Stocks plunged Monday afternoon, starting a new month on a bad foot, as dismal manufacturing reports worldwide added to fears of a prolonged recession.
In a report released Monday, the National Bureau of Economic Research confirmed what many have long believed - that the nation is in a recession. According to the NBER, the official body that calls economic cycles, the U.S. has been in a recession since December 2007.
The Dow Jones industrial average (INDU) lost over 400 points - or 4.6% - almost three hours into the session. The Standard & Poor's 500 (SPX) index lost 5.6% and the Nasdaq composite (COMP) gave up 5.6%.
Stocks gained in a holiday-shortened trading week after President-elect Obama announced his economic team and the government bailed out Citigroup. The Dow and S&P 500 rose Friday for the fifth consecutive session, the best streak since July 2007.
Positive reports on Black Friday, the start of the critical holiday-shopping period, also helped stocks late last week. But the advance petered out Monday as investors eyed the day's economic news and worried that the Black Friday momentum was unsustainable.
"Last week we saw stocks drift higher on no volume, so you're seeing some profit taking today when more people are here," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.
He said what will be more significant is whether the market can hold in near these levels or whether it's going to go back down to the lows of mid-November
Rovelli said that everyone will be looking to Thursday's November retail sales reports from the nation's chain stores, as they include Black Friday and the Thanksgiving hoiday weekend.
"If they don't report a lift up in same-store sales, even with Black Friday included, that's going to be a big negative," Rovelli said.
Same-store sales is an industry metric that refers to sales at stores open a year or more.
Economy: The Institute of Supply Management said its November manufacturing index fell to a 26-year low of 36.2 from 38.9 in October. That was worse than what economists were expecting, according to a survey from Briefing.com.
October construction spending fell 1.2% versus a flat reading in the previous month. Economists thought spending would drop 1%.
Global economic news was pretty grim as well, with manufacturing surveys in Britain and the euro zone showing a steep slowdown. A reading on China's manufacturing survey was equally worrisome.
Asian markets ended in mixed territory and European markets tumbled in the afternoon.
Obama: The president-elect announced his national security team. As expected, Sen. Hillary Clinton, D-N.Y., was nominated Secretary of State and current Defense Secretary Robert Gates was asked to stay on. Retired Marine Gen. James Jones was nominated as national security adviser, Eric Holder was picked for Attorney General and Arizona Gov. Janet Napolitano was the choice for Secretary of Homeland Security. (Full story)
Retail sales: Shoppers came out in droves over the weekend, motivated by pent-up demand and deep discounts, but the surge is not expected to last.
Including "Black Friday," the day after Thanksgiving, shoppers spent $41 billion in the four-day holiday weekend, according to the National Retail Federation (NRF), an industry trade group. The average shopper spent $372.57, up 7.2% from a year ago.
However, overall 2008 holiday spending is expected to rise just 2.2% from a year ago, the smallest gain in six years.
Early predictions are for "Cyber Monday" online shopping sales to be pretty flat with a year ago.
Consumer spending drives two-thirds of economic growth, and the pullback has exacerbated the economic slowdown.
Automakers: GM (GM, Fortune 500) and Ford (F, Fortune 500) gained last week on growing bets that they, along with Chrysler, will receive a government bailout. But the stocks tumbled Monday in tune with the broader market.
The auto industry's first pitch to Congress was rebuffed, but there is increased speculation that its second pitch will be more successful.
The companies have until Tuesday to submit proposals for how they would use $25 billion in taxpayer money to make their companies "viable." The Senate Banking Committee is scheduled to host a hearing Thursday, while the House Financial Services Committee is holding a hearing Friday.
Other movers: Johnson & Johnson (JNJ, Fortune 500) said it will buy breast implant maker Mentor (MNT) for $1.07 billion, or $31 a share, nearly double the company's closing price from Friday. Dow stock J&J fell 3%, while Mentor gained 89%.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 9 to 1 on volume of 500 million shares. On the Nasdaq, decliners topped advancers by four to one on volume of 720 million shares.
Other markets: The dollar gained versus the euro but fell against the yen.
U.S. light crude oil for January delivery fell $4.39 to $50.04 a barrel on the New York Mercantile Exchange.
COMEX gold for February delivery fell $47 to $772 an ounce.
Gasoline prices continued the fall to nearly four-year lows, with prices down half a cent to a national average of $1.820 a gallon, according to a survey of credit-card swipes released Monday by motorist group AAA. Prices have been sliding for more than two months, losing over $2 a gallon or 53%.
Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 2.82% from 2.92% Friday. Last month, the 2-year, 10-year and 30-year government bonds all hit their lowest levels since the Federal Reserve started keeping records in 1962.
The yield on the 3-month Treasury bill improved to 0.03% from 0.02% Friday, but still not far from 68-year lows of zero hit last month. The 3-month is seen as the safest place to put money in the short term. A low yield means wary investors would rather preserve cash despite earning little or no interest on it than risk the stock market.
Lending rates were mixed. The 3-month Libor rate held steady at 2.22%, unchanged from Friday, while overnight Libor fell to 1.09% from 1.16% Friday, according to Bloomberg. Libor is a key bank lending rate.
