Fed Tried to Cover-up Its Involvement in Bank of America-Merrill Deal

Bernanke under fire in Congressional testimony

U.S. Economy: Jobless Claims Rise by 15,000 Last Week


By Courtney Schlisserman and Shobhana Chandra

June 25 (Bloomberg) -- The number of Americans filing claims for unemployment benefits unexpectedly rose last week, a reminder that companies will keep cutting staff even as the economy stabilizes.

Initial jobless claims rose by 15,000 to 627,000 in the week ended June 20, from a revised 612,000 the week before, the Labor Department said today in Washington. A report from the Commerce Department showed gross domestic product shrank at a 5.5 percent annual pace in the first three months of the year.

Recent data show some areas of the economy, such as housing and manufacturing, are seeing a smaller pace of decline, consistent with the Federal Reserve’s projection that the slump is “slowing.” Even so, companies are unlikely to hire until there are sustained gains in demand, meaning a recovery remains dependent on the effectiveness of government stimulus efforts.

“We’re in the prelude to the end of the recession,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, who accurately forecast the drop in GDP. “The stimulus will build steam, but it’ll be a pretty tepid recovery.” The loss of jobs “is one factor holding back consumer spending,” he said.

Stocks gained as higher oil prices triggered a rally in energy shares. The Standard & Poor’s 500 index closed up 2.1 percent at 920.26 in New York. Treasuries rose, sending the yield on the benchmark 10-year note down to 3.53 percent at 4:30 p.m. from 3.69 percent late yesterday.

Unexpected Jump

Economists forecast claims would fall to 600,000, according to the median of 41 estimates in a Bloomberg News survey, from a previously reported 608,000 a week earlier.

The number of people collecting unemployment insurance increased by 29,000 in the prior week, to 6.74 million.

The four-week moving average of initial claims, a less volatile measure, rose to 617,250 from 616,750.

The jobless rate among people eligible for benefits held at 5 percent in the week ended June 13. The June 13 data coincides with the week Labor conducts its monthly payrolls survey, which the department is due to report on July 2.

Thirty-six states and territories reported a decrease in new claims for the week ended June 13, while 17 had an increase. Some states that don’t ordinarily report layoffs related to the end of the school year saw larger than expected job losses in education services, Labor said, declining to be specific.

Economy Shrinks

The contraction in first-quarter GDP, which was less than the 5.7 percent drop estimated last month, capped the worst six- month performance in half a century, the revised figures from Commerce showed. The world’s largest economy shrank at a 6.3 percent annual rate from October to December.

The biggest slump in business investment and inventories since records began in 1947 and the worst contraction in homebuilding since 1980 paced the decline last quarter.

The housing recession, now in its fourth year, is showing signs of abating. Builders broke ground on more homes than forecast in May, with single-family starts posting a third straight gain, Commerce figures showed earlier this month.

Business investment may also be on the mend. Orders for non-defense capital goods excluding aircraft, a proxy for future spending on new equipment, jumped in May by the most since 2005, Commerce reported yesterday.

Some companies are seeing signs of stabilization. Nucor Corp., the second-largest U.S. steelmaker, may boost plant operating rates to as much as 60 percent of capacity in the third quarter as customers use up inventories, Chief Executive Officer Dan DiMicco said.

Orders Improving

“We have seen distributors begin to order at a level consistent with real demand,” DiMicco said in a Bloomberg television interview yesterday in New York. Still, “we will not be happy, and our competitors will not be happy, until we are north of the 80 percent levels again,” he said.

Fed officials said in a statement at the end of their two- day meeting yesterday said “the pace of economic contraction is slowing.” Consumer spending “remains constrained by ongoing job losses, lower housing wealth and tight credit.”

At the same time, the slack in the economy means “inflation will remain subdued for some time,” they said.

Part of that slack is being created by the bankruptcies of General Motors Corp. and Chrysler LLC. Earl Hesterberg, chief executive officer of Group 1 Automotive Inc., the owner of 99 U.S. and U.K. dealerships, this month said car sales remain weak.

Auto Slump

“We now have eight or nine months of bouncing along the bottom,” Hesterberg said in an interview, referring to the industry. “Really we don’t see much difference from month to month.”

