Government could own up to 36 pct. of Citigroup

Citigroup reaches deal that could give the government up to a 36 percent stake in the bank.

Citigroup Inc. said Friday it reached a deal that will give the government up to a 36 percent stake in the struggling bank.

The government, along with other private investors, will convert some of their preferred stock in Citi to common shares.

iti will offer to exchange up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 per share, a 32 percent premium over Thursday's closing price of $2.46. The government will match up to $25 billion of preferred stock it currently owns for conversion at the same price.

If the maximum amount of preferred stock is converted, current common stockholders will see their ownership stake fall to about 26 percent.

The conversion will help provide Citi the mix of capital to withstand further weakening in the economy.

The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors, Capital World Investors are among the private investors that said they would participate in the exchange.

One of the hardest hit banks by the ongoing credit crisis, Citi has already received $45 billion in cash from the government and guarantees protecting it from the bulk of losses on $300 billion of risky investments.

Under the exchange agreement, the Treasury Department's remaining $20 billion in preferred shares will be converted into a more senior preferred stock that carries an 8 percent cash dividend rate.

Citigroup said the increase in government ownership will not require additional taxpayer money. The government currently holds about an 8 percent stake in Citi.

As part of the agreement, Citi will suspend dividends on both its common stock and preferred shares.

Citi will also reshape its board of directors, Richard Parsons, the bank's chairman, said in a statement. The board will have a majority of new independent directors as soon as possible, Parsons added.

The company also said it recorded a goodwill impairment charge of about $9.6 billion due to deterioration in the financial markets.

The goodwill charge was added to Citi's 2008 results along with a $374 million impairment charge tied to its Nikko Asset Management unit. The charges resulted in Citi revising its 2008 loss to $27.7 billion, or $5.59 per share.

Shares of Citi tumbled 56 cents, or 22.7 percent to $1.90 in premarket trading.

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Will we see your like again?

The Royal Bank of Scotland announces a huge loss. It will now be dismantled.

AT ITS obligatory roasting by the Treasury Select Committee this week, Britain’s financial regulator was accused of “being responsible for supervising ten big banks and allowing five to collapse”. In response, the boss of the Financial Services Authority, Lord Turner, promised a “revolution” at his organisation.

That is not far off what is taking place north of the border, at Royal Bank of Scotland (RBS), the most spectacular of those failures. Two bail-outs have left RBS majority state-owned. On Thursday, amid furore over his discredited predecessor’s lavish and now taxpayer-funded pension, its new boss, Stephen Hester, provided details on plans to break up the group. He also described RBS’s probable use of the government’s asset-guarantee scheme, which will soon be rolled out to other banks as well. For good measure Mr Hester also announced the largest loss in British corporate history.

There is a lot to break up: acquisitive RBS was the world’s largest bank by assets in 2008. Its purchase of bits of ABN AMRO, a Dutch bank, in 2007 brought the kind of geographic spread (try 20 branches in Indonesia) that looks sage at the pinnacle of a bull market and more like imperial overstretch at any other time. Mr Hester plans to split the bank into two parts: the good and the mediocre.

Into the good pot will go about three-quarters of the bank’s existing activities, consisting mainly of its British and American banking operations, its insurance division and the less-dangerous bits of its investment bank, which is to be halved in size. Some tasty overseas businesses, for example in India, will be retained. The mediocre pot will contain the other foreign retail assets, which RBS will attempt to auction. But it will consist overwhelmingly of the dodgy bits of the investment bank (such as its leveraged-loan and property activities), which will probably be wound up over several years.

To bolster capital and prod the bank into lending more, the government will guarantee assets on RBS’s books with a value of £302 billion ($430 billion)—equivalent to about a quarter of its total risk-weighted balance-sheet. RBS will be responsible for the first £19.5 billion of any losses, and the state for most of the rest. By limiting its risk (for a fee of £6.5 billion to the Treasury), RBS will boost its core capital ratio from 7% to 9%. It also promises to lend £50 billion more in the next two years, expanding its domestic loan book by a fifth.

That punchy rate of growth helps explain the biggest surprise. The Treasury is investing a further £13 billion which, like the guarantee fee, will take the form of a new kind of preference stock that can be converted to ordinary shares. This stock will bolster capital more securely than the suspect hybrid stuff that American regulators are keen to inject into banks, since its dividends can be cancelled. The result will be that RBS’s core capital ratio hits a whopping 12.4%, about double the level at JPMorgan Chase, America’s soundest big bank.

All of which may seem overgenerous, particularly since the state’s voting rights will be capped at 75% of the total—less than its likely financial stake in the business. But the advantages to taxpayers of having a bank that is well-capitalised enough to lend, but also well-run enough to be sold back to private investors one day, should not be underestimated.

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A credible budget?

Barack Obama's ambitious budget is unveiled.

ON THURSDAY February 26th Barack Obama unveiled a draft budget that promises to cut the deficit from a vast $1.75 trillion in fiscal 2009 (which ends this September) to $533 billion in 2013, when his first term ends. As a share of GDP, the draft has the deficit falling from this year’s post-war high of 12% to just 3%.

Is that promise credible? At a minimum, Mr Obama seems more fiscally honest than George Bush, whose accounting gimmicks vied with Enron’s. Mr Bush’s budgets routinely excluded unavoidable outlays, such as those for wars and natural disasters, incorporated tax increases and spending trims that he knew would never occur, and masked his policies’ impact on the deficit by shortening the forecast horizon to five years from ten. Mr Obama puts most of the missing items back in the budget, and restores its horizon to ten years. However, he undoes some of this laudable clarity with a rosy economic forecast.

To boost revenue, Mr Obama will let Mr Bush’s 2001 tax cuts for the 2% of richest Americans (typically those earning more than $250,000) expire as scheduled at the end of 2010. Corporations will no longer be able to exclude foreign-source income from tax. Many popular tax deductions, such as those for local taxes, mortgage interest and charitable gifts, will be limited for the rich. A cap-and-trade programme for carbon emissions that is yet to be designed will raise additional revenue starting in 2012. To curb spending, Mr Obama promises to remove most American troops from Iraq before the end of 2010, reduce payments to privately managed Medicare plans and farmers, and find other savings.

Mr Obama told Congress in his address on the 24th that “everyone…will have to sacrifice some worthy priorities for which there are no dollars. And that includes me.” Yet the evidence of such sacrifice remains scarce. He appears to earmark his tax increases and spending cuts mostly to pay for his long-standing priorities: making permanent the worker tax credit in the fiscal-stimulus plan; expanding public subsidies to reduce the number of those without health insurance (though no details have been provided); more money for parents, students, the disabled and the unemployed; investment in alternative energy; and extra deployments to Afghanistan. And he suggested that he will need more money to bail out banks than the $700 billion already authorised. A $250 billion facility is being set aside for this, one reason why this year’s deficit is so huge.

Most of Mr Obama’s targeted deficit-reduction comes not from his own actions, but from the expiry of the stimulus, a halt to bail-outs, and the natural restoration of tax revenue as the economy pulls out of recession, growing by a robust 4% on average from 2010 through to 2013. And therein lies the biggest threat to the president’s plans. Mr Obama’s forecast is already more optimistic than the private sector consensus was in January, and that consensus has since become more pessimistic. Ben Bernanke, the Federal Reserve chairman, said this week that the recession would end this year only if the financial system stabilises, which so far it has not.

A longer recession or long-term stagnation pose two distinct fiscal risks. First, Mr Obama will be (rightly) reluctant to raise taxes and tempted to extend parts of the stimulus package if unemployment is not dropping by 2010. Premature fiscal tightening, after all, could lengthen the recession, as Japan learned in the 1990s.

