Taiwan and Thailand exited recession last quarter and Malaysia probably followed, as Asian economies lead the global recovery.
Taiwanese gross domestic product rose 9.2 percent in the fourth quarter from a year earlier and the Thai economy expanded 5.8 percent, according to reports today. Malaysian figures for the three months to Dec. 31, due for release on Feb. 24, may show GDP increased 3.4 percent last quarter, according to the median estimate of 14 economists surveyed by Bloomberg News.
Asian economies are paving the way for a global recovery from the worst worldwide recession since the Great Depression after central banks in the region slashed interest rates to record lows and governments increased spending by more than $1 trillion. The strength of Asia’s rebound has seen policy makers lead the way in withdrawing stimulus.
“Asia’s recovery is at least two quarters ahead of the U.S. and monetary authorities have been contemplating exit strategies for some time,” said David Carbon, head of economic and currency research at DBS Group Holdings Ltd. in Singapore. “With higher U.S. rates on the cards, Asia’s central banks can pursue their exit strategies with less to fear on the inflow and currency front.”
Policy makers in China, India and Vietnam are tightening monetary conditions amid signs that accelerating growth is fueling inflation and may led to asset bubbles. The U.S. Federal Reserve, which increased its discount rate by a quarter point to 0.75 percent on Feb. 18, has left its benchmark policy rate unchanged for more than a year.
Rising Demand
Asian stocks jumped by the most since November on speculation Federal Reserve Chairman Ben S. Bernanke will say in a report due to be released this week that U.S. interest rates will be kept low to spur economic growth. The MSCI Asia Pacific Index gained 2.4 percent to 118.14 as of 2 p.m. in Tokyo, the biggest increase since Nov. 30.
The emergence of the world economy from the global recession is encouraging companies in Asia to boost production and hire more workers. Singapore last week raised its economic growth forecast for 2010, predicting an expansion of as much as 6.5 percent this year.
Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp., the world’s largest makers of custom chips, are boosting capital spending this year after fourth- quarter profits beat analysts’ estimates.
‘Very, Very Strong’
Demand has been “very, very strong” in the computer, automotive and consumer electronics sectors over the past few quarters, Richard Han, chief executive officer of Hana Microelectronics Pcl, said in an interview with Bloomberg Television in Bangkok today. Hana makes parts for computers and mobile phones including Apple Inc.’s iPhone.
Taiwan’s fourth-quarter economic growth was the strongest since June 2004 and Thailand’s increase in GDP was the most in seven quarters.
China’s central bank on Feb. 12 ordered lenders to set aside larger reserves, aiming to rein in credit growth after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed the most in 21 months. Goldman Sachs Group Inc. expects the Chinese economy will expand 11.4 percent this year.
Reserve Bank of India Governor Duvvuri Subbarao on Jan. 29 increased the cash reserve ratio to 5.75 percent from 5 percent, exceeding the median forecast for a half-point move in a Bloomberg News survey of economists. India is due to release GDP data for the December quarter on Feb. 26, along with the budget for the next fiscal year.
Emerging Asia
India’s $1.2 trillion economy may grow 7.2 percent in the current fiscal year through March, accelerating for the first time since 2007, the statistics office said Feb. 8.
“We expect GDP growth in emerging Asia to stay strong in coming quarters,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “The most trade-dependent economies will eventually see slower GDP growth later this year and in 2011 as the global upswing loses momentum. But Asia’s rebound will not come to a complete halt and growth, by some distance, will stay higher than in any other part of the world.”
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WASHINGTON – House Democrats headed into the final stretch on a long-awaited Wall Street regulation bill Friday after fending off an effort to kill a proposed U.S. consumer agency that is a central feature of the legislation.
The sweeping regulatory overhaul aims to address the myriad conditions that led to last year's financial crisis.
Test votes during two days of debate indicate that Democratic support for the underlying legislation will hold in final passage.
Before the final vote Friday, House members rejected by a vote 223-208 an amendment that would have killed a proposed Consumer Financial Protection Agency. The agency would consolidate consumer lending regulations and enforcement that is now split among several banking regulators.