Still, other areas show signs of improvement this quarter. Retail sales rose in May for the first time in three months, government figures showed.

The economy may not yet need a second stimulus after the administration’s $787 billion initiative, which includes tax cuts and spending on infrastructure, President Barack Obama said at a White House news conference this week.

“I think it’s important to see how the economy evolves and how effective the first stimulus is,” the president said.

To contact the reporters on this story: Courtney Schlisserman in Washington [email protected]Shobhana Chandra in Washington [email protected]

A Regional Central Banker Blows the Whistle

Gary North / LewRockwell.com | June 10, 2009

"In the long run, we are all dead but our children will be left to pick up the tab." ~ Thomas Hoenig, Federal Reserve Bank of Kansas City

Thomas Hoenig is the president of the Federal Reserve Bank of Kansas City. In a recent speech, he laid out a scenario for what the Federal Reserve ought to do and what the U.S. government ought to do, and what will happen if they refuse. You can read it  here.

They will refuse. He did not say this, but it is clear to me that they will refuse, at least for the near term.

I hope they won’t refuse.

Hoenig surveyed what he called "challenges." He said that we – a crucial word in the speech – must "begin now to address them genuinely and systematically or we risk repeating past mistakes and creating an environment that leads to our next set of crises.

Who are "we"? How will "we" accomplish this?

Herbert Hoover could have said as much in 1932. So could Bush 1 in 1991 or Bush 2 in 2001. So could Barack Obama today. They never say anything like this. Neither do Federal Reserve Chairmen, except when they are about to implement past mistakes.

He thinks the recession will abate in the second half of this year or in 2010. He did mention housing price declines as a drag on the economy. He did not mention foreclosures.

He said that the cause of this new economic growth will be the result of "the significant degree of monetary and fiscal stimulus" that has taken place.

  • A d v e r t i s e m e n t
He said that "Monetary policy has been enormously accommodative, with the fed funds rate being near zero." This correctly identifies the cause of the fed funds rate at zero: monetary inflation. The FED cannot simply announce a lower fedfunds rate. It has to back this up with fiat money. He identified the main subsidized sectors. The FED has thrown money at housing and the financial markets. It is now buying longer-term assets, including T-bonds. If we count all of the Federal Reserve Banks’ balance sheets, the increase has been from $1 trillion to $3 trillion in less than two years (p. 2).

Fiscal policy – the code words for "Federal deficits" – has matched the FED’s expansion of money. There was $700 billion for TARP during the past 8 months. The recent spending package will add another $800 billion in tax cuts, grants to state governments, and jobless benefits. There will be more highways.

NO FREE LUNCHES

He is a Keynesian. They all are. So, he did not mention that every dime that the Federal government spends in excess of revenues must be borrowed. That is what a deficit means. The only question is: From whom?

If from foreign central banks, the dependence of the U.S. government and the economy on foreign central bankers increases.

If from the domestic economy, every dime lent to the Federal government must come out of savings that would otherwise have gone into the private sector or local government. Every dime transferred from the private capital markets to the Federal government reduces economic productivity. The private sector jobs that would have been created become government jobs.

If from the Federal Reserve System, fiat money will spread into the economy.

If from commercial banks, this will come at the expense of either private producers or consumers, or through moving funds presently kept at the FED as excess reserves. The fractional reserve process will then take over: more money through the money multiplier, which will at last go positive.

Hoenig mentioned none of this.

There are no free lunches. There are no free loans. There are always costs attached.

He is cautiously optimistic. He thinks the recovery will be modest. This is becoming the standard opinion. He added this word of warning:

Our financial institutions remain fragile and will require significant additional amounts of capital to regain their stability.
He did not say how this capital is going to be raised.

THE OLIGARCHY OF INTERESTS

He said that the U.S. financial system very nearly collapsed in 2008. Then he did what they all do. He announced that we "need a better set of incentives within the industry and better oversight by the regulatory institutions if we are to avoid a repeat of these events in the future."

This raises a few questions.

