U.S. bank rescue plan could come on Monday

The U.S. government will announce as soon as Monday a long-awaited plan to try to get bad assets off the books of banks, a cornerstone of its efforts to tackle the credit crisis, The Wall Street Journal reported.

The Obama administration, battling a deepening recession, is set to adopt a three-pronged approach to ridding the financial system of so-called toxic assets, the newspaper and the New York Times said on their websites on Friday.

The plan would create an entity, backed by the Federal Deposit Insurance Corp, a U.S. banking regulator, to buy and hold loans, the reports said.

It would expand a newly launched Federal Reserve facility -- that lends money to investors to buy securities backed by consumer loans -- to include toxic assets. And it would create new public and privately financed funds to buy such securities under the management of private investment experts.

The Obama administration plans to contribute between $75 billion and $100 billion in new capital to the effort although that amount could be expanded, the Wall Street Journal said.

The Treasury Department and Federal Reserve declined to comment. Sources familiar with the government's thinking have told Reuters details of a plan could be announced next week.

The Bush administration tried without success late last year to set up a mechanism to get bad assets off the balance sheets of commercial banks.

The banks have been hammered by losses incurred by mortgage-related debt that has turned sour amid a fall in house prices and a pickup in defaults, sparking a credit crisis that has strangled the U.S. and global economies.

Obama's Treasury secretary, Timothy Geithner, has outlined a new proposal to soak up as much as $1 trillion in assets through a public-private program.

But investors have grown increasingly concerned that his efforts are running into problems more than a month after he outlined the plan.

The slow start of the new Federal Reserve consumer lending program this week has been seen as a sign that private capital may shun the toxic-asset plan because of public outrage over large executive bonuses.

Many big private investors are worried they could face tough new rules in U.S. financial rescue programs after Congress pressed ahead with efforts to claw back bonuses paid to executives at failed insurer American International Group.

The Wall Street Journal said the Treasury would match private sector finance for the public-private toxic asset funds on a one-for-one basis in most cases.

Washington would be a co-investor also in the new FDIC troubled loans program but could contribute 80 percent in some cases, and would guarantee as much as $500 billion in loans investments, the newspaper said in its report.

The New York Times said the FDIC program could involve government funding for up to 97 percent of the equity.

It also said the plan is likely to offer generous taxpayer subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government.

msn money

After Bonusgate, what next?

The AIG bloodletting let everyone vent. But there's still a financial system to fix. Why Treasury Secretary Tim Geithner's job just got harder.

Treasury Secretary Tim Geithner sat alone at the witness table answering questions and getting an earful from a panel of senators.

Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee, cautioned Geithner that Americans were crazy angry about corporate bailouts.

"I have never -- in the 22 years I've been here, I've never seen such anger, with the sense of betrayal, that people in positions of responsibility took advantage of them," said Conrad. "The outrage of people cannot be dismissed."

That was on March 12. It turns out, the next day was when American International Group would award $165 million in bonuses to some 400 employees.

Over the past week, Congress turned the anger over AIG into legislation. The House rushed through a bill to tax bonuses, and the Senate made a similar proposal.

Now, with the Obama administration about to announce its most significant step yet in trying to rescue the banks, the blowback over the AIG bonuses threatens to sour its relations with Congress, some experts say.

"The notion you're going to get more money out of Congress to stabilize the financial system is a pipe-dream at this point," said Jaret Seiberg, a banking expert with research firm Concept Capital. "Politically, it's not possible to approve more cash and get re-elected."

Geithner, who marks his 8th week on the job on Monday, is on the spot. He is already facing what President Obama called the toughest challenges of any Treasury secretary since Alexander Hamilton. A few Republicans have even called for his resignation.

House Minority Leader John Boehner, R-Ohio, said Geithner was on "thin ice," claiming he didn't do enough early on to stop the bonuses. Democrats have been more measured in their criticism, saying last week that they wished Treasury did a better job of communicating with Capitol Hill.

A Treasury spokesman declined to comment on relations with Congress, but pointed out Obama's defense of Geithner and his economic team several times this week -- even on Jay Leno's "The Tonight Show."

0:00 /24:35Geithner opens up

"He understands that he's on the hot seat, but I actually think that he is taking the right steps, and we're going to have our economy back on the move," Obama said.

Critical time

The flare-up over AIG bonuses comes at a critical time in Treasury's handling of the financial rescue.

Within the next few days, the department is expected to reveal details of its program to help wipe out toxic assets from the balance sheets of the nation's struggling banks and investment firms. Such a program is key to clearing bad debt and getting the financial markets rolling again.

