Business life: My finance news blog

Malaysia's central bank, expected by economists to raise interest rates tomorrow, said it will assess the risks to economic growth as well as the outlook for inflation before making a decision.

The case for raising borrowing costs is “less clear'' in some countries than in others, Governor ZetiAkhtar Aziz said today in Kuala Lumpur. Bank Negara Malaysia has left the benchmark overnight policy rate at 3.5 percent since April 2006.

“There have been mixed assessments both in developed as well as developing countries,'' Zeti said. “For countries that had strong growth and overheating conditions, as well as high inflation, the solution was very clear for them to raise interest rates. We will consider all the factors and take a decision that is in Malaysia's best interests.''

Central banks in the region, including Indonesia and the Philippines, have boosted borrowing costs to battle inflation at the risk of curtailing growth as a U.S. slowdown hurts exports. Inflation in Malaysia accelerated to a 26-year high of 7.7 percent in June, and Credit Suisse Group AG said today rates may be raised tomorrow, earlier than it previously forecast.

Last month's 41 percent increase in gasoline prices has fanned inflation in Malaysia, where the government is attempting to cut fuel subsidies and trim the budget deficit.

So-called second-round inflation, where higher food and oil costs spread to other goods and services, as well as wages, may be “highly damaging,'' Zeti said.

“We are going to look at what are the risks to the inflation outlook, whether it is going to increase and continue to increase in an extended period of time, or whether there will be other mitigating factors,'' she said. “We will also look at what is the risk to moderation in our growth outlook.''

Higher borrowing costs in Malaysia may weigh on consumer spending, which the government is relying on to sustain economic growth as exports to the U.S. slow.

Zeti has said she expects economic growth to drop to about 5 percent this year from 6.3 percent in 2007.

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The House of Representatives is set to vote today on a rescue plan for Fannie Mae and Freddie Mac after U.S. lawmakers reached a deal on legislation aimed at alleviating the worst housing recession in a quarter century.

“The package we have got is fully acceptable'' to the Treasury, Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said late yesterday. Legislators crafted the agreement nine days after Treasury Secretary Henry Paulson asked for powers to inject capital into Fannie Mae and Freddie Mac.

The agreement increases the likelihood Paulson will get the authority this week, after he lobbied lawmakers to overcome concerns about taxpayer liability. The Treasury chief argued that the backstop for the beleaguered mortgage companies was critical to help safeguard U.S. financial market stability.

“It's important to get this legislation in place, and Congress and Paulson have done well to put together a workmanlike bill,'' said Peter Wallison, a former Treasury general counsel who is now a fellow at the American Enterprise Institute in Washington.

Lawmakers added the provisions to legislation that would create a stronger regulator for Fannie Mae and Freddie Mac and expand federal efforts to stem mortgage defaults. Frank introduced the bill to reduce foreclosures in April.

Bush administration officials are reviewing the 694-page bill. Frank told reporters in Washington the House will vote today, with the Senate expected to take it up tomorrow.

Debt Limit

Lawmakers, intent on limiting potential losses to taxpayers, tied the potential aid to Fannie Mae and Freddie Mac to the federal debt limit. Still, they also raised that ceiling to $10.6 trillion from the current $9.815 trillion.

Paulson, in an emergency move after Fannie Mae and Freddie Mac stock dropped to the lowest levels in more than 17 years, asked July 13 for power to make unlimited equity purchases in the firms. He also asked for “unspecified'' increases in their lines of credit, from $2.25 billion each. Both proposed measures would last until the end of next year.

Democratic lawmakers challenged the White House with yesterday's deal by including a measure it has repeatedly threatened to veto.

The provision would channel $3.9 billion to communities for the purchase of foreclosed properties. Officials have said it would aid lenders who now owned the vacated properties rather than struggling homeowners. House Democrats have predicted President George W. Bush wouldn't veto the bill.

`Play Politics'

“It's clear that the Democrats chose to play politics with the legislation,'' White House spokesman Tony Fratto said in an e-mail, without mentioning any veto plans.

Frank's counterpart in the Senate issued a statement indicating he backs the bill.