Why were the regulators blind before?
For how long?
Why are they better able to see now?
What kind of incentives motivate them?
Who applies these incentives?
What about disincentives?
Who applies these?
He understands this. "Unfortunately, I’m afraid we are witnessing some regulatory malpractice now" (p. 4). That is exactly what we are seeing. We are seeing the financial regulatory structure being handed over to the Federal Reserve System. This was the source of the bubble in the first place. Greenspan denied that anyone can identify a bubble in the making.

What if we do not get the reforms we need? His answer is amazing for its candidness: ". . . we will perpetuate an oligarchy of interests that will fail to serve the best interests of business, the consumer and the U.S. economy."

Notice the key word: "perpetuate." It is an admission of the existence of such an oligarchy.

It has been with us ever since the Civil War. It has consolidated its hold on the economy ever since the Federal Reserve began operations in 1914.

Why will this change now? He never said.

Today, the FED has created the legal basis of massive monetary inflation – unprecedented. How will it police the financial system?

He said that before "we" spend time reforming the system, "we should first determine which rules of conduct should be reintroduced and enforced to provide for better outcomes."

How inspiring! But who are "we," and how will "we" make these assessments? How will "we" get the existing oligarchy to consent to its suicide?

We have heard all this before, but never from a sitting president of a regional Federal Reserve Bank.

TOO BIG TO FAIL

He called for policy-makers to abandon this doctrine (p. 5). The policy is anti-capitalistic, he said. Indeed, it is. That is the reason why the Federal Reserve System was created by the big bank oligarchy in 1913.

He said the bailouts create moral hazard. Senior managers take extreme risks, looking for easy profits from high leverage, knowing that if their companies get in trouble, the government or the FED will bail them out.

To warn against "moral hazard" at this late date is naïve. The concept was first named and discussed in the 1870’s. It is well enough known by now that a Nashville financial planner has created a country music alter ego named Merle Hazard. He sings more sense than the Board of Governors of the Federal Reserve has yet to announce. If you doubt me, listen for yourself.

Hoenig did not outline exactly what this new, improved "let ‘em die" system should look like. He did not say how Congress will implement it. He did not say why, at this late date, the oligarchy will consent to it.

This is standard fare. Nobody in authority says what needs to be done or how it will ever come to pass. Economists tell us that incentives are everything. Then, when they call for financial reform, they refuse to discuss incentives. How does the fractional reserve banking process not create booms and busts? How can regulators overcome the booms that fiat money produces, or the busts that monetary stabilization later produces?

ECONOMIC IMBALANCES

He identified several. One is the balance of payments problem. We borrow hundreds of billions of dollars from abroad.

But who are "we"? He did not identify the major lenders: Asian central banks. He did not mention why they do this: to increase their exports of goods to the United States. How? By lowering the dollar-denominated value of their currencies. These central banks buy dollars with their own recently created fiat money.

The balance of payments deficit is mainly a product of mercantilist economics in Asia and Keynesian economics in the United States. Mercantilism and Keynesianism are the mutually dependent twins of modern trade. Asian central banks buy mainly Treasury debt and Federal agency debt. The imbalance problem stems from governments on both sides of the transactions.

Until very recently, the personal savings rate has fallen, he said (p. 6). Quite true. Now that it is rising again, the Federal government is running a $1.8 trillion deficit to get Americans to spend, spend, spend. The Federal Reserve has lowered the fedfunds rate to zero. Lend, lend, lend! The joint policies of the government and the FED are designed to increase spending. The lower capital gains rate will expire in 2010. That will reduce thrift.

Then there are the unfunded liabilities of the Federal government: Social Security and Medicare (p. 7). These are permanent imbalances. They have grown up over decades. Why would Hoenig imagine that Congress will reverse itself and start funding these sinkholes? With what? Congress will not invest in the private markets. It buys Treasury debt and spends the money. It always has.

Where are the new incentives that will change Congress? Who will impose them?

Hoenig’s whole exercise is utterly utopian. It is an economists’ fantasy: a world devoid of political incentives to correct the imbalances. Government created these imbalances for political purposes: buying votes, expanding power, deferring a day of reckoning. It has been successful. Why change now?

Someday, he said, "investment will slow and cause lower productivity." What does he mean, someday? We are there.

The whole Western world is there. Every government and central bank has pursued the same policies. Every government is now trapped. Every central bank has lowered the overnight interest rate. Every central bank has inflated.