Geithner has suggested the plan could cost close to $1 trillion. And the Obama administration has placed hundreds of billions in its budget outline as a placeholder for future bailouts.

Most experts believe the administration will likely have to ask Congress for more money again. Right now, Congress will be hard-pressed to cough up more dough for taxpayer financed recovery efforts.

"As of today, it's not possible to ask for more money," said Brian Gardner, an analyst for investment firm Keefe, Bruyette & Woods, who added it could be several months before more bailout money could be made available.

Moreover, Congress is now intensely focused on targeting bonuses at companies that received bailout dollars.

On Friday, new anti-bonus legislation circulated among key House members. And the Senate was also expected to start discussing similar legislation next week.

"The atmosphere is very poisonous right now," said Bert Ely, a financial policy consultant. "I wouldn't want to put something forward, simply because all the flap on the AIG bonuses."

Big agenda

It had already been a rough couple weeks for Geithner and his team.

After surviving an onslaught of criticism during his confirmation hearings for failing to pay some taxes, Geithner has yet to put top deputies in place. Several applicants dropped out while facing heightened scrutiny in the screening process.

"Because they're not there, the Treasury ends up making sloppy mistakes, and that hurts them," Gardner said.

Geithner is also attempting to negotiate a coordinated global effort to recovery.

On March 10, the day he said he first "fully learned" about the AIG bonuses, Geithner was preparing for a tough meeting in London with other finance ministers whose recovery priorities differed from the Obama administration's.

In the midst of all this, Geithner has been trying to nail down specifics of his plan to woo the private sector to buy bad assets from troubled banks and investment firms. The administration has high hopes that it will get a better reception than the last time Geithner broached the subject -- and caused the stock markets to tank.

Now the AIG flap threatens to derail those efforts, even before it's fully understood. It's clear that the Treasury wants to draw on the private sector to work with the government to figure out how much these assets are worth and clear them out.

But private investors, saying that episodes like the legislation attacking the AIG bonuses show that the rules of the game can change at any time, are becoming increasingly skittish of taking taxpayer dollars.

"Everyone is going to think twice about wanting government assistance," said Charles Calomiris, a finance professor at Columbia University's business school. "You know you're going to have to deal with the fact that compensation to your middle managers is going to be micromanaged by [Rep.] Barney Frank, leading a mob with pitchforks."

Geithner's next public date with Congress was supposed to be on Thursday and give him a platform to highlight his ideas for rescuing the system and strengthening regulations.

Instead, Geithner first on Tuesday has to face lawmakers to answer questions about AIG bonuses.

This time he won't be alone. Federal Reserve Chairman Ben Bernanke, who knew about the AIG bonuses for months, will answer tough questions beside him.


CNN Money.com

Where the Jobs Will Be This Spring

A quarterly survey reveals the cities expecting the largest employment growth--and losses--across the country.

Thanks to last year's strong harvest of apples and the jobs that followed in juicing, packaging and shipping, Yakima, Wash., has the strongest employment outlook in the country for the second quarter of 2009, according to a quarterly survey by employment services firm Manpower.
"This is an agricultural base, a huge apple-growing region," says Bill Cook, director of community and economic development for Yakima. "Last year's apple harvest was huge, and it helped carry employment through the winter. Even in a normal economic year that wouldn't happen."

Cities in the Pacific Northwest and Texas have the best employment outlook for April through June, while cities in the Southeast have the weakest, according to the study.

Manpower's Employment Outlook Survey is conducted quarterly to measure employers' intentions of increasing or decreasing their numbers of employees. Each employer was asked: "How do you anticipate total employment at your location to change in the three months to the end of June 2009 compared with the current quarter?" The answer is the net employment outlook--the difference between employers who plan to increase and those who plan to decrease.

Of the 31,800 public and private sector employers surveyed in 201 metropolitan areas throughout the U.S., 15% anticipated increases in hiring, 14% said they'd likely decrease staff, and 67% foresaw no change.

Five Florida cities came in among the 10 weakest metropolitan areas for employment outlook. That's largely because of the downturn in the construction industry there, combined with the slowdown in tourism.

"Hospitality was hit hard," says Michael Doyle, vice president and general manager of Manpower's Southeast region. "People aren't traveling to Florida, and all the service industries, like hotels, rental cars and restaurants, are affected. Everything gets hit when fewer people come to visit."

Meanwhile, Anchorage, Alaska, has the third-strongest employment outlook, thanks to a strong showing in health care. That sector has added nearly 2,700 jobs since 2003 and employs close to 15,000 people. Also, Target just opened in Anchorage, and the town will soon get its first Walgreens and Kohl's.