“We remain optimistic about the prospects for this legislation,'' Democratic Senator Christopher Dodd said in a joint statement with Republican Senator Richard Shelby.

Dodd, of Connecticut, chairs the Senate Banking Committee and Shelby, of Alabama, is the panel's top Republican. After the Senate, the bill would go to President Bush for signing into law.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about half of the $12 trillion of U.S. home loans outstanding. The companies face mounting losses stemming from the collapse of the subprime market.

Drop in Stocks

Fannie Mae has dropped about 45 percent in the past month, and Freddie Mac has tumbled about 60 percent, on concern they have insufficient capital to cover writedowns and losses.

“This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television yesterday. “We must, in the short term, take steps to boost confidence'' in the firms.

In addition to a new regulator, the bill provides for the Federal Reserve to consult on Fannie Mae and Freddie Mac finances. Paulson said this week that the Fed has already begun participating in assessments of the companies.

The housing bill would create a program aimed to help an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government.

Fannie Mae and Freddie Mac would have a new, higher cap on the size of mortgages they may purchase. The new limit would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said.

Mortgage Bonds

States would be able to offer an additional $11 billion of mortgage-revenue bonds to refinance subprime loans.

Chances for the legislation's passage also got a boost yesterday when the Congressional Budget Office released a cost estimate for Paulson's plan that was lower than some had feared. While a range of outcomes was possible, the non-partisan group put a price tag of $25 billion on the proposals.

“It's pretty good news — a lot of people thought it would be much higher,'' Shelby said yesterday.

The CBO also warned of the consequences of Congress failing to approve the backstop.

“Failing to provide such authority at this point could trigger turmoil in the nation's financial and housing markets, with potentially serious adverse consequences,'' the CBO said, noting that markets are anticipating the measure's passage.

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Chancellor of the Exchequer Alistair Darling said fallout from a global credit crunch is proving worse than previously expected, a sign that U.K. policy makers are bracing for slower growth.

“The effect of what has happened is going to be far more profound than people predicted even at the turn of this year,'' Darling said in an interview with Bloomberg Television, which will air excerpts today. “It is quite clear that if you look during the course of this year, conditions have become more difficult across the world.''

The finance minister, whose tenure has coincided with the sharpest decline in house prices and the steepest rise in living costs in a decade, reiterated his belief the British economy will escape recession and pledged to keep up the fight against inflation.

The deteriorating economic outlook, together with a run on deposits at Northern Rock Plc in September and a series of U- turns on tax policy, have eroded Prime Minister Gordon Brown's popularity. Darling won't release new economic forecasts until his pre-budget statement in the fourth quarter.

Britain's economic growth will probably slow to 1.6 percent this year and 1.3 percent in 2009, the weakest since 1992, according to a survey of 40 economists by the Treasury released on July 16. In March, Darling expected growth of up to 2.25 percent this year, compared with 3.1 percent in 2007.

Slower Growth

The Bank of England has already presented a more somber outlook. Governor Mervyn King said then that there may be “an odd quarter or two of negative growth.'' His deputy, John Gieve, said policy makers must grapple with inflation “well over'' 4 percent, double the government's target.

The central bank expects growth to slow to 1 percent in the first quarter of 2009. Consumer prices climbed 3.8 percent in June from a year earlier, the most since records began in 1997.

House prices fell the most in 15 years in June as higher borrowing costs reduced mortgage lending, triggering the worst property slump since Britain's last recession in 1991, according to HBOS Plc, the U.K.'s biggest mortgage lender.

“Times are tough,'' Darling said in the interview, which was recorded July 14. “They are tough for everyone.''

The Conservative opposition had a 22 percentage point lead over Labour in a YouGov Plc survey published on July 13. Forty- six percent of people predicted a recession in the next year, compared with 31 percent in June, YouGov said in its survey of 1,800 people. Brown has until June 201o to call the next election.

Tax Cuts

In May, Darling announced a 2.7 billion-pound ($5.4 billion) emergency tax cut for 22 million people and last week postponed for six months an increase in fuel duty to cushion the effect of record oil costs.