Monday, December 1, 2008
Friday, November 28, 2008
European unemployment soars
Unemployment in the 15 nations that share the euro shot up to 7.7% in October - the highest level in two years - as growth dropped sharply, the EU statistics agency Eurostat said Friday.
Prices also plunged with the annual inflation rate sinking to 2.1% in November from 3.2% in October, Eurostat said. Lower inflation gives the European Central Bank more room to reduce interest rates, which would help stoke growth.
The euro area officially went into a recession in spring and summer this year when growth shrank in the second and third quarters, as a financial crisis curbed global demand.
In real terms, this means job losses - lots of them and more to come.
Eurostat said some 225,000 more people were seeking work in October from the previous month. That means some 12 million people in the euro area were out of work last month. It also said unemployment in September was worse than it had first estimated, revising the rate upward to 7.6% from the 7.5% it reported last month.
Across all the EU's 27 states, some 17 million people were job-hunting in October, 290,000 more than a month earlier. The EU jobless rate was 7.1% in October, up from 7% in September.
The EU's executive Commission forecasts that the labor market will get even worse next year, with the euro-zone rate climbing to 8.4% in 2009 from a decade-low of 7% at the end of 2007. This will see an extra 2 million people out of work.
Unemployment is highest in Spain, at 12.8%. The bursting of a housing bubble has put builders out of work just as the tourism industry has been hurt by the global economic downturn.
The European Commission this week called on EU governments to pay out $258 billion in tax cuts, soft loans to industry and credit guarantees to encourage growth.
Tumbling exports have hurt Europe's manufacturing industry - particularly in Germany, the world's largest exporter - which had helped drive economic growth this year even as household spending froze.
But one of the most important tools to manage the economy is out of the hands of most European governments - the independent European Central Bank decides on borrowing costs for euro nations and until recently was slow to cut interest rates while inflation was high.
The price index is a calmer 2.1% this month, the lowest since September 2007. It is also close to the ECB's guideline of just under 2%. Oil prices have dropped by more than half since July while retailers are slashing prices in the key Christmas shopping season.
The bank's mandate is to tackle inflation, which it has repeatedly stressed was too high this year, but the lower figure released Friday will allow it to move more aggressively to slash rates and kickstart the economy.
In recent days, bank governors have spoken out in favor of lowering its key interest rate - now 3.25% - to tackle the slowing economy. They next meet to decide rates is on Dec. 4 in Brussels.
Marco Valli, an economist at Unicredit, said he expected the ECB to make a "shy cut" next week to bring the interest rate to 2.75% next week. Bank of America's Gilles Moec said he thought the bank might gun for a more dramatic cut to 2.5%.
Lower borrowing costs can tempt businesses and households to borrow more - as long as banks pass on the cuts to customers.
That isn't always the case in the current climate of tight credit. Banks are more fearful about taking on risks in the wake of the financial crisis and are finding it harder and more expensive to borrow money on credit markets that they lend on to customers.
In Britain, the government has pressured banks to pass on hefty interest rate cuts to hard-pressed homeowners and small businesses. Some banks prefer to freeze their rates to claw back profit and shore up their reserves.
Prices also plunged with the annual inflation rate sinking to 2.1% in November from 3.2% in October, Eurostat said. Lower inflation gives the European Central Bank more room to reduce interest rates, which would help stoke growth.
The euro area officially went into a recession in spring and summer this year when growth shrank in the second and third quarters, as a financial crisis curbed global demand.
In real terms, this means job losses - lots of them and more to come.
Eurostat said some 225,000 more people were seeking work in October from the previous month. That means some 12 million people in the euro area were out of work last month. It also said unemployment in September was worse than it had first estimated, revising the rate upward to 7.6% from the 7.5% it reported last month.
Across all the EU's 27 states, some 17 million people were job-hunting in October, 290,000 more than a month earlier. The EU jobless rate was 7.1% in October, up from 7% in September.
The EU's executive Commission forecasts that the labor market will get even worse next year, with the euro-zone rate climbing to 8.4% in 2009 from a decade-low of 7% at the end of 2007. This will see an extra 2 million people out of work.
Unemployment is highest in Spain, at 12.8%. The bursting of a housing bubble has put builders out of work just as the tourism industry has been hurt by the global economic downturn.
The European Commission this week called on EU governments to pay out $258 billion in tax cuts, soft loans to industry and credit guarantees to encourage growth.
Tumbling exports have hurt Europe's manufacturing industry - particularly in Germany, the world's largest exporter - which had helped drive economic growth this year even as household spending froze.
But one of the most important tools to manage the economy is out of the hands of most European governments - the independent European Central Bank decides on borrowing costs for euro nations and until recently was slow to cut interest rates while inflation was high.
The price index is a calmer 2.1% this month, the lowest since September 2007. It is also close to the ECB's guideline of just under 2%. Oil prices have dropped by more than half since July while retailers are slashing prices in the key Christmas shopping season.
The bank's mandate is to tackle inflation, which it has repeatedly stressed was too high this year, but the lower figure released Friday will allow it to move more aggressively to slash rates and kickstart the economy.
