Google Inc canceled plans for a search advertising partnership with Yahoo Inc amid opposition from antitrust regulators and advertisers, Google’s chief legal officer said in a blog posting on Wednesday.
Yahoo expressed dismay at Google’s decision, saying it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”
The U.S. Justice Department, in a statement issued on Wednesday, said it had told Google that it planned to file a lawsuit to block the deal on antitrust grounds.
“Had the companies implemented their arrangement, Yahoo’s competition likely would have been blunted immediately with respect to the search pages that Yahoo chose to fill with ads sold by Google rather than its own ads,” the Justice Department said.
Google shares were down 2.05 percent in late-morning trade at $359.30, while Yahoo was up 4.34 percent at $13.93. Both are traded on the Nasdaq market.
Google and Yahoo, Nos. 1 and 2 in the Internet search market, announced the planned partnership in June but delayed implementation to allow the Justice Department to scrutinize it for antitrust issues.
Google said it pulled out of the deal rather than face a protracted legal fight.
“After four months of review, including discussions of various possible changes to the agreement, it’s clear that government regulators and some advertisers continue to have concerns about the agreement,” the Google legal officer, David Drummond, said in his Internet posting bad credit pay day loans.
“We’re of course disappointed that this deal won’t be moving ahead,” he said.
Between them, Google and Yahoo had more than 80 percent of the web search market in August, according to comScore Inc.
In some ways, Google’s decision to scrap the deal comes as a surprise. In August, Google Chief Executive Eric Schmidt said the company would move forward with the partnership in October, with or without approval from the Justice Department.
Advertisers — who apparently had the ear of regulators — hotly opposed the deal, arguing that Google and Yahoo’s dominance of the market could mean they would rise prices.
Part of the impetus for Google’s decision could be Yahoo’s talks on buying the content and advertising operations of Time Warner Inc’s AOL unit. Yahoo initially struck a deal with Google as a way to fend off an unsolicited takeover bid from Microsoft Corp.
There had been hints that the Justice Department was prepared to challenge the Google-Yahoo deal: The department hired litigator Sandy Litvack to work on its probe of the agreement.
Litvack was the department’s antitrust chief under President Jimmy Carter.
European Central Bank Governing Council member Ewald Nowotny said there is no need for the ECB to change borrowing costs any time soon.
“The current level'' of interest rates “is adequate to ensure price stability over the medium-term,'' Nowotny, who is also head of Austria's central bank, said in an interview today in Bratislava, Slovakia. “The ECB follows a steady-hand policy, this has proven itself.''
The ECB earlier this month kept its benchmark lending rate at a seven-year high of 4.25 percent to fight inflation even as the economy cools. While the ECB along with the world's largest central banks has pumped cash into money markets over the past week to ease a credit squeeze, Nowotny said that he doesn't see “any reason'' for Europe to adopt similar measures to the U.S.
The central banks sought to soothe money markets after last week's collapse of Lehman Brothers Holdings Inc. and the U.S us fast cash easy payday loans. government's takeover of American International Group Inc. threatened to derail financial markets. That led to the unveiling of the U.S. government's $700 billion rescue plan to restore confidence.
“Europe can't be compared with the U.S. Our financial system is inherently more stable,'' said Nowotny, who joined the ECB governing council last month. “We have to remain cautious. It is to be hoped that the massive intervention by the U.S. government has a stabilizing effect.''
Nowotny today reiterated that the ECB has “no bias'' when it comes to interest rates. While it is a “realistic goal'' to expect inflation to fall below the ECB's 2 percent limit by 2010, the bank will monitor wage developments “with great alertness and some concern,'' he said.
The latest move by the Fed appeared to work - for a few hours at least.
The announcement early Thursday morning that the Federal Reserve and several other foreign central banks were injecting $180 billion of cash into the market - on top of the $67 billion provided earlier this year - is the Fed’s latest attempt to restore faith in the financial system.
