The Group of Seven warned the surging yen posed a threat to financial and economic stability on Monday in the latest coordinated effort by the world’s richest nations to contain worst financial crisis in 80 years.
The yen was the only currency mentioned in a brief G7 statement issued as it rallied to 13-year high against the dollar, threatening Japanese exports as world’s second-largest economy tumbles toward recession.
With Tokyo’s Nikkei share average hitting a 26-year low and share of Japan’s biggest banks tumbling on fears that they would have replenish capital, Finance Minister Shoichi Nakagawa said the G7 was worried about volatility in the yen.
“We continue to monitor markets closely and cooperate as appropriate,” Nakagawa said, reading from the G7 statement.
South Korea resorted to a record interest rate cut and Australia’s central bank said it had intervened to support its currency in another sign that policymakers are reaching beyond troubled banks now that the financial crisis has shattered investor confidence, and threatens jobs and corporate sales.
Japanese Prime Minister Taro Aso asked ministers to consider emergency measures to stabilize the stock market, including government purchases of shares and relaxing rules on recapitalization of banks. Three banks were looking to raise cash to offset stock market losses, Japanese media reported.
The Nikkei clawed 0.7 percent higher but Asia-Pacific shares outside of Japan fell 2.6 percent to a four-year low, according to an MSCI index. Safer assets such as government bonds and gold traded higher on the day, suggesting investors would need to see more than just rhetoric before acting.
“Whether what we’re seeing right now from policymakers is sufficient is difficult to tell faxless pay advances. The price action alone in markets tells me not,” said Dwyfor Evans, currency strategist with State Street Global Markets in Hong Kong.
Developing nations have been turning to the International Monetary Fund for help to stave off the worst global financial crisis since the Great Depression in the 1930s. Hungary had reached an agreement to get a “substantial financing package” in the next few days that will include financing by the European Union and some individual European governments, the IMF said.
The IMF agreed on a $16.5 billion loan package for Ukraine on Sunday.
STERNEST TEST
South Korean policymakers took their most dramatic measures yet in a months long battle to buttress confidence in an economy facing its sternest test since the Asian financial crisis a decade ago.
The Bank of Korea cut its main interest rate by 75 basis points to 4.25 percent in an unscheduled meeting. The rate cut was the biggest on record and only the second emergency move since the bank adopted its current monetary policy system; the first was after the September 11, 2001 attacks on the United States.
“Their priority is to minimize the impact of the crisis on growth and on volatility. Eventually this could also help the markets,” said Sebastien Barbe, senior economist and foreign exchange strategist with Calyon in Hong Kong.
President Lee Myung-bak pledged to increase government spending and to cut taxes to support Asia’s fourth largest economy, which grew at the slowest quarterly pace in four years during the last quarter.
The U.S. Treasury is considering taking stakes in insurers, as it prepares a new round of capital injections targeted at regional banks and other financial companies, a person briefed on the plan said.
A final decision hasn't been made on whether insurers will be included in the government's purchases of preferred equity, said the person, who spoke on the condition of anonymity. The Treasury, which had planned to announce investments in about 20 banks, reversed course and will let firms disclose their own share sales in coming days, the person said.
An initial $125 billion out of the $700 billion approved by Congress was allocated last week to buy shares of nine of the largest U.S. banks and another $125 billion was set aside for smaller lenders. Investments in insurance companies would widen the scope of Treasury Secretary Henry Paulson's Troubled Asset Relief Program as the credit crisis deepens.
“We had a problem that turned into a panic, and now the government is running around trying to put out the fires,'' said James Angel, a finance professor at Georgetown University in Washington. “If you need capital, it might be the only game in town.''
Paulson has shifted the financial rescue program to focus on equity purchases after markets deteriorated faster than policy makers anticipated. The strategy offers a quicker way to deploy taxpayer funds, Neel Kashkari, the Treasury official running the bailout plan, told lawmakers two days ago.
Insurers, Automakers
The Financial Services Roundtable, a trade association of the 100 largest banks, securities firms and insurers, pressed Treasury to broaden its guidelines so that insurance companies, broker-dealers, automobile companies and institutions controlled by foreign banks could also sell stakes to the government.