In recent days, bank governors have spoken out in favor of lowering its key interest rate - now 3.25% - to tackle the slowing economy. They next meet to decide rates is on Dec. 4 in Brussels.
Marco Valli, an economist at Unicredit, said he expected the ECB to make a "shy cut" next week to bring the interest rate to 2.75% next week. Bank of America's Gilles Moec said he thought the bank might gun for a more dramatic cut to 2.5%.
Lower borrowing costs can tempt businesses and households to borrow more - as long as banks pass on the cuts to customers.
That isn't always the case in the current climate of tight credit. Banks are more fearful about taking on risks in the wake of the financial crisis and are finding it harder and more expensive to borrow money on credit markets that they lend on to customers.
In Britain, the government has pressured banks to pass on hefty interest rate cuts to hard-pressed homeowners and small businesses. Some banks prefer to freeze their rates to claw back profit and shore up their reserves.
Wednesday, November 26, 2008
Consumer spending drops 1%
Consumer spending fell dramatically in October, according to a government report released Wednesday, in another woeful sign that the economy will continue to contract.
The Commerce Department said spending by individuals fell by 1% last month, after declining 0.3% in September. It was the biggest decline since September 2001 and worse than the 0.7% drop economists surveyed by Briefing.com had forecast.
Falling consumer prices contributed heavily to the decline in overall spending. The so-called core PCE deflator rose by just 2% in the past 12 months, down from 2.2% by that measure in September.
This key reading, which measures prices paid by consumers for goods and services other than food and energy, is now in the 1% to 2% inflation window the Federal Reserve is generally believed to want, and it echoes a Labor Department report released last week that showed consumer prices fell by the highest amount since 1947.
But the report showed spending still fell by 0.5% when prices were not taken into account.
That's an ominous sign ahead of the holiday shopping season. It's particularly worrisome for the economy since consumer spending accounts for about two-thirds of the nation's gross domestic product.
Personal income, however, rose 0.3% in October, following a 0.2% rise in the previous month. Economists had expected a 0.1% rise.
The rise in personal income far outpaced the change in prices, leading to a 1% rise in real income in the period, the most since September 2005.
Because income gains outpaced spending, consumers posted a savings rate of 2.4% in the month compared with just 1% in September. That means the average household saved $2.40 on every $100 of after-tax income.
The Commerce Department said spending by individuals fell by 1% last month, after declining 0.3% in September. It was the biggest decline since September 2001 and worse than the 0.7% drop economists surveyed by Briefing.com had forecast.
Falling consumer prices contributed heavily to the decline in overall spending. The so-called core PCE deflator rose by just 2% in the past 12 months, down from 2.2% by that measure in September.
This key reading, which measures prices paid by consumers for goods and services other than food and energy, is now in the 1% to 2% inflation window the Federal Reserve is generally believed to want, and it echoes a Labor Department report released last week that showed consumer prices fell by the highest amount since 1947.
But the report showed spending still fell by 0.5% when prices were not taken into account.
That's an ominous sign ahead of the holiday shopping season. It's particularly worrisome for the economy since consumer spending accounts for about two-thirds of the nation's gross domestic product.
Personal income, however, rose 0.3% in October, following a 0.2% rise in the previous month. Economists had expected a 0.1% rise.
The rise in personal income far outpaced the change in prices, leading to a 1% rise in real income in the period, the most since September 2005.
Because income gains outpaced spending, consumers posted a savings rate of 2.4% in the month compared with just 1% in September. That means the average household saved $2.40 on every $100 of after-tax income.
Rough start on Wall Street
Stocks slumped Wednesday morning as a barrage of weak economic reports exacerbated fears of a prolonged recession.
The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all slumped in the early going.
Overseas markets were down, with the exception of Hong Kong. London's FTSE index and Frankfurt's Dax were down more than 2%, and the CAC in Paris fell more than 3%. The Nikkei fell 1.3% in Tokyo, though the Hang Seng surged 3.8%.
Economy: Investors were hit by a wave of gloomy reports.
The biggest disappointment was the Commerce Department's report on durable orders, which fell 6.2% in October, a retraction in manufacturing that was much worse than expected. Durable orders were expected to slide 2.5%, according to a consensus of economists surveyed by Briefing.com. This follows an decline of 0.2% the prior month.
The Labor Department's report on jobless claims was not as bad as expected, though it provided little cause for celebration ahead of the holidays. Jobless claims totaled 529,000 in the week ended Nov. 22, the department said, which was less than the 537,000 expected by a consensus of economists surveyed by Briefing.com.
The Commerce Department said personal income rose 0.3%, which was better than the 0.1% projected in economist consensus provided by Briefing.com. This is compared to an increase of 0.2% in the prior month.
Personal spending slipped 1% in October, the department said, which was not as bad as the 0.7% decline expected by Briefing.com's consensus of economists, but was still the biggest gain since the September 11 attacks on New York and Washington. There was a decline of 0.3% the prior month.
Peter Cardillo, analyst for Avalon Partners, said, in an interview before the economic reports were released, that weak economic data could put further pressure on stocks.
At 10:45 a.m. ET, President-elect Barack Obama is expected to announce his appointment of former Federal Reserve Chairman Paul Volcker to lead a special council aimed at battling the economic crisis.