Second, a longer recession makes it harder for America to grow out of its debt burden as it, and other countries, have done at previous debt peaks. Because of stagnating output and declining prices, Japan’s nominal GDP in 2005 was smaller than in 1996, contributing mightily to a climb in that country’s net debt from 29% of GDP to 85% (it will reach 98% this year). One worrying parallel for America is that its nominal GDP will probably decline this year for the first time since 1949 (the administration optimistically sees it creeping up by 0.1%)

So Mr Obama’s 3% deficit target may be much harder to reach than he thinks; and it may not be tough enough anyway. Using reasonable policy assumptions, Alan Auerbach of the University of California at Berkeley, and William Gale of the Brookings Institution, think the deficit will bottom out near 5% of GDP in 2013 then climb to almost 6% by 2019, while debt continues to rise as a share of GDP. That is before the government has to deal with the full impact of the surge in health and pension entitlement costs. The academics reckon higher taxes or lower spending equal to a staggering 8% of GDP a year are necessary to contain those costs and stabilise the long-run debt.

Despite his inspiring rhetoric, Mr Obama’s plans for dealing with those long-term obligations have been frustratingly vague. He called on Americans to “address the crushing cost of health care” but proposes to spend many billions more, not less. He reportedly abandoned support for a commission to restore solvency to Social Security, the public-pension system, because congressional Democrats objected to this loss of their authority. He had a golden opportunity to introduce the idea of the rich, multinational corporations and carbon-emitters paying higher taxes as part of a broad reform of a monstrously inefficient tax system, and so make the economy more productive. He passed it up.

In fairness, these are early days in his presidency, and stabilising the economy needs to be his priority. The summit and the speech to Congress were just part of the essential process of softening up the public for the long and contentious chore of fixing entitlements and the tax system.

It was also an opportunity for Mr Obama to counter the pervasive economic gloom that he himself engendered with his warnings of “catastrophe” if his stimulus plan was not passed. With the rhetorical flair for which he is famous, he asserted that Americans would triumph because “amid the most difficult circumstances”—his voice briefly descending to a warm and coaxing growl—“there is a generosity, a resilience, a decency”. As if to prove his point, legislators gave one of their longest ovations to Leonard Abess, a Miami banker in attendance who sold most of his bank for $927m and gave $60m of the proceeds to 471 current and past employees. Even amid the gloom, there are occasional flashes of light.

www.economist.com

Wall Street opens higher as investors bet on banks

Stocks open higher as investors grow more upbeat on prospects for banking industry.


Wall Street is opening higher as investors show some relief over more government help for the banking system.

President Barack Obama's budget proposal outlines the possibility of spending $250 billion more for additional financial industry rescue efforts on top of the $700 billion that Congress has already authorized, a senior administration official told The Associated Press.

Investors also are applauding planned job cuts at JPMorgan Chase & Co. and moves by the British government to help banks remove toxic assets from their books.

The Dow Jones industrial average is up 77 at 7,348, while the Standard & Poor's 500 index is up 9 at 774. The Nasdaq composite index is up 10 at 1,436.

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GM loses $9.6 billion

Embattled automaker reports larger than expected in fourth quarter loss and burns through more than $5 billion in cash; says it needs new loans this year.

General Motors posted a $9.6 billion net loss in the fourth quarter, a period in which its sales plunged and it needed a federal bailout to avoid filing for bankruptcy.

The company also disclosed that its auto operations burned through $5.2 billion in cash during the last three months of the year. The company ended the quarter with cash of $14 billion.

If not for the $4 billion federal loan it received in the quarter's closing days, GM's cash level would have fallen below the $11 billion to $14 billion in cash the company has said it needs to continue operations.

Since receiving the first installment of that loan, GM has gotten another $9.4 billion in federal assistance. The company asked for an additional $16.6 billion in the turnaround plan it submitted to the Treasury Department last week. GM disclosed Thursday it will need this money in 2009 to weather the current downturn.

The company also said it anticipates its outside auditors will issue a statement on whether the company is a "going concern." The statement could be important not only to investors but to federal officials who are determining whether the company is viable in the long-term.

If the government determines GM is not viable, it would demand immediate repayment of the company's loans.

The auditor's statement will be included in GM's year-end results filing with the Securities and Exchange Commission. GM disclosed Thursday it had filed for a two-week extension to submit that report.

As bad as the net loss was, it could have been worse. The company posted a $533 million gain because of the fact that GMAC, the finance unit in which it held a 49% stake during the quarter, got its bond holders to agree to swap debt for equity. GMAC become a bank holding company as a result of the debt swap, which significantly reduced GM's stake in the unit.

Excluding special items, GM lost $5.9 billion, or $9.65 a share, in the quarter. Analysts surveyed by Thomson Reuters had forecast a loss of $7.39 a share, compared to a profit of 8 cents a share on that basis a year ago.

The operating losses were particularly pronounced in GM's core North American market. It lost $3.5 billion before taxes in the quarter, up from a $1.3 billion loss in North America a year earlier.

Revenue in the North American unit plunged about 32% to $19.3 billion. GM's market share also slid 1.7 percentage points to 21%.

But GM, which now sells more than half its vehicles outside of North America, is facing challenges around the globe.

Losses more than quadrupled in Europe, and the company lost money in its Asia-Pacific and Latin America-Africa-Middle East units. GM posted profits in those two regions a year ago.

Overall revenue at GM plunged 34% to $30.8 billion, significantly worse than the Thomson-Reuters forecast of $35.1 billion.

For the full year, GM reported a net loss of $30.9 billion. The automaker has posted net losses of $82 billion over the past four years as its U.S. sales and market share plunged and it closed plants and slashed staff in an unsuccessful effort to stem losses.


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Spy scandal in Estonia.

A senior spy for Russia in NATO is convicted.

WHY he did it is still unclear. But the “how” is leaking out. Hermann Simm, a former Estonian official who was one of Russia’s highest-placed spies in NATO, pleaded guilty to treason on Wednesday February 25th and was jailed for 12½ years. The Estonian authorities have released some details of a case that has had the spook world buzzing for the past year.

Russia’s foreign-intelligence service, the SVR, recruited Mr Simm on his holiday in Tunisia in 1995. He was a prime catch. He had finished a stint as a top policeman, and was starting a new security job at the defence ministry. The approach was made by Valery Zentsov, once a KGB officer in Soviet-occupied Estonia. Mr Simm was neither blackmailed nor, at first, bribed; he just wanted his Soviet-era rank of colonel back. At a third meeting he was put on the payroll, receiving just over $100,000 in all.

Mr Simm betrayed every secret that crossed his desk. There were plenty: as the man in charge of Estonia’s national security system, he organised the flow of all classified military documents in the country and abroad. Once Estonia joined NATO in 2004, he acted as the Kremlin’s eyes and ears on the alliance too (although his poor English, say some, may have limited his usefulness). He also tried but failed to get hold of secrets from Estonia’s security and intelligence services, which are separate from the defence ministry.

In 2002, say Estonian officials, Mr Zentsov was replaced by another Russian handler. Sergei Yakovlev worked for the SVR’s elite S-directorate, which runs “illegals”: spies who acquire a genuine identity in a foreign country. Mr Yakovlev, a near-native speaker of Portuguese, appears to have acquired Portuguese citizenship illegally, gaining a passport in the name of Antonio de Jesus Amurett Graf. Travelling as a business consultant, he met Mr Simm every three months or so, in at least 15 countries in the EU and elsewhere.

The plan came unstuck because of poor spycraft. According to spycatchers elsewhere, Mr “Graf” tried to recruit a senior official in another country, who reported the incident to his own counter-intelligence service. Under scrutiny, the Portuguese was seen meeting Mr Simm. That set alarm bells clanging across NATO. The difficulty was to observe Mr Simm closely enough to build a criminal case without sparking his suspicion. Estonia’s security service is getting many plaudits for this, which culminated in his arrest last September. In a separate prosecution, Mr Simm was ordered to pay 20m Estonian kroons ($1.7m) for the cost of new security systems. The SVR did not immediately reply to a request for comment.

Mr Simm is not the only Russian spy at high level in NATO. Several other countries are apparently following up five leads arising out of Mr “Graf’s” activities. The results are unlikely to become public. The way in which Estonia put Mr Simm openly on trial is striking. In other countries, those caught spying for Russia tend to be eased out discreetly rather than being brought to justice in the painful light of day.

www.economist.com

A brighter future, but who pays?