“The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market,'' wrote Steve Bartlett, the group's president, in a letter yesterday to Kashkari.
Separately, a group of insurance companies — mainly life insurers — asked the Treasury earlier this week if they would be eligible to participate in the program, said an industry official with knowledge of the discussion.
Some life insurers have asked the government to make the participation mandatory because firms don't want to identify themselves as needing funds, the person said.
PNC Acquisition
Among regional lenders, PNC Financial Services Group Inc. of Pittsburgh said yesterday it is buying Cleveland-based National City Corp. for about $5.2 billion in stock after getting a $7.7 billion infusion from the Treasury free credit report .com.
First Horizon National Corp., Tennessee's largest bank, said yesterday it obtained preliminary approval to receive about $866 million. The board of SunTrust Banks Inc., Georgia's largest lender, earlier this week authorized the sale of $1.6 billion to $4.9 billion in preferred shares to the Treasury.
The rescue law requires that Treasury's investments be publicly revealed within 48 hours. It isn't clear whether that means from the time the bank is approved or from when it receives the funds.
Under the Treasury's rules for the capital injection program, some U.S. insurance companies — those with a banking business — are eligible to request an equity investment from the TARP.
The Standard & Poor's 500 Insurance Index yesterday rose 2.31, or 1.7 percent, to 139.66. The broader S&P 500 Index fell 31.34, or 3.5 percent, to 876.77.
A number of insurance companies have been battered by the recent market downturn.
Market Slide
U.S. life insurance stocks have plunged about 45 percent in the past month on concern that losses on corporate debt and mortgage-backed securities will squeeze the firms' liquidity and force them to raise capital.
MetLife Inc., the biggest U.S. life insurer, raised about $2.3 billion this month in a stock offering, and Hartford Financial Services Group Inc. said it would raise $2.5 billion from Allianz SE.
The largest insurers in the U.S. and Bermuda posted more than $93 billion in writedowns and unrealized losses on holdings tied to the collapse of the U.S. subprime mortgage market since the beginning of last year. Insurers invest policyholder premiums in bonds before paying claims.
American International Group Inc., once the world's largest insurer, accounts for about $48 billion of the declines.
AIG, which posted three straight unprofitable quarters because of bad bets on the housing market, agreed last month to turn over an 80 percent stake to the U.S. in exchange for an $85 billion loan. The New York-based insurer subsequently tapped a second federal credit line and has borrowed $90.3 billion.
AIG may need more than the $122.8 billion available, Chief Executive Officer Edward Liddy said Oct. 22 on PBS's “The NewsHour With Jim Lehrer.''
Insurers including Allstate Corp., Prudential Financial Inc., Lincoln National Corp., MetLife and Travelers Cos. have suspended or scaled back share buybacks to shepherd capital as losses from fixed-income investments mount.
Internet advertising giant Google reported a strong increase in sales and a bigger profit than expected despite the current economic slump.
The Mountain View, Calif.-based company reported revenue of $5.54 billion in the quarter ended Sept. 30, an increase of 31% from $4.23 billion a year ago.
Excluding commissions paid to advertising partners, Google posted sales of $4.04 billion, roughly in line with the $4.06 billion in sales analysts polled by Thomson Reuters expected on this basis.
Google reported net income for the third quarter of $1.35 billion, up 26% from $1.07 billion a year ago. Excluding certain charges, such as the cost of employee stock options, the company earned $4.92 a share, better than consensus estimates of $4.75 per share.
"While we are realistic about the poor state of the global economy, we will continue to manage Google for the long term, driving improvements to search and ads, while also investing in future growth areas such as enterprise, mobile, and display," said Google chief executive Eric Schmidt in a statement.
Shares of Google (GOOG, Fortune 500) jumped more than 7% in after-hours trading.
But for the past three months, investors have been concerned about Google’s performance, since its business relies heavily on advertising.
Google’s shares have fallen more than 36% over that time period as investors worried that cash-strapped businesses simply might pull back on spending on search advertising.
However, the number of paid clicks registered by Google on its sites and through its AdSense advertising network grew 4% compared to the second quarter and rose 18% compared to the same period a year ago electronic check payday advance.