In the interview, Darling said the worst of the credit crisis is far from over, noting action to prop up the mortgage lenders Freddie Mac and Fannie Mae in the U.S. In Britain, Alliance & Leicester Plc agreed to be acquired by Banco Santander SA of Spain for 1.26 billion pounds, less than half of its market value at the end of last year.

Worldwide, banks and securities firms have raised $324 billion in the past year after record writedowns and credit losses of almost $410 billion from the collapse of the subprime mortgage market, according to data compiled by Bloomberg.

“I don't think anyone would be wise to start speculating on how long the present difficulties will last,'' Darling said. “We are dealing with them here and other countries are dealing them as well. If you look at the problems the banks have had, they have moved into a different phase and governments have to take account of that.''

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For Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, chocolate isn't as sweet as it used to be: The cost of almost every ingredient has gone up.

“Commodities across the board have pressured us,'' said Bryan Merryman, the chief financial officer of Rocky Mountain Chocolate Factory Inc., as he led Hoenig on a two-hour tour of the company's Durango, Colorado, factory this week. “There are a lot of pressures in our system that we haven't seen before.''

Nestled on the western slope of the Rocky Mountains about 400 miles (643.6 kilometers) southwest of Denver, the 53,000- square-foot (4,770-square-meter) factory offers a glimpse of how Fed policy makers gather anecdotes that shape their views on the economy. Hoenig, one of 12 regional Fed presidents, said he takes road trips two or three times a year. The factory visit supports his worries about inflation, he said.

“When you see a business like this one, where everything it uses has been accelerating in price, you see what it does to a business person,'' Hoenig, 61, said. The July 15 visit “reinforced the way I think, because I'm on record as being concerned about inflation,'' he said.

A day after the trip, the Labor Department reported a 5 percent increase in consumer prices for the 12 months ended in June, the most in 17 years. Fed policy makers are trying to fight inflation and economic weakening. Growth for the six months ended in March was the slowest in five years.

Rocky Mountain's sales began to slow in September, Merryman said. Now, “our business is certainly in a recession. I don't know what the catalyst is going to be for a turnaround.''

Rising Costs

Cocoa prices have risen 10 percent annually for five or six years, and fuel and corn syrup are climbing at annual rates of 30 percent or more, Merryman said.

The central bank is facing the biggest U.S. financial crisis since the Great Depression, according to the International Monetary Fund, amid collapsing home values and lack of credit for many borrowers. Fed Chairman Ben S. Bernanke told the Senate Banking Committee in Washington on July 15 that risks have increased for U.S. growth and inflation.

Durango, best known for whitewater rafting, kayaking, and access to five major ski areas, has largely been shielded from the “peaks and valleys'' of the real-estate market because of economic diversity, said Gary Derck, chief executive and president of the company that manages the Durango Mountain Resort.

The Old West city of about 15,000 people has a college and a medical center and acts as a center for the oil and gas industry in the U.S. Southwest.

Donning Hair Nets

Hoenig and the Kansas City Fed's Denver branch directors donned hair nets and peppered Merryman with questions on the tour as they watched workers make Rocky Pop caramel corn and raisin clusters.

Rocky Mountain's revenue for the fiscal first quarter ended May 31 dropped to $7.1 million from $7.3 million a year earlier as fewer customers visited its more than 300 stores. Rocky Mountain shares have dropped 45 percent this year to $8.72 yesterday on the Nasdaq Stock Market.

With chocolates priced at $19 a pound, Rocky Mountain positions itself between Godiva Chocolatier Inc., owned by Yildiz Holding AS of Turkey, and See's Candies Inc., owned by Berkshire Hathaway Inc.

While states such as California, Florida and Nevada were hit by falling real-estate values during the past year, the Kansas City Fed's district has been insulated by surging farm incomes and farmland values. The district includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming and parts of New Mexico and Missouri.

`Modest' Growth

Economic growth in the seven-state area has been “modest,'' with higher gasoline and food prices limiting spending at malls in April and May, according to the Fed's most recent summary of current economic conditions in the region.

Anecdotes like the ones gathered at the Rocky Mountain factory make their way into the Fed's so-called Beige Book report and are a part of a give-and-take process of gathering and sharing information, Hoenig said.