Among industries nationwide, leisure and hospitality is expected to add the most positions. Across the country, employers expect a 14% net employment gain in the sector, but not because Americans are going on vacation. Rather, they are dining at inexpensive restaurants like McDonald's, Chili's and the Olive Garden, which will all have to beef up their staffs.

Business services--accountants and lawyers--also expect to see a boost in hiring in the next quarter, with a +9% net employment outlook. Also in that group are data processors, thanks largely to President Obama's push to get health care records digitized.

Manufacturing of durable goods will take the hardest hit, particularly in the Southeast. "The bulk of what the South is known for is manufacturing, and that's on a decline because of emerging markets and because of the general lack of need," says Doyle. "That's the whole theme in the South."

Best Cities for New Jobs This Spring

1.Yakima, Wash.
Net employment outlook: +21%

Yakima is known for its abundance of apple varieties, and last year's harvest boosted employment. Packing and juice companies that revolve around the apple orchards helped carry that employment through the winter, something that wouldn't happen in a more ordinary year. Yakima also grows hops for beer and ships them around the world.

2. Kennewick, Wash.
Net employment outlook: +19%

Once home to the nation's most Ph.D.'s per capita, Kennewick has an impressive number of engineers and scientists. Pacific Northwest National Lab employs many of them to convert agricultural materials into plastics and biofuels and perform research involving fuel cells. The region's farmland also provides jobs, with workers growing potatoes, corn, asparagus and wheat.

3. Anchorage, Alaska
Net employment outlook: +18%

A high-growth area in Anchorage this year is health care, which has added nearly 2,700 jobs since 2003 and employs close to 15,000 people. Retail is also booming, and although it may seem strange to those in the rest of the country, Anchorage just added its first Target and is soon to get its first Walgreens and Kohl's.

4. Amarillo, Texas
Net employment outlook: +15%

Pantex is one of Amarillo's largest employers, with more than 3,000 workers refurbishing nuclear warheads--the only place in the world where it's done. Beyond that, medical services and food processing are big. The Harrington Medical Center employs 8,000 to 10,000 people, and Blue Cross and Nationwide Insurance are also a presence. California-based Hilmar Cheese recently opened a plant in Amarillo.

5. Sioux Falls, S.D.
Net employment outlook: +14%

Despite recent economic news, financial services are flourishing in Sioux Falls. Citigroup built its headquarters there, and Wells Fargo, HSBC and Premier Bankcard employ close to 3,000 people. In addition to the banks, Avera Health and Sanford employ more than 10,000 people.

Worst Cities For New Jobs This Spring

1. Cape Coral--Ft. Myers, Fla.
Net employment outlook: -16%

The entire state of Florida has taken a hit from the crumbling of its construction and real estate industries. Florida and Arizona were among the first states struck by the housing slump, and they have yet to recover. The state's hospitality industry has also been hit hard since fewer people are taking vacations.

2. San Juan, Puerto Rico
Net employment outlook: -16%

Manufacturing has taken a beating here. Not too long ago Puerto Rico was considered an emerging market for manufacturing since the cost of doing business was inexpensive. Large companies built plants because it was cheaper than in the States. Now Vietnam and the Dominican Republic are cheaper, and manufactures are sending their business there.

3. Port St. Lucie, Fla.
Net employment outlook: -14%

Like so many areas in Florida, Port St. Lucie was hit by the one-two punch of drops in both the hospitality industry and construction.

4. Miami--Fort Lauderdale--Pompano Beach, Fla.
Net employment outlook: -14%

In addition to leisure, hospitality and construction, professional and financial services in this stretch of southeastern Florida have also suffered.

5. Santa Barbara--Santa Maria--Goleta, Calif.
Net employment outlook: -11%

There has been a significant decline in construction in this part of the country. What's more, there has been a reduction in financial activities, which in these parts means mortgage brokers. While many homeowners elsewhere have been refinancing their mortgages to get lower interest rates, homeowners here haven't, probably because so many owe more than their homes are worth and are in foreclosure. Another weak area is durable-goods manufacturing, which was a core industry here and has taken a hit too.

finance.yahoo.com

Going down quietly

Bernard Madoff, history's biggest swindler, faces life behind bars.

