The Federal Reserve should keep alive its asset purchase programs beyond the first quarter of 2010 to give policy-makers more flexibility if the economy took another turn for the worse, a senior Fed official said on Sunday.
“I would just like to keep them active at a very low level. It would give the Fed the option to react if the economy weakened,” St. Louis Federal Reserve bank James Bullard told reporters after his speech at an event organized by Princeton University students in New York.
“When you are trying to think how the economy might evolve, it could be that the economy comes in very strong … or it could go the other way payday loan. There is a lot of uncertainty. I’d hate to get the feeling that the Fed is saying our work is done. We need a policy that can react either way,” Bullard said.
The Federal Reserve cut interest rates to near zero last December and has kept them there since. At its last policy-setting meeting the central bank reiterated its pledge to keep interest rates “extraordinarily low” for an “extended period”.
Bullard said it could be helpful to have a discussion on what the term “extended period” means.
Treasury Secretary Timothy Geithner defended the Obama administration’s economic record and dismissed a call for his resignation from the senior House Republican on the Joint Economic Committee.
Geithner blamed the policies of the Republican party and President George W. Bush for the financial crisis that pushed the nation into the deepest recession since the 1930s.
Republicans “gave this president an economy falling off the cliff,” Geithner told Representative Kevin Brady of Texas as the two men interrupted each other during a hearing today. “I can’t take responsibility for the legacy of crises you bequeathed the country.”
Gearing up for next year’s elections, Republicans are training their sights on Geithner, an architect of the Wall Street bailout as Treasury secretary and in his previous job as president of the Federal Reserve Bank of New York. A report issued earlier this week critical of Geithner’s handling of the rescue of insurer American International Group Inc. has also prompted calls for him to quit.
Today, the Treasury chief fired back, saying that by “any measure” of consumer or investor confidence, the economy is “substantially stronger today than when the president took office” in January.
The “worst financial crisis in generations” happened after “almost a decade, certainly eight years, of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy,” Geithner said.
Economic Management
Brady told Geithner that a growing number of liberal Democrats as well as conservative Republicans think that he is handling the economy poorly.
“For the sake of our jobs, will you step down from your post?” Brady asked. “The public has lost all confidence in your ability to the do the job, and it is reflecting on your president.”
Another Republican on the panel, Representative Michael Burgess of Texas, told Geithner that he disagreed with Brady.
“I don’t think you should be fired,” Burgess told Geithner. “I thought you should have never been hired.”
Democrats on the panel defended Geithner .
“It just amazes me how there are some people here who are trying to pretend, and I think consciously and intentionally pretending, that the economic circumstances that we’re confronting, all of them, mysteriously materialized over the course of the last nine months or so, which is totally, completely false,” said Representative Maurice Hinchey, a New York Democrat.
White House Comment
The White House stepped in to defend the Treasury chief later in the day. “Secretary Geithner has helped steer the American economy back from the brink, and is now leading the effort on financial reform,” White House spokeswoman Jennifer Psaki said in an e-mailed statement. “His focus today — and ours — is on economic recovery and addressing the challenges the American people face every day.”
Earlier this week, former Republican congressman Rob Simmons, seeking a U.S. Senate seat from Connecticut, called on Geithner to resign over his role in the AIG bailout.
Simmons, who is bidding to challenge Democratic incumbent Christopher Dodd in the 2010 election, cited the report issued Nov. 16 by the watchdog of the $700 billion Troubled Asset Relief Program that faulted the New York Fed — with Geithner at its helm — for making “limited efforts” to protect taxpayer funds during last year’s rescue of AIG.
Dodd chairs the Senate Banking Committee, which is considering legislation to toughen oversight of the U.S. financial system.
In today’s hearing, Geithner also told lawmakers that the Treasury wants to end the TARP as soon as possible.
“We are working to put TARP out of its misery,” he said.
The Obama administration is moving “aggressively” to shut down “the programs that defined TARP at the beginning of the crisis,” he said.
The department has already completed its guarantee for money-market mutual funds and it has ceased making capital injections into large banks.
And the PM’s Indian audiences have reacted with jubilance.
