress, we think we can do even more," Allison told lawmakers.

Many industry insiders fear that the foreclosure crisis in outpacing efforts to help troubled borrowers. Thursday's hearing came on the same day as a report revealed a record 1.53 million properties were in the foreclosure process during the first half of 2009, up 15% more than the same period of 2008. One out of every 84 homes received at least one filing between January and June, according to RealtyTrac.

The Obama program has been plagued by problems since its February debut. As soon as most servicers started processing applications in April and May, borrowers began reporting that their paperwork was being lost, their calls were going unreturned and decisions on their cases were being delayed.

"This is disgraceful," said Sen. Christopher Dodd, D-Conn., head of the banking committee. "Why am I still reading about lost files, under-staffed and under-trained servicers, and hours spent on hold on the phone?"

When the president unveiled his program on Feb. 18, he said it could help up to 9 million people. Allison said that goal was still attainable by the end of 2012.

To achieve those figures, the administration is trying to make sure borrowers in need know where to turn. It is pressing banks to do more outreach, as well as holding its own educational events.

Among the issues holding up loan modifications are second liens, which are often owned by banks as opposed to investors. The administration issued revised guidelines in April saying that participating servicers had to modify or extinguish second liens if they adjust the first. But banks are waiting for additional information, which officials say will be available in coming weeks.

After lawmakers grilled administration officials, the committee heard from a borrower and consumer advocates reiterating problems with the program. Mortgage executives from Wells Fargo and Bank of America also spoke, defended their efforts to assist troubled homeowners.

Wells Fargo was in the process of finalizing 52,000 loan modifications under the president's program, as of June 30, said Mary Coffin, head of mortgage servicing for the bank. Only 55% of its seriously delinquent borrowers are eligible for it. During the first half of this year, it boosted its default team staff by 54% to 11,500.

Some 80,000 Bank of America customers, meanwhile, are in trial modifications or are responding to offers, said Allen Jones, the bank's default management executive. Bank of America also has funded nearly 40,000 refinances applications. It has 7,400 people dedicated to home retention, double the number a year ago. They respond to an average of 80,000 calls a day.

Tuesday, July 7, 2009

Jittery investors dump stocks

Stocks tumbled Tuesday morning, as jittery investors dumped shares ahead of the start of the G8 summit and the second-quarter corporate reporting period.

The Dow Jones industrial average (INDU) lost 80 points, or 1% roughly 90 minutes into the session. The S&P 500 (SPX) index lost 8 points, or 0.9% and the Nasdaq (COMP) fell 18 points, or 1%.

Stocks were mixed Monday as investors drifted back in after the long holiday weekend. Stocks have been inching lower since mid-June as a three-month stock market rally has lost steam.

The S&P 500 spiked 40% on bets that the economy is stabilizing, but a recent bout of mixed news has stalled the advance, culminating with last week's weaker-than-expected June jobs report.

Economic news due later this week includes readings on retail sales, the job market, import and export prices and consumer sentiment.

Investors are also primed for the start of the second-quarter reporting period, which unofficially kicks off after the close Wednesday with Dow component Alcoa. The aluminum maker is expected to post a loss of 37 cents per share, according to Thomson Reuters estimates. Alcoa earned 65 cents a year ago.

However, most quarterly financial reports are due out later in the month. Market participants will be looking to see not only that companies beat forecasts, but that they provide an encouraging outlook for future quarters.

Also in focus: The G8 summit of the world's leading industrialized nations, beginning Wednesday in L'Aquila, Italy. President Obama is expected to speak about the economic outlook. Leaders of Japan, Britain, France, Italy, Germany, Canada and Russia will also speak.
0:00 /1:12The G8's new guest list

Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.51% from 3.52% late Thursday. Bond markets were closed Friday. Treasury prices and yields move in opposite directions.

Other markets: In global trade, Asian markets tumbled and European markets were mixed in the afternoon.

Energy prices tumbled, with U.S. light crude oil for August delivery falling 97 cents to $63.08 a barrel on the New York Mercantile Exchange.

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

COMEX gold for August delivery fell 80 cents to $923.50 an ounce.

Market breadth was negative and volume was light. On the New York Stock Exchange, decliners beat advancers five to two on volume of 250 million shares. On the Nasdaq, losers topped winners three to two on volume of 580 million shares.

Friday, June 26, 2009

States lock in highway stimulus funds

Every state has committed at least half its highway stimulus funds so none will lose any of its allocation, the Obama administration said Thursday.

States had until June 29 to obligate the funds or risk losing half the leftover money. Only a month ago, some 14 states had yet to satisfy that goal. Hawaii was the last to meet the mark, hitting it on June 19.

Maine has secured 100% of its funds and 15 states have more than 80% of their money committed.

"By delivering on these projects ahead of schedule and under-budget, we have been able to do even more than we expected," said Vice President Joe Biden.

The Federal Highway Administration has approved a total of $15.8 billion for more than 4,800 projects, as of June 25. States, however, have spent less than $190 million, as of June 19, according to federal data.