INTEREST RATES WILL RISE

He finally gets down to the real world (p. 8). He said that interest rates will rise.

He actually predicted monetary deflation. "As the economy recovers, even at a modest pace, resource demands will begin to increase. At that point, the current level of monetary accommodation will need to be withdrawn to avoid introducing inflationary impulses." This is true. But if this is done, unemployment levels will remain high, he said.

If this happens, he predicted, "there will be considerable pressure on the central bank to ‘help out’ in easing the adjustment process by keeping interest rates low for an extended period" He’s got that right! This would lead to "high inflation and an actual worsening of an economy’s long-term performance." Correct again!

Conclusion: "We face difficult adjustments that must be made. The process will not be free of pain."

The FED has more than doubled its balance sheet over the past two years (p. 9). The FED must now remove this stimulus "carefully." What does he mean, "carefully"? The FED either removes it or else it doesn’t.

He refused to say the obvious: to maintain today’s rate of price inflation, the FED will have to sell all of the toxic assets, all of the Fannie Mae and Freddie Mac debt, and all of the T-bonds that it has bought.

In short, it will have to collapse the already fragile financial system.

How likely is this scenario?

The monetary base has more than doubled. This allows a doubling of bank loans. This will double the money supply. If the FED does nothing, we will see 100% price inflation when the banks finally lend all of the money they legally can lend today.

So, at some point, he is right. The FED must sell those assets, or else raise bank reserve requirements to sterilize the assets it has bought. I think the latter is more likely.

If the FED does not sell assets or raise reserve requirements, then mass inflation is guaranteed.

This is not just America’s problem. This is the whole world’s problem,

MORE OF THE SAME

It has finally become acceptable to blame Alan Greenspan for his policy of lowering short-term rates. The problem today is this: the central banks have inflated at a rate that makes Greenspan look like a hard-money man. They have lowered short-term rates to unprecedented levels. They have out-Greenspanned Greenspan.

Now what? The supposed green shoots of recovery will persuade solvent banks to lend again. The M1 money supply will rise without being offset by a negative money multiplier, as has happened so far.

If banks refuse to lend, then interest rates will go up. This will cut short the recovery.

Imagine what the real estate market would look like if the FED ever unloaded its Fannie Mae and Freddie Mac bonds, and mortgages went to 7% or 8%. If you think the Case-Shiller index of urban housing prices in 20 cities looks like Niagara Falls today, just wait.

I think the FED will continue to buy T-bonds. It will not unload its assets until the political repercussions of 30% price inflation finally force it to stop buying. Then rates will soar.

CONCLUSION

The FED is on the back of the tiger. Hoenig sees this. He knows the financial system remains fragile. I presume that he knows that the only way to keep it solvent is for the FED to refuse to sell its assets to the general investment community. Bernanke knows this, too.

No matter how carefully the FED sells off debt, this policy will reverse the recovery. I mean the hoped-for recovery. It is nowhere in sight yet.

The FED will continue to support the T-bond market. It will not allow T-bond rates to rise dramatically.

It will ignore corporate bond rates. Get ready for a bumpy ride.

Get Ready for Inflation and Higher Interest Rates

Russia May Swap Some U.S. Treasuries for IMF Debt

Obama seeks to control executive pay

The System is designed to exert Total Control over the Lives of Individuals

Picture
Richard C. Cook
Global Research
May 17, 2009 What impresses me in the current financial crisis is the near-total failure of so-called progressives to appreciate the magnitude of what is going on or the level of intelligence behind it. How many will say, for instance, that the crash was deliberately engineered by the creation, then destruction, of the investment bubbles of the last decade?

"The development of a sophisticated form of slavery may be an absolute prerequisite for social control." When the financial system creates bubbles it drives up the cost of assets far beyond their true value in producing or storing wealth. When the bubbles burst the value of the assets plummets. Those with ready cash then buy them up on the cheap. When the dust settles more wealth has been concentrated in fewer hands. The rich get richer, and ordinary people are left in a deeper condition of indebtedness, poverty, and pressure to perform to the liking of the financial masters.