A bipartisan coalition had proposed keeping the consumer powers within each regulator and creating an oversight council. The U.S. Chamber of Commerce lobbied heavily to kill the agency and ran national television ads against it. Consumer groups said it was essential to the overall regulatory package.
In a separate vote Friday, Democratic leaders failed to revive legislation that would let bankruptcy judges rewrite mortgages to lower homeowners' monthly payments. The measure was rejected by a 241-188 .
The House previously passed bankruptcy-mortgage legislation, but it failed in the Senate.
Democrats hoped that by inserting the provision in the regulatory legislation they would have had another opportunity to make it law. Aiding homeowners through bankruptcy had been a key feature of President Barack Obama's foreclosure fighting proposal, but the president did not push for it.
Banks and credit unions have lobbied against the bankruptcy measure. They say it would force a flood of bankruptcy filings and ultimately drive up mortgage rates paperless payday loans.
Late Thursday, scores of Democrats voted with Republicans on amendments that eroded the reach of proposed regulations on complex derivatives trades.
Democratic attempts to toughen the legislation failed.
Though not major setbacks, the votes illustrated the difficulties facing House Financial Services Chairman Barney Frank and the Obama administration as they seek to pass the most ambitious rewrite of financial regulations since the New Deal of the 1930s.
The Chamber has been an aggressive opponent of the legislation, running television ads against the proposed consumer agency and pressuring lawmakers to vote to eliminate it and to ease the derivatives regulations.
The legislation still imposes restrictions on derivatives, aiming to prevent manipulation and bring transparency to a $600 trillion global market. An amendment by New York Democrat Scott Murphy, adopted 304-124 Thursday night, exempted businesses that trade in derivatives, not as financial speculators, but to hedge against market fluctuations such as currency rates or gasoline prices. The amendment also provided an exception for businesses that are considered too small to be a risk to the financial system.
A Democratic effort to make more companies subject to derivatives regulation failed 279-150.
For Democrats, the votes split along turf lines. All but a few of the Democrats on the House Agriculture Committee voted for the broader exception. The Agriculture Committee oversees commodities trading and had recommended less restrictive derivatives rules, but the final bill did not include them.
The stock advance has hit some resistance in the last two weeks and it’s only going to get tougher as the third quarter reporting period gets underway.
Since hitting rally highs nearly two weeks ago, the broad S&P 500 index has lost 4.3% as investors have sorted through a spate of manufacturing, consumer and jobs reports that have missed forecasts.
The standout was Friday’s September jobs report, which showed the unemployment rate spiked to 9.8%, a new 26-year high. On top of that, employers cut a whopping 263,000 jobs from their payrolls during the month.
But the stock market’s decline over the last two weeks was pretty minimal, considering the nearly seven-month run up that propelled the S&P 500 by 51.2%.
That rally was driven by extraordinary amounts of monetary and fiscal stimulus and a spate of "less bad" news as the economy moved from recession to stabilization to the start of a recovery.
But lately there’s been a change, with the trend going from ‘less bad’ to ‘less better’ economic news, said Karl Mills, president and chief investment officer at Jurika Mills & Keifer. "The market is trying to understand that switch."
Although he says the recent trend doesn’t undermine signs of a recovery, it does indicate that the road ahead is a lot more twisty than the stock market rally would imply.
Investors are now moving into a sorting period, he said, where they are separating the wheat from the chaff, in terms of good and bad assets. He said that the period of more speculative, so-called lower quality names leading the rally will end as higher quality names start to take over.
"We are moving into a new phase, from collapsing to rebounding to recalibrating," he said.
Financial results: The week ahead is pretty mild in terms of economic reports, with a reading on the services sector of the economy and Treasury’s $60 billion in debt auctions the big standouts.
But it also brings the start of the third-quarter reporting period, albeit a very small start, with only one notable company due to report.
Dow component Alcoa (AA, Fortune 500) is the unofficial start to the quarterly reporting period, as per usual. The aluminum maker is expected to report a loss of 12 cents per share versus a profit of 37 cents a year ago.