After three straight days of gains in the Dow Jones industrial average, Cardillo said a positive reaction to Obama's announcement is the best potential market-driver on the day before Thanksgiving.
"I think Mr. Obama's press conference just might steer us towards a fourth day of gains," said Cardillo.
Cardillo said the bulk of Wednesday's trading volume will take place in the early part of the session, before traders take off for the Thanksgiving holiday.
U.S. financial markets will be closed Thursday, with only a half-day of trading scheduled Friday.
Oil and money: Crude prices steadied after the previous session's drop. U.S. crude for January delivery rose $1.71 to $52.48 a barrel on the New York Mercantile Exchange.
The dollar edged higher versus the euro and the British pound, but fell versus the yen.
China rate cut: On Wednesday, China's central bank cut its key interest rate by a hefty 1.08 percentage points. The move is aimed at boosting the country's slowing economic growth.
The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all slumped in the early going.
Overseas markets were down, with the exception of Hong Kong. London's FTSE index and Frankfurt's Dax were down more than 2%, and the CAC in Paris fell more than 3%. The Nikkei fell 1.3% in Tokyo, though the Hang Seng surged 3.8%.
Economy: Investors were hit by a wave of gloomy reports.
The biggest disappointment was the Commerce Department's report on durable orders, which fell 6.2% in October, a retraction in manufacturing that was much worse than expected. Durable orders were expected to slide 2.5%, according to a consensus of economists surveyed by Briefing.com. This follows an decline of 0.2% the prior month.
The Labor Department's report on jobless claims was not as bad as expected, though it provided little cause for celebration ahead of the holidays. Jobless claims totaled 529,000 in the week ended Nov. 22, the department said, which was less than the 537,000 expected by a consensus of economists surveyed by Briefing.com.
The Commerce Department said personal income rose 0.3%, which was better than the 0.1% projected in economist consensus provided by Briefing.com. This is compared to an increase of 0.2% in the prior month.
Personal spending slipped 1% in October, the department said, which was not as bad as the 0.7% decline expected by Briefing.com's consensus of economists, but was still the biggest gain since the September 11 attacks on New York and Washington. There was a decline of 0.3% the prior month.
Peter Cardillo, analyst for Avalon Partners, said, in an interview before the economic reports were released, that weak economic data could put further pressure on stocks.
At 10:45 a.m. ET, President-elect Barack Obama is expected to announce his appointment of former Federal Reserve Chairman Paul Volcker to lead a special council aimed at battling the economic crisis.
After three straight days of gains in the Dow Jones industrial average, Cardillo said a positive reaction to Obama's announcement is the best potential market-driver on the day before Thanksgiving.
"I think Mr. Obama's press conference just might steer us towards a fourth day of gains," said Cardillo.
Cardillo said the bulk of Wednesday's trading volume will take place in the early part of the session, before traders take off for the Thanksgiving holiday.
U.S. financial markets will be closed Thursday, with only a half-day of trading scheduled Friday.
Oil and money: Crude prices steadied after the previous session's drop. U.S. crude for January delivery rose $1.71 to $52.48 a barrel on the New York Mercantile Exchange.
The dollar edged higher versus the euro and the British pound, but fell versus the yen.
China rate cut: On Wednesday, China's central bank cut its key interest rate by a hefty 1.08 percentage points. The move is aimed at boosting the country's slowing economic growth.
Tuesday, November 25, 2008
Fed bets $800 billion on consumers
The Federal Reserve and Treasury Department on Tuesday unveiled hundreds of billions more in money they are pumping into the struggling U.S. economy, trying to jumpstart lending by the nation's banks for mortgages and consumer debt.
Together, the programs from the Federal Reserve and the New York Fed aim to dump $800 billion in additional funds into the struggling U.S. economy, more than Congress approved in October for a bailout of the nation's banks and Wall Street firms.
By putting that money in the hands of holders of consumer and mortgage loan securities, the government hopes more money will flow to consumers than has occured so far in previous bailout plans.
But the program to make $200 billion available for a range of consumer loans - including credit cards and car loans - likely won't be up and running until February. Government officials briefing reporters couldn't say how much additional credit the program might make available to consumers in time to feed purchases for the holiday shopping season.
That $200 billion aimed at spurring consumer borrowing will come from the Federal Reserve Bank of New York, which will lend that money to holders of securities backed by consumer debt, such as credit card debt.
The statement from Treasury said that while roughly $240 billion of those kinds of securities were issued by the nation's financial institutions in 2007, the issuance of those securities essentially came to a halt in October.
"This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy," said Treasury Secretary Henry Paulson at a press conference.
Treasury will allocate $20 billion to back that lending by the New York Fed, an attempt to cover any losses that the New York Fed might suffer as a part of the program.
But the $200 billion under this program, and an additional $600 billion being made available to increase mortgage lending, will come from an increase in reserves by the Fed. Essentially, the central bank is creating more money to cover that lending.
The Treasury, which oversees the $700 billion approved by Congress last month to help financial institutions, has been reluctant to make a major commitment of those funds to this new effort. Thus it allocated only $20 billion, or the same amount it invested in troubled banking giant Citigroup (C, Fortune 500) in a move announced Sunday.