Progressives think the system needs to be “reformed.” Maybe the banking system needs to be re-regulated or even nationalized. Maybe it should be possible for families facing loss of their homes to get a lower monthly payment from a bankruptcy court. Maybe the government instead of the private sector should administer student loans.

What we fail to acknowledge is that the system itself is totalitarian. This means that it is designed to exert total control over the lives of individuals. We are accustomed to use this label when thinking of anachronisms of history like communism or fascism. We do not understand that globalist finance capitalism and the government which protects, enables, or even regulates it are also totalitarian.

What has happened in the last year as the financial system has seemingly gone belly-up, and is coming back only through massive government bailouts, is part of a pattern that has been around for decades if not centuries. How the controllers work was laid out in 1967 when Dial Press published a leaked copy of The Report from Iron Mountain. This was a study put together by a team of academics and analysts who met at the underground facility in New York that was home to the Hudson Institute.

  • A d v e r t i s e m e n t

The report began by identifying war as the central organizing principle of society. It stated, “War itself is the basic social system, within which other secondary modes of social organization conflict or conspire. It is the system which has governed most human societies of record, as it is today.”

The report said that, “The basic authority of a modern state over its people resides in its war powers.” It said that any failure of will by the ruling class could lead to “actual disestablishment of military institutions.” The effect on the system would be, the report said, “catastrophic.”

The appearance of the report caused a sensation when it came out at the onset of the Vietnam War. Officials within the government had no comment, and the report faded into history. But certain of its sections fit the situation in 2009 precisely.

This is because the report outlined the ways the civilian population of a developed nation could be controlled even in the absence of a large-scale war that disrupted their daily lives. One of these ways was defined as follows: “A…possible surrogate for the control of potential enemies of society is the reintroduction, in some form consistent with modern technology and political process, of slavery….The development of a sophisticated form of slavery may be an absolute prerequisite for social control….” (Cited in Rule by Secrecy by Jim Marrs, 2000.)

We see the development of such a “sophisticated form of slavery” today. What else can a system be called that subjects the population to skyrocketing personal and household debt, a widening gap between the rich and everyone else, constant warfare justified as necessary to fight “terrorism,” erosion of personal freedoms, constantly expanding power allocated to the military and police, pervasive electronic eavesdropping, complete lack of accountability by politicians for their dishonesty and crimes, a mass media devoted solely to establishment propaganda, etc.

None of this seems to be diminishing under the Barack Obama administration. Even the economic recovery Obama is attempting to engineer through massive Keynesian deficit spending is expected by economists to be another “jobless” one like that of 2002-2005. Of course the unemployed or those who fear unemployment are easy to control. And the permanent series of Asian land wars George W. Bush instigated for control of resources and geopolitical leverage against Russia and China continue unabated.

None of this is accidental. As The Report from Iron Mountain made clear four decades ago, it’s what has been planned all along.


Obama Says U.S. Long-Term Debt Load ‘Unsustainable’


By Roger Runningen and Hans Nichols

May 14 (Bloomberg) -- President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

Earlier this week, the Obama administration revised its own budget estimates and raised the projected deficit for this year to a record $1.84 trillion, up 5 percent from the February estimate. The revision for the 2010 fiscal year estimated the deficit at $1.26 trillion, up 7.4 percent from the February figure. The White House Office of Management and Budget also projected next year’s budget will end up at $3.59 trillion, compared with the $3.55 trillion it estimated previously.

Two weeks ago, the president proposed $17 billion in budget cuts, with plans to eliminate or reduce 121 federal programs. Republicans ridiculed the amount, saying that it represented one-half of 1 percent of the entire budget. They noted that Obama is seeking an $81 billion increase in other spending.

Entitlement Programs

In his New Mexico appearance, the president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare. He also said he was confident that the House and Senate would pass health-care overhaul bills by August.

“Most of what is driving us into debt is health care, so we have to drive down costs,” he said.

Obama prodded Congress to pass restrictions on credit-card issuers, saying consumers need “strong and reliable” protection from unfair practices and hidden fees.

“It’s time for reform that’s built on transparency, accountability, and mutual responsibility, values fundamental to the new foundation we seek to build for our economy,” the president said.