The weakness in Alcoa is indicative of a materials sector that is expected to take it on the chin in the third quarter. The sector is expected to see earnings fall 68% from a year ago, followed by energy, down 64% from a year ago. Financials, by default, are expected to show the best results, as the companies bounce off dismal results accrued in the third quarter of 2008. Financials are expected to post earnings growth of 59%.
Overall, "we’re looking for another down quarter, the ninth in a row and the longest streak since we began calculating the growth over a decade ago," said John Butters, senior research analyst at Thomson Reuters.
Overall S&P 500 profits are expected to have dropped 24.8% from a year ago, he said.
On the docket
Monday: The Institute for Supply Management (ISM)’s services sector index is due shortly after the start of trading. Last week, the ISM’s manufacturing index showed a surprise decline that rattled investors. The services sector report is expected to show growth, rising to 50 from 48.4.
Treasury is auctioning $30 billion in six-month bills and $30 billion in three-month bills, with results due in the early afternoon. Wall Street will be looking to see what kind of demand the auctions draw, particularly from international investors, as the government seeks to fund trillions in economic stimulus projects.
Federal Reserve Vice Chairman William C. Dudley is due to speak.
Tuesday: The World Business Forum runs Tuesday and Wednesday in New York, with participants including Bill Clinton, T. Boone Pickens, Jack Welch, George Lucas and Paul Krugman.
The IMF and World Bank Group annual meeting in Istanbul runs through Wednesday.
Wednesday: August consumer credit, the September Treasury budget and the weekly oil inventories report are all due throughout the session.
Thursday: The weekly initial claims report from the Labor Department is due before the start of trading. No analyst estimates were available as of Friday.
Wholesale inventories are expected to have fallen 1% in August, after declining 1.4% in the previous month. The Commerce Department report is due shortly after the start of trading.
Federal Reserve Chairman Ben Bernanke is due to speak on the Fed’s balance sheet.
Also Thursday, Federal Reserve Governor Daniel K. Tarullo is due to speak.
Friday: The August trade balance is due before the start of trading. The trade gap is expected to have widened to $32.9 billion from $32 billion.
Federal Reserve Governor Donald L. Kohn is due to speak.
The bond market closes early ahead of the Columbus Day holiday.
General Motors was set to end months of suspense over the fate of its Opel unit on Thursday, and announce whether it plans to sell the European automaker to one of two rival bidders.
GM said in a statement its board had taken a decision on Opel after a two-day meeting.
A Sky News report, citing unnamed sources, said GM had decided to keep the Ruesselsheim-based automaker it first took control of some 80 years ago, but two bankers close to the negotiations played down that report.
A source in Berlin said senior members of the German government, including Chancellor Angela Merkel, had not been informed of GM’s decision as of Thursday morning.
Separate sources familiar with the proceedings told Reuters after the board meeting that GM had dispatched its chief Opel negotiator John Smith to Berlin, where he was expected to brief the trust supervising Opel and German government officials before a news conference scheduled around 10 a.m. ET.
The trust was set up in May to keep Opel from being swept into GM’s bankruptcy and has the final say on who buys the company. It comprises two representatives each from GM and Germany, as well as an independent chairman who is supposed to act as an arbiter between the two sides.
Politically charged
"General Motors’ board of directors approved a course of action for its Opel subsidiary and will be communicating its recommendation to the German government, other European governments, both bidders, employees and the Opel trust board over the next 24 hours," GM said.
It was not immediately clear what action the GM board had chosen after spending the past month weighing the merits of selling its European unit against the cost of keeping it.
The decision is being closely watched in Germany, where Opel employs roughly half of its 50,000 European workers at four plants making everything from three-door Corsa subcompacts to Zafira vans.
The automaker has two factories that produce automobiles under the Vauxhall badge as well as major sites in Belgium, Poland and Spain free credit score online.
Chancellor Angela Merkel, facing an election on Sept. 27, has thrown her weight behind Canadian auto parts group Magna’s bid for Opel, promising 4.5 billion euros ($6.6 billion) in government guarantees if GM opts for the Russian-backed offer.