To commit the funds, states had to gain approval for their projects from the Federal Highway Administration, an agency of the Department of Transportation. The money doesn't actually have to be spent, which can take months as projects go through the contracting and construction process.

Some states -- Florida, Georgia, Hawaii, Arizona, Virginia and New Mexico -- have yet to claim any funds. Illinois has spent the most, claiming more than $47.6 million of the $664 million allocated so far.
0:00 /3:00States' budget bummers

Republicans in Congress said they were concerned by the slow pace of spending.

"This is pitiful that we can't get people working, we can't get the stimulus money out," said Rep. John Mica, (R-Fla.), the top Republican on the House Committee on Transportation and Infrastructure. "People want jobs and they want them now."

The administration did not report how many jobs have been created or saved thanks to the infrastructure funding. The issue has become a source of controversy, with Republicans on Capitol Hill questioning the the recovery act's effectiveness in stemming the unemployment tidal wave.

States are sharing $26.6 billion for highway infrastructure projects, though only $18.6 billion is subject to the June deadline. The road allocations are among the earliest of the $280 billion in funds going to states and municipalities as part of the $787 billion recovery act.

Including transit and airport construction, the federal Department of Transportation is making $48.1 billion available, of which $19 billion has already been committed to more than 5,300 projects, according to the administration. Currently, more than 1,900 projects are underway.

A total of $369 million has been spent, Mica said. Only $11 million has flowed to the 10 states with the highest unemployment rates, he said.

Tuesday, June 9, 2009

Stocks try to rise

Stocks edged higher Tuesday afternoon on news that 10 of the banks that received government loans will be allowed to give the money back, adding to bets that the worst of the financial crisis is over.

The Dow Jones industrial average (INDU) was barely changed 3 hours into the session. The S&P 500 (SPX) index added 3 points, or 0.3%.

The Nasdaq composite (COMP) added 16 points, or 0.9%, with technology shares rising after chipmaker Texas Instruments (TXN, Fortune 500) boosted its quarterly sales and earnings outlook late Monday.

Stocks have been on the rise since early March, with the Dow having risen more than 32%, the S&P 39% and the Nasdaq 46%, as of Monday's close.

The gains have been sparked by a series of not-as-bad-as-expected economic reports.

After such a run, it's not surprising to see markets drifting a bit, said Steven Goldman, market strategist at Weeden & Co. Overall, the trend should remain up, he said.

"The market has had a nice run of around 40%, and so a pullback is to be expected," he said. "But overall, I think stocks will continue to find buyers on pullbacks and the trend will remain up."

He said that historically, stocks tend to gain six months ahead of the end of a recession and for the first three months after a recession is over. Using data that goes back to 1901, he found that the S&P was always higher in the three months after a recession ended.

Banks: The U.S. government said Tuesday morning that 10 banks that received TARP loans last fall can repay a total of $68 billion to the government.

The news shows that the fear of an implosion has subsided and that the risk factor in financial markets has diminished, Goldman said.

Morgan Stanley (MS, Fortune 500), American Express (AXP, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Bank of New York Mellon (BK, Fortune 500), BB&T (BBT, Fortune 500), Capital One (COF, Fortune 500), Northern Trust (NTRS, Fortune 500), State Street (STT, Fortune 500) and US Bancorp (USB, Fortune 500) have confirmed that they are allowed to repay loans.

But banks that were stress-tested earlier this year should undergo another round of tests, a U.S. watchdog group said Tuesday.

The Congressional Oversight Panel said that recent signs that the recession could be worsening show the tests did not go far enough. In particular, the group pointed to the May employment report, which showed a slower pace of job losses but also that the unemployment rate rose to a 26-year high of 9.4%.

Chrysler: The Supreme Court delayed the sale of Chrysler's assets to Italian automaker Fiat, in a late-Monday move that threw a wrench into the automaker's plans for a quick exit from bankruptcy.

Under terms of the agreement, Fiat can ditch the deal if it is not finished by June 15. However, the company said Tuesday that it won't walk away from Chrysler.

Economy: Wholesale inventories fell 1.4% in April, the Census Bureau reported, after falling 1.8% in the previous month. Economists surveyed by expected a decline of 1.1%, on average.
0:00 /5:11Getting tough on Treasury

Bonds: Treasury prices inched higher, lowering the yield on the benchmark 10-year note yield to 3.85% from 3.82% late Monday. Treasury bond prices and yields move in opposite directions.

The Treasury is set to auction $65 billion this week, including 3-year and 10-year notes. It will also reopen 30-year bonds.

The recent rise in the 2-year note has raised concerns that the Federal Reserve will need to lift interest rates again before the end of the year, something stock investors don't like.

And the spike in the 10-year has caused worries that it may stunt a burgeoning recovery, as the longer-term bond yields are tied to mortgage rates. Higher mortgage rates could dissuade home buyers at a time when the housing market is just starting to stabilize in some areas.

Other markets: In global trading, Asian markets ended lower and European markets were mixed in late trading.