The move follows the Fed’s fevered, but ultimately failed, talks over the weekend to try and save Lehman Brothers (LEH, Fortune 500), the decision on Tuesday to hold interest rates steady and Tuesday night’s stunning $85 billion loan to insurer AIG (AIG, Fortune 500).
Unlike those actions, the cash infusion seemed to soothe investor fears, albeit temporarily. U.S. stock markets all shot up Thursday morning, following a rise in European stock markets.
But how long this sense of relief lasts is anybody’s guess. In fact, stocks turned south by early afternoon before heading higher again.
Clearly, the move to put more money into what are, to put it mildly, fragile markets is a good thing.
Still, some wonder if the confidence boost will be fleeting as investors continue to speculate about who the next financial bailout or bankruptcy might be.
"I think this helps. Liquidity is an issue," said Phil Dow, director of equity strategy with RBC Wealth Management in Minneapolis. "But trust has to be earned and that doesn’t happen overnight."
Even though this morning’s rally faded away around noon before resuming again later in the day, it’s important to point out that, regardless of what happens with stocks, the new round of cash could lead banks to finally begin lending to one another again.
"This is a focused, well coordinated and well targeted action aimed at dealing with the unfortunate fact that private sector financial institutions worldwide are unwilling to lend to each other," said Daniel Alpert, managing director of Westwood Capital, a New York-based investment bank.
Alpert explained that the Fed and other central banks "did exactly what they needed to" since the deepening credit crisis has caused banks across the globe to seize up as fears spread that nobody is immune.
"This week left banks scrambling for the life-sustaining plasma of overnight funds, because now every institution is concerned - with a lot more justification than in prior months - that every other institution is about to go down - including themselves," he said.
Without doubt, the collapse of Lehman and AIG, combined with Merrill Lynch’s (MER, Fortune 500) decision to sell out to Bank of America (BAC, Fortune 500), has caused all major financial institutions to rapidly rethink what the banking landscape will look like in the next few months.
So the deal making in the sector is probably not even close to being over…as evidenced by the published reports indicating that Washington Mutual (WM, Fortune 500) is shopping itself and that Wachovia (WB, Fortune 500) is talking to Morgan Stanley (MS, Fortune 500).
"People are scared to lend anyone money easy quick payday loans payday loan cash advance loan. Nobody’s sure who is safe and who isn’t," said David Wyss, chief economist with Standard & Poor’s. "So we are going to have to see more consolidation take place and people have to feel more confident about lending to each other."
Don’t get me wrong. The addition of $180 billion may help unfreeze the credit markets. And that is sorely needed.
But a new era on Wall Street is beginning…and even with the help of the Fed, it’s too late to undo the damage that’s already been done. Some big brand-name banks have died and more will do so.
The best the Fed can hope for now is to stop the bleeding and let the strongest firms on Wall Street figure out how to make the pieces in the merger puzzle fit.
AIG is out of the Dow: Finally, a quick comment on AIG being booted from the Dow Thursday morning. Kraft (KFT, Fortune 500) is replacing it. As I wrote on Monday, this had to happen but I’m surprised that the folks at the Wall Street Journal didn’t use this an excuse to kick out other companies in financial distress, such as GM (GM, Fortune 500).
Still. I’m going to do my best Stephen Colbert now and gloat that I called it! I said back in June and that Kraft was a great candidate for the Dow. Ok. Gloating over.
Oil prices fell Tuesday, as investors believed OPEC will keep production at current levels, and as Hurricane Ike lost strength over Cuba.
U.S. crude for October delivery settled down $3.08 to $103.26 a barrel, the lowest close since April 1, when oil ended the day at $100.98 a barrel.
Waiting for OPEC: The Organization of Petroleum Exporting Countries met Tuesday to discuss production levels in light of falling prices and a perceived pullback in demand as the world economy slows.
Slumping global energy demand has caused the price of crude to fall sharply from the record-high $147.27 a barrel, set on July 11.