"The south Asian tiger has awoken and the world is standing in awe," Harper told a business gathering at the posh Trident Hotel in Mumbai on Monday – and the audience rose to give the visiting statesman a standing ovation.
Yet for all its headline-grabbing dynamic growth this decade, India still has the world’s biggest poor population. At 400 million people, India’s destitute would, on their own, be the world’s third-most-populous country.
India ranks 45th in the latest Legatum Prosperity Index, which measures quality of life and economic progress in 104 nations accounting for 90 per cent of the world’s population.
It is held back by malnutrition affecting one in five Indians, an average life expectancy of just 53 years and a severely inadequate health care system. With a GDP of about $1 trillion (U.S.), this nation of 1.2 billion people still trails in size the $1.2 trillion (Canadian) economy of Canada.
It’s the nature of such friendly exchanges – and this one is long overdue – that pleasantries dominate the conversation.
And in that context it was admirable of Harper to complain that while "between us, our combined GDP is well on the way to $4 trillion … at the moment we are only doing $5 billion worth of business per year."
That’s equal to five days’ trade between Canada and the U.S. "Where we are today is not where we ought to be," Harper said.
In fact, both nations are in catch-up mode in what has long been a relationship of mutual disdain. Canada recently boosted from five to eight its permanent trade missions in India. The Harper government has sponsored 11 ministerial visits to India, whose GDP growth will far outstrip that of the West over the next few years.
India’s largest firms at last are taking on multinational status. The century-old Tata family empire has acquired the former British Steel and the Jaguar and Land Rover brands. Names such as Reliance, another old-line conglomerate; ICICI Bank, which operates in Canada; and IT giant Infosys, which now has a branch in Mississauga, are becoming familiar to North American business clients low cost payday loans.
A handful of Canadian firms have established toeholds in India, including Sun Life, Bombardier, SNC-Lavalin, Cameco and Bank of Nova Scotia.
Yet, the larger picture is one of stalled initiatives.
Talk of a free-trade pact has been just that. A deal to protect foreign investors from bureaucratic meddling in each country is stalled, apparently over Indian fears of tainted Canadian meat products. A civilian-nuclear materials export program announced in January remains in limbo, long after the U.S., Britain and other nations signed such agreements.
There is no annual ritual of Team Canada political-business missions to south Asia, as there were under Jean Chretien in China, the other emerging economic superpower, and the one that has always claimed much more of Canada’s attention in matters of diplomacy and business.
Annual Canadian corporate investment in India trails that of Sweden, Belgium and even Bermuda. Despite the presence in Canada of about a million people claiming Indian descent, Canadian universities have enrolled just 4,000 Indian students. Australian universities have 80,000 Indian students.
Yet India also is home to the world’s largest middle class, at about 300 million people. There’s no question that with expected heady economic growth of 5.75 per cent next year, India and China are leading the world out of the global recession. There are euphoric local predictions of an Indian economy surpassing that of the U.S. in size by mid-century.
But real progress in Canada’s potentially crucial relationship won’t come from PM photo-ops with Indo-Canadian heartthrob Akshay Kumar, which the PMO spent weeks lining up.
It will require a sustained, low-key effort by notoriously unadventurous Canadian firms to understand the Indian market.
That won’t happen until Canadian entrepreneurs grasp that India’s economic growth is destined to be far more dynamic than North America’s for decades, and that the easier trip south will gradually yield less rewarding returns on investment.
Private equity firm TPG could partner with American Airlines on a minority investment in Japan Airlines to prevent its defection to a rival airline group, the chief financial officer of American parent AMR Corp said.
The emergence of TPG as a potential investor comes as the loss-making Japan Airlines seeks its fourth state bailout since 2001, saddled with $15 billion in debt, a massive pension deficit and dozens of unprofitable routes.
The Japanese government pledged on Tuesday to enlist a state bank to offer bridge loans to prevent the airline from running short of cash and said it may introduce legislation to cut a pension shortfall that hit $3.7 billion in March.
Even as it struggles to avoid bankruptcy, JAL is being wooed separately by American Airlines and Delta Air Lines, which are keen to gain access to JAL’s network in Asia and a stronger foothold in Japan. JAL is Asia’s largest carrier by revenues.