Tighter wallets may play to Google’s strengths and drive up web traffic however, according to Schmidt.
"As marketing budgets are squeezed, targeted measurable ads are becoming more valuable to advertisers, and as consumer budgets are squeezed, people use the web for comparison shopping to hunt for bargains online and in stores," he said in a conference call to analysts.
"The number of search queries is actually going up," said Jeffrey Lindsay, analyst with Sanford C. Bernstein & Co.
When economic times are tough, people don’t stop searching for things online, according to Lindsay; they just search for different things.
"Even if someone loses their job, they’re going to look on the Internet for a new job," he said.
Investors have also been frustrated by the fact that a potential ad-sharing deal with rival Yahoo! (YHOO, Fortune 500) has been put on hold due to scrutiny from antitrust regulators.
The deal would give Google a gigantic new ad partner and help it widen its lead over Microsoft (MSFT, Fortune 500), which tried unsuccessfully to buy Yahoo earlier this year, in the lucrative online advertising market. But the government is concerned that a Google-Yahoo alliance would produce an online advertising monopoly.
The beleaguered insurance giant AIG announced plans Friday to hold onto its property and casualty insurance businesses, while selling off the rest of the company to pay its massive debt to the federal government.
American International Group (AIG, Fortune 500) said it also would retain a majority stake in its foreign life insurance operations.
Everything else is on the table, said Chief Executive Edward Liddy, who was installed by the Federal Reserve last month after it gave AIG an $85 billion loan. Other businesses include its aircraft leasing unit, asset management division, retirement services and U.S. life insurance operations.
Liddy gave an upbeat presentation to analysts, saying the company will end up strong and nimble after the asset sales.
"We fully expect to emerge from this with a capital structure that’s fit to fight," said Liddy in a conference call, noting the property and casualty businesses generated $40 billion in 2007 revenue. "Our insurance businesses…are strong and well-capitalized. Our policyholders are secure."
Liddy said the company has "already been contacted by numerous strong, stable parties, and we expect that buyers will recognize the value of these properties."
He did not provide a price estimate, but noted the $700 billion government bailout of troubled assets will help stabilize the firm.
The goal is to divest these units in larger transactions to brand-name companies, he said. If AIG gets good bids, it will sell fewer assets.
Potential bidders include Berkshire Hathaway, Allstate, State Life, MetLife and Manulife, as well as some European insurers, said CreditSights, a debt analysis firm.
First to hit the market will likely be units tied to airline leasing and consumer lending, both of which require funding from the debt markets, which is hard to come by these days.
International Lease Finance Corp. could command more than $7 billion and American General Finance Corp. will likely bring in about $2 billion, according to CreditSights.
While Liddy was very reassuring on the call, some analysts said his talk was mainly hype. As the financial turmoil continues, it’s hard to say how successful the asset sales will be.
"They don’t know what they are going to get," said David Schiff, founder of Schiff Insurance Observer, a newsletter.
Ratings agency Standard and Poor’s wasn’t impressed either. It placed AIG and its guaranteed subsidiaries in its financial-services division - such as the airline leasing company - on CreditWatch negative (best payday loan).
"The current disruption in the credit markets could make it difficult to sell businesses at attractive valuations," S&P said.
CreditSights valued the units AIG planned to sell at $32.9 billion and the divisions it will keep at $86 billion. These figures do not include the sale of a minority stake in its foreign life insurance operations, valued at $133.1 billion.
Once AIG sells its assets, it faces many hurdles in stabilizing its property and casualty insurance divisions. Customers are already fleeing and rivals are swooping in, experts said.
"The next challenge will be getting the core insurance business back on track, keeping the existing business and bringing in new customers," said Stewart Johnson, portfolio manager with Philo Smith, an investment bank. "Given the competitive nature of the industry, it will be tough without giving incentives."
AIG said it has drawn $61 billion in credit from the Federal Reserve as of Sept. 30. About $54 billion of it went to boost collateral at its troubled securities lending business, which is being wound down, Liddy said.
AIG’s stock rose more than 20% - to just under $5 - in afternoon trading Friday.