Because of the more than $40 drop in oil prices, some OPEC member-states have been calling for tighter production requirements.
As the cartel met in Vienna, traders listened for word on possible production cuts.
The oil minister of Saudi Arabia, Ali Naimi, indicated that he did not think the production levels need to be changed, according to reports from the Associated Press.
"The market is fairly well balanced," Naimi told the AP on Tuesday. "I think things are in balance, in a healthy position." Because Saudi Arabia is a heavyweight in the cartel, Naimi’s comments were closely watched.
A day before, the oil minister from Kuwait expressed similar sentiment.
The meeting was still in progress as floor trading ended in New York.
"If they cut production to try to shore up prices, that would be viewed very unfavorably by the markets that are struggling," said Phil Flynn, senior market analyst at Alaron Trading.
"I don’t think OPEC wants to be viewed as muddying up the waters here, so they will be forced to do nothing," he said. "My general sense right now is that OPEC is more concerned about demand destruction than about the price drop."
Another analyst said that while it looks as if OPEC will not officially cut production, it may try to adhere to quotas more strictly.
"They are probably 700,000 to 800,000 barrels each day over their quotas," said Andrew Lebow, a broker at MF Global in New York. "The chat is that they might adhere more to the quotas."
"As usual, the Saudis are the key," said Lebow. When it comes to the "increase over the quotas, they are the ones that have the lion share."
Hurricane Ike: Hurricane Ike lost strength Tuesday and moved toward missing most U.S. offshore facilities, reducing worries that it could keep production shuttered in the Gulf of Mexico.
The National Hurricane Center downgraded the storm to a Category 1 hurricane as it passed over Cuba.
"There is a sense that the storm might not be as bad as originally feared, and that is good news for the market, but it is also bearish news," said Flynn faxless cash advance fast payday loan no faxing.
If supply is not impacted, then prices move lower, as the market focuses on sagging demand.
It seems that Ike "is going to miss most of the U.S. crude production and natural gas production areas, and track more toward Southern Texas and the Yucatan peninsula in Mexico," said Lebow. But the oil market will continue to monitor Ike, because the track can change.
The storm was expected to reach the southeastern Gulf of Mexico as early as Tuesday afternoon. "Some weakening is likely as Ike crosses Western Cuba," the Hurricane Center’s public advisory said. "But restrengthening is expected once Ike moves into the Gulf of Mexico."
Gulf production: Oil rigs and refineries in the Gulf region remained on standby more than a week after Hurricane Gustav slammed into the coast of Louisiana.
About one quarter of the nation’s oil production facilities are located in the Gulf.
As of Tuesday, 79.4% of crude oil production and 64.2% of natural gas production in the Gulf of Mexico remained shut from Gustav, according to the Department of Energy.
Gustav damaged two offshore drilling rigs owned by Transocean (RIG) in the Gulf of Mexico, according to Guy Cantwell, a spokesman for the company. Gustav also damaged the mooring system on a third rig, the company said Monday.
Shell has decided to wait until after Ike to return completely into the Gulf.
"Remaining production recovery from Gustav will be delayed until after we can redeploy after Hurricane Ike has safely passed," according to a written statement on Shell’s Web site.
Currently,Shell (RDSA) has 240 personnel working on offshore facilities, but plans to "evacuate most or all of our Shell operated assets by Wednesday or Thursday."
On Monday, U.S. crude oil for October delivery settled up 11 cents to $106.34 a barrel, but not before falling from a trading high of $109.89 earlier in the day. A dollar rally on Monday moved oil prices back more than $3 off early session highs.
Companies in the U.S. unexpectedly added an estimated 9,000 jobs in July, a private report based on payroll data showed today.
The increase followed a revised drop of 77,000 for the prior month that was smaller than previously estimated, ADP Employer Services said.