AMR’s Thomas Horton said TPG, which helped fund Continental Airlines emergence from bankruptcy in 1993 and backed a failed takeover attempt for Australia’s Qantas Airways in 2007, has agreed to potentially invest in JAL as part of any deal with American Airlines.
“As appropriate and if it were welcomed by Japan Airlines and the government of Japan, TPG could also be part of a comprehensive recovery plan,” Horton told reporters in Tokyo.
“They have been active in the airline space over the years payday cash loan.”
A spokesman for TPG in Tokyo declined to comment.
American partners JAL in the Oneworld alliance, which pools frequent flyer miles and feeds passengers between members, and is keen to block it from joining Delta in the rival SkyTeam group.
American has argued that JAL and Delta would have difficulty clearing regulatory hurdles if they sought antitrust immunity for closer business ties because the alliance would give SkyTeam control of 60 percent of air traffic between Japan and the U.S.
American, which has hired Rothschild ROT.UL as an adviser on the deal, also estimates that defecting to SkyTeam could drain JAL of about $500 million in revenues during a transition period of 18-24 months.
A Delta spokeswoman in Tokyo declined to comment.
SIDE SHOW
In addition to a capital investment, American has been talking with JAL on forming a joint venture to cooperate more closely on scheduling, pricing and marketing. American estimates this could bring another $100 million in annual revenue to JAL.
Such close cooperation requires an “open skies” agreement between Japan and the United States. The two governments are in negotiations and are aiming for a deal this year.
The U.S. jobless rate unexpectedly jumped to 10.2 percent last month, a 26-1/2-year high, adding to pressure on the Obama administration to do more to tackle unemployment even as signs of recovery mount.
The Labor Department said on Friday that employers cut 190,000 jobs in October, more than the 175,000 markets had expected but fewer than the 219,000 jobs lost in September.
Job losses for August and September were revised to show 91,000 fewer jobs were lost than previously reported, taking some of the sting out of the report.
While the revisions hinted at some improvement, economists had expected the jobless rate to rise to 9.9 percent from September’s 9.8 percent. A wider gauge of labor-market slack that includes unemployed Americans who have given up looking for work hit a record 17.5 percent.
Speaking at the White House, President Barack Obama said the administration was considering infrastructure investments and business tax cuts to aid the economy’s recovery.
“I can promise you that I won’t let up until the Americans who want to find work can find work and all Americans can earn enough to raise their families and keep their businesses open,” he said. For a graphic of the jobless rate over time, please see: here
Stocks on Wall Street ended higher after initially falling as investors looked past the jump in the jobless rate and focused instead on the moderation in payroll losses. .N
U.S. Treasury debt prices rose as traders saw the data as supporting a prolonged period of low interest rates.
“Unfortunately, the problem is becoming deeper and more protracted,” Mohamed El-Erian, chief executive of bond giant Pacific Investment Management Co (PIMCO) told Reuters.
“It’s not just the increase in the headline number,” he said. “It’s also about the longer-term nature of unemployment, the increase in underemployment and the prospect for only a very gradual recovery,” he said.
While Obama sees job creation as his top priority, the scope for further steps to boost the economy is limited by record budget deficits.
Rising unemployment could pose problems for the Democrats who control Congress as they head into elections in November 2010. This week, Republicans wrested control of two state governorships away from Democrats in races where the weak economy figured prominently.
“President Obama promised jobs during his campaign for president and the elections in Virginia and New Jersey on Tuesday were a clear referendum on his failure to deliver on this promise,” Republican National Committee Chairman Michael Steele said in a statement reacting to the jobs report.
ECONOMY GROWING, LABOR MARKET LAGS
The U.S. economy grew at a 3.5 percent annual rate in the third quarter, likely ending the most painful recession in 70 years, but the jobs data suggested employers are wary of the prospects for a strong, sustained recovery.
The Federal Reserve should lose its authority to bail out big, failing financial firms like AIG and Bear Stearns under proposed reforms aimed at limiting the collateral damage from such failures, U.S. Treasury Secretary Timothy Geithner said on Thursday.
Geithner, in testimony to the U.S. House of Representatives Financial Services Committee, said the Fed should keep its ability to act as an emergency lender of last resort, but only to solvent firms in times of severe stress in financial markets — with Treasury consent.