“The Fed is not just a Washington-centric institution,'' he said. “It's an institution that has 12 regional banks reaching out for information and sharing information with citizens.''

Hoenig, who makes 50 to 60 mostly private speeches a year, said he plans to make trips to Oklahoma City and Scottsbluff, Nebraska, later this year.

“What the reserve banks hear from their contacts can provide the Fed with an early warning of changes that may not show up in the published statistics for several weeks or even months,'' said Al Broaddus, former president of the Richmond Fed.

`Emotional Recession'

While Durango Mountain Resort is expecting a 20 percent year-over-year rise in lodging rates and volume from June to September, some families aren't staying extra nights or buying vacation homes, Derck said.

“We think we have an emotional recession that's preventing even folks whose personal situations are better off than a year ago from investing, spending and enjoying life,'' he said before meeting with Hoenig at the French restaurant Chez Grand-Mere. “People who are affluent and well-off have a brain, too, and have the same psychology: They don't know what the next shoe is to drop.''

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China's economy grew at the slowest pace since 2005 in the second quarter, prompting speculation the government will slow the yuan's gains to protect export jobs.

Gross domestic product rose 10.1 percent from a year earlier, down from 10.6 percent in the first quarter, as exports weakened and the government curbed lending. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May, the statistics bureau said today in Beijing.

The yuan fell 0.2 percent against the dollar, paring a 7 percent advance this year that made it Asia's best performer. Some Chinese officials are pressing for slower currency appreciation to protect jobs as cooling global demand threatens to trigger a slump in shipments from the world's fastest-growing major economy.

“A slower pace of appreciation would mean breathing room for the export sector,'' said Jing Ulrich, JPMorgan's chairwoman of China equities.

The yuan closed at 6.8213 against the dollar in Shanghai.

GDP growth cooled for the fourth straight quarter. The median estimate of 18 economists surveyed by Bloomberg News was for a 10.3 percent expansion. The U.S. economy grew 2.5 percent in the first quarter.

China's growth is still the fastest of the world's 20 biggest economies and is helping to sustain the global expansion this year as a housing slump and credit-market turmoil threaten to send the U.S. into a recession.

`Orderly Slowdown'

“This is an orderly slowdown, not a dramatic one,'' said Kevin Lai, a Hong Kong-based economist with Daiwa Institute of Research.

The trade surplus for the second quarter narrowed 12 percent from a year earlier to $58.14 billion as import costs climbed and U.S. demand faltered.

Export prospects have deteriorated, with Federal Reserve Chairman Ben S. Bernanke saying this week that the U.S. faces “significant downside risks to the outlook for growth.''

Rising prices, constraints on agricultural output, lagging rural incomes and global financial market turmoil are problems for China's economy, the statistics bureau said in a statement.

The Ministry of Commerce has urged China's cabinet to rein in currency gains and raise some export rebates, a ministry official said July 14, speaking on condition of anonymity.

The yuan will gain only another 2.6 percent against the dollar by year end, according to the median estimate of 26 currency analysts surveyed by Bloomberg. It has risen 21 percent since the government scrapped a fixed exchange rate in July 2005.

`We'll Be Dead'

“We'll all be dead if the government doesn't increase tax rebates and slow the appreciation,'' Tang Zhenya, a salesman at Changshu Shengtian Knitting & Clothing Co. in Jiangsu province said yesterday.

Most textile companies were unprofitable in the first five months of the year, Du Yuzhou, President of China Chamber of Commerce for Import and Export of Textiles said at an industry conference in Shanghai.

As many as 45 million workers earn their livings in export- oriented sectors, according to Jonathan Anderson, a Hong Kong- based economist with UBS AG. He cites government surveys.

Inflation has eased from February's 12-year high of 8.7 percent on smaller gains in food prices. It remains above the central bank's 4.8 percent annual target and rising commodity costs may keep prices elevated.

Morgan Stanley today raised its inflation forecast for the year to 7 percent from 6.5 percent, citing the likelihood of energy-price increases.

Producer-Price Inflation

Producer prices climbed 8.8 percent in June from a year earlier, the statistics bureau said today, after rising 8.2 percent in May. That is the fastest pace since Bloomberg data began in 1999.