The ADP data aren't necessarily a guide to the Labor Department's numbers to be published Aug. 1. Four of the six previous ADP reports showed an increase in employment; all six of the government's estimates showed the workforce contracted. Private payrolls dropped by an average 94,000 a month from January through June, according to official figures, while ADP showed gains of almost 11,000 on average.
“The trend is toward lower jobs,'' Roger Kubarych, chief U.S. economist at UniCredit Global Research, said in an interview with Bloomberg Television in New York. “There is still contraction in construction jobs and manufacturing jobs, offset to a great extent, but not entirely, by the services sector and the government.'' ADP has “been overestimating'' private payroll figures “for many months now,'' he said.
The ADP report was forecast to show a decline of 60,000 jobs, after a drop of 79,000 previously estimated for June, according to the median projection of 29 economists surveyed by Bloomberg News. Estimates ranged from decreases of 115,000 to 4,000.
Market Reaction
Stocks rose and Treasury securities fell after the report. The Standard & Poor's 500 Index rose 1.2 percent to 1,278.61 as of 10:30 a.m. in New York. The yield on the benchmark 10-year note increased to 4.10 percent from 4.04 percent late yesterday.
ADP includes only private employment and does not take into account hiring by government agencies. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP.
“Employers are being extremely cautious about expanding payrolls,'' Joel Prakken, chairman of Macroeconomic Advisors, said in a telephone interview today. “In sectors where there were excesses in payrolls, we're still working those off.''
The ADP figures come ahead of the government's Aug. 1 report, which may show total payrolls fell by 75,000 in July, the seventh consecutive month of job losses, according to the median forecast in a Bloomberg survey pay day loans low fee cash advance. The unemployment rate probably increased to 5.6 percent.
Less Hiring
The extended housing slump, record fuel prices and crisis in credit markets have weakened demand, prompting employers to cut staff.
Today's ADP report showed a decrease of 65,000 jobs in goods-producing industries including manufacturers and construction companies. Service providers added 74,000 workers. Employment in construction fell by 16,000 and financial firms increased jobs by 4,000.
Companies employing more than 499 workers shrank their workforce by 32,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 9,000 jobs and small companies increased payrolls by 50,000.
The ADP report is based on data from 399,000 businesses with about 24 million workers on payrolls.
Further softening in the job market adds to concern that consumer spending, which accounts for more than two-thirds of the economy, will retrench. Recent reports indicate the boost from the government's tax rebates may be starting to fade.
Credit Crunch
Concerns about the credit crunch have roiled U.S. households, outweighing worries about surging consumer prices, said Larry Kantor, head of research at Barclays Capital Inc. in New York.
“When people are focused on the financial distress, these worries about inflation go to the sidelines,'' Kantor said yesterday in an interview with Bloomberg Radio. Over the next three to six months, `that's going to be the main issue.''
Coca-Cola Bottling Co. Consolidated, the second-biggest U.S. Coke bottler, is among companies cutting staff to offset a surge in the cost of energy and raw materials. The Charlotte, North Carolina-based company said on July 18 it will eliminate 350 positions, about 5 percent of its workforce.
ADP began keeping records in January 2001 and started publishing its numbers in 2006.
The European Central Bank will keep interest rates at a six-year high today to fight inflation even as the euro-region economy cools, a survey of economists shows.
ECB policy makers meeting in Frankfurt will leave the benchmark lending rate at 4 percent, all 59 economists in a Bloomberg News survey said. The bank will wait until at least February to cut borrowing costs, according to a separate survey.
The ECB is concerned that unions will push through demands for higher wages and companies will lift prices to compensate for record energy and food costs, which have fueled the fastest inflation in 16 years. Price increases are also draining consumers' purchasing power, weighing on an economy already struggling with a credit squeeze and the stronger euro.
“The inflation outlook has worsened to such an extent that it dominates other worries,'' said Gareth Classe, an economist at Royal Bank of Scotland Group Plc in London. “As long as there are no clear signs of second-round effects, the ECB shouldn't have to raise interest rates. It's more likely they'll cut them in 2009.''