AIG’s downfall was due in large part to a small financial services unit in London, which prospered for years issuing credit default swaps, which insure against corporate debt defaults. With the global titan on the brink of bankruptcy a day after being downgraded by credit rating agencies, the Fed stepped up with a $85 billion loan carrying a steep interest rate, currently 12.83%. In exchange, the government took control of nearly 80% of the company.
The purpose of the loan, according to the Fed, was to help AIG to sell off its $1.1 trillion worth of assets in an "orderly manner, with the least possible disruption to the overall economy." And with the financial industry in chaos, the company needs the time so it won’t have to divest at firesale prices.
Based on the call, Liddy clearly intends to keep the company operating. In a nod to past complaints of AIG’s radio silence during troubled times, Liddy promised the company would be more forthcoming about its plans.
"Our communications and transparency will be second to none going forward," he said.
CNNMoney.com Staff Writer Aaron Smith contributed to this report.
British consumer confidence held at the lowest level in at least four years in August after economic growth stalled, Nationwide Building Society said.
An index of sentiment taken from the responses of 1,000 people in a survey stayed at 52, the same as in July, which was the lowest since the survey began in May 2004, the U.K.'s second- biggest mortgage lender said in a statement today.
Prime Minister Gordon Brown's government suspended a tax on some home purchases and pledged to accelerate 1 billion pounds ($1.8 billion) of spending yesterday to help reverse the housing slump. The fastest inflation in at least a decade will prevent the Bank of England from bolstering the economy by cutting interest rates tomorrow, economists say.
“Economic uncertainty continues to affect sentiment around spending and employment,'' Fionnuala Earley, Nationwide's chief economist, said in the statement. “It seems that consumers are beginning to take a more realistic view of the future and are factoring in the possibility of tougher times ahead.''
Sixty-five percent of those questioned said the current economic situation worsened in August, up from 61 percent in July, Nationwide said. Forty-seven percent of people surveyed think there will be few jobs available in six months' time, up from 42 percent in July, the report showed.
Job Placements
The number of workers placed in permanent jobs fell the most since November 2001 last month, a separate report today by the Recruitment and Employment Confederation and KPMG showed get a free credit report payday loans. Their index of permanent placements fell to 41.5 from 44.1 in July, according to an e-mailed statement.
Brown's government yesterday introduced measures to tackle the worst slump in residential property values in almost two decades. Chancellor of the Exchequer Alistair Darling said the tax plans would help half of all homebuyers.
“We face a unique set of circumstances that we have not seen in a generation,'' Darling said in an interview broadcast yesterday on U.K. television channels. “I remain optimistic that we can get through it. We will get through it.''
Britain's economy stalled in the second quarter, ending the nation's longest stretch of expansion in more than a century. The Organization for Economic Cooperation and Development yesterday cut its forecast for U.K. economic growth to reflect the deterioration in the housing market.
The Bank of England has kept the benchmark interest rate at 5 percent since April to control inflation, which accelerated to 4.4 percent in July, more than double the 2 percent target. The bank's panel will probably keep the rate unchanged tomorrow, according to all 61 economists in a Bloomberg News survey.
The government’s latest assessment of the nation’s financial system showed that many more small banks are in trouble. But what the report didn’t say may speak volumes.
On Tuesday, the Federal Deposit Insurance Corp. revealed that the number of institutions on its so-called "problem bank" list jumped to 117 during the second quarter, up from 90 just three months earlier.
That list has gained greater attention lately as many banks continue to suffer losses stemming from the deteriorating housing market and slowdown in the broader economy. Nine banks have failed so far this year, including IndyMac, a California-based mortgage lender with assets of $32 billion at the time of its collapse.
But experts contend that the list is a lagging indicator and, as a result, may not provide an accurate picture of the current health of U.S. banking industry.
Typically, the list is published some 8 weeks after all of the nation’s banks have reported their latest quarterly results.
What’s more, notes Mark J. Flannery, a professor of finance at the University of Florida’s Warrington College of Business Administration, regulators base their decision on what banks tell them.
And since current accounting standards give banks some discretion about when they recognize bad news, they may want to put it off as long as possible.
Exactly how bank regulators determine which institution is worthy for the "problem list" remains a process shrouded in secrecy.
