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."
Builders in the U.S. broke ground on the fewest houses in 17 years last month as the real estate recession showed no sign of abating, economists said ahead of a government report today.
Residential starts fell 1.7 percent to an annual rate of 995,000, according to the median of 64 economists surveyed by Bloomberg News. Permits, a gauge of future building, probably fell to a 1.02 million pace from 1.061 million in January.
The Federal Reserve, which is forecast to cut its benchmark interest rate by a full percentage point today, is struggling to stem a meltdown in financial markets that is damaging the economy. Stabilization in housing may be difficult to engineer as property values fall, while lenders tighten borrowing rules and keep mortgage rates elevated.
“Housing will continue to have a drag on growth,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “There is more adjustment to come in the level of housing starts that will contribute to paring inventory.''
The Commerce Department is scheduled to issue the starts report at 8:30 a.m. in Washington. Estimates in the Bloomberg News survey ranged from 950,000 to 1.08 million.
A report from the Labor Department at the same time may show that wholesale prices rose 0.4 percent in February after jumping 1 percent the prior month, according to the survey median. Excluding food and energy, prices probably rose 0.2 percent, the survey also showed.
Prices at the retail level were unexpectedly unchanged in March, the Labor Department reported last week. A cooling in inflation would make it easier for the Fed to keep cutting interest rates.
Fed Projection
Investors almost unanimously project the Fed will lower the target for overnight loans between banks to 2 percent from 3 percent following their meeting today payday advance lenders cash advance loan no fax.
On March 16, the central bank cut the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.
The Fed has been lowering its benchmark overnight rate since the middle of September, after the collapse of U.S. subprime mortgages started to infect markets around the world.
Too many home loans have been “neither responsible nor prudent,'' Fed Chairman Ben S. Bernanke said at a conference on March 14. He called for “strong oversight'' of mortgage lenders.
Foreclosures Surge
Home foreclosure filings jumped 60 percent and bank seizures more than doubled in February from the same month last year as rates on adjustable mortgages rose and property owners were unable to sell or refinance, according to RealtyTrac Inc., a seller of foreclosure data.
The yield on 10-Year Treasury notes averaged 3.59 percent in the first week of March, down almost a full percentage point from mid September as the Fed lowered rates and demand for the relative safety of government debt grew.
During the same period, the average rate on a 30-year fixed mortgage was unchanged at 6.37 percent, according to figures from the Mortgage Bankers Association.
The National Association of Homebuilders said yesterday that confidence among builders held near a record low this month.
Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, last week reached an agreement with banks on new lending terms after slowing home sales made it harder to generate cash. Hovnanian also reported its sixth straight quarterly loss.
Hope Now, the foreclosure prevention coalition put together with the Bush administration’s support, claims dramatic success in helping at-risk mortgage borrowers stay in their homes.
The groups has reworked more than 1 million mortgage loans since July, Treasury Secretary Henry Paulson said in a speech before the National Association of Business economists on Monday.
But of those borrowers, only 278,000 actually saw the terms of their mortgages modified. Their lenders either froze or reduced their interest rates, and may have reduced their balances as well to make loans more affordable.
The remaining home owners were put on repayment plans, which merely allow borrowers to make up missed payments by tacking them on to the life of the loan. Critics argue that this does little to make to make mortgages any more affordable for hard-pressed borrowers.
Loan modifications alone increased 19% from December to January, Paulson told the gathering. By comparison, foreclosure starts increased just 5% during the same period, he said.
"I am encouraged that the number of borrowers receiving help is rising faster than the number entering foreclosure."
Loan modifications are indeed making up a greater proportion of Hope Now’s workouts - 36.4% in January, compared with 29.9% in the last three months of 2007 and 19.1% for the three months ended September 30.
Paulson also reiterated the administration’s opposition to any government led bail out of lenders.
"The number of loans being modified shows progress," said Austin King, director of the Financial Justice Center for the Association of Community organization for Reform Now (Acorn), "but it’s still not enough."
"The majority of the work-outs are still repayment plans, which are not going to [keep people out of foreclosure]," said King same day payday loans no fax payday loan. "The reliance on repayment plans is one of the biggest failings of the lenders."
When borrowers are stretched so thin that a financial setback, such as unexpected medical bills or temporary job loss, puts them behind on payments it means they really don’t have enough income to keep up their mortgage payments. And tacking on missed payments on to a loan just makes things worse, according to King. Many of those borrowers will default again.
Even many mortgage modifications have shortcomings and may also simply delay default. If low teaser rates on hybrid adjustable rate mortgages are simply extended for a year or two, borrowers may still fall behind when the rates do finally reset, according to King.