Barack Obama, in his address to Congress, asks for sacrifice but skips the details.

AS A new president, Barack Obama’s first speech to Congress was not, officially, a state-of-the-union address. That was just as well: its current state is awfully precarious. On Tuesday February 24th, a few hours before he spoke to the Senate and House of Representatives, a survey reported that consumers’ confidence in the future was at its lowest in 40 years of polling.

Mr Obama did not sugar-coat matters. The economic crisis “is the source of sleepless nights,” he said. His budget, to be delivered on Thursday, “reflects the stark reality of what we’ve inherited—a trillion dollar deficit, a financial crisis and a costly recession.”

He promised that beyond this grim present lies a brighter future of plug-in hybrid-energy cars, wind- and solar-powered cities, digital health records, vanquished disease, and the world’s highest college-graduation rates. And, with the inspirational flourish for which he is famous, he insisted that Americans would triumph because there exist “amid the most difficult circumstances”—his voice descending to a throaty growl—“a generosity, a resilience, a decency”.

Such speeches are typically meant to sketch a president’s broad agenda rather than deliver specifics. This one at times felt like an economics class with simple explanations of how credit markets work, and at others like a late-night cable TV commercial: “The average family who refinances today can save nearly $2,000 per year on their mortgage.”

Still, he did give clues to his priorities. Congress, he said, had to act soon to overhaul America’s multiplicity of financial regulators, which struggled to anticipate and cope with the financial crisis. He called for a cap-and-trade system to reduce the growth of greenhouse-gas emissions. He gave warning that the Treasury would probably need more than the $700 billion that Congress has already authorised for propping up the banking system (while studiously avoiding the debate over whether banks should be nationalised in the process). He strongly indicated that there would be more aid for General Motors and Chrysler, which are now contemplating whether to file for bankruptcy to shrink themselves more rapidly. “The nation that invented the automobile cannot walk away from it,” he said.

A theme that permeated the speech was rapidly rising national debt, following the budget-busting $787 billion stimulus that Mr Obama just signed. “Everyone in this chamber—Democrats and Republicans—will have to sacrifice some worthy priorities for which there are no dollars. And that includes me,” Mr Obama said. But he has yet to say what he is prepared to sacrifice. He still plans to expand publicly financed health care, make permanent tax credits to the majority of workers, expand college assistance and invest in alternative energy.

The budget on Thursday is expected to show that Mr Obama inherited a deficit of $1.3 trillion this fiscal year, and raised it to $1.5 trillion with the fiscal stimulus (a post-war high of some 10% of gross domestic product). Mr Obama will promise to get it down to $533 billion or 3% of GDP by fiscal year 2013. Most of that drop will come from the expiration of temporary stimulus measures, the cessation of capital injections and the hoped-for start of economic recovery. The rest will come from withdrawing troops from Iraq, trimming payments to privately-managed Medicare plans, letting George Bush’s tax cuts expire as scheduled in 2010 for the richest 2% of Americans, the taxation of foreign corporate income and the sale of permits for carbon-emissions trading. He promised, as every previous president has, to vet the budget “line by line” for waste; he will find it just as hard as his predecessors to kill programmes with powerful congressional backers.

At a Monday budget summit with congressional leaders and again on Tuesday Mr Obama rightly noted that the cost of old people’s health care and pensions are the country’s biggest long-term fiscal threats, but on neither occasion did he propose how to deal with them. In fairness it is early and stabilising the economy should be Mr Obama’s priority, not long-term fiscal discipline. Premature fiscal tightening could abort a recovery. The summit on Monday and the speech on Tuesday were part of the process of softening up the public for future pain.

Both events also demonstrated that despite being jilted on his quest for some Republican support during the debate on the fiscal stimulus, he is not giving up on his pursuit of bipartisanship. On Tuesday night, at least, Republicans were co-operative, rising in applause almost as often as Democrats.

www.economist.com

Stimulus: Can it feed the hungry?

The economic stimulus plan provides $150 million for food banks. Advocates for the hungry say it can't arrive soon enough.

For Jesse Taylor, the debate over the federal stimulus plan wasn't about politicians trying to score points or economists parsing the unemployment rate.

It was about the growing ranks of hungry people lining up outside his Harlem food pantry.

"We're in the midst of a perfect storm: We've received budget cuts, we've seen an increase in the number of people coming in, and we've seen the cost of food going up," said Taylor, senior director of Community Kitchen, a food pantry and soup kitchen run by the New York City Food Bank.

On a recent cold morning, the unassuming and friendly Taylor greeted members of the community -- some of whom he has come to know by name -- waiting to enter the pantry for a bundle of groceries.

"We definitely need to bail out the hungry," Taylor said.

The $787 billion economic stimulus plan signed by President Obama on Feb. 17 allocates $150 million to the U.S. Department of Agriculture's Emergency Food Assistance Program.

The 28-year old program, known as TEFAP, sends shipments of federally purchased food to states, which in turn gets the food in the hands of large food banks. The food banks then allocate the food to soup kitchens and pantries that serve people in need.

The $150 million for TEFAP provided by stimulus about doubles the amount of money allotted to the program in 2009, and the funds will be distributed starting soon, according to the USDA. But with the economic situation still deteriorating, people on the front lines of the nation's hunger problem worry that it's not enough.

"It's a great first step, and we're grateful to the administration for putting those funds into TEFAP," said Taylor, whose parent agency is set to receive about $6 million more in food this year because of the stimulus package. "But it's not enough to cover all the people coming in and requesting emergency food assistance."

The $150 million is half of what Feeding America, a network of more than 200 food banks that advocates in Washington for food assistance programs, sought from Congress. Feeding America said its member food banks are reporting a 30% increase in the number of people seeking assistance over a year ago, and 72% of food banks have been unable to adequately meet demand.

New York Gov. David Patterson's office estimates that 3.5 million New Yorkers will require some form of food assistance in 2009. New York City Food Bank, the largest in the country, said that 2 million of those people will have never accessed food assistance programs in the past.

One such person is Rosetta Stokes, a former postal worker who retired 10 years ago due to a disability. She had managed to get by on her disability payments until now. Thursday was her first day at a soup kitchen.

"I do have my disability, but it doesn't seem like it's lasting. Food prices are rising and sizes are getting smaller," said Stokes, who called her grits and eggs served up by the Community Kitchen staff "a blessing."

"Everything's just gotten overwhelming," she added. "Every day it's something like, 'Wow, I can't do ... what I was doing yesterday.' "

Rising prices worry advocates

People seeking emergency food have cited unemployment and soaring food prices as the leading causes of their need. Food costs rose 5.9% last year, and staple foods like corn, wheat and other grains have grown even more expensive.

"Food is the most elastic expenditure in a household's budget," said Maura Daley, vice president of government relations and advocacy and Feeding America. "Food prices are still rising, so it's hard to predict how quickly we'll see relief."

Even though the stimulus plan plans to alleviate hunger by allocating $20 billion to food stamp programs, rising food prices could still put a dagger into those plans.

"They helped us by raising the food stamps, but the food [costs] have gone higher," said Carmen Quinones, a foster mother in Harlem, who has been coming to the Community Kitchen's food pantry for two months.

"You still have to come out of pocket to make ends meet at the end of the month," said Quinones. "Hopefully this stimulus package will provide more funds for us and more jobs. That's what it's all about - creating jobs and getting people off the system."

Stimulus: A good start

Some experts are optimistic that the recovery plan's aim of creating or saving 3.5 million jobs over the next two years will indirectly help the hunger situation.

"The more preventative work we can do, obviously the better," said Aine Duggan, vice president of government relations at the New York City Food Bank. "The more jobs we create at this time, then the less people we'll see turning to emergency food programs."

Still, Duggan said organizations that work with the huger issue are readying themselves for even greater demand for food banks' services in 2009 than in 2008. She expects resources to be stretched thin but said the stimulus money will help.

"The message with the economic stimulus bill is there isn't a silver bullet here. There is no way to fix the entire problem with one bill," Duggan said. "But we can certainly provide assistance to people who are most in need - at least in a temporary way."