“The high producer-prices number points to the potential risk of inflation in the coming months,'' said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong. “Inflation is still way above the official target so a tight policy will continue.''

Besides using the currency to cool inflation, China has imposed lending quotas and ordered banks to set aside a record 17.5 percent of deposits as reserves to soak up cash flooding the economy from trade, foreign direct investment and investors betting on gains by the yuan.

The central bank hasn't raised interest rates this year to avoid attracting capital inflows. The China Banking Regulatory Commission has warned against higher bank reserve requirements because they've already damaged the industry's ability to repay debt, according to a person with knowledge of the matter.

Borrowing Costs

Standard Chartered Bank Plc today cut its forecast for four interest-rate increases this year to none and said the next change will be a reduction in 2009.

Goldman Sachs Group Inc. reduced its estimate for this year's economic expansion to 10.1 percent from 10.6 percent and said it no longer expected a rate increase. Lehman Brothers Holdings Inc. forecasts the yuan will rise to 6.7 against the dollar by year end.

Government efforts to boost consumption at home may be paying off. Retail sales rose 23 percent in June from a year earlier, the fastest pace since at least 1999. Urban disposable incomes rose 14.4 percent to 8065 yuan for the first half from a year earlier. Rural cash incomes climbed 19.8 percent to 2528 yuan.

“The surprising thing is the strength of the domestic economy,'' said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong. “Consumers still have a lot of cash and in that sense it's difficult to be too pessimistic about the domestic economy.''

Earthquake Reconstruction

Investment jumped amid rebuilding after the Sichuan earthquake in May. Urban fixed-asset investment surged 26.8 percent in the first half from a year earlier, the statistics bureau said, after climbing 25.6 percent in the first five months.

“They can keep the economy growing at 10 percent even if there is a sharp slowdown elsewhere in the world,'' said Julian Jessop, an economist with Capital Economics Ltd. in London, citing the government's ability to boost spending.

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The FDIC stressed Sunday that the takeover of failed bank IndyMac is largely a "non-event" for most customers.

"Come Monday morning, it will be business as usual for all insured customers," said John Bovenzi, chief operating officer of the Federal Deposit Insurance Corporation, which insures U.S. banks.

When a bank shuts down, traditional accounts are insured to at least $100,000. Some accounts, such as annuities and mutual funds, are not insured at all. Individual Retirement Account (IRAs) funds are insured to $250,000.

If you had $100,000 at one bank and $100,000 at another, both would be insured, according to Allan Roth, a Colorado Springs, Colo. financial planner.

Individuals with multiple accounts in the same name at the same bank are limited to the $100,000 cap. If an individual has a $100,000 savings account in her name and a $100,000 joint account with her husband, both accounts would be covered.

"The difference is not in the number of accounts [that each individual has at an FDIC-insured bank]," said Roth. "The difference is in the titling [or name] on the account."

IndyMac Bancorp, once one of the nation’s largest home lenders, was taken over by federal regulators on Friday and transferred to the FDIC.

While IndyMac customers did not have access to online and phone banking services over the weekend, they could access funds by ATM, debit cards and checks.

"That fact is that for insured depositors, IndyMac’s conversion has been largely a non-event," said Sheila Bair, chairman of the FDIC in a statement.

IndyMac customers with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells the bank, said Bair.

Loan customers were advised to continue making loan payments as usual.

The FDIC disclosed last month that it was closely watching 90 financial institutions on its "problem list," up from 76 in the first quarter of 2008. The total assets of "problem" institutions rose from $22.2 billion to $26.3 billion, the FDIC said. The FDIC does not publish a list of trouble banks out of concern it could spur a bank run

But for non-IndyMac customers, Bair stressed that their money is safe.

"IndyMac is only one of 8,494 depository institutions operating throughout the country," she said. "The overwhelming majority of banks in this country are safe and sound. The chance that your own bank will be taken over by the FDIC is extremely remote. And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits."

Bovenzi added that all IndyMac branches will reopen Monday with full operations. "Customers should view this as a change in ownership," he said.  

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