Berlin believes the Magna bid guarantees the brightest long-term future for Opel, which traces its roots in Germany back to the 19th century.
Opel workers are preparing mass protests if GM fails to pick Magna, a labor leader said. "We will then tomorrow with many thousands of people go to Eisenach … and will symbolically protect the factory from access with a chain of people," Klaus Franz said on German television station ZDF.
But GM management has said a rival bid by Brussels-listed RHJ International, which Berlin is refusing to help finance, would be easier to implement.
Some elements within the board are known to have favored keeping Opel instead of selling it to either bidder, but all three options carry risks for GM, which is struggling to turn itself around under U.S. government majority ownership.
Magna wants to use plant capacity at Opel by tapping into its expertise in contract manufacturing and building rival models for outside automakers. It forecasts high growth rates, particularly in Russia, home of its consortium partners Sberbank and GAZ.
Under its proposed plan, Magna and Sberbank would each own 27.5% of the company, while Opel employees would hold 10% and GM the remaining 35%. Some 10,000 European jobs would be cut, 25% of those in Germany.
RHJ plans to take a majority stake in Opel and shrink production to return the company to profit. It plans about the same number of job cuts as Magna and would be expected to sell its holding in the company at some point in the future, possibly even back to GM.
G20 finance leaders pledged on Saturday to keep economic life-support packages in place until a recovery is firmly secured, but reached no deal on putting limits on bankers’ pay.
Finance ministers and central bankers meeting in London agreed fiscal and monetary policy would stay “expansionary” until recovery from the worst financial crisis since World War II was certain, a draft of their joint statement seen by Reuters showed.
The global economic outlook is certainly a lot better since leaders last meeting on the economic crisis in April, but policymakers are worried about derailing that recovery by pulling the plug too soon.
“We will continue to implement decisively our necessary financial support measures and expansionary monetary and fiscal policies consistent with price stability and long-term fiscal sustainability until a recovery is firmly secured,” the draft said.
With politicians looking for someone to blame for the recession, the rhetoric leading up to the meeting had been directed firmly at bankers and their lavish multi-million dollar bonuses.
But the ministers could not agree on putting an actual cap on bonuses as had been advocated by some countries and leading charities.
Instead, they agreed to create a global structure for imposing tighter controls on pay at financial institutions to discourage bankers from making the kind of risky bets that started the crisis back in August 2007.
These included deferring bonus payments over time and subjecting them to “clawback” in case things went sour. The compromise was that the Financial Stability Board, a global regulatory council headed by Bank of Italy chief Mario Draghi, would study caps and the whole issue of pay further auto loan rates.
“Pay and bonuses cannot reward failure or encourage risk taking.” British Prime Minister Gordon Brown told the start of the meeting. “It is offensive to the public whose taxpayers’ money in different ways has helped many banks from collapsing and is now underpinning their recovery.”
CHANGING WORLD ORDER
The draft statement showed agreement that emerging nations like India and China should have a greater say in the running of the International Monetary Fund and World Bank but did not offer up any formula of how this should be achieved.
It said only that their voice in global economic policymaking would grow “significantly” and that it expected “substantial progress” to be made on the issue at a summit of world leaders in Pittsburgh later this month.
The BRIC group of leading emerging powers — India, China, Russia and Brazil — had laid out on Friday concrete targets for how much movement they wanted in IMF and World Bank quotas.
Nor was there much clarity yet on a U.S. proposal for increasing the capital that banks hold in order to prevent a rerun of the crisis that led to the collapse of some of the world’s biggest banks.
While G20 countries agree that banks need more money set aside in reserves to cushion against losses, how much is needed and how that is calculated appears to be in dispute.
The foreclosure plague is not going away — it’s only getting worse.
A record 1.53 million properties were in the foreclosure process — default notices, auction sale notices and bank repossessions — during the first six months of 2009. That was 9% more than the previous six months and 15% more than the same period of 2008, according to a report released Thursday by RealtyTrac.