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World markets fall amid relentless financial fears.

World stock markets fall amid relentless fears about financial system; HK off nearly 3 pct.

Asian stock markets tumbled Tuesday, with Hong Kong and South Korea down around 3 percent, after relentless fears about the financial system and world economy drove Wall Street to its worst finish in nearly 12 years. European shares opened lower.
Every major market shuddered from losses across a range of sectors, from banks to technology firms, exporters and commodities, wiping out solid gains from the previous day.

Tokyo's benchmark languished near a 26-year low as news that Nomura Holdings, Japan's biggest broker, will raise billions more in capital by selling shares added to worries about the financial sector.

Most Asian bourses advanced strongly Monday on reports the U.S. government may take a greater stake in tottering financial giant Citigroup.

But concerns that Citigroup and other banks will keep suffering severe losses flared overnight amid pessimism about a quick economic recovery and doubts the government can return the reeling financial system to working order.

As the Obama administration tried to pacify fears, saying it would launch a revamped bank rescue program this week, U.S. investors hammered stocks. The Dow Jones and Standard & Poor's 500 indexes plummeted to their lowest closes since 1997.

"Investors are just selling out in disgust across the board -- disgust with the market, disgust with the financial problems," said Lorraine Tan, director of equities research at Standard & Poor's in Singapore.

"The government seems to keep throwing in money, but there doesn't seem to be any end to the declines or solutions to the problems," she said.

European stocks fell in early trade, with Britain's FTSE 100 down 1.1 percent, Germany's DAX lower 2.4 percent and France's CAC 40 off 1.8 percent. Stock futures suggested Wall Street would rise modestly Tuesday. Dow futures were up 33, or 0.5 percent, at 7,149 and S&P500 futures rose 3.6, or 0.5 percent, at 748.30.

Earlier in Japan, Japan's Nikkei 225 stock average lost 107.60 points, or 1.5 percent, to 7,268.56, though selling eased somewhat as the government signaled it may prop up stock prices, possibly by buying shares with public funds. Nomura dived 9.3 percent.

Hong Kong's Hang Seng sank 376.58, or 2.9 percent, to 12,798.52, while South Korea's Kospi fell 3.2 percent to 1,063.88.

Mainland Chinese shares, among the year's best performers, got slammed, and the Shanghai benchmark plunged 4.6 percent.

Sentiment there also took a hit after China's central bank said the country's economic downturn could worsen and warned the risk of deflation is "quite big" amid collapsing consumer demand. The bank's report could temper expectations that China's slump might be bottoming out and a recovery might be taking shape,

Elsewhere, Australia's stock measure was off 0.6 percent, and Singapore's benchmark lost 1 percent.

Overnight, U.S. investors seemed unconvinced after regulators promised to ensure the viability of banks by providing capital and said they would start conducting "stress tests" on Wednesday to gauge the health of financial firms.

Amid the assurances, however, came more reports of financial gloom.

Struggling insurer American International Group Inc. said it's evaluating "potential new alternatives" to tackle its financial problems amid reports it will soon announce a $60 billion loss and ask the government for more aid.

After the markets closed, JPMorgan Chase said it was slashing its quarterly dividend to preserve capital in case economic conditions drastically worsen.

The Dow plunged 250.89, or 3.4 percent, to 7,114.78. It last closed this low on May 7, 1997 when it finished at 7,085.65. The Dow hasn't traded below the 7,000 mark since October 1997.

While the S&P500 managed to close above its Nov. 21 trading low -- considered a key threshold among investors -- it still took a beating. The benchmark fell 26.72, or 3.5 percent, to 743.33. It was the lowest close since April 11, 1997.

Oil prices languished in Asian trade, with light, sweet crude for April delivery down 36 cents at $38.08 a barrel the New York Mercantile Exchange. The contract lost 4 percent, or $1.59, to settle at $38.44 overnight.

In currencies, the dollar strengthened to 95.45 yen from 94.43 yen. The euro was up slightly at $1.2790 from $1.2705.

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Banks under stress

Is it time to nationalise Citigroup and Bank of America?

AMERICA has been dithering about how to sort out its banking crisis. The market has forced its hand. On the morning of Monday February 23rd a joint statement by banking regulators said that they stood “firmly behind” the banking system and would initiate promised stress tests of banks’ capital positions on Wednesday. The fine print remains critical and, so far, unclear, but the statement should at least halt the scary market moves that took place last week.

In a five-day period last week shares of two of the biggest and most vulnerable banks, Citigroup and Bank of America (BoA), fell by 44% and 32% respectively. Those of better capitalised institutions, such as JPMorgan Chase, fell by less. Far more worryingly, this sorting of the wheat from the chaff occurred in the credit defaults swap market, which showed the perceived risk of bankruptcy ballooning for Citi and rising sharply for BoA, while JPMorgan remained more secure. Investors seemed to be betting that new injections of straight equity from the state (rather than more dollops of preferred shares) would dilute existing shareholders, but also that the state might insist that a “haircut” be imposed on those further up the capital structure.

However emotionally satisfying, forcing banks to default on debt would cause the type of liquidity runs and market dislocation that brought chaos after the collapse of Lehman Brothers last year. The regulators’ statement seems designed to reassure on this front. What it still sidesteps is the basis on which new equity will be injected into tottering banks. Clearly the government could take all sorts of forensic decisions about the carrying values of assets that banks have on their balance sheets. But the market is mainly betting that the government will bow to common sense. Headline tier-one capital ratios show all three banks at 11-12% (with BoA including Merrill Lynch). But Citi and BoA have flattered these ratios with huge amounts of preference stock, much of it issued by the state.

This capital is not genuinely loss bearing: for example Citi can defer dividends on its latest government preference stock but not cancel them entirely in the same way as common shares. Strip out the hybrid capital and JPMorgan is at 6.4%. This is in line with the best capitalised European banks—for example Britain's state-controlled RBS, even after it latest round of big losses, stands at about 7%. However Citi and BoA look much weaker, with ratios at about 3-4% as well as carrying higher investment banking exposure.

Investors appear only to trust banks with high levels of pure equity capital. That suggests it would be a good idea to convert existing government preference stock into pure equity. If this occurred at current market prices, the state would own about two thirds of BoA and about 80% of Citi. But instead the regulators’ announcement on Monday appears to support the idea of more “temporary” preferred shares that would convert into common stock “over time” as and when losses materialise. This further fiddlyness seems designed to avoid the appearance of nationalisation, but it could well create even more confusion about the true loss bearing capacity of these two firms, and of other banks that are likely to fail the test. It is hard to believe the solution to banks’ problems is to make their capital structures more, not less, complicated.

www.economist.com

Citi in talks over bigger U.S. stake - Report.

Bank and regulators discuss plan for government to convert preferred shares, according to Wall Street Journal.

Citigroup Inc. is in discussions with regulators about a plan for the federal government to take a larger ownership stake in the bank, according to a report Sunday.

The Wall Street Journal, citing sources familiar with the matter, reported that the government would convert a large portion of its preferred Citigroup shares to common shares.

The government received the preferred shares in return for investing $45 billion in Citi as part of the $700 billion bailout of the financial system.

According to the Journal, the talks involve Citi executives and regulators at the Federal Reserve and Office of the Comptroller of the Currency. Officials in the Obama administration have not said whether they support the plan, the Journal reported.

Citigroup spokesman Michael Hanretta declined to comment on the Journal report. On Friday, the bank issued a statement saying that its capital base is "very strong" and capital reserves were among the highest in the industry at the end of the fourth quarter.

"We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," Hanretta said.

The report is sure to stoke speculation about whether the Obama administration may have to nationalize large banks to stabilize the financial system.

The question of nationalization has weighed on the minds of investors in the two weeks since Treasury Secretary Tim Geithner announced a comprehensive stability plan that fell flat.

The issue came to a head on Friday when nationalization fears helped drag down shares of Citi and Bank of America as much as 36% at one point.

BofA recovered most of its losses to finish down just 3.6%. But Citi's stock closed with a 22% loss.