“Any firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure,” Geithner said. “The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm.”
Geithner said a bill by the Financial Services Committee’s chairman, Representative Barney Frank, meets the tests for key elements of a resolution authority that the Obama administration would like to see passed.
It is a “comprehensive coordinated answer to the moral hazard problem” and does not provide any implicit guarantees for financial institutions, he said.
“We cannot put taxpayers in the position of paying for the losses of large private financial institutions,” Geithner said cheap payday advance. “We must build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy.”
Geithner said large failing firms should be put into a receivership managed by the Federal Deposit Insurance Corp that would seek to “unwind, dismantle, sell or liquidate the firm in an orderly way” where losses would be borne by shareholders and creditors of the firms.
The costs of such shutdowns would be borne by other large financial firms, imposed afterward, Geithner said. This would eliminate a standing insurance fund that creates expectations that the government would step in to protect creditors and shareholders.
Regulators also must impose tougher capital and liquidity standards on large firms that take on more risk, Geithner said, to reduce the probability of a larger firm experiencing financial distress.
But Geithner said there would not be a set list of large firms held to higher standards, adding that the government did not want to provide a false impression that such firms would be protected from failure by the government in times of stress.
(Reporting by David Lawder; Editing by Andrea Ricci)
The world’s top cellphone maker Nokia surprised investors by taking a major writedown at its struggling networks unit and revealing a fall in its smartphone sales from the previous quarter.
Nokia, battling aggressively with competitors Apple (APPL) and RIM (RIMM) , said its smartphones market share fell to 35% in July-September from 41% the previous quarter.
"Consumer demand may be showing early signs of improvement but these results show sustained pressure on smartphone margins. Apple’s iPhone is defying gravity in the high tier," said CCS Insight analyst Geoff Blaber.
Nokia booked a $1.35 billion hit from its networks unit, citing challenging market conditions, and dragging the reported group result to a loss per share of 0.15 euros compared with expectations of a 0.09 euros per share profit Nokia’s key handset unit performed slightly better than expected in the July-September quarter as consumer demand for mobile devices started to improve in many markets.
Shares in Nokia (NOK) were down 11% to $14.30 in pre-market trading.
Here’s another sign of a sickly banking sector: a flurry of letters urging banks to raise money — and fast.
Federal bank watchdogs issued 29 so-called prompt corrective action letters for the year through August. That’s up from just seven over the same period a year ago, according to data tracker SNL Financial.
A prompt corrective action letter comes when regulators determine a bank has become undercapitalized, meaning it doesn’t have a big enough cushion against future losses. The directives typically give banks as long as a month to bulk up, usually through issuing more shares.
In addition, officials have filed broader actions against hundreds of banks, covering issues ranging from capital and management deficiencies to risk management. All told, actions against institutions more than doubled in the first eight months of 2009, to 347, according to SNL.
Regulators have been pressing banks to straighten out their problems at a time when they are struggling under the weight of home-lending losses and bracing for a commercial real estate downturn. This year has brought 98 bank failures, with many more expected.
"There is an awful lot of softness on bank balance sheets," said Hal Reichwald, a banking lawyer at Manatt Phelps & Phillips in Los Angeles. "There’s real concern about problems coming down the road and how much it will take to deal with them."
The number of banks deemed troubled by the Federal Deposit Insurance Corp. hit 416 in the quarter ended June 30, a 15-year high and nearly four times the number a year ago. The FDIC doesn’t name the banks on its list or comment on open institutions, because doing so could spark damaging deposit runs.
Meanwhile, the federal deposit insurance fund has been dwindling. Member banks pay into the fund to protect account holders with balances up to $250,000. The FDIC said recently the fund has a negative balance and could run out of cash by the end of the first quarter next year. Over the past year, the deposit insurance fund balance has dropped to $10 billion from $45 billion.
The FDIC said recently that it expects expenses tied to failed banks to surge to $100 billion over five years — up 43% from the agency’s last estimate in May.
Trouble raising capital
Among the institutions that has come under regulatory scrutiny is FBOP Corp., an Oak Park, Ill., holding company that owns nine banks in Illinois, California, Arizona and Texas.