Obama called on Congress to send to him by May 25 a bill that would clamp down on what he says are sudden rate increases, unfair penalties and hidden fees. He also wants the measure to strengthen monitoring of credit-card companies.

House Bill

The U.S. House of Representatives passed the credit-card bill last month after adding a provision requiring banks to apply consumers’ payments to balances with the highest interest rates first. The bill also imposes limits on card interest rates and fees.

The Senate continued debating its version of the bill today. It would require credit-card companies to give 45 days’ notice before increasing an interest rate. It would prohibit retroactive rate increases on existing balances unless a consumer was 60 days late with a payment.

The president said Americans have been hooked on their credit cards and share some blame for the current system. “We have been complicit in these problems,” he said. “We have to change how we operate. These practices have only grown worse in the midst of this recession.”

The American Bankers Association, which represents card issuers, has warned lawmakers and the Obama administration against taking punitive action or setting requirements that are too stringent. Doing so, the lobby group says, would limit consumer credit and worsen a credit crunch.

Obama said that restrictions “shouldn’t diminish consumers’ access to credit.”

Uncollectible Debt

Uncollectible credit-card debt rose to 8.82 percent in February, the most in the 20 years that Moody’s Investors Service Inc. has kept records. Lawmakers have said they’re under increasing pressure from constituents to respond to rising interest rates and abrupt changes to consumers’ accounts.

Obama held a White House meeting last month with executives from the credit-card industry, including representatives from Bank of America Corp. and American Express Co. Afterward, he told reporters that credit-card issuers should be prohibited from imposing “unfair” rate increases on consumers and should offer the public credit terms that are easier to understand.

“The days of any time, any increase, anything goes -- rate hike, late fees -- that must end,” Obama said today at Rio Rancho High School. We’re going to require clarity and transparency from now on.”

He also said the steps he has taken to stimulate the economy and start the debate on overhauling the health-care system are beginning to take effect.

‘Beginning to Turn’

“We’ve got a long way to go before we put this recession behind us,” Obama said. “But we do know that the gears of our economy, our economic engine, are slowly beginning to turn.”

Taking questions from the audience, Obama repeated his stance that he wants legislation to overhaul the health-care system finished before the end of the year, saying it is vital to the economy.

Health-care costs are driving up the nation’s debt and burdening entitlement programs such as Medicare, the government- run insurance program for those 65 and older and the disabled.

The programs’ trustees reported May 13 that the Social Security trust fund will run out of assets in 2037, four years sooner than forecast, and Medicare’s hospital fund will run dry by 2017, two years earlier than predicted a year ago

U.S. Foreclosure Filings Hit Record for Second Straight Month

U.S. Economy: Retail Sales Unexpectedly Fall for Second Month

Recovery? What Recovery?


Kevin Kelly
Newsweek
May 9, 2009 A d v e r t i s e m e n t

Don’t tell me that the economy is getting better, or has even hit rock bottom. My faith in an imminent recovery deserted me on May 5, when one of our customers, Salyer American Foods, based in Monterey, Calif., suddenly fell into receivership. There had been little to no indication that the company was so close to financial ruin. As it turns out, the company’s lenders say Salyer owes them over $34 million, a debt equal to almost half its sales. A company attorney told local media that tight credit markets and the economic recession had pushed Salyer over the edge. If the receiver doesn’t find some way to revive the company’s fortunes, our bag manufacturing company stands to lose nearly $1.5 million in revenue, about 2 percent of our $60 million in sales. On the same day my customer fell into receivership, Fed chairman Ben Bernanke told a congressional committee that he believed the economy was in the process of bottoming out and “would turn up later this year.” He’s not alone in his optimism. Over the past two weeks or so, it has become a cottage industry among economists and the media to spot the first “green shoots” of a recovery. Certainly shoots there may be. The stock market has rebounded smartly over the past two months, as has consumer confidence. Pending home sales have ticked up, while unemployment claims are easing. And many economists insist a manufacturing revival is in the wings because inventories have fallen so low that restocking must begin soon.

Fed Sees Up to $599 Billion in Bank Losses

 

DAVID ENRICH, ROBIN SIDEL and DEBORAH SOLOMON
The Wall Street Journal
May 8, 2009 The federal government projected that 19 of the nation’s biggest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.