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

U.S. light crude oil for July delivery rose $1.05 to $68.14 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery rose $5.50 to $958 an ounce.

Wednesday, May 27, 2009

GM moves step closer to bankruptcy

General Motors said Wednesday that it has fallen far short of the bondholder support it needed for its proposed debt-for-stock offer, virtually guaranteeing that the nation's largest automaker will be forced to file for bankruptcy court protection within the next five days.

The bondholders were not satisfied with the prospect of owning only 10% of the company when the U.S. government would own nearly 70% and a union-controlled trust fund up to 20%.

The bondholders own $27 billion in corporate notes. GM (GM, Fortune 500) needed owners of 90% of those bonds to accept stock in return for the debt in order to reduce its interest expenses to a more manageable level.

But GM's announcement said that bondholders who took the company's offer were "substantially less than the amount required."

The company owes the bondholders $1 billion in interest payments on June 1 - money it says it does not have.

The company also faces a June 1 deadline to win concessions from its union, creditors and other parties or be forced into bankruptcy by the U.S. Treasury Department, which is funding GM's operations through direct federal help.

"The GM board of directors will be meeting to discuss GM's next steps in light of the expiration of the exchange offers," said the company's statement.

In another sign that a bankruptcy filing could come as soon as Friday, GM moved up the pay date for its U.S. employees this week.

Hourly employees represented by the United Auto Workers union were paid Wednesday, and salaried employees will be paid Thursday, said GM spokesman Chris Lee. Both normally would have been paid Friday.

"Obviously there's a lot of anxiety as we approach the June 1 deadline," said Lee. "We just moved the payroll up as a way to reassure our employees that payroll will continue regardless of what takes place next week."

GM had previously announced that it would make about $2 billion in payments due to suppliers on Thursday, rather than waiting for the normally scheduled payment on June 2. If the company files for bankruptcy, it would need court approval to make payments to employees and suppliers.

Lee said the early payroll payments should not be taken as an indication that the filing would come on Friday.
What next for bondholders?

The ad hoc committee of major bondholders had no immediate comment on the vote. The group, which includes major pension funds and mutual funds that own large blocks of the bonds, had proposed the bondholders as a group receive 58% of the stock in GM, rather than the 10% being offered.

The major bondholders have also said they want to continue negotiating with Treasury's auto industry task force overseeing the federal bailout of GM and Chrysler LLC.

A source with knowledge of GM's restructuring discussions said Treasury is willing to hold negotiations up until June 1.

"We've said consistently that we were happy to talk to any stakeholder any time about anything," the source said. "Recently there have been far more constructive and orderly conversations."
0:00 /02:53Remove GM from the Dow

But the source added that Treasury believed the offer made to GM creditors, which would give them 225 shares of GM stock for every $1,000 they are owed, is fair and equitable, and that it is not likely to be substantially increased. The 225 shares would be worth $324 based on Tuesday's closing price, although the value of these shares could be significantly less after a reorganization.

However, if GM does go into bankruptcy, the source said that Treasury believes the bondholders would likely get even less than what was offered.

"In any kind of liquidation scenario, they would get nothing or something unbelievably small," said the source.

It is estimated that about 20% of the $27 billion in debt, between $5 billion and $6 billion, is held by individual investors who bought the bonds for the steady revenue stream they provided. Most of the bonds pay better than 7% interest, and those that were purchased at a discount since GM debt was downgraded to junk bond status in 2005 pay an even better return.

GM stock does not pay any dividend and will not do so for the foreseeable future. Stock is also a riskier investment than bonds because stockholders are certain to be wiped out if there is a bankruptcy filing, while bondholders can hope that they will recover some of their investment in court.

But rating agency Standard & Poor's estimates that the bondholders, whose debt is not secured by specific company assets, will get between 0% and 10% of their investment back in bankruptcy court.

The stock being offered bondholders would be equal to only about 10% of the company. GM's stated plan is for the government and a union-controlled trust fund to own 89% of the company between them.

The UAW disclosed to its local presidents Tuesday that it has agreed to accept 17.5% of GM's common stock to cover future retiree health care costs, as well as warrants for an additional 2.5% that give the trust fund the right to buy shares at a very low price.

Previously, many had expected the union to control nearly 40% of GM shares, rather than 20%. But the source familiar with the restructuring discussions said the lower stake for the UAW does not open the way for bondholders to get a larger stake in GM.

The source said the Canadian government will own a small percentage of GM, as it does of Chrysler. The source added that a Treasury stake well above 50% is fair given that the government has provided GM with $19.4 billion in help so far and will likely give the company tens of billions of dollars more to fund its operations during bankruptcy.

General Motors' U.S. operations are not the only ones experiencing trouble. The company is looking to sell a majority stake in its money-losing European business, which operates under the Opel and Vauxhall brands.

On Wednesday, GM spun off those brands - including plants, sales organizations and patents - into a new company. GM said the move will allow the German government to place those assets into a trusteeship and provide its own bailout to continue operations until a sale can be finalized.

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