So it was left to the Federal Reserve of New York, which is headed by Timothy Geithner, the man nominated by President-elect Obama to take Paulson's place, to come up with the funds to try to restart consumer lending.
The moves came as the Commerce Department announced that gross domestic product, the broad measure of the nation's economy, fell at an annual rate of 0.5% in the third quarter, the biggest drop in economic activity in seven years. Economists believe that the economy is likely to continue to contract in the current quarter and into early next year.
In addition, the Federal Reserve, the nation's central bank, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and closely held Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," said the statement from the Fed.
The financial crisis has frozen lending markets, making it nearly impossible for consumers and businesses to borrow money.
Treasury originally had planned to use the $700 billion bailout to buy troubled mortgage assets. But it has shifted gears and focused mostly on injecting capital into banks.
The last capital injection into Citigroup was part of a broader rescue package under which Treasury and another U.S. agency, the Federal Deposit Insurance Corp., announced it would guarantee losses on more than $300 billion of Citi's troubled assets.
But once again, Treasury is not using the $700 billion in bailout funds for that guarantee, as it tries to keep those funds available for future capital needs by the nation's financial institutions.
Together, the programs from the Federal Reserve and the New York Fed aim to dump $800 billion in additional funds into the struggling U.S. economy, more than Congress approved in October for a bailout of the nation's banks and Wall Street firms.
By putting that money in the hands of holders of consumer and mortgage loan securities, the government hopes more money will flow to consumers than has occured so far in previous bailout plans.
But the program to make $200 billion available for a range of consumer loans - including credit cards and car loans - likely won't be up and running until February. Government officials briefing reporters couldn't say how much additional credit the program might make available to consumers in time to feed purchases for the holiday shopping season.
That $200 billion aimed at spurring consumer borrowing will come from the Federal Reserve Bank of New York, which will lend that money to holders of securities backed by consumer debt, such as credit card debt.
The statement from Treasury said that while roughly $240 billion of those kinds of securities were issued by the nation's financial institutions in 2007, the issuance of those securities essentially came to a halt in October.
"This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy," said Treasury Secretary Henry Paulson at a press conference.
Treasury will allocate $20 billion to back that lending by the New York Fed, an attempt to cover any losses that the New York Fed might suffer as a part of the program.
But the $200 billion under this program, and an additional $600 billion being made available to increase mortgage lending, will come from an increase in reserves by the Fed. Essentially, the central bank is creating more money to cover that lending.
The Treasury, which oversees the $700 billion approved by Congress last month to help financial institutions, has been reluctant to make a major commitment of those funds to this new effort. Thus it allocated only $20 billion, or the same amount it invested in troubled banking giant Citigroup (C, Fortune 500) in a move announced Sunday.
So it was left to the Federal Reserve of New York, which is headed by Timothy Geithner, the man nominated by President-elect Obama to take Paulson's place, to come up with the funds to try to restart consumer lending.
The moves came as the Commerce Department announced that gross domestic product, the broad measure of the nation's economy, fell at an annual rate of 0.5% in the third quarter, the biggest drop in economic activity in seven years. Economists believe that the economy is likely to continue to contract in the current quarter and into early next year.
In addition, the Federal Reserve, the nation's central bank, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and closely held Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," said the statement from the Fed.
The financial crisis has frozen lending markets, making it nearly impossible for consumers and businesses to borrow money.
Treasury originally had planned to use the $700 billion bailout to buy troubled mortgage assets. But it has shifted gears and focused mostly on injecting capital into banks.
The last capital injection into Citigroup was part of a broader rescue package under which Treasury and another U.S. agency, the Federal Deposit Insurance Corp., announced it would guarantee losses on more than $300 billion of Citi's troubled assets.
But once again, Treasury is not using the $700 billion in bailout funds for that guarantee, as it tries to keep those funds available for future capital needs by the nation's financial institutions.
Problem banks rise to 13-year high
The government's watch list of problem banks grew staggeringly in the third quarter, according to a government report on the embattled financial sector released Tuesday.
The Federal Deposit Insurance Corp. reported that the number of firms on its so-called problem bank list grew to 171 during the third quarter - the highest since 1995 when there were 193 banks on the list. There were 117 banks on the list in the second quarter.
"We've had profound problems in our financial markets that are taking a rising toll on the real economy," said Sheila Bair, FDIC chairman, at a press conference. "Today's report reflects these challenges."
Though the FDIC does not reveal the names of the banks on the list, it said the total assets of these institutions rose to $115.6 billion in the third quarter from $78.3 billion in the previous three months, the first time since 1994 in which the assets of problem banks exceeded $100 billion.
Since home prices began to decline late last year, banks have faced strong headwinds as the value of their mortgage-backed securities declined sharply in value. Those assets became "toxic" holdings on their balance sheets, resulting in a lending freeze, soaring borrowing costs and large writedowns.
"Banks got caught in a vicious cycle mainly of their own developing," said Matt McCormick, analyst at Bahl & Gaynor Investment Counsel. "The lowest common denominator turned out not to be their best client; for all their brilliance, they flunked Economics 101."