SURELY a drama this dark deserved a more explosive finale. A previous wave of financial fraud produced many an entertaining courtroom battle, featuring the likes of Enron’s Jeffrey Skilling and Tyco’s Dennis Kozlowski. But Bernard Madoff has robbed the world of such a catharsis, just as he robbed almost 5,000 credulous clients of billions of dollars. On Thursday March 12th he pleaded guilty in a Manhattan court to 11 charges, ranging from securities and mail fraud to money laundering and perjury. Together they carry a maximum jail term of 150 years, leaving the 70-year-old “Monster Mensch” all but certain to spend the rest of his life behind bars.

The fraud he masterminded was remarkable for its scale, longevity and the sophistication of its victims: hedge-fund founders, Swiss banks and movie moguls, as well as charities and small investors, some of whom put in their life savings. The charge sheet confirms that he ran a Ponzi scheme of unprecedented boldness, dating at least as far back as the 1980s. Mr Madoff claimed to achieve healthy, stable returns through a whizzy stock- and options-trading strategy. In reality, there was no trading for well over a decade. Money from new investors was used to cover redemptions for old ones. It was that simple and brazen.

The fraud was bigger than the $50 billion Mr Madoff originally claimed to have lost. On paper, he had $65 billion in client accounts just before he was arrested in December, say prosecutors, who are claiming an eye-popping $171 billion in restitution. But there now appears to be little left for investors who stuck with him: a court-appointed liquidator has so far recovered just $1 billion. Even Charles Ponzi’s victims got a third of their money back.

Mr Madoff’s guilty plea is especially anticlimactic because he has apparently refused to co-operate with investigators, leaving many a loose thread. Few believe that he acted alone, but identifying those who colluded, and how, is proving difficult. Friends and relatives who helped to run the firm remain under scrutiny. Junior employees were apparently made to generate fake trade confirmations and monthly statements, though it is not clear if they knew they were partaking in a fraud. Mr Madoff creamed off commissions from his investment business to support his share-trading operations. But how much he kept for himself is anyone’s guess.

The drama has several more acts. Those who channelled investors’ money to Mr Madoff, such as his now notorious “feeder funds”, face years of litigation as victims go after those with deep pockets. Some conduits, such as Santander, a Spanish bank, have already offered partial reimbursement. Lawyers are also targeting investors who withdrew their funds (plus fictional interest) before the fraudster’s arrest. Whether that includes the charity that withdrew $90m more than it paid in remains to be seen.

Seething victims and pundits have variously denounced Mr Madoff as a “terrorist”, a “financial serial killer” and, most cuttingly, a “turd”. For now, they will have to make do with seeing him locked up without the fireworks of a trial, still guarding his biggest secrets. To hope for more may only court further disappointment.

www.economist.com

Is it the Time to kill the big banks?

Two key Republican senators suggest that troubled big banks should be allowed to fail. It is an idea with merit but it may not be that simple.

What's the best way to fix the nation's banking system? Well, at least two senators making the rounds on the Sunday morning political TV gabfests think it's to let the megabanks fail.

Sen. Richard Shelby, R.-Ala., said on ABC's "This Week" that the most troubled banks are already dead and should be "buried."

Meanwhile, Sen. John McCain, R.-Ariz., added on "Fox News Sunday" that big banks had to fail even if it meant that shareholders will "take a beating." (Note to Sen. McCain: with the stocks of both Citigroup and Bank of America down more than 90%, shareholders already have taken a beating.)

So is the solution really that simple? After already propping up two huge banks, Citi and BofA, with $90 billion in bailout funds and hundreds of billions of dollars in loan guarantees, should the government just shut them down the same way that the FDIC closes small, community banks?

There is some merit to the idea that Citi, which Shelby derisively referred to Sunday as a "problem child," and BofA have done so much damage to the economy already that they should no longer be allowed to survive -- at least in their current form.

"Letting more banks fail is something we should at least consider. Blanket capital injections for all banks no matter how healthy they appear to be seems to be counterintuitive," said J.W. Verret, senior scholar for the Mercatus Center at George Mason University. "Some banks need to go through FDIC receivership."

And the Federal Deposit Insurance Corp. does do a good job of taking over small banks and finding a buyer for them quickly -- often a purchaser is announced the same day that the bank fails.

But closing a bank the size of Citi or BofA -- which is what Shelby appeared to suggest Sunday -- is more complicated.

You can't simply let the banks go out of business. Something has to be done with all the deposits, assets and branches. This would not be your typical FDIC bank failure where regulators swoop in on Friday night, slap up a new sign and it's business as usual on Saturday morning.

Consider the size of some of the banks that have failed in recent weeks. Typically, they have just a handful of branches and only a few hundred million dollars in deposits. For example, Freedom Bank of Commerce, Georgia, which failed Friday, had four branches and $161 million in deposits.