But what is known is that the health of a bank tends to be based on several factors including the amount of capital an institution has on hand to protect against losses, the quality of its assets, its management, and its earnings, liquidity and sensitivity to market risk.
Bank regulators - which in addition to the FDIC include the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) - then give the banks a report card, assigning a composite rating based on the bank’s performance in each category. Those that receive a rating of 4 or 5 are put on the list.
Since the failure of IndyMac in mid-July, however, speculation has emerged that regulators may have exercised some discretion about which institutions they put on the confidential list.
The FDIC’s first-quarter problem list, released at the end of May, clearly did not have IndyMac on it. That’s because the FDIC reported that the 90 banks on the list had a combined $26.3 billion in assets - less than the size of IndyMac. That suggested that the only problem banks at the time were smaller community banks.
Experts say that if IndyMac had been on the list, the total asset size of troubled banks would have been much higher. That might have prompted a witch hunt of sorts, with the market looking for which bank was in trouble and possibly causing a run on that institution.
"It is kind of the issue of the snake swallowing the watermelon," said Bert Ely, an Alexandria, Va.-based banking industry consultant of Ely & Co cash advance flexible payments instant payday advance. "I can assure you if IndyMac had been on the list in late May, there would have been an immediate hunt."
Others pointed out that bank failures, as a rule, don’t happen to be overnight phenomena.
Tim Yeager, a professor of finance at the University of Arkansas’ Walton College of Business who previously worked for the Federal Reserve Bank of St. Louis, said regulators probably knew about the state of IndyMac for some time even though it wasn’t on the first-quarter problem list.
"It is telling that IndyMac was not on the problem list the quarter before," said Yeager. "Usually bank failures like that are pretty slow events - it is unlikely [federal regulators] were surprised by that."
The OTS, IndyMac’s primary regulator, has maintained that it was aware of the company’s problems, but was in the midst of an examination of the lender that did not wrap up until after the first quarter was over. At that point, IndyMac was placed on the list.
Those who keep a close eye on the nation’s banking industry argue that the nearly 30-year-old bank monitoring system, commonly referred to as CAMELS (which stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk) remains quite effective at gauging a bank’s health.
In recent years, there have been calls for regulators to take into greater account the wisdom of the market, most notably a bank’s stock price or the yield a company’s debt is trading at.
As innovative a solution that may be, the lion’s share of the nation’s banks are not publicly traded. What’s more, those indicators aren’t always reliable, note experts such as Flannery.
Stock prices, for example, can be affected by broader gyrations in the market and may not accurately predict if a bank will go bust or is even on the verge of failure.
"I think there are times when the CAMELS system is more informative and times when the market price is more informative," said Flannery. "There is no general rule."
If regulators are at a disadvantage, it is determining just how many banks could fail as a result of the current credit crisis.
While regulators are working hard to stay ahead of the problems faced by banks, their forecasting models have not endured a credit or mortgage crisis of this magnitude before and, as a result, have no way of telling how deep the impact will be.
"You can look at this and say they are missing the problems, but this business cycle is different from others," said Yeager. "You need to go through this to be able to update the model - it is really a Catch-22."
Federal Reserve Bank of Dallas President Richard Fisher said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices.
“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic'' economy, Fisher said yesterday in a speech in San Francisco.
Fed bank presidents, including Gary Stern of Minneapolis and Thomas Hoenig of Kansas City, have expressed growing concern this month about rising prices. Fisher, 59, is the only member of the Federal Open Market Committee to dissent three times from decisions to lower the overnight bank-lending rate, favoring either no change or less aggressive reduction.
“I don't know a single person on the committee that isn't concerned about inflation,'' the Dallas Fed chief said after his speech to the Commonwealth Club of California. “The question is, `what is the right treatment?' That is subject to debate.''
Fed policy makers estimated in April that consumer prices, minus food and energy costs, will rise this year by 2.2 percent to 2.4 percent, up from a range of 2 percent to 2.2 percent in January forecasts, according to central bank figures released on May 21. U.S. gross domestic product will increase by 0.3 percent to 1.2 percent this year, down from the 1.3 percent to 2 percent growth Fed officials predicted in January.