Still, just 2% of FDIC-regulated banks are now on its watch list, compared to about 10% in the late 1980s and early 1990s during the savings and loan crisis. The government identifies problem banks as institutions on the brink of failure, facing severe financing difficulties and management issues. But few banks typically reach that point - just 13% of banks on the FDIC's problem list have failed on average.
"Most banks remain well-capitalized, profitable and sound," said Bair. "We believe the overall majority of them will not fail."
Three more banks failed on Friday, bringing the total to 22 failed banks so far this year - compared to just three in 2007. Nine banks failed in the third-quarter alone, including the collapse of savings and loan Washington Mutual, the largest bank failure in history.
This was the highest number of failures in a quarter since the third quarter of 1993 but pales in comparison to the more than 1,000 banks that failed during the savings and loan crisis. Still, the failures in the third quarter forced the FDIC to draw down $10.6 billion from its deposit insurance fund.
That number could rise substantially if there are more bank failures. Beginning in October, the FDIC began insuring interest-bearing accounts up to $250,000 (the previous limit was $100,000) and has issued unlimited guarantees on non-interest-bearing accounts and newly issued unsecured bank debt as part of the government's financial rescue initiatives.
Ugly profits
Toxic assets continued to weigh on the industry's profits, which fell 90% to $1.7 billion in the quarter from $28.7 billion a year ago. That was the second-lowest quarterly net income for banks since 1990, the FDIC said. About one in five banks reported a net loss in the quarter, compared just to one in eight during the same period last year.
Much of that decline was due to loan-loss provisions, which totaled $50.5 billion in the quarter after banks set aside $50.2 billion in the previous quarter. That's more than three-times the $16.8 billion in loan-loss provisions from the fourth quarter of 2007.
"Loan performance problems are spreading to a much wider range of lenders and category of loans," said Bair. "This trend is linked to a weaker economy and uncertainty in the financial markets."
Also contributing to damaged profits were loan losses, which rose for the seventh consecutive quarter. Net charge offs, or loans banks don't think are collectable, rose to $27.9 billion in the quarter, up from $17 billion during the same period a year ago, and its highest level since 1991.
In a sign that credit remained tight, banks borrowed $162.5 billion from the Federal Reserve's emergency lending window, up 4.8% from the same period a year ago. In its so-called "discount window," the Fed offers overnight funding for commercial banks at a rate slightly higher than its targeted funds rate.
Bair said smaller community banks with assets of less than $1 billion are also beginning to feel the stress of the weak economy, even though they remain better capitalized than the industry average.
As a result, Bair said it is essential that those banks take part in the Treasury Department's capital purchase program and the FDIC's new temporary liquidity program to stay afloat.
But there were some bright spots in the report. One of the government's early liquidity programs, which provided support to money market mutual funds by funding banks' purchases of asset-backed corporate debt led to a 2.1% boost of banks assets in the quarter. And banks' net interest income rose 4.9% to $4.4 billion as borrowing costs rose.
"It's important to emphasize that banks in large part still made money in the third quarter, which was a very difficult one," said Gary Townsend, president of the Chevy Chase, Md.-based Hill-Townsend Capital. "The fourth quarter is likely to be worse, but last quarter they paid forward a lot of loan losses."
Bair said the poor credit conditions will persist for some time, as it will take a while for sentiment to improve and for the numerous government liquidity programs to take effect.
She added she will continue to work with President-elect Obama's administration beginning Jan. 20 to help stabilize the financial sector.
The Federal Deposit Insurance Corp. reported that the number of firms on its so-called problem bank list grew to 171 during the third quarter - the highest since 1995 when there were 193 banks on the list. There were 117 banks on the list in the second quarter.
"We've had profound problems in our financial markets that are taking a rising toll on the real economy," said Sheila Bair, FDIC chairman, at a press conference. "Today's report reflects these challenges."
Though the FDIC does not reveal the names of the banks on the list, it said the total assets of these institutions rose to $115.6 billion in the third quarter from $78.3 billion in the previous three months, the first time since 1994 in which the assets of problem banks exceeded $100 billion.
Since home prices began to decline late last year, banks have faced strong headwinds as the value of their mortgage-backed securities declined sharply in value. Those assets became "toxic" holdings on their balance sheets, resulting in a lending freeze, soaring borrowing costs and large writedowns.
"Banks got caught in a vicious cycle mainly of their own developing," said Matt McCormick, analyst at Bahl & Gaynor Investment Counsel. "The lowest common denominator turned out not to be their best client; for all their brilliance, they flunked Economics 101."
Still, just 2% of FDIC-regulated banks are now on its watch list, compared to about 10% in the late 1980s and early 1990s during the savings and loan crisis. The government identifies problem banks as institutions on the brink of failure, facing severe financing difficulties and management issues. But few banks typically reach that point - just 13% of banks on the FDIC's problem list have failed on average.
"Most banks remain well-capitalized, profitable and sound," said Bair. "We believe the overall majority of them will not fail."
Three more banks failed on Friday, bringing the total to 22 failed banks so far this year - compared to just three in 2007. Nine banks failed in the third-quarter alone, including the collapse of savings and loan Washington Mutual, the largest bank failure in history.