There were a total of 1.91 million filings resulting in 1 out of every 84 U.S. properties receiving at least one filing in the first half of the year. Banks repossessed 386,800 properties.
"What this means is, despite the intensity of the efforts on the part of government and lenders we don’t have a handle on foreclosures yet," said Rick Sharga, a spokesman for RealtyTrac.
And, in a bad sign for a housing recovery, there was no recorded improvement in June, the last month of the cycle. More than 336,000 homes reported foreclosure filings, the fourth straight 300,000-plus month. Filings were up 33% over last June and nearly 5% compared with May.
"Foreclosure activity continues to increase to record levels," said James J. Saccacio, chief executive officer of RealtyTrac in a prepared statement. "Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes’ are now worth represent a potentially significant future risk."
It’s the economy
The biggest problem affecting foreclosure figures is the recession. As job losses mount, more out-of-work borrowers are falling behind on payments. And home prices are still falling, albeit at a slower rate, which by itself is enough to drive more homeowners into default.
The home-price drop means more homeowners are underwater on their mortgages, owing more than their home is worth. That discourages some borrowers from repaying loans because they see it as a poor financial decision to keep paying on a declining asset.
Homeowners are apt to walk away from their mortgages once their home values fall 15% below their mortgage balances, according to recent research reported by Paola Sapienza of the Kellogg School of Management at Northwestern University, and Luigi Zingales of the University of Chicago Booth School of Business.
They claim that at least 25% of all mortgage defaults may be "strategic," borrowers walking away from their homes because they’ve lost so much value. And in many of the areas hardest hit by foreclosure, home prices have fallen by 40% or more.
Others, however, are working with their lenders, trying to get the terms of their loans modified so they can stay in their homes. But that process has been slow and infuriating to many borrowers and community activists.
The Federal Housing Finance Agency, the government watchdog created to manage Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), reported Wednesday that only 13,800 mortgages had been modified by Fannie/Freddie lenders in April faxless payday loan. That is down 12% from March.
The stats did not include workouts arranged through the Home Affordable Modification Program, the administration’s foreclosure prevention effort that seems to be making very slow progress.
The program, which got up to speed in April, has resulted in 43,000 refinances and more than 325,000 offers to modify loans. Another 160,000 have borrowers accepted and are currently in the process of restructuring. But before these modifications can be recorded as final, the borrowers must make three months of on-time payments.
Another reason for the slow progress, according to a research paper released by the Federal Reserve of Boston, is that some banks have some sound financial reasons to drag their heels.
Many delinquent homeowners, for example, "self-cure," that is, start paying again without assistance. In a report issued last week, the Fed found that an estimated 30% of all borrowers who miss two payments start repaying on their own.
If the lenders had modified these loans, the would have lost money unnecessarily.
A second reason, according to the report, is that so many modified loans re-default, with up to 50% of all modified mortgages succumbing. That costs the banks twice: They bear the expenses of the initial workouts and they pay again to finish the foreclosures, including any additional missed payments.
And by postponing foreclosures, lenders absorb any subsequent housing value losses. If the final repossessions are delayed a year, the lenders could be getting houses worth 10%, 20% or even 50% less than they were at the point of the original default. The banks would have been better off foreclosing then.
"We think these are very powerful forces [acting against modification]," said Manuel Adelino, one of the authors of the report.
Where the pain is
The Sun Belt suffered more foreclosures than other region during the last six months.
California, with 391,611 filings, one for every 34 households, recorded more than any other state. Nevada had the highest foreclosure rate with one for every 16 households. Arizona, one for every 30, and Florida, one for every 33, were next. Utah had the fifth highest rate at one for every 69.
Midwestern industrial states did little better with Michigan recording one foreclosure for every 74 households, seventh among the states. Illinois came in eighth with one for every 76; and Ohio, with one for every 86, was twelfth.
Georgia, at one for every 70 households, and Idaho, one for every 79, were sixth and ninth respectively. Colorado, with one for every 80, rounded out the top 10.
Goldman Sachs proved that it was well on its way towards making a full recovery from last fall’s crisis, after its latest quarterly results shattered even the most bullish of expectations on Tuesday.