Anemic Growth
The U.S. “is in for a period of anemic economic activity'' that will probably last “for a while,'' Fisher said after his speech payday advance how to get a free credit report. When the economy quickens, the U.S. may be “encumbered by a higher rate of inflation than we ordinarily would like to have.''
Most central bank officials considered the decision to cut the federal funds rate last month as “a close call,'' according to minutes of the April 29-30 meeting. Fisher and Charles Plosser, president of the Philadelphia Fed, preferred no change because of the “more worrisome development'' in inflation, the records show.
Futures traders estimate a 96 percent probability of no change in the benchmark interest rate at the Fed's next meeting in June. The Federal Reserve has lowered the main U.S. interest rate by 2.25 percentage points this year, the most aggressive cuts in two decades.
Fisher devoted most of his speech to the federal government's long-term fiscal situation, which he called “a frightful storm brewing in the form of untethered government debt.''
`Debauching of Credit'
“Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets,'' he said.
Minneapolis Fed bank President Gary Stern said in a speech yesterday in Altoona, Wisconsin that inflation is too high and the central bank will need to consider the timing and magnitude of any reversal in interest rate reductions.
When the housing crisis hit last summer, it became very hard for borrowers to land the jumbo loans they needed to buy homes in high-priced areas, like California and New York.
So as part of the Economic Stimulus Act, Congress tried to get funds for jumbo loans flowing again by temporarily raising the dollar limits for mortgages that Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) can buy. The two government-sponsored entities (GSE) had previously only been permitted to buy so-called conforming loans of up to $417,000 and then resell them on the secondary market.
The new limits raised that conforming loan cap to as much as $729,750 in some high-priced metro areas through Dec. 31, in order to make home loans more readily available to help stabilize falling markets.
But the move hasn’t juiced the market, and so the House Financial Services Committee is holding a hearing Thursday to examine why.
"The liquidity crisis in mortgages has given added impetus to expanding the conforming loan limit in high-cost areas. As the correction took hold last fall and winter, jumbo and other non-conforming lending all but ground to a halt in many markets," said Thomas Lund, executive vice president for Fannie Mae in his testimony.
Despite the increased caps, these new "conforming jumbo" loans - between $417,000 and $729,750 - are still more expensive than the conforming loans below $417,000.
For months after the conforming jumbos were introduced, interest rates for them ranged between a point and a point and a half higher than on regular conforming loans. That made jumbo loans much more expensive; for a $600,000 mortgage, a borrower paid an extra $400 to $600 a month.
In the past, the spread between jumbo and conforming loans was much smaller, a quarter point or so.
"[The raised caps] produced less activity than I thought they would," said Rep. Barney Frank, D-Mass., in opening remarks at the hearing.
"Beneficial effects have be slow to materialize," added Spencer Bachus, R-Ala., ranking member on the committee.
The problem: The investors who buy mortgages on the secondary market still consider these new conforming jumbo loans riskier than the original conforming loans, and put a higher risk premium on them.
"The ultimate investor was not comfortable with the prices of the new jumbos," said Rob McDonald, director with the global business advisory firm FTI Consulting. "The secondary market participants needed to accept the prices Fannie and Freddie were offering."
That reluctance comes despite the fact that buyers who use jumbo mortgages tend to be better credit risks and often put more money down, McDonald said.
Part of the problem is simply that fear is contagious.
"If there’s a credit squeeze, despite the higher credit profiles of jumbo loans, there’s hesitancy on the part of mortgage backed securities buyers," he said. "This gets to the correlation between subprime secondary mortgage markets and conforming secondary markets."
Indeed, Fannie and Freddie don’t actually package conforming jumbos for sale to investors in the same way they treat sub-$417,000 conforming loans. They are not what’s called "TBA-eligible." These are "to-be-announced" transactions where the purchase price is settled at some future date.
The Securities Industry and Financial Markets Association decided in February to exclude jumbo conforming loans from TBA-eligible pools cashadvance.com pay day loan. But the TBA market is well established and understood by investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association.
"Buyers of securities feel very secure about this market," he said. "They’re accustomed to the pricing and they know how the securities perform."
The exclusion of conforming jumbos from that market makes them a somewhat unknown security. "No one is sure what their performance will be, so no one is sure how to price them," said Keith Gumbinger of HSH Associates, a publisher of mortgage market information.