A d v e r t i s e m e n t

The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues. The Federal Reserve’s worst-case estimates of banks’ total losses and capital shortfalls were smaller than some had feared. Optimists interpreted the Fed’s findings as evidence that the worst is over for the industry. But questions remain about the stress tests’ rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks.

The government’s tests measured potential losses on mortgages, commercial loans, securities and other assets held by the stress-tested banks, ranging from giants Bank of America Corp. and Citigroup Inc. to regional institutions such as SunTrust Banks Inc. and Fifth Third Bancorp. The government’s “more adverse” scenario includes two-year cumulative losses of 9.1% on total loans, worse than the peak losses of the 1930s

Almost a Quarter of U.S. Homeowners Are Underwater (Update1)
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By Daniel Taub

May 6 (Bloomberg) -- A growing number of U.S. homeowners owe more than their properties are worth after prices extended their two-year decline in the first quarter, Zillow.com said.

About 21.8 percent of all owners were underwater as of March 31, the Seattle-based real estate data service said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier.

Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The decline has left about 20.4 million of the U.S.’s 93 million houses, condos and co-ops with loans higher than the properties are worth. The gain in underwater homeowners will lead to more bank repossessions, Zillow said.

Many owners “would be more willing to bear the financial consequences of bankruptcy or foreclosure,” Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. “You are going to continue to see home prices fall for the rest of this year and some portion of next year.”

The recession cut home values by $2.4 trillion last year, First American CoreLogic said in a March 4 report. More than 8.3 million U.S. mortgage holders owed more than their properties were worth and an additional 2.2 million borrowers will be underwater if prices decline another 5 percent, the Santa Ana, California-based seller of mortgage and economic data, said in the report.

Unemployment Rising

The data demonstrates the challenges facing Federal Reserve Chairman Ben S. Bernanke and the Obama administration as they seek to spark a housing recovery. The Fed has pushed 30-year fixed home loan rates to a record low by purchasing mortgage- backed securities. The jobless rate jumped to 8.9 percent last month from 8.5 percent in March and employers cut at least 600,000 workers from payrolls for a fifth straight time, according to the median estimate in a Bloomberg News survey ahead of a May 8 Labor Department report.

The U.S. market with the biggest drop in home values in the first quarter was Salinas, California, where the median price fell 37 percent to $301,793 from year earlier, Zillow said.

About 32 percent of all homes there were worth less than what’s owed on them, Zillow said. Among the worst-performing markets, Salinas was followed by Redding, Stockton, Madera, and Vallejo-Fairfield, all in California. The company estimates values for homes, whether or not they are sold in the period tracked, in 161 metropolitan areas.

Foreclosures Dominate

In 85 of the markets tracked, the annualized home-value change over the past five years was negative or little changed. About 20 percent of all home transactions in the past 12 months were foreclosures, and short sales made up about 12 percent. A short sale is when a home is sold for less than the outstanding mortgage balance.

The data for Zillow’s study dates to 1996 and comes from public records, the closely held company said. Its mortgage figures come from information filed with individual counties.

The decline in values is holding potential sellers back from putting their properties on the market, the company said. In a separate survey of homeowner sentiment, 31 percent of homeowners said they would be at least “somewhat likely” to put their property up for sale in the next 12 months should they see signs of a recovery.

Harris Interactive surveyed 2,123 adults, 1,266 of whom were homeowners, on line last month, Zillow said.

To contact the reporter on this story: Daniel Taub in Los Angeles at [email protected].

Last Updated: May 6, 2009 12:02 EDT

BofA and Citi need capital as stress tests results loom On Wednesday May 6, 2009, 9:23 am EDT
Buzz up!
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By Karey Wutkowski and Jonathan Stempel

Reuters - People walk past a branch of Bank of America in New York's financial district April 28, 2009. REUTERS/Brendan ...

WASHINGTON/NEW YORK (Reuters) - Regulators have told Bank of America Corp it needs $34 billion of capital to withstand a deep economic downturn, an industry source familiar with results of a government stress test said late on Tuesday.

Citigroup Inc may need as much as $10 billion, a person familiar with the matter said this week. About 10 of the 19 big U.S. banks being stress-tested may need more capital, a person familiar with the official talks has said.