The ECB will announce today's decision at 1:45 p.m. and President Jean-Claude Trichet will hold a press conference 45 minutes later. Separately, the Bank of England may keep its key rate at 5 percent. That decision is due at noon in London.
Inflation in the 15-nation euro region accelerated to 3.6 percent in May, matching March's 16-year high. The ECB, celebrating its 10th anniversary this week, aims to keep the rate just below 2 percent, something it has failed to do every year since 1999.
Weber's Call
ECB council member Axel Weber has called for the bank to consider raising interest rates. New economic projections, to be published by the ECB today, will be “a good basis to discuss medium-term options,'' Weber said.
With crude oil prices rising 16 percent since its last forecasts were published in March, the ECB may “markedly'' revise up its inflation outlook, said Michael Schubert, an economist at Commerzbank AG in Frankfurt. The 2008 forecast may be increased to 3.5 percent from 2.9 percent and the 2009 prediction to 2.5 from 2.1 percent, Schubert said.
“There will be at least some discussion about a rate increase'' at today's meeting, said Kenneth Broux, an economist at Lloyds TSB Group Plc in London. The decision “could be a closer call than many are willing to accept.''
The ECB has said Europe's economic fundamentals are sound and stressed the need to keep inflation expectations in line with its 2 percent price-stability goal fastcash quick payday.
Expectations Rise
In a report last week, the bank said inflation expectations appear to be “trending up.'' Expectations, as measured by French inflation-indexed bonds, have risen above 2.4 percent from 2.1 percent two months ago.
“Although our central scenario remains that the central bank will keep interest rates on hold this year as it balances growth and inflation concerns, the upward drift in inflation expectations has increased the chances of rate hike in 2008,'' said Nick Kounis, an economist at Fortis Bank NV in Amsterdam.
Eonia swap contracts, a widely used market gauge of interest- rate expectations, show investors have fully priced in a quarter- point rate increase from the ECB by the end of the year.
Europe's economy expanded more than economists forecast in the first quarter, prompting the International Monetary Fund to raise its euro-region growth forecast for this year to 1.75 percent from 1.4 percent. That's still less than last year's 2.6 percent.
`Consumer Recession'
There are signs growth is slowing. Manufacturing and service industries barely expanded in May and retail sales suffered the biggest annual decline in April since records began.
“Inflation is painfully high and the negative effect on purchasing power is squeezing the life out of the domestic economy,'' said Ken Wattret, an economist at BNP Paribas SA in London. “It now looks increasingly like a consumer recession is unfolding.''
The U.S. Federal Reserve has reduced its main lending rate seven times since mid-September, to 2 percent from 5.25 percent, after the collapse of the subprime mortgage market drove the world's largest economy to the brink of a recession.
The U.S. housing slump has caused about $386 billion in credit losses and writedowns at the world's biggest banks and pushed up credit costs globally. At the same time, the Fed's rate reductions have helped fuel the euro's surge against the dollar, making European exports less competitive.
“Some ECB council members would like to raise interest rates given high inflation, but I don't see them winning a majority,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London. “Growth is weakening significantly.''
Expectations that the Bank of Japan will cut interest rates have plunged in the past month as investors bet new Governor Masaaki Shirakawa will maintain a policy of gradually raising borrowing costs.
Investors see a 6 percent chance the bank will lower its key overnight call rate by December, down from 71 percent on March 20, the day Shirakawa became acting chief, according to calculations by JPMorgan Chase & Co. They were around 34 percent last week, when he was appointed governor. Japan's benchmark rate is 0.5 percent, the lowest in the industrialized world.
The appointment of central bank veteran Shirakawa, who has long argued that Japan's rates need to be normalized, reduces the chances of the first reduction in seven years, analysts said. Receding concern that the world's second-largest economy will follow the U.S. into a recession is also damping speculation of easier credit.