The Mortgage Bankers Association argued that the new conforming jumbos should be issued as TBA products, but there was resistance to this. Others were hesitant to introduce any new element that might harm the conforming loan market.
"They said, ‘The conforming market is the only one really functioning. Don’t mess it up by adding jumbos to it,’" said Brinkman. Indeed, jumbos perform differently for investors than conforming loans.
Jumbo borrowers are more likely to pay off their loans early, which cuts off the revenue stream of their interest payments for investors, while those with $100,000 mortgages tend to keep making the same monthly payment year after year.
If jumbos were packaged with these in the same mortgage-backed securities, investors would require higher interest rates to purchase them. Borrowers of conforming loans would have to pony up the increased interest, in effect subsidizing more affluent, jumbo loan borrowers.
There are other risk factors that makes investors wary. Jumbos are, by definition, less diverse geographically; they’re only available in about 70 metro areas - many of the most challenging markets in the nation.
"Look at the markets where these are offered," said Gumbinger. "It’s where home prices are falling. An investor will say, ‘I’ll buy them but I have to get more yield out of them.’"
In early May, Fannie changed in the way these loans are handled; instead of packaging them for sale on the open market, they are keeping them in their portfolios. Fannie can set the price itself and is doing so as if the loans were TBA-eligible.
And weekly mortgage application statistics show that the pipeline for the loans has opened up during the last couple of weeks.
In March 2007, 12.1% of all mortgage loans requests were for jumbos. A year later, only 4.4% were. During the past couple of weeks, jumbos have accounted for 5.8% of all applications.
According to Freddie Mac Vice President Patricia Cook, interest rates for conforming jumbos are now a full point below regular jumbos and only two-tenths of a percentage point higher than conforming loans.
Gumbinger confirms that spreads between conforming and jumbo conforming have narrowed down to below half a point, good news for home buyers in high-priced areas.
Meanwhile, however, interest rates for non-conforming jumbo loans have not improved much, according to Gene Choi, president of Commodore Mortgage Group. "In that market, the pricing is still much higher," he said.
"In January, I had a guy buying a $1.4 million home in New Jersey whose loan was going to be in the upper sevens, 7.875% or so," said Choi. "He was very surprised."
Chile's gross domestic product expanded at the slowest pace since 2003 in the first quarter as mining output slumped and a drought cut hydroelectricity supplies.
Chile's economy expanded 3 percent in the first quarter from the year-earlier period, slower than a 4 percent rise in the previous quarter and less than the 3.2 percent median estimate in a Bloomberg survey of 20 economists.
The worst drought in 50 years in Chile lowered hydropower reserves as shortages of natural gas curtailed output by generators, resulting in a slowdown in economic activity and industrial production. Chile's President Michelle Bachelet this week promised to solve energy problems after the central bank cut its growth forecast for the year to as low as 4 percent.
“Economic activity is facing supply restrictions in sectors like manufacturing, mining and electricity generation because of gas shortages, bad weather and strikes,'' said Alfredo Coutino at Moody's Economy.com Inc. in West Chester, Pennsylvania. “Those things should be transitory, so we could see a rebound of economic activity in the second quarter.''
Mining output declined 2.7 percent because of labor disputes and lower yields from mines. Copper output fell 8.4 percent in March from a year earlier, the National Statistics Institute said. Chile is the world's biggest copper producer.
Output from the utility industry dropped 16 percent, the central bank said. Electricity generation fell 2.2 percent in March because of the drought and gas shortages.
Recent Rainfall
Energy Minister Marcelo Tokman today said recent rainfall will help replenish reservoirs, reducing the risk of power shortages free credit report .com no teletrak payday loans. Shares of Santiago-based hydroelectricity generator Colbun SA rose 12 percent this week as dams filled.
“If this process continues, if we have more water, that's good news for the cost of energy,'' Finance Minister Andres Velasco said today. “As we've seen, if the energy sector is running better, the whole economy runs better.''
In central and southern Chile, where Codelco, Antofagasta Plc, Anglo American Plc and Freeport-McMoRan Copper & Gold Inc. have mines, between 45 percent and 70 percent of the electricity comes from water-driven turbines.