"For modifications to work, they have to make the loans more affordable [permanently]," he said.
In addition to lender cooperation, Paulson also noted in his speech that homeowners have to seek help out if they need it. He noted that lenders only get a 2% - 3% response rate when they contact struggling home owners. The Hope Now alliance, which includes Citigroup (C, Fortune 500), J.P. Morgan (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and many other banks, has a 20% response rate.
Still, he noted that leaves 80% of at-risk borrowers without a plan. "If borrowers don’t ask for help, they will have to bear the consequences," Paulson said, "which may very well mean losing their homes when that could have been prevented."
Gap Inc. closed out its third consecutive year of declining sales with a 21% increase in its fourth-quarter profit, reflecting the gains from cost cutting triggered by the worst slump in the clothing retailer’s history.
The San Francisco-based company said Thursday that it earned $265 million, or 35 cents per share, during the three months ended Feb. 2. That compared with net income of $219 million, or 27 cents share, in the same period a year earlier.
Revenue totaled $4.68 billion, a 5% decrease from $4.92 billion in the previous year.
In a more accurate measure of a merchant’s health, sales at Gap’s stores open for at least a year fell 3%. It marked the 14th consecutive quarterly decline in Gap’s comparable-store sales, the deepest funk that the company has suffered through since co-founders Donald and Doris Fisher opened the first store in 1969.
The company now operates 3,100 stores under the Gap, Old Navy and Banana Republic brands.
The fourth-quarter earnings matched the average estimate of analysts surveyed by Thomson Financial.
In an effort to placate shareholders while a new management team tries to engineer a turnaround, Gap announced plans to spend $1 billion buying back its stock and raised its quarterly dividend by six percent to 34 cents per share.
Those moves seemed to please investors as Gap shares surged $1.05, or 5.4%, in extended trading after dropping 42 cents to finish the regular session at $19.45.
Although Gap’s sales are still shriveling, tighter controls on spending and clothing inventory have helped lift the company’s profits in each of the last two quarters fast cash loans paydayloans. Last year’s cost cutting included laying off 1,500 workers and the closure of an experimental chain called Forth & Towne that catered to women 35 years and older.
"In 2007, the company made the business decisions and changes necessary to deliver improved earnings for our shareholders," said Gap Chairman Glenn Murphy, who was hired as chief executive seven months ago.
China's central bank said it will increase innovation in monetary-policy tools after a report showed that inflation surged to an 11-year high.
China's economy faces “prominent'' problems such as imbalanced international payments and excess liquidity, the People's Bank of China said. The comments were in a five-year plan for the finance industry released today on the central bank's Web site.
“We will further improve monetary policy controls, continue to use quantitative measures, widen usage of price- related policy tools and increase innovation in monetary policy measures,'' the central bank said in the report, without elaborating.
China's economy risks overheating after expanding 11.4 percent in 2007 from a year earlier, the fastest pace in 13 years. Inflation climbed to 7.1 percent last month, the statistics bureau said today.
The government will “better coordinate domestic and exchange-rate policies'' and use “multiple'' tools to control bank lending, the central bank said in the report http://easy-quick-payday-loans.com faxless payday advances.
China will explore more channels for investing the world's biggest foreign-currency reserves, aiming for “higher returns,'' the report said. The nation set up China Investment Corp., a $200 billion sovereign wealth fund, in September.
The report was jointly issued by the central bank, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission and runs from 2006 to 2010.
China will further develop the debt market, especially corporate bonds, according to the statement. It will encourage securities backed by mortgage loans and by projects and explore the sale of municipal bonds to fund public works.
British Airways confirmed Friday that it and Virgin Atlantic have agreed in principle on a settlement of a U.S. price-fixing case.
British Airways (BAIRY) did not confirm the size of the settlement, but the Wall Street Journal has said the two airlines would pay more than $200 million to customers who flew between Aug. 11, 2004, and March 23, 2006.
The airlines were the subject of a class action suit in California that alleged they colluded in setting fuel surcharges on long-haul flights.
Passengers who bought tickets in the United States or Britain for travel on long-haul routes between Aug. 11, 2004 and March 23, 2006, will be entitled to claim one-third of the fuel surcharge levied per long-haul ticket, BA said.
The airline said that would be worth $1.50 to $20.50 per ticket bought in the United States.
The settlement is subject to court approval.
British Airways was also fined more than $500 million by U.S http://fcrwizard.com bad credit payday loans. and British authorities for its role in the fuel-surcharge price-fixing case. Virgin was not fined because it came forward to expose the alleged collusion.
Powered by WordPress -- XHTML 1.0