Owner Michael Kelly has built the firm over nearly three decades. Starting in 1981 with one bank — First Bank of Oak Park, from which the firm takes its name — Kelly built the company through acquisitions into the 46th biggest bank holding company in the U.S., according to Federal Reserve data, with more than $18 billion in assets.
But FBOP was hit hard in September 2008 when Treasury took over Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), the government-sponsored mortgage investors. Treasury’s decision to wipe out those firms’ preferred stock left numerous banks and insurers nursing losses. FBOP has also been hurt by its longtime focus on commercial real estate. FBOP posted a loss of $708 million for 2008.
By the end of June, FBOP’s resources had dwindled so low that the firm ranked below 98% of similar bank holding companies in terms of tier 1 leverage ratio, a measure of bank capital.
In August, FBOP signed a so-called written agreement with the Fed that gave it a schedule to raise capital, improve risk management and reduce its concentration of commercial real estate loans. The bank was to submit a capital plan within 30 days.
But raising capital isn’t easy when banks have taken big losses and are looking at more of the same ahead, and FBOP hasn’t made any announcement on the status of its planned capital raise. The company didn’t return a call seeking comment.
Most banks that go on the FDIC problem list or are subject of enforcement actions survive — though two-thirds of the banks that have received prompt corrective actions this year have already failed.
But in numerous instances over the past year, regulators — facing deteriorating fundamentals at banks in a weak economy — have stepped in earlier than they might have planned.
Take, for instance, Irwin Financial, a holding company that owned two banks in Ohio and Kentucky.
It agreed Sept. 11 to a so-called cease-and-desist order from the Federal Reserve, which called for it to boost its capital by the end of the month.
A week later, regulators closed Irwin’s banks — at a cost of $850 million to the deposit insurance fund.
The possibility of securing a mortgage rate below 5% has greatly improved in recent weeks, in a positive sign for would-be home buyers.
Home mortgage rates fell for the sixth straight week, according to two key measures, with one of them pointing to a sub-5% rate for the 30-year fixed loan for the second week in a row.
Freddie Mac’s (FRE, Fortune 500) weekly report said the 30-year rate slipped to 4.87% for the week ended Thursday, the lowest since May. According to the mortgage backer, last week’s rates stood at 4.94%.
Mortgage tracker Bankrate.com said the average 30-year fixed loan slipped to 5.22% from 5.25% the previous week. The 15-year fixed rate also fell, Bankrate said, to 4.6% from 4.64% the week before.
The 30-year rate is influenced by the benchmark 10-year note’s yield, which moves in the opposite direction of its price. Treasury prices have risen over the past week as $78 billion worth of auctions received above-average demand.
"Another disappointing employment report had investors questioning the strength and sustainability of the economic rebound," the Bankrate report said. "The resulting uncertainty drove investors into the safety of government and mortgage-backed bonds."
"Not even a substantial auction of government debt has been enough to derail the streak of declining mortgage rates," the Bankrate report said.
Rates are returning to levels not seen since the spring when, in an effort to cap mortgage rates, the Federal Reserve began a campaign to buy back $300 billion in Treasurys easy pay day loans. The Fed hoped that it would spark demand and keep yields — and therefore, mortgage rates — in check.
Mortgage rates fell as refinancings abounded. But those benefits seemed to wear off, as rates started on a tear in the summer. By June, the benchmark 10-year bond’s yield had increased steadily to hover around 4%.
Now the central bank has less than $15 billion left to spend on its buyback program, which led some investors to worry that yields would soar again. So far, that’s not the case.
On Wednesday, reports said Democratic congressional leaders were working to extend a $8,000 tax credit for first-time home buyers past the Nov. 30 expiration date and could even make it available to current homeowners who buy a new house.
Homeowners have received a boost from both the tax credit and the lower rates — last year, the average 30-year fixed mortgage rate was 6.2%, according to Bankrate.
To translate the difference in mortgage rate into dollars, consider a $200,000 loan. At last year’s rate of 6.2%, the monthly payment would be $1,224.94, or $124 higher than the monthly payment at the current rate.
The low rates helped mortgage applications surge by 16.4% last week, according to a separate report.
For General Motors, the road out of bankruptcy isn’t proving to be as smooth as its quick trip through it.