The Obama administration has said it wants to keep the banking system in private hands, which seems to suggest it isn't aiming to run the likes of Citi and BofA. But that leaves the door open to an "intervention" -- a takeover of a troubled bank for the purpose of breaking it up, bringing in new capital and finding new owners and management.

The term nationalization has been used to cover a range of very different outcomes. Most obviously, it refers to the outright takeover of troubled firms, such as when the Treasury Department put mortgage giants Fannie Mae and Freddie Mac into conservatorship.

But it has also been used by some people to cover sizable investments that give government officials considerable say in a firm's activities -- such as the loan guarantees extended in recent months to Citi and BofA.

Asian, European stocks advance on Citigroup report

World stocks mostly rise on report US could take bigger stake in Citigroup; HK up 3.8 pct.

Asian and European stock markets advanced Monday, as investors digested reports the U.S. government might expand its stake in troubled banking giant Citigroup to ease the financial crisis.
Worries that major Western banks like Citigroup Inc. and Bank of America Corp might have to be nationalized because of mounting bad debts sent global markets sharply lower last week.

But investors seemed relieved, at least for now, to have some clarity about the fate of Citigroup after the Wall Street Journal said late Sunday the company is negotiating with authorities to increase the U.S. government's stake in the teetering lender to as much as 40 percent.

Executives would prefer to keep the government's stake closer to 25 percent, according to the Journal, which cited people familiar with the situation. The talks arose after Citigroup made the proposal to regulators.

The Obama administration has not indicated whether it would back the plan, the Journal said. Just last week, Obama officials voiced support for keeping the banking system private as widespread talk about nationalization led investors to unload shares in Citigroup and Bank of America.

The news was unlikely to give stocks extended support, analysts said. Should the U.S. end up taking greater ownership, however, the move could help restore long-term confidence in the hard hit financial sector, raising prospects of a faster recovery in the world economy.

"People are taking it as a positive sign," said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong. "It shows the government will not allow a major bank to fail again. They've learned their lesson with Lehman Brothers that the ramifications are so great, sometimes no amount of money can rebuild confidence."

As markets opened in Europe, Britain's FTSE 100 rose 1.1 percent, Germany's DAX added 1.7 percent and France's CAC-40 was up 1.5 percent.

Earlier in the day, Hong Kong's Hang Seng closed up 475.93 points, or 3.8 percent, at 13,175.10, and South Korea's Kospi was up 33.60, or 3.2 percent, at 1099.55 as the country's currency, the won, recovered some after plummeting against the dollar last week.

In mainland China, the Shanghai benchmark added almost 2 percent amid expectations of further government measures to help the real estate sector. Markets in Taiwan, Singapore, Indonesia, Thailand and the Philippines also edged higher.

In Japan, the Nikkei 225 stock average recouped some of its losses to end down just 40.22 points, 0.5 percent, at 7,376.16 as the dollar gained against the yen.

The market was pressured partly by the collapse of Japanese bank SFCG Co., a major high-interest lender focusing on small business. The firm filed for bankruptcy protection with $338 billion ($3.6 billion) in liabilities.

Australian and New Zealand shares also fell.

U.S. futures were higher on the Citigroup report, suggesting Wall Street would recover at the open. Dow futures rose 118 points, or 1.6 percent, to 7,470 and Standard & Poor's 500 index futures were up 13.1 points, or 1.7 percent, at 782.60.

Selected banks in Asia were buoyed by news about Citigroup. KB Financial Group Inc., the holding company for top South Korean lender Kookmin Bank, advanced 5.3 percent. HSBC, its shares pummeled in recent days, added almost 1 percent in Hong Kong.

Citigroup and other banking heavyweights in the U.S., Britain and other countries have already received hundreds of billions of dollars in government aid in hopes of saving the financial system from collapse.

While providing a short-term of jolt of optimism, the measures have failed to put to rest fears that more institutions could follow in the footsteps of Lehman Brothers, which declared bankruptcy in September, without governments assuming full or partial ownership.

Earlier this month, President Barack Obama's financial rescue plan met with a lukewarm reception from investors concerned the measures were vague or didn't go far enough to recapitalize the banks. This week, investors are expecting more details on Obama's program.

Last Friday, relentless financial and economic worries sent the Dow industrials down 100.28 points, or 1.3 percent, to 7,365.67. On Thursday, the Dow broke through its Nov. 20 low of 7,552.29, and closed at its lowest level since Oct. 9, 2002.

The S&P500 index fell 8.89, or 1.1 percent, to 770.05.

Oil prices were higher in Asian trade, with light, sweet crude for April delivery up 28 cents at $40.31 a barrel. The contract edged down 15 cents to settle at $40.03 Friday.

In currencies, the dollar rose to 94.34 yen from 93.32 yen, while the euro strengthened to $1.2869 from $1.2825.

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The American car industry: In pieces

General Motors and Chrysler say they need more help. So do their suppliers.

FROM the moment in December that the outgoing Bush administration reluctantly threw a $17.4 billion lifeline to General Motors and Chrysler, it was always likely that one way or another the government would have to provide a lot more money. So it has proved.

On February 17th the two struggling carmakers submitted recovery plans to the Treasury Department, as required under the terms of the emergency-loan deal. GM said that it would need at least another $16.6 billion, in addition to the $13.4 billion it has already received, to become smaller, leaner and, it hopes, profitable. It is also seeking $6 billion from other governments to prop up its generally more successful overseas operations. To stay in business, Chrysler asked for $5 billion on top of its existing $4 billion loan.

Both firms insisted that if they did not get the money, bankruptcy would end up costing the taxpayer a great deal more. GM reckoned the government might have to stump up $86 billion to finance its passage through Chapter 11, and Chrysler put the cost of “debtor-in-possession” financing of an orderly wind down of its operations at $24 billion. Most of that money would have to come from the government.

The numbers, though big, were foreseen. The money advanced by President George Bush was only a down-payment designed to see the companies through the first quarter, while his successor decided what to do. Since then, the light-vehicle market has deteriorated further. New-car registrations in America fell by 37.1% year-on-year in January. That equates to an annual market of just 9.5m vehicles, compared with 13.2m in 2008 and 16.1m in 2007. GM is now projecting a market of 10.5m this year, rather than the 12m it had thought was a cautious assumption in December. The company has decided to shut 14 factories in America instead of the nine it had announced. It will eliminate nearly 2,000 dealers and cut 47,000 employees from its payroll, 20,000 of them in America. The Hummer, Saturn and Saab brands are all up for sale or closure. GM thinks it can break even next year, provided the market recovers to 12.5m vehicles or so.

Chrysler attempted, somewhat unconvincingly, to show how it might survive either in a shrunken form as an independent company or as a more successful and global outfit if a proposed alliance with Fiat goes ahead. The Italian carmaker has offered to supply Chrysler with fuel-efficient engines and small-car platforms in exchange for a 35% stake. In that case Chrysler expects, optimistically, to reduce its capacity by only 100,000 vehicles a year.

Both firms (and Ford) also announced tentative agreements with the United Auto Workers union to bring labour costs fully into line with those at the American factories of Asian and European carmakers. But they have been less successful in meeting two of the government’s other conditions for funding. The UAW is unwilling to accept that half the payments into a union-run trust to cover retired workers’ health care should be in company stock. GM is also struggling to unite its bondholders in an agreement to convert two-thirds of its $28 billion debt into equity.

One problem may well have been an absence of sustained government pressure on the negotiators. Only the day before GM and Chrysler were due to present their plans did the administration finally get around to setting up a presidential task-force that will assess both the restructuring efforts of the two companies and the plight of the rest of the American automotive industry. The panel, to be chaired by the treasury secretary, Tim Geithner, and the director of the National Economic Council, Larry Summers, includes Ron Bloom, a former banker and consultant to the United Steelworkers, who played a big part in restructuring the American steel industry.

The task-force faces an unenviable task. In theory, if it is unimpressed by what GM and Chrysler have come up with by March 31st, when the carmakers have to show that their plans are bearing fruit, it could demand immediate repayment of the loans the government has already granted. Given the noises coming from the White House, that is highly unlikely. But the task-force still faces three big, urgent and inextricably related questions.