“The market is starting to assess and build in the potential hawkishness of Shirakawa,'' said John Richards, head of debt-market strategy for the Asia-Pacific region at RBS Securities Japan Ltd. in Tokyo. “Once the world gets out of recession mode, Shirakawa will be inclined to tighten.''
The yield on three-month euroyen futures, debt derivatives that are sensitive to changes in interest-rate expectations, rose to the highest in four months today. The yield on Japan's five- year note added 4 basis points to 0.895 percent today, the highest in seven weeks.
The International Monetary Fund last week said Japan's economy will grow 1.4 percent in 2008, after saying in January it will expand 1.5 percent. The IMF forecast U.S. growth of 0.5 percent, down from 1.5 percent predicted previously payday advance lender cash advance loan.
Easing Concern
Concern that Japan's economy is faltering eased in the past month, with reports showing export growth quickened, wages rose and companies faced the largest labor shortages in 16 years.
“Japan's economic growth is decelerating, but the pace is much milder than the U.S. and Europe,'' said Chotaro Morita, head of fixed-income strategy research at Barclays Capital Japan Ltd. “Speculation for a rate cut in the market was based on the economy's weakness, and that speculation is being corrected.''
Morita added that investors paring bets doesn't mean a cut is off the table, as the Bank of Japan may need to lower rates if a meltdown in global financial markets requires coordinated action with other central banks.
No Preconceptions
Shirakawa last week said he has no preconceptions about the policy direction because the economic outlook is “filled with uncertainties that could quickly subside.'' The veteran of 34 years at the bank also said providing too much economic stimulus in the short term could hurt long-term growth and has described Japan's monetary conditions as “very accommodative.''
Japan's central bank has kept the benchmark rate at 0.5 percent since doubling it in February 2007. Shirakawa, who was promoted to the top post to fill the bank's first vacancy in more than 80 years, this week said that the impact of the subprime- mortgage crisis on Japanese banks has been limited and that economic growth will probably pick up eventually.
China's economy probably expanded more than 10 percent in the first quarter and inflation may have stayed near an 11-year high, maintaining pressure on the government to do more to cool prices.
Gross domestic product rose 10.4 percent in the first quarter from a year earlier, according to the median estimate of 24 economists surveyed by Bloomberg News, after expanding 11.2 percent in the previous three months. The statistics bureau is due to release the figure at 2:30 p.m. tomorrow.
Faster yuan gains failed to stop inflation topping 8 percent for a second straight month in March, according to the survey. China's cabinet, the State Council, said this month that the world's fastest-growing major economy faces dual risks: overheating and the threat of a slowdown.
“Slower growth and high inflation have trapped the central bank in a difficult position,'' said Sherman Chan, an economist at Moody's Economy.com in Sydney. “The authorities obviously do not want to see a sharp slowdown in economic growth, as it may have social implications, but high inflation is also a huge concern.''
The worst blizzards in half a century and weaker overseas demand for China's goods trimmed first-quarter growth.
Inflation may have eased to 8.2 percent after an 8.7 percent increase in February. The government aims to bring inflation down to 4.8 percent in 2008, matching the level for all of last year.
Stocks Tumble
The benchmark CSI 300 Index of stocks has tumbled 35 percent this year, partly on concern that government measures to cool prices will dent earnings. The index was down 1.8 percent as of the 11:30 a.m. break in trading in Shanghai after falling 6.5 percent yesterday.
To cool prices, China has let the yuan appreciate 4.4 percent this year versus the dollar, reducing import costs. It has also imposed price controls and raised banks' reserve requirements to a record.
“Tackling inflation requires a cocktail of measures and faster currency appreciation is one important ingredient,'' said Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong. Tao expects the yuan to climb at least 10 percent versus the dollar this year after a 7 percent gain in 2007, helping to reduce inflows of trade cash that threaten to fuel inflation payday advance cash advance.
China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March. The trade surplus pumped $41.4 billion into the financial system in the first quarter and foreign direct investment added $27.4 billion.