Just six months after reporting its first loss as a public company, the New York City-based firm delivered its second straight period of better-than-expected results, this time earning $3.44 billion, or $4.93 a share for the second quarter.
Just a year ago, Goldman Sachs reported a profit of $2.1 billion, or $4.58 per share.
"It was a phenomenal quarter all the way around," said Mark Lane, an equity research analyst who tracks Goldman Sachs for at Chicago-based investment firm William Blair & Co.
Helped by a strong performance within the firm’s fixed-income and its broader trading business, much of Wall Street was anticipating a blowout quarter from the investment bank, heading into Tuesday’s announcement.
Consensus estimates among analysts polled by Thomson Reuters was for net income of $1.73 billion, or $3.54 a share. But the firm managed to blow past even high-end estimates of $4.65 a share.
Still, Wall Street was reluctant to buy on the news after a big run up in the company’s stock just a day earlier. Shares of Goldman (GS, Fortune 500) edged higher in midday trading Tuesday.
The good and the bad. Driving much of the firm’s latest performance was its fixed income business, which also deals in trading currencies and commodities. Net revenue in the division surged 186% from a year ago to $6.8 billion.
Strong stock issuance activity during the quarter, particularly among some of the nation’s top financial firms, also pushed Goldman’s equity underwriting business to record revenue levels.
"We did well across a variety of businesses," said David Viniar, Goldman Sachs’ chief financial officer. "It was basic blocking-and-tackling for the firm."
Of course, a smaller field of investment bank competitors certainly didn’t hurt either, noted Viniar. With Lehman Brothers and Bear Stearns now gone, Goldman Sachs and others have scooped up much of their rivals’ former business clientele.
Still, there were pockets of sluggishness for the firm. Traditional investment banking suffered as deal activity languished, as did revenues at Goldman’s asset management and securities services businesses health insurance quotes.
The firm also said it took a $426 million charge related to its repayment of $10 billion in money received as part of the government’s Troubled Asset Relief Program, or TARP.
A bonus boost? Goldman’s latest results, which mark its highest level of profitability in more than a year, come at a time when there has been increased scrutiny about the firm’s compensation policies, namely its bonuses.
Last month, the Guardian reported that Goldman is on track to pay record bonuses after a stellar performance during the first half of 2009.
Currently, the pool of funds out of which the company pays bonuses stands at $11.36 billion. Were Goldman able to maintain its current performance during the second half of the year, its bonus pool would exceed the lofty levels reached in 2007, when the company spent $20.2 billion on employee salaries and bonuses.
That year, the firm doled out compensation packages that averaged roughly $661,400 for the more than 30,500 workers the firm employed at the time. And with far fewer individuals employed by the company nowadays, the average pay package could be even larger.
Of course, the firm is no longer bound to government compensation restriction after winning its freedom from TARP last month. But it remains to be seen whether the bonuses could raise eyebrows among regulators or the American public.
Viniar noted that there is nothing his firm could do to prevent such a response, instead pointing out that employee compensation rises and falls with the firm’s fortunes. If the second half of the year proved tough for the company, he said, pay packages would fall in tandem.
With Goldman’s results now public, Wall Street’s attention turns towards the rest of the big name financial firms. Peers JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) are both set to deliver results later this week, while Goldman Sachs rival Morgan Stanley (MS, Fortune 500) is set to report next Wednesday.
Prosecutors in the case against Bernard Madoff on Monday submitted 113 victim statements to the New York judge that will preside over the disgraced financier’s sentencing.
The statements were emotional, blaming Madoff for ruining lives and wiping out entire life-savings.
Madoff, 70, who masterminded the biggest Ponzi scheme in history, is due to be sentenced June 29. The statements were addressed to to Judge Denny Chin of the Southern District of New York.
Madoff has been held in the Metropolitan Correctional Center in lower Manhattan since March, when he pleaded guilty to 11 criminal counts, including fraud, money laundering and perjury. He faces a potential 150-year sentence in federal prison.