The first is whether GM really can achieve the required degree of restructuring without entering into some form of managed bankruptcy. The second is whether Chrysler—even with Fiat’s assistance—has a future as an independent company. If not, would it make more sense to grasp the nettle now by selling those assets, such as the Jeep brand, that still have some value? The third is what help should be given to the car-parts industry, which receives far less attention than its famous customers, but which is facing acute problems of its own.

The plight of the parts-makers demonstrates both the urgency and the complexity of the situation. Their trade organisation, the Motor and Equipment Manufacturers Association (MEMA), wrote to Mr Geithner on February 13th warning him that the entire industry, which is the largest manufacturing employer in the country, was facing “breakdown”. In the 18 months to June 2008 the industry’s employment fell from 783,000 to 653,000, since when the rate of job losses and bankruptcies has accelerated.

Although the suppliers are heavily exposed to the difficulties of the Detroit Three, most of them also sell parts to the Asian and European manufacturers in America (see table). Given the extreme interdependency of the supply chain and the degree of specialisation within it, the failure of even one or two small firms can lead to stoppages on vehicle-assembly lines.

The collapse in new-vehicle demand has traumatised parts-makers. They have seen their cashflow fall by half or more during the first quarter, as carmakers have scrambled to cut production, in many cases entirely shutting factories for weeks and months. MEMA’s surveys suggest that a third of the supply base is already in financial distress, and another third expects to fall into that state before the end of the quarter. With inventories finally thinning, the carmakers are now starting to ramp up production, albeit at a much reduced rate. But parts-makers, which typically get paid only after 55 days, must somehow find the cash to supply their customers when no one will lend to them and no payments can be expected before late April.

Parts suppliers used to be able to borrow against payments owing from the Detroit Three, but now cannot find any lenders willing to bear that risk. So they are asking Mr Geithner to guarantee the debt, and to oblige GM and Chrysler, as a condition of their federal loans, to pay them within ten days rather than the usual 55.

But it is unlikely that even these measures would be enough to stave off mass bankruptcies were the task-force to allow GM to go into Chapter 11, which in turn would jeopardise the ability of the carmakers so far not seeking bail-outs—Ford and the foreign transplants—to keep their factories open.

President Obama has said that the final decisions about the future of America’s automotive industry will rest with him. It is doubtful whether any of the choices his task-force presents him with will be either cheap or palatable.

www.economist.com

Wall Street falls sharply at opening.

Wall Street slides sharply Friday morning as investors continue to worry about economy.

Wall Street fell sharply early Friday, with the Dow Jones industrials reaching new six-year lows as investors around the world keep selling on pessimism about the global economy. Financial stocks led the market lower.
Disappointing fourth-quarter earnings reports from Lowe's and J.C. Penney provided new evidence that the recession is taking a heavy toll on U.S. businesses. The pair also forecast 2009 earnings below analysts' expectations.

The reports came as investors are increasingly worried about the weakening banking industry and what the government is doing to stabilize it.

The Dow tumbled 131.10, or 1.76 percent, to 7,334.85. On Thursday, the Dow fell to its lowest level since Oct. 9, 2002, the depths of the last bear market.

The Standard & Poor's 500 index tumbled 14.05, or 1.80 percent, Friday to 764.89, while the Nasdaq composite index fell 16.14, or 1.12 percent, to 1,426.68.

Key financial stocks including Citigroup Inc. and Bank of America Corp. were falling again after being battered Thursday. Both Citi and Bank of America have been among the hardest hit by the ongoing turmoil in the industry and received multiple multibillion investments from the government to help stabilize their operations.

Citi shares tumbled 52 cents, or 20.9 percent, to $1.99. Bank of America shares sank 72 cents, or 18.3 percent, to $3.21.

"There's perceived disappointment from the lack of clarity from the Treasury (Department) for what it will do with the financial sector," said Wasif Latif, portfolio manager at USAA Investment Management Co. "That's hitting financials regularly."

Stocks have fallen steadily over the past two weeks as investors lost confidence in multiple Obama administration programs aimed at bolstering the economy. The market's inability to rally signals that investors don't have a sense of when the recession, already 14 months old, will end.

"We're going through a tug of war between optimism and pessimism," Latif said. "When there is a lack of clarity, it becomes more of an emotional or psychological environment. The mood can sway on any given day based on the flow of news coming out."

Friday's sell-off followed steep drops overseas. Japan's Nikkei stock average fell 1.87 percent and Hong Kong's Hang Seng fell 2.49 percent. In afternoon trading, Britain's FTSE 100 declined 3.09 percent, Germany's DAX index tumbled 4.08 percent, and France's CAC-40 fell 3.50 percent.

Investors received further evidence of the sagging economy as home improvement retailer Lowe's said its fourth-quarter profit dropped 60 percent after customers cut back on spending. Lowe's also provided a 2009 earnings forecast that was short of analysts' expectations.

Department store chain J.C. Penney said its fourth-quarter profit tumbled 51 percent, but beat analysts' expectations. However, J.C. Penney forecast a first-quarter loss greater than what analysts are forecasting.

Shares of Lowe's fell 42 cents, or 2.5 percent, to $16.56. J.C. Penney shares declined 33 cents, or 2.2 percent, to $14.59.


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Consumer prices edge higher.

Gain is first for government index since July. Annual rate of inflation is lowest since 1955.

Consumer prices rose last month for the first time since July, the government said Friday, but the year-over-year inflation rate was at the lowest level in more than a half-century.

The Consumer Price Index, the key measure of prices at the retail level, was up 0.3% in January, in line with the consensus forecast of economists surveyed by Briefing.com. But the index was unchanged from January 2008 levels, the first time that reading has not shown a year-over-year increase since August 1955, when prices were falling on an annual basis.

Consumer prices fell 0.8% in December.

On an annual basis, the so-called core CPI, which strips out volatile food and energy prices, was up 1.7%, the lowest increase in nearly 5 years. Core prices rose 0.2% in January, a bit more than the 0.1% rise forecast by economists.

Even though there wasn’t a 12-month decline in CPI, it fell at an 8.4% compounded annual rate over the last three months, even with the modest rise in January. And the core CPI rose at a compounded annual rate of only 0.9% over that period, which is below the range of 1% to 2% annual rise in that closely watched reading that is widely believed to be optimal for economic growth.

With inflation in check, there has been growing concern by some economists that the economy could be hurt by deflation, or the widespread drop in prices. James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech Tuesday that deflation is the greatest risk facing the economy this year.

Lower prices are one way businesses respond to the lack of demand for their products in a slowdown. But if companies can't make a profit selling their products at the lower price, they'll respond by cutting production and laying off more people.

More job losses can cut even further into demand. But even if consumers have jobs and money, they're likely to hold off on purchases if they come to believe that prices will head even lower. All of which adds up to even more weakness in the economy.

The January increase in overall consumer inflation was due largely to a 1.7% rise in overall energy prices, which included a 6% boost in the cost of gasoline.

On a year-over-year basis, energy prices were down 20%, driven by a 40% drop in gasoline.

But the decline in energy prices was not the only thing keeping inflation in check. Overall weak demand for goods and services due to rising job losses and tight credit kept prices low for a wider range of products. Products such as clothing, hotels, video and audio entertainment, and cars and trucks were all cheaper than they were in January 2008.


CNN Money.com

Can’t pay or won’t pay?

Barack Obama’s team wades into a debate over what is driving foreclosures.

NO PART of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better. Now it is Barack Obama’s turn. On Wednesday February 18th he pledged $75 billion to reduce the mortgage payments of homeowners at risk of default. Lenders who help people to refinance their mortgages will receive matching subsidies from the government. These could reduce a borrower’s monthly payments to as little as 31% of their income, and last for up to five years.

Firms that service mortgages held by investors will also receive fees for successful modifications. As a stick, Mr Obama reiterated his intention to alter the bankruptcy code so that courts can reduce mortgage principal. The details will depend on negotiations with Congress.