Borrowing Costs
Interest rates have stayed unchanged this year, after six increases in 2007, as the government tries to avoid encouraging inflows of speculative capital. Even so, Zhou Xiaochuan, the governor of the People's Bank of China, said this week that there's still room for an increase. The key one-year lending rate stands at 7.47 percent, while the one-year deposit rate is 4.14 percent.
Surging global commodities and food costs are maintaining pressure for China's prices to keep rising. World food prices rose 57 percent last month from a year earlier, according to the United Nations.
“We probably haven't seen the peak in prices yet, because rice prices are soaring and the rise in other staple food costs is also showing no sign of a slowdown,'' said economist Chan, of Moody's Economy.com. “Overall, the inflation problem is due to supply shortages.''
Blizzard Disruptions
Snowstorms crimped first-quarter growth by disrupting the production of companies such as Zhuzhou Smelter Group Co. and Chenzhou Mining Group Co. A weakening appetite for exports may further cool China's expansion.
Group of Seven nations' policy makers said April 12 that a world economic slowdown may worsen amid an “entrenched'' credit squeeze. China's export growth slowed in the first quarter and the trade surplus narrowed for the first time in more than three years as U.S. demand waned.
The following table shows economists' estimates for percentage changes in China's gross domestic product in the first quarter from a year earlier.
Construction spending fell in February, according to a government report released Tuesday, but the decline was less than expected.
The Commerce Department reported that total spending fell by 0.3%.
A consensus of economists polled by Briefing.com predicted a decline of around 0.9%.
"I wouldn’t want to characterize this as a ‘good news’ report," but it won’t significantly drag down the gross domestic product "unless consumer spending slows a lot more," said Robert Brusca, economist with FAO Economics.
Spending on private construction projects fell 0.5%, led by a decline in residential spending, while money put toward public projects rose 0.4%.
Spending on residential construction fell 0.9%, reflecting homebuilder losses due to plunging home prices.
In late March, the Census Bureau reported that new construction on privately owned homes fell to a 17-year low.
Homebuilder KB Home (KBH, Fortune 500) reported $223.9 million in writedowns due to lower home prices and a sharp decline in orders paydayloan cashadvance.com. Rivals Lennar Corp. (LEN, Fortune 500), Hovnanian Enterprises (HOV, Fortune 500) and Pulte Homes (PHM, Fortune 500) also saw losses.
"The pace of decline [in residential spending] is starting to ease," said Aaron Smith, senior economist with Moody’s Economy.com. However, it has yet to show any improvement, he added.
Growth in private business construction, which has offset the declining housing market, is starting to slow as businesses try to keep spending low, said Smith.
Spending on private non-residential projects fell 0.1% in February, according to the Commerce Department.
"The weakness that was in private residential seems to have leaked out into the private non-residential [sector]," added Brusca. "We have lost the growth," he warned.
The Fed’s resolve to defend the stressed-out U.S. financial system was put to an early test Monday when investors bet that Lehman Brothers could be the next Wall Street giant to fall.
The brokerage firm saw its shares drop as much as 39% in early trading in wake of JPMorgan Chase’s $2-a-share purchase of Bear Stearns (BSC, Fortune 500). Monday’s selloff took Lehman (LEH, Fortune 500) shares to $24.50, down from $39 Friday, before they staged a mild recovery.
The collapse of Bear Stearns has fueled fears of a widespread breakdown in the U.S. financial system. Lehman, like Bear Stearns, has been a big player in the mortgage market in recent years and investors worry that its exposure to now-toxic mortgage-based securities, combined with its relatively small size, might be fatal. Lehman is the fourth-largest U.S. player on Wall Street, behind Goldman Sachs, Merrill Lynch and Morgan Stanley.
On Monday, Lehman executives sought to calm investors. In a statement, they said the firm’s solid cash position will be bolstered by the Federal Reserve’s decision Sunday to let securities firms use the Fed’s discount window for emergency borrowing. Until now, direct Fed lending was restricted to banks, which the Fed regulates. The Fed does not oversee securities firms like Lehman.