In an annual address to lawmakers, Bachelet said Chile will develop ethanol from woodlands, consider plans for solar power plants in the desert and encourage hydroelectric development. The government will increase spending on infrastructure such as roads, ports and dams by 60 percent this year, and set up a $6 billion fund abroad to finance overseas study for postgraduate students, she said.
Public Holidays
The economy grew 5.8 percent in the first three months, taking into account public holidays, and should accelerate in the second quarter, Velasco said today. Investment rose 15 percent in the first three months of the year, and foreign direct investment reached almost 10 percent of quarterly GDP, he said.
“For all the respect I have for Velasco, he'll find the bright spot in anything,'' said Luis Arcentales, a New York- based economist at Morgan Stanley.
The U.K. trade deficit narrowed in February as record oil sales and the weakness of the pound kept exports close to the highest in 1 1/2 years.
The goods trade gap was 7.5 billion pounds ($14.8 billion), compared with 7.9 billion pounds in January, the Office for National Statistics said in London today. The result matched the median forecast of 24 economists in a Bloomberg News survey. Exports fell 0.2 percent and imports declined 1.7 percent.
Manufacturing reached the strongest level since 2001 in February, buoyed by a drop in the pound against foreign counterparts including the euro. The British currency has fallen on speculation the Bank of England will cut its benchmark interest rate for a third time since December as soon as today to shore up economic growth.
“The impact of the weaker currency is positive,'' said Peter Dixon, an economist at Commerzbank AG in London. “Looking forward, trade conditions are going to be pretty poor with global growth slowing. We are approaching a period where exporters will find it difficult in spite of the weaker pound.''
Oil sales climbed to 2.5 billion pounds, the highest since monthly records began in 1980, as the price of crude increased, the statistics office said. The cost of a barrel of crude reached an all-time high of $112.21 yesterday. The oil balance was in surplus for the first time since April 2006.
Goods Exports
Total goods exports were little changed at 20.5 billion pounds in February, the statistics office said. Apart from oil, overseas sales of cars and basic materials rose.
The pound fell to a record 80.29 pence against the euro after the report today. The British currency has fallen 11 percent in the past year on a trade-weighted index compiled by the central bank. U.K. exporters sell about half their goods to the euro region.
Sales to the European Union fell 4 percent, less than the 4.2 percent drop in imports. Exports to the rest of the world increased 5.4 percent to a record 8.6 billion pounds, outpacing the 1.5 percent gain in imports electronic check payday advance http://paydayloans-on.com.
U.K. manufacturing unexpectedly rose for a second month in February to the strongest level since March 2006, data from the statistics office showed yesterday.
A narrowing deficit may support economic expansion, helping to offset weakening consumer spending and service industries.
“Most people are looking for a turnaround in the contribution of net trade to the U.K. economy, which has been a sizable drag on growth,'' said Nick Bate, an economist at Merrill Lynch & Co. in London and a former Treasury official.
Slowing Growth
Slowing economic expansion overseas may still curb demand for British goods. The International Monetary Fund yesterday estimated a 25 percent chance of a worldwide economic downturn and lowered its forecast for global growth to 3.7 percent this year from a 4.1 percent prediction in January.
The IMF also reduced its forecast for U.K. growth this year to 1.6 percent from 1.8 percent and said that the Bank of England has scope to lower interest rates. Central bank Executive Director Paul Tucker said last week there was a risk that economic growth will slow “considerably'' because of turmoil in credit markets.
“Two fairly sluggish years lie ahead of us,'' Geoffrey Dicks, chief U.K. economist at Royal Bank of Scotland Group Plc, said in Bloomberg Television interview. “It's a more difficult climate for business.''
Fifty-two of 61 economists in a Bloomberg survey predict the central bank will reduce the rate to 5 percent today, with the remainder forecasting it will keep it unchanged at the current 5.25 percent.
Neil Mackinnon, chief economist at London-based hedge-fund ECU Group Plc, said policy makers may vote for a half-point cut.
“No central bank regardless of their mandate can ignore what's going on in the real economy,'' he said in a Bloomberg Television interview.
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