Some 5m homes have entered foreclosure in the past three years. Credit Suisse estimates that over 9m more will enter the process in the next four years. (In normal times, new foreclosures run at fewer than 1m a year.) Mr Obama predicts his plan will prevent up to 4m foreclosures. In a separate initiative, up to 5m borrowers will be able to refinance their mortgages at lower rates even if their equity is less than the 20% usually required by Fannie Mae and Freddie Mac, the now nationalised mortgage agencies.
Previous, less ambitious, efforts have flopped. George Bush’s first plan aimed to help up to 240,000 delinquent subprime borrowers refinance their debts into government-backed fixed-rate mortgages. Only 4,000 did so. A Democrat-inspired $300 billion plan to guarantee up to 400,000 mortgages attracted just 517 applications, as lenders balked at the requirement that they first write down the principal. Private-sector programmes have achieved higher numbers, but their success is mixed. Of 73,000 loans modified in the first quarter of last year, 43% were again delinquent eight months later.

Mr Obama’s chances of being any more successful depend on whether his team has correctly diagnosed what is driving the wave of foreclosures. Is it that homeowners cannot afford to pay; or is it that they are declining to do so, because their homes are now worth less than their mortgages, the phenomenon known as negative equity?

Both factors play a part, but economists are divided on their relative importance. One school thinks that, even in cases of negative equity, most homeowners will not default if they can afford the payments—not least because defaulting will wreck their credit records. A second school believes that once the home is worth less than the mortgage, homeowners have a significant incentive to walk away even if they can make the payment, since in many states lenders cannot then pursue them for the shortfall.

Mr Obama’s advisers were drawn to the first school, in part by a Federal Reserve Bank of Boston study that found that when home prices fell by 23% in Massachusetts between 1988 and 1993, only 6.4% of borrowers with negative equity ended up in foreclosure. The authors concluded that most such borrowers felt what they got from their home was still worth the payment. The advisers were also influenced by the Federal Deposit Insurance Corporation’s apparent success in reducing the payments of delinquent customers of IndyMac, a failed bank. In a matter of months, 10% of the bank’s 56,000 seriously delinquent borrowers had their payments reduced to 38% or less of income.

But others question the likelihood of success without reducing the principal. Edward Pinto, an independent financial industry consultant, estimates that 20% of borrowers with negative equity went to foreclosure in the past three years, in part because they started out much less creditworthy than their counterparts in Massachusetts two decades ago.

If negative equity is the real problem, principal will have to be reduced to stem the foreclosures. But lenders are reluctant: they worry that many homeowners who can afford their payments will choose to default, or that investors in the loans will sue them. With house prices still falling, many borrowers would soon have negative equity again. And the write-downs, whether voluntary or court-ordered, could destroy the lenders’ capital. Aggregate negative housing equity is thought to top $500 billion. The government could absorb some or all of this, but at an astronomical and politically unpalatable price.

In truth, both lower payments and lower principal would help reduce foreclosures. At present, banks aren’t doing much of either. Last month Communities Creating Opportunity, a non-profit group in Kansas City, Missouri, invited representatives of Bank of America and Countrywide to negotiate loan modifications with local customers. Damon Daniel, an organiser, says none of the 16 who applied got a write-down, though some might have their mortgages converted from an adjustable to a fixed interest rate.

Leslie Kohlmeyer and her husband fell behind on their payments two years ago when his construction business dried up. He eventually found new work and they resumed payments, but could not pay their arrears. Three days after Christmas, Countrywide notified them of foreclosure. Ms Kohlmeyer went to Mr Daniel’s event, where a Countrywide official arranged to suspend the foreclosure; her arrears were added to the loan balance, and her monthly payment went up by $20. She thinks she’ll be fine. Unless either she or her husband lose their jobs.

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Obama plan seeks to save millions from foreclosure

Obama plan seeks to attack home mortgage foreclosures at heart of nation's economic crisis.

His massive stimulus plan now signed into law, President Barack Obama is turning to attack the home foreclosure crisis at the heart of the nation's deepening economic woes.

His goal is to prevent millions of American families from losing their houses because they can't make mortgage payments.

"We must stem the spread of foreclosures and falling home values for all Americans, and do everything we can to help responsible homeowners stay in their homes," Obama said Tuesday as he signed his tax cut and spending package into law.

The ambitious plan he was announcing at a Phoenix high school Wednesday was expected to offer government cash to mortgage companies that reduce interest rates -- and therefore monthly payments -- for homeowners in danger of default, according to several people briefed on the plan. What remained unclear was how the government will decide who qualifies for relief.

One Democratic official familiar with the plan said it also would allow homeowners to refinance their mortgages if they owed more than their homes were valued. Still another section would give bankruptcy judges more authority to change mortgages. That last provision has been opposed by lenders, who said it would add risk and lead to higher interest rates.

The official, who spoke on the condition of anonymity to avoid pre-empting the president, said the Obama administration also would use Fannie Mae and Freddie Mac to help prevent borrowers from defaulting on their mortgages, and create national standards for loan modifications.

The biggest players in the mortgage industry already had halted foreclosures pending Obama's announcement.

Obama's announcement was coming a day after he signed into law a $787 billion economic stimulus plan he hopes will spark an economic turnaround and create or save 3.5 million jobs.

In a ceremony at the Denver Museum of Nature and Science, he hailed the plan's spending on green technology, education and health care, as well as badly needed repair of roads and bridges, and said those, plus middle-class tax cuts, represent the "essential work of keeping the American dream alive in our time."

Obama cautioned that the initiative isn't "the end of our economic troubles. Nor does it constitute all of what we are going to have to do to turn our economy around. But today does mark the beginning of the end."

Republicans dismissed the stimulus plan as hugely expensive and unlikely to succeed. To House Minority Leader John Boehner, R-Ohio, it was "a missed opportunity, one for which our children and grandchildren will pay a hefty price."

At the same time, the administration was grappling with the darkening prospects for the U.S. auto industry.

Even as Detroit carmakers submitted restructuring plans to qualify for continued government loans, General Motors Corp. and Chrysler LLC asked for another $14 billion in bailout cash.

White House press secretary Robert Gibbs said the car companies' plans were being reviewed, but added, "It is clear that going forward, more will be required from everyone involved -- creditors, suppliers, dealers, labor and auto executives themselves -- to ensure the viability of these companies."

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GM, Chrysler ask for $21.6 billion more

Automakers say bankruptcy would cost taxpayers more; accelerate job cuts.

General Motors and Chrysler LLC said Tuesday they could need an additional $21.6 billion in federal loans between them because of worsening demand for their cars and trucks.

The two firms, in documents submitted to the Treasury Department, also detailed plans to cut 50,000 jobs worldwide by the end of the year. GM said it plans to close five more plants in the next few years and confirmed it will drop some of its weaker brands.

When all is said and done,GM said that by 2011 it could need a total of $30 billion, which includes the $13.4 billion in Treasury loans it has already received. In the near term, GM will most certainly need $9.1 billion in additional loans and could require another $7.5 billion in the next two years if auto sales don't improve.

Chrysler said it now needs a total of $9 billion, up from the $4 billion Treasury loan it received in December. Chrysler said it will need that money by March 31.

GM also accelerated its job cut plans, saying that it would eliminate 47,000 jobs over the course of 2009. The company said it would cut about 20,000 jobs in the United States, or about 22% of its remaining U.S. staff.

Previously, GM called for U.S. job cuts of between 20,000 to 30,000 workers, but it had stretched out those reductions through 2012.

The company said it plans to close five additional U.S. plants by 2012 --in addition to the 12 planned closings announced in December. Executives would not identify the plants that would be closed.

"Our plan is significantly more aggressive because it has to be," said GM Chairman Rick Wagoner.

Experts said that the request for additional dollars are not a surprise, given how bad auto sales have been since the December plea for help.

"The most important issue is not what the automakers are going to do to cut costs, but rather what the government is going to do to stimulate car sales," stated Jeremy Anwyl, CEO of car sales tracker Edmunds.com. "No automaker is viable under the current market conditions, and so far the spending package appears to spread money too thin to actually make much of a difference in any one area."