This was the highest number of failures in a quarter since the third quarter of 1993 but pales in comparison to the more than 1,000 banks that failed during the savings and loan crisis. Still, the failures in the third quarter forced the FDIC to draw down $10.6 billion from its deposit insurance fund.
That number could rise substantially if there are more bank failures. Beginning in October, the FDIC began insuring interest-bearing accounts up to $250,000 (the previous limit was $100,000) and has issued unlimited guarantees on non-interest-bearing accounts and newly issued unsecured bank debt as part of the government's financial rescue initiatives.
Ugly profits
Toxic assets continued to weigh on the industry's profits, which fell 90% to $1.7 billion in the quarter from $28.7 billion a year ago. That was the second-lowest quarterly net income for banks since 1990, the FDIC said. About one in five banks reported a net loss in the quarter, compared just to one in eight during the same period last year.
Much of that decline was due to loan-loss provisions, which totaled $50.5 billion in the quarter after banks set aside $50.2 billion in the previous quarter. That's more than three-times the $16.8 billion in loan-loss provisions from the fourth quarter of 2007.
"Loan performance problems are spreading to a much wider range of lenders and category of loans," said Bair. "This trend is linked to a weaker economy and uncertainty in the financial markets."
Also contributing to damaged profits were loan losses, which rose for the seventh consecutive quarter. Net charge offs, or loans banks don't think are collectable, rose to $27.9 billion in the quarter, up from $17 billion during the same period a year ago, and its highest level since 1991.
In a sign that credit remained tight, banks borrowed $162.5 billion from the Federal Reserve's emergency lending window, up 4.8% from the same period a year ago. In its so-called "discount window," the Fed offers overnight funding for commercial banks at a rate slightly higher than its targeted funds rate.
Bair said smaller community banks with assets of less than $1 billion are also beginning to feel the stress of the weak economy, even though they remain better capitalized than the industry average.
As a result, Bair said it is essential that those banks take part in the Treasury Department's capital purchase program and the FDIC's new temporary liquidity program to stay afloat.
But there were some bright spots in the report. One of the government's early liquidity programs, which provided support to money market mutual funds by funding banks' purchases of asset-backed corporate debt led to a 2.1% boost of banks assets in the quarter. And banks' net interest income rose 4.9% to $4.4 billion as borrowing costs rose.
"It's important to emphasize that banks in large part still made money in the third quarter, which was a very difficult one," said Gary Townsend, president of the Chevy Chase, Md.-based Hill-Townsend Capital. "The fourth quarter is likely to be worse, but last quarter they paid forward a lot of loan losses."
Bair said the poor credit conditions will persist for some time, as it will take a while for sentiment to improve and for the numerous government liquidity programs to take effect.
She added she will continue to work with President-elect Obama's administration beginning Jan. 20 to help stabilize the financial sector.
Sunday, November 23, 2008
Obama expected to tap Geithner for Treasury
President-elect Barack Obama is expected to nominate New York Federal Reserve President Timothy Geithner for Treasury Secretary.
Two sources close to the transition told CNN on Friday that Geithner is "on track" to be offered the post. An announcement is expected within days.
Geithner has played a central role in the government's efforts to wrangle the credit crisis, which has damaged markets and economies worldwide. While a number of those efforts have been controversial, Geithner remains a well-regarded figure from Wall Street to Washington.
In the wake of the Geithner news, stocks soared in late-day trade on Friday. The Dow closed nearly 500 points higher, pushing back above 8,000, after a dismal week.
Many believe the post of Treasury Secretary will be the most important in the next administration's cabinet. And indeed, Geithner would inherit one of the toughest jobs in Washington.
Geithner would be charged with restoring stability to the financial markets, the banking system and the housing sector through oversight of the controversial $700 billion financial rescue package, of which about half is still available for use at the discretion of the Treasury Secretary.
He would also be chief overseer of the international push to reform the regulatory regime for the financial system, which, like a sputtering lemon on the autobahn, has been severely outrun by 21st century developments in financial practices and products.
His overarching task: Ensure that what happened to world markets and economies in the fall of 2008 never happens again.
In the span of just two months, Americans and investors around the world have lost trillions in wealth, economies have fallen into recession like dominoes and the current prospects for recovery are insufficient to offer comfort. All the while, the foreclosure beat goes on, with roughly 165,000 more Americans losing their homes in September and October, bringing the total to 936,000 since August 2007.
Expect Geithner, if nominated, to roll up his sleeves and get busy even before his confirmation hearings with Congress, which could come before Inauguration Day.
Henry Paulson, the current Treasury Secretary, has indicated that he's reserved office space for his successor so that the Bush and Obama Treasury teams can work closely to insure a smooth transition during what has become the most tumultuous period for the U.S. financial system and economy in recent history.
What Geithner brings to the job
Often described as brilliant but modest, Geithner, 47, has held for the past five years one of the most powerful, if little known, jobs in the country as president of the New York Federal Reserve. His post at the New York Fed is essentially one of Wall Street watchdog. He also sits on the Federal Open Market Committee, which sets the country's monetary policy.