In the past week, the company’s plans to sell its Saturn brand to auto retailer Penske Auto Group fell through, forcing GM to start winding down a network of about 350 dealerships.
But that’s not the only post-bankruptcy problem for GM. Its plans to sell Hummer to a Chinese industrial company missed a target date of closing by Sept. 30.
GM is also trying to close a deal to sell two-thirds of GM’s European Opel brand to a joint venture between Canadian auto parts maker Magna International (MGA) and Russian automaker GAZ Group. Despite ongoing losses at Opel, the decision to sell that stake was a difficult one for GM. Many experts are concerned that the Opel sale will weaken GM by limiting its global reach.
"It hurts their global capabilities," said Tom Libby, president of the Society of Automotive Analysts. "They can’t draw on this major source of engineering resources that they’ve used for years. If they had had the money they needed, they wouldn’t have done it."
Libby said it’s not surprising that the Saturn deal fell through, that Hummer is behind scheduled, or that the Opel deal has raised questions. But he said these are all signs that turning around GM for the long run will be a significant challenge.
"They made assumptions during the bankruptcy process and that’s why the process was so quick," he said, referring to the company’s six-week trip in and out of bankruptcy court. "But it was always going to be difficult to meet those expectations."
Saturn closure comes with costs
The Saturn deal with Penske (PAG, Fortune 500) was never going to raise a large amount of money for GM. But it would have allowed GM to supply a Penske-run Saturn with vehicles for two years while it found a new contract supplier. That plan would have helped GM keep factories running more efficiently.
In addition, GM will now have to pay Saturn dealers between $100,000 and $1 million each to wind down, which will cost the company more than $100 million. Libby said those payments, while modest in comparison to the company’s ongoing losses, still will hurt GM.
"They have no excess funds. It’s going to affect something in the organization significantly," he said.
GM spokesman John McDonald said that the company never counted on avoiding payments to dealers through a Saturn sale. So the collapse of the Saturn deal is not a setback, he said.
McDonald added that the company hopes to produce the same number of vehicles for its other brands that it would have if it was still making Saturns no fax pay day loans. GM has Chevrolet and Buick offerings that are similar to most Saturn models.
Saturn’s industrywide market share has fallen to a record low of less than 1% this year as buyers avoided the endangered brand and GM cut back on marketing efforts. But Saturn still accounted for about 4% of GM’s total sales in 2009. So any slip in sales could hurt GM at a time when it is struggling to end a period of market share declines in the U.S.
Opel deal critical. Hummer? Not so much.
The Opel deal could affect GM’s competitiveness not just in Europe but in North America as well. Some of GM’s most critically acclaimed vehicles in recent years, including the Chevrolet Malibu and the Buick Lacrosse, are built on an Opel platform.
The Opel sale was temporarily put on hold by GM’s new board as it studied whether it was the best move for the company following bankruptcy. But the need for short-term cash and political pressure from the German government, which had loaned the company money to keep Opel afloat, left GM little choice than to proceed with the sale.
"It wasn’t negotiating from a position of power," said Subroto Banerjee, a partner with business consultant Frost & Sullivan. "In a time of being forced to sell something, you’re in deep trouble. You’re going to give up more than they’d like."
Still, the Opel deal could benefit GM even though some worry about the impact it will have on sales. The keys to whether the deal will be good or bad for GM depends on how much access GM will have to Opel’s engineering resources going forward and the limits on Opel’s new owners being able to compete against GM in markets outside of Europe.
"From GM’s position, those two things are critical," said David Cole, chairman of the Center for Automotive Research, a Michigan think tank.
Then there’s Hummer. The decision to get rid of Hummer, while arguably attracting the most attention because a Chinese company wants to buy the brand, will likely have the least impact on GM. Hummer is small even in comparison to Saturn and it has a much smaller dealer network.
GM’s McDonald insists that missing the target date to close the deal is not necessarily a sign that there are problems. "Especially when dealing with an international buyer, missing a deadline is not uncommon," he said.
Nonetheless, Hummer has been another drain on GM’s limited resources, and experts say they need to resolve the future of the brand sooner rather than later. Libby said that keeping Hummer is not an option for GM.
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