Some economists argued that the problems detailed in the plans show that GM and Chrysler are already failed companies.

"When consumers refuse to buy your product, that's the economy telling you you're bankrupt," said Rich Yamarone, director of research at Argus Research. "

But Yamarone said it may make sense to give them the money they need, even if it's good money after bad, because the battered U.S. economy can't weather the halt of operations at GM and Chrysler right now.

GM added it plans to phase out the Saturn brand by the middle of 2011 if it is unable to sell or spin-off the brand. GM is also looking to sell its Saab brand, and will look for help from the Swedish government to support Saab until a buyer is found.

Chrysler said it plans to cut about 3,000 jobs, or 6% of its workforce, and reduce capacity by another 100,000 vehicles this year as it tries to adjust to reduced demand. It also said it has won the concessions from the United Auto Workers union and its creditors that were demanded under terms of the loan from the Treasury Department.

The companies had a deadline of Tuesday to update the government on the status of their turnaround plans. The new plans highlighted a worsening forecast for sales, and more job cuts at the companies in the coming months.

Bankruptcy could be 'cataclysmic'

A newly-appointed auto panel will review both plans and determine by March 31 if GM and Chrysler can be viable in the long run. Specifically, the Treasury Department is looking for details about the progress of negotiations with creditors and the UAW.

White House spokesman Robert Gibbs issued a statement late Tuesday saying that the panel would be reviewing the plans and that "We appreciate the effort that these companies and their stakeholders have made."

The automakers' request for a $34 billion federal bailout in December fell short when Senate Republicans blocked passage of the request. The Democratic majorities in both houses of Congress have grown since then.

While both plans are more than 100 pages each, they have only limited details about the latest deals reached with the United Auto Workers union to shed costs, as well as about GM's efforts to shed much of its unsecured debt, as required under the terms of its existing loans.

GM is struggling under a $35 billion mountain of unsecured debt. It hopes to shed about two-thirds of that debt with a swap of debt for equity with its bond holders.

But the company was not able to reach a deal with the bond holders by Tuesday's deadline, although it did include a letter from their committee's financial and legal advisers saying that they are "prepared to recommend that the committee approve and support the bond exchange" proposed by GM.

If the federal panel looking at the plans rules either company is not viable, it could recall the outstanding loans, a move that would likely force them into bankruptcy. In a statement, Chrysler chairman Robert Nardelli said he believes additional federal help is the best course for both Chrysler and the battered U.S. economy.

"We believe the requested working capital loan is the least-costly alternative and will help provide an important stimulus to the U.S. economy and deliver positive results for American taxpayers," said Nardelli in the statement.

To that end, the companies also submitted an analysis of what would happen if it filed for bankruptcy. In a reorganization scenario, GM said it might need up to $100 billion in additional federal loans to finance their operations during a two-year reorganization. Chrysler said it would need up to $20 billion to $25 billion.

If it was forced to liquidate, Chrysler estimated there would be a loss of 2 million to 3 million jobs, resulting in a $150 billion reduction in federal tax revenue over three years.

Nardelli added that a Chrysler bankruptcy would have a "cataclysmic" impact on the auto parts supplier industry, which would affect operations and production at all automakers.

Sales forecast: From bad to worse

The other member of Detroit's so-called Big Three, Ford Motor ,requested a credit line of $9 billion from Congress in December.

But Ford said it would not to have to tap the line of credit unless conditions in the auto market and economy deteriorated more than expected.

Since then, demand for cars and trucks has gone from bad to worse, with January sales falling to their lowest level in 26 years. The automakers and industry experts have also slashed sales forecasts for 2009 and beyond.

Chrysler has been among the hardest hit in the industry though. Sales plunged 54% from year-earlier levels in December and January, and the company left most of its 12 North American assembly plants idled throughout January due to weak demand and excess inventory.

In addition to the job and production cuts, the company pledged to further lower costs by eliminating a manufacturing shift and discontinuing three models.

"We fully understand the need to adapt to significantly reduced annual U.S. sales," said Nardelli in Chrysler's statement.

The company now expects to industrywide U.S. sales this year of only 10.1 million vehicles, which would be a 40-year low. It believes sales from 2010 through 2012 will average only 10.8 million a year.

GM's U.S. sales forecast for 2009 is close to Chrysler's estimate - around 10.5 million cars and light trucks. But it is far more optimistic about a rebound in sales from 2010-2012.

Separately, UAW president Ron Gettelfinger said in a statement Tuesday that the union had "reached tentative understandings with Chrysler, Ford and General Motors on modifications to the 2007 national agreements."

Gettelfinger said "the changes will help these companies face the extraordinarily difficult economic climate in which they operate." But he declined to disclose specific terms of the tentative agreement and said that discussions were continuing.


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Doubling up

The IMF is sharply increasing its lending capacity. It expects that more countries may need its help.

THE International Monetary Fund usually draws attention when it doles out cash. As notable, however, was the news last week of a deal with the Japanese government, allowing the fund to add an extra $100 billion to its kitty. The loan will augment the fund’s existing lending capacity by about half, but it is not stopping there: it plans to raise still more money (perhaps another $200 billion) from other governments. If it succeeds, it would have roughly doubled its lending capacity compared with the start of September 2008, when the global financial crisis broke in earnest.

It is not immediately obvious why the IMF, already flush with cash, needs to raise so much more money now. In September last year it had roughly $250 billion available for loans in uncommitted funds. Since then it has committed roughly $48 billion to a variety of battered emerging economies, including Belarus, Latvia, Pakistan, Iceland, Ukraine, Hungary and Serbia. A burst of activity at the end of last year has, however, been followed by a period of calm. No more loans have been agreed upon this year, except a precautionary arrangement with El Salvador, under which the country is entitled to draw $800m in case of balance-of-payments difficulties. That should leave the fund with some $200 billion lying about, even before the injection of Japanese funds.

Evidently the fund is worried that emerging economies face a large shortfall in external financing, and in turn is concerned that it might suddenly lack the means to plug the gap, if asked. Such concerns are not misplaced. Private capital, which flooded into emerging countries in the boom years, is now rushing out just as fast. According to the Institute for International Finance (IIF), net inflows of such capital to these economies peaked at nearly $929 billion in 2007, but then almost halved to $466 billion last year. Worse is to come. The IIF expects that flows will dwindle to a paltry $165 billion this year. Bank lending to emerging economies, in particular, has dried up. Western banks have hunkered down in their home markets; the IIF predicts a net outflow of $61 billion this year, a dramatic reversal of the net inflow of $410 billion in 2007. As private capital dries up, therefore, emerging markets may have to turn elsewhere: the fund is an obvious, if usually unpalatable, choice

The worry is that if several large emerging economies needed to turn to the IMF at once, the latter’s resources could prove inadequate. Also, the fund has been adding facilities to its arsenal. In October it launched a new short-term liquidity facility to help countries with otherwise sound macroeconomic policies facing sudden capital flight. Although no loans have been made under this facility so far, these would only be credible if they were backed up by enough resources.

Signs suggest that more countries may soon have to turn to the IMF for money, over and above loans that have already been approved. Pakistan’s government is considering a request for a $4.5 billion loan to top up the $7.6 billion the IMF agreed to lend in November. Romania’s prime minister says that his government will decide in the next two weeks whether it will seek money from the IMF. More generally eastern Europe has been hit hard by the reversal of private capital flows. Turkey is negotiating the terms of a possible loan with the fund.

Some economists, including former IMF economist Arvind Subramanian, even estimate that $500 billion may not be enough to allay worries about the fund’s capacity to commit, credibly, to rescuing countries in trouble. Mr Subramanian reckons the fund may need to have as much as $1 trillion on hand. But where such additional funds would come from is far from clear. The fund is not yet considering turning to private markets. Tapping additional resources from reserve-rich emerging countries such as China is a possibility. But this may require the fund to reform its governance structure radically to give these countries significantly more voice in its running than they have at present. In a hopeful sign, reforming the IMF figures prominently on the agenda of the meeting of G20 leaders in April. Movement on this vexed issue would hugely help the effectiveness of the IMF.

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