"His reputation is excellent," said former Federal Reserve Governor Lyle Gramley, who adds he doesn't know Geithner personally.
Geithner was the U.S. Federal Reserve's point person on the rescue of Bear Stearns and American International Group (AIG, Fortune 500) as well as in the failed talks to keep Lehman Brothers out of bankruptcy.
Lehman's demise is blamed by many for the freeze up in global credit markets that followed immediately afterwards.
He is typically cited as one of the few people on or off Wall Street who can begin to untangle the murky and unregulated market of credit default swaps, the so-called "side bets" that felled AIG. He has pushed for greater transparency and the creation of a central clearinghouse where credit default swaps could be recorded and secured. And, according to Fortune, he has gotten informal promises from banks that they would participate.
Prior to joining the Fed, he served as director of policy development and review at the International Monetary Fund. Before that, he was the under secretary of the Treasury for international affairs under Treasury Secretaries Robert Rubin and Lawrence Summers.
His is an international background, which would come in handy at a time when G-20 governments have pledged to coordinate efforts to dig out their economies and markets. Geithner has lived in China, Japan, Thailand, India and East Africa. He got his bachelor's from Dartmouth in government and Asian studies and his master's in international economics and East Asian studies from Johns Hopkins School of Advanced International Studies.
Indeed, during his years at the Treasury, he played a central role in the agency's handling of international crises. A profile of him in The New Republic asserted that without his influence "the '90s might have looked very different ... [His role made him] Treasury's first-responder to foreign-currency emergencies, like the kind that plagued East Asia throughout the decade."
Two sources close to the transition told CNN on Friday that Geithner is "on track" to be offered the post. An announcement is expected within days.
Geithner has played a central role in the government's efforts to wrangle the credit crisis, which has damaged markets and economies worldwide. While a number of those efforts have been controversial, Geithner remains a well-regarded figure from Wall Street to Washington.
In the wake of the Geithner news, stocks soared in late-day trade on Friday. The Dow closed nearly 500 points higher, pushing back above 8,000, after a dismal week.
Many believe the post of Treasury Secretary will be the most important in the next administration's cabinet. And indeed, Geithner would inherit one of the toughest jobs in Washington.
Geithner would be charged with restoring stability to the financial markets, the banking system and the housing sector through oversight of the controversial $700 billion financial rescue package, of which about half is still available for use at the discretion of the Treasury Secretary.
He would also be chief overseer of the international push to reform the regulatory regime for the financial system, which, like a sputtering lemon on the autobahn, has been severely outrun by 21st century developments in financial practices and products.
His overarching task: Ensure that what happened to world markets and economies in the fall of 2008 never happens again.
In the span of just two months, Americans and investors around the world have lost trillions in wealth, economies have fallen into recession like dominoes and the current prospects for recovery are insufficient to offer comfort. All the while, the foreclosure beat goes on, with roughly 165,000 more Americans losing their homes in September and October, bringing the total to 936,000 since August 2007.
Expect Geithner, if nominated, to roll up his sleeves and get busy even before his confirmation hearings with Congress, which could come before Inauguration Day.
Henry Paulson, the current Treasury Secretary, has indicated that he's reserved office space for his successor so that the Bush and Obama Treasury teams can work closely to insure a smooth transition during what has become the most tumultuous period for the U.S. financial system and economy in recent history.
What Geithner brings to the job
Often described as brilliant but modest, Geithner, 47, has held for the past five years one of the most powerful, if little known, jobs in the country as president of the New York Federal Reserve. His post at the New York Fed is essentially one of Wall Street watchdog. He also sits on the Federal Open Market Committee, which sets the country's monetary policy.
"His reputation is excellent," said former Federal Reserve Governor Lyle Gramley, who adds he doesn't know Geithner personally.
Geithner was the U.S. Federal Reserve's point person on the rescue of Bear Stearns and American International Group (AIG, Fortune 500) as well as in the failed talks to keep Lehman Brothers out of bankruptcy.
Lehman's demise is blamed by many for the freeze up in global credit markets that followed immediately afterwards.
He is typically cited as one of the few people on or off Wall Street who can begin to untangle the murky and unregulated market of credit default swaps, the so-called "side bets" that felled AIG. He has pushed for greater transparency and the creation of a central clearinghouse where credit default swaps could be recorded and secured. And, according to Fortune, he has gotten informal promises from banks that they would participate.
Prior to joining the Fed, he served as director of policy development and review at the International Monetary Fund. Before that, he was the under secretary of the Treasury for international affairs under Treasury Secretaries Robert Rubin and Lawrence Summers.
His is an international background, which would come in handy at a time when G-20 governments have pledged to coordinate efforts to dig out their economies and markets. Geithner has lived in China, Japan, Thailand, India and East Africa. He got his bachelor's from Dartmouth in government and Asian studies and his master's in international economics and East Asian studies from Johns Hopkins School of Advanced International Studies.
Indeed, during his years at the Treasury, he played a central role in the agency's handling of international crises. A profile of him in The New Republic asserted that without his influence "the '90s might have looked very different ... [His role made him] Treasury's first-responder to foreign-currency emergencies, like the kind that plagued East Asia throughout the decade."
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