The Fed said the decision would "improve the ability of primary dealers to provide financing to participants in securitization markets." Lehman chief Richard S. Fuld Jr. agreed, saying that the Fed move "improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table."
The Fed’s expansion of access to the discount window aims to prevent a repeat of last week’s run on Bear Stearns. Bear was forced to sell itself at a 93% discount to Friday’s market closing price after its core customers - the hedge funds that used Bear Stearns to borrow money and make trades - fled en masse, betting they wouldn’t be able to get their money out in the event of a bankruptcy filing.
The Fed’s decision to expand access to the discount window is crucial because big banks and brokerages are trying to conserve cash to deal with their own problems, rather than stepping up to buy distressed properties. Investors remain fearful in part because the prices of all sorts of assets, ranging from houses to bonds, are in free-fall - so it’s not easy to determine the true value of bank and brokerage firm balance sheets.
JPMorgan execs admitted as much on a conference call Sunday evening, when they characterized the $2-a-share price they’re paying to take over Bear Stearns’ assets and liabilities as a "cushion" for JPMorgan (JPM, Fortune 500) shareholders against future problems at the brokerage firm. An additional cushion comes from the Fed, which has agreed to provide a $30 billion loan to JPMorgan.
According to JPMorgan, Bear Stearns has $33 billion in so-called risk positions: $16 billion worth of commercial mortgage-backed securities, $15 billion in nonsubprime residential mortgages, and $2 billion in subprime assets payday loan cash advance in one hour. JPMorgan said it plans to use two-thirds of the Fed’s loan to defray JPMorgan’s exposure to those positions. Presumably it is holding the other $10 billion in reserve for problems that aren’t yet on the horizon.
The uncertainty about financial firms’ exposure to bad loans means that the next bank or brokerage to run into trouble will likely face a near wipe-out of its equity investors, just as Bear Stearns did. Roger Ehrenberg, a former Wall Street executive who writes the Information Arbitrage blog, says he is in general "not a big fan of the bailout game." But with Bear shareholders getting $2 a share on a stock that traded at $170 a year ago, no one can claim equity investors are being made whole by U.S. taxpayers.
The issue of so-called moral hazard aside, it’s clear the market tumult is adding new wrinkles to the government’s bailout game plan. With JPMorgan having taken on Bear Stearns’ bloated balance sheet and Bank of America (BAC, Fortune 500) under contract to do the same with struggling Countrywide (CFC, Fortune 500), there aren’t many domestic financial firms left to step up for the next bailout. Ehrenberg said Friday that he believes the only U.S. firms with big enough balance sheets to help out a top tier player are JPMorgan, Bank of America and perhaps AIG (AIG, Fortune 500), the big insurer that has had its own troubles in recent weeks with mounting derivatives writedowns.
The inability of big domestic players to come to the rescue of their struggling peers could presage a second wave of sovereign wealth fund investments. Big U.S. trade partners such as Dubai, China and Abu Dhabi have funneled billions of dollars into money-losing bets on U.S. companies such as Citi (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and Blackstone (BX). But Ehrenberg believes they will be back for more, though - only at much better terms.
In the meantime, Ehrenberg says, executives, legislators and regulators will have to work to restructure the U.S. financial system to remove the incentives for players to take irresponsible actions. The Bear Stearns meltdown, he says, offered "a window into the inherent conflicts and weaknesses" in current arrangements which, for instance, allowed mortgage brokers and banks to originate loans without taking any realistic view of whether the loans could be repaid. They did this in part because they stood to make big fat fees for doing deals, while other investors bore the risk that the loans would go bad - which they did in huge numbers once housing prices stopped rising.
"The cycle will come back," Ehrenberg says. But when the economy starts growing again, he adds, financial firms must have incentives "to originate good loans, not just to originate loans."
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