The sources were not authorized to speak because the stress test results have not yet been made public. Results are due late Thursday.

Early results of the tests may unnerve investors who had hoped they might show the industry was in less dire condition than feared.

Bank of America's test results are also certain to increase pressure on Chief Executive Kenneth Lewis, who was ousted as chairman last week in a shareholder vote. That ouster could also lay the groundwork for his departure from the company he has served for 40 years, including the last eight as CEO.

In morning trading, Bank of America shares rose 36 cents to $11.20, while Citigroup rose 14 cents to $3.45. Standard & Poor's 500 index futures rose 0.8 percent. Stocks rebounded from earlier losses after a report suggested the U.S. economy lost fewer private-sector jobs than expected in April.

Analysts believe other banks that may need capital include Wells Fargo & Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, PNC Financial Services Group Inc Regions Financial Corp and SunTrust Banks Inc.

BANK OF AMERICA SURPRISE

The government has spent three months conducting stress tests on the 19 largest U.S. banks to determine their capital needs should economic conditions worsen more than many economists now expect.

It is unclear how Bank of America might raise capital, whether by selling assets, issuing more common stock or other steps. The largest U.S. bank has already received $45 billion of government help.

Bank of America spokesman Scott Silvestri, the Federal Reserve and the U.S. Treasury Department declined to comment.

Citigroup analyst Keith Horowitz raised his price target for the bank's shares to $14 from $10, though he believes Bank of America will need a "substantial increase" in common stock.

Bank of America is struggling with its controversial January 1 takeover of Merrill Lynch & Co as well as heavy credit losses.

Lewis told analysts on an April 20 conference call that "we absolutely don't think we need additional capital," but added: "Make no doubt about it, credit is bad, and we believe credit is going to get worse."

Through Tuesday, shares of Bank of America had fallen 68 percent since the Merrill purchase was announced September 15.

Bank of America could raise capital by selling some or all of its 16.6 percent stake in China Construction Bank Corp, that country's second-largest bank.

It may sell 13.5 billion CCB shares, a 6 percent stake worth $8.3 billion, when a lock-up period ends on Thursday. Bank of America has also said it may sell its First Republic Bank business.

If Bank of America cannot sell enough assets, it might be forced to convert some of its preferred shares held by the government into common stock, leaving the government as one of its biggest shareholders.

Fed Chairman Ben Bernanke on Tuesday said most banks needing capital can raise it through "either issuance of new capital or through conversions and exchanges, or the sales of assets and other measures."

GOVERNMENT PRESSURE

Critics fault Lewis for failing in December to back away from the Merrill merger or disclose Merrill's sinking finances. Merrill later posted a $15.84 billion fourth-quarter loss.

U.S. regulators are examining the Bank of America disclosures, as well as $3.6 billion of bonuses that Merrill paid out.

Lewis has said in testimony that he felt pressure from Bernanke and former U.S. Treasury Secretary Henry Paulson to close the merger, so as to not upset the financial system. Law professors and governance experts say Lewis owed a fiduciary duty to his shareholders first, not to regulators.

Bernanke on Tuesday told lawmakers he did not pressure Lewis to withhold information from shareholders about Merrill.

(Reporting by Karey Wutkowski and Jonathan Stempel; Additional reporting by Dan Wilchins in New York; Mark Felsenthal and David Lawder in Washington, D.C.; Douwe Miedima in London; and Michael Flaherty and Parvathy Ullatil in Hong Kong; Editing by David Holmes and John Wallace)

China has 'canceled US credit card': lawmaker
Published: Thursday April 30, 2009


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China, wary of the troubled US economy, has already "canceled America's credit card" by cutting down purchases of debt, a US congressman said Thursday.

China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country.

But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.

Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had "very legitimate" concerns about its investments.

"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.

"I'm not sure too many people on Capitol Hill realize that this is now happening," he said.

The Republican lawmaker said that China was justified in concerns about returns from finance giants Fannie Mae and Freddie Mac, which were bailed out by the US government due to the
financial crisis.

Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.

"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.

"We should track that, because up until last month they were the number one provider of currency to the United States and now they're gone."

With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States.

China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.