"At the age of 89, I find myself and my wife (86) devoid of future hope," said one victim. "I find it hard to believe what he did to us and…all the charities affected by this Bastard."
Another victim said she and her husband had their entire life savings invested with Madoff.
"I often feel as if life is futile," the victim, who said she was a mother of three, said in a statement default payday loan. "Why bother to do ‘the right thing’ when it doesn’t mean anything?"
Eight of the victims requested to speak at the sentencing later this month, including one, who said she had known Madoff personally for 20 years.
"My family and I have lost everything," she wrote.
Thousands of investors were victimized by Madoff’s massive, long-running scheme, with losses in the billions of dollars. Investigators are still tallying up the number of victims and the amount of the money that was stolen.
Investigators are also seizing and itemizing Madoff’s assets - including those belonging to his wife Ruth - for liquidation. The assets will be used to pay back burned investors.
Attorneys for Madoff could not immediately be reached for comment.
Americans saw $1.3 trillion of wealth vaporize in the first quarter of 2009, as the stock market and home values continued to decline, according to a government report released Thursday.
Household net worth fell to $50.4 trillion, according to the flow of funds report by the Federal Reserve. Americans’ stock holdings plunged 5.8% to $5.2 trillion and mutual funds holdings slid 4.1% to $3.3 trillion, while their home value dropped 2.4% to $17.9 trillion.
The nation’s households have now seen their net worth shrink for seven straight quarters. Family net worth had hit an all-time high of $64.4 trillion in the second quarter of 2007, thanks to the housing bubble and a strong stock market.
"It’s more of what we saw late last year," said Scott Hoyt, senior director of consumer economics at Moody’s economy.com. "Consumers are cutting back on their borrowing to some extent, but the decline in value of assets is swamping that."
The results are not surprising. The Standard & Poor’s 500 index dropped 11.7% in the quarter, while home values fell 14.2% from the prior-year period, according to Zillow.com.
Though Americans are getting poorer, the rate of decline is slowing. Last year, households’ net worth dropped by a record $10.9 trillion, or 17.4%. It ended the year at $51.7 trillion. The fourth-quarter loss of $4.9 trillion, or 8.6%, was the largest quarterly plunge since the Fed started keeping records in 1951.
Americans also continued to pull back on their borrowing. Household debt fell at an annual rate of 1.1% to $13.8 trillion for the first quarter, after contracting 2% in the fourth quarter of 2008. That was the first time household debt shrank.
During the white-hot housing boom, Americans piled on debt. Between 2002 and 2006, annual household borrowing grew at double-digit rates.
Such debt levels are unsustainable and had to come down to restore Americans’ household financial health, said Amir Sufi, finance professor at the University of Chicago. This contraction is a major factor behind the recession.
"Household deleveraging has to happen even though it’s painful," Sufi said unsecured personal loans with bad credit.
Mortgage borrowing remained flat, after falling for the previous three quarters. Consumer credit, however, dropped at an annual rate of 3.5%, the largest dip in at least 35 years, as people slowed their use of credit cards and auto loans.
The plunge in consumer credit concerns Paul Wachtel, economics professor at New York University’s Stern School of Business. It shows that either consumers are not able or willing to borrow.
"The ability of the consumer sector to start spending again is what will pull the economy out of the recession," he said.
Homeowners’ equity also fell to a record low 41.4% as values continued their plunge. More than one in five homeowners now owe more than their houses are worth, according to Zillow.com.
Businesses also decreased their borrowing for the first time since 1992, slipping 0.3% for the quarter. The federal government, however, pumped up its borrowing by 22.6% in an attempt to stabilize the economy. Federal debt grew by 39.2% in the third quarter of 2008 and 37% in the fourth quarter.
If the stock market comeback continues, though, Americans will likely see their net worth increase in the second quarter, said Michael Englund, chief economist at Action Economics. Financial assets, including stock holdings, account for 80% of a household’s wealth. The S&P 500 is up 17.7% so far this quarter.
"The gains in this quarter should more than reverse the declines of the first quarter," Englund said.
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It’s starting to look like the spring awakening in bank stocks may not be enough to save the CEOs of America’s biggest troubled banks, Citigroup’s Vikram Pandit and Bank of America’s Ken Lewis.
A top banking regulator is agitating for Pandit’s removal, according to a report Friday in the Wall Street Journal. The clash between Pandit and Sheila Bair, the head of the Federal Insurance Deposit Corp., comes just a month after restive shareholders at Charlotte-based BofA (BAC, Fortune 500) stripped CEO Lewis of his chairmanship.
The FDIC told CNN it had no comment on the story. Citi (C, Fortune 500) says it stands behind Pandit, who took over as CEO at the end of 2007 and has spent much of his tenure trying to clean up the messes left by his predecessors Chuck Prince and Sandy Weill.
In a statement to CNN Friday, Citi chairman Dick Parsons said the company was "confident in our management."
BofA has similarly endorsed Lewis, and the three-month-long rally in bank stocks has quieted talk of wholesale government takeovers of these firms.
But given the massive investor losses at these banks and the failure of their top managers to anticipate the industry’s meltdown last year, few would shed a tear at either executive’s departure.
"These companies are sort of the poster children for the excesses that created this crisis," said Eric Jackson, an activist investor and managing member of Ironfire Capital in Naples, Fla. "I think it’s appropriate for the regulators to push for substantial changes in management and on the boards." Jackson’s firm does not own shares of either bank.
Citi and BofA have been the two biggest bank recipients of federal aid since the financial crisis erupted last fall. Together they have taken some $500 billion in federal aid, the lion’s share of which has come in the form of federal guarantees of their troubled assets.
Recently, both firms have shown some signs that they have broken out of what earlier this year looked like terminal decline.
Shares of Citi have tripled since Pandit surprised Wall Street by saying Citi was on track for its first quarterly profit since mid-2007. BofA’s stock price has quadrupled during the same time frame.
Both banks went on to report better-than-expected first-quarter results in April. Those surprises further boosted the shares even as many observers warned the numbers were padded by one-time gains and legal but incredible accounting maneuvers, such as profits tied to the declining value of the banks’ own debt.
The hopes of a banking sector recovery only intensified after regulatory stress tests showed banks didn’t need that much more money quick payday loan. The findings helped spur a surge of capital raising from the private sector that has bolstered the balance sheets of many big institutions.
But while investor fears of a giant bank failure have dissipated, regulators haven’t lost sight of the problems ahead. Though the 10 of the 19 biggest banks that had to raise $75 billion in capital after the stress tests had no trouble doing so, future loan losses will surely dwarf that figure — which means further capital raises could be necessary.
"There’s a desire to make sure the banks don’t get complacent," said Douglas Elliott, a former investment banker who is an economic studies fellow at the Brookings Institute in Washington. "Until we have a better grasp on exactly how bad the losses are going to be, it’s important to be cautious."
Even before the FDIC’s push to oust Pandit came to light, it was clear that policymakers intended to shake up the big banks.
BofA named a new chief risk officer this week after regulators questioned the management failures that led BofA into its current morass. Citi shook up its own board earlier this year, with former Time Warner (TWX, Fortune 500) chief Parsons replacing Win Bischoff as chairman and Clinton administration Treasury Secretary Robert Rubin stepping down. (Time Warner is the parent company of Fortune and CNNMoney.com.)
Still, skeptics such as Jackson say a change here and there won’t be enough, given the size and visibility of the two big banks.
"How can you have such massive failures without there being accountability?" said Jackson. "Citi and BofA are so large, so critical, they’re almost a case unto themselves."
And some observers believe that even management changes won’t be enough, and BofA and Citi will have to be broken up.
Vernon Hill, a longtime bank executive who is now chairman of investment firm Hill-Townsend Capital in Bethesda, Md., notes that a recent national customer satisfaction survey showed Citi was either last or tied for last in each of the five regions in which it does retail banking.
"Citi has been dysfunctional as long as I can remember," said Hill, who owns "only minor amounts" of both stocks. "How many times are we going to let these guys get in trouble before we put an end to it?"
CNN’s Amy Sahba contributed to this report.
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