Cleaning up a huge money center bank wouldn't be so easy. If BofA or Citi were to be seized by the FDIC, they would likely have to be sold off in pieces, a process that could take months, if not years. And you don't have to look any further than the mess that is AIG to see how difficult (and costly to taxpayers) it is to break up a struggling financial behemoth.

The collapse of Washington Mutual last September, which was taken over by the FDIC and immediately sold to JPMorgan Chase , is more likely the exception instead of the rule in terms of big bank failures.

Keep in mind that last year's other large bank failure -- IndyMac -- turned out to be far more complicated. IndyMac failed in July and the FDIC had to run it for several months before agreeing to sell it to a private investment group on the last day of 2008. The FDIC has estimated that the failure of IndyMac will cost it $8.5 billion to $9.4 billion.

IndyMac had deposits of about $19.1 billion at the time it failed. So how much would a shutdown of Citi or BofA, which had worldwide deposits of $774.2 billion and $893 billion as of the end of last year, cost the FDIC?

"There would be a Main Street impact the size that we've never seen before. The FDIC would be stretched beyond belief," said Jess Varughese, managing partner of Milestone, an independent management consulting firm focused on financial services.

And fears of such a big failure could be one reason why Senate Banking Committee chair, Chris Dodd, D-Conn, and Sen. Mike Crapo, R-Idaho, proposed a bill last week that would let the FDIC temporarily borrow up to $500 billion from the government to keep the deposit insurance fund solvent.

Finally, what would the goal of shutting down a big bank be at this point? Shelby said Sunday that the government would be sending a "strong message to the market" and that people might start investing in banks again afterwards.

Varughese wasn't sure that would work out and pointed to the last time a big financial institution was allowed to fail.

"There's a populist message here and there's reality. This idea of letting one of the large global institutions fail does not sit well. Lehman Brothers brought us to the brink of financial Armageddon," he said.

Another financial expert agreed, saying that the damage created by a megabank failure would be "calamitous," since it could lead to more job losses and even tighter credit conditions.

"The economy needs a level of confidence to come back and it would fall even deeper if Bank of America or Citi were allowed to go under," said Bob Hartnett, managing director of Lenox Advisors, a New York-based investment firm with about $1 billion in assets.

So when all is said and done, Hartnett said the government may have to take over failing banks not to put them out of business but to keep them in business and force them to start doing what healthy banks are supposed to do: extend credit to responsible individuals and businesses.

"Everyone is looking to save their own skin and to hell with the borrower. We need to get banks to start lending again. We want them to start lending," he said.

CNN Money.com

Oil rises to near $48 as OPEC signals supply cuts

Oil rises to near $48 as OPEC signals another supply cut likely at Sunday's meeting.

Oil rose to near $48 a barrel Tuesday in Asia after OPEC signaled it will likely announce another production cut within days, adding to large supply reductions the cartel has already implemented.Benchmark crude for April delivery rose 73 cents to $47.80 a barrel by midafternoon in Singapore on the New York Mercantile Exchange. Oil prices gained $1.55 on Monday to settle at $47.07.

Leaders of the Organization of Petroleum Exporting Countries have suggested for weeks that the group may cut output quotas at its next meeting on March 15 in Vienna.

On Monday, Kuwaiti Supreme Petroleum Council member Moussa Marafi told the Kuwait News Agency that an OPEC production cut of a million barrels a day would raise prices to over $50 a barrel by the third quarter of 2009.

Marafi said OPEC compliance with the 4.2 million barrels a day of cuts announced since September has been "very high" at 80 percent and would reach 90 percent by the time the group meets Sunday.

Investors expect OPEC to announce fresh production cuts of between 500,000 and 1 million barrels a day, said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore.

"If the cut exceeds expectations, there would be a short-term pop in prices," Chu said. "But it will take months for the cut to affect supplies in the U.S. It's not an overnight thing."

Iraqi Oil Minister Hussain al-Shahristani said Monday on Sharqiyah television station that oil prices were too low and OPEC is working to "inch them up."

Investors largely brushed off OPEC's output cut announcements for months, doubting whether the 12-member group would have the discipline to implement them. But OPEC has complied with most of the quota reductions, earning back some credibility, Chu said.

"Everybody used to produce over quota, and OPEC lost credibility," Chu said. "According to Game Theory, cartels don't work because each member gains from cheating."

"But with prices so low, they've had to cooperate."

Oil prices have fallen from $147 a barrel in July as crude demand plummeted amid the worst global economic slump in decades. Prices won't likely jump higher until the U.S. economy stabilizes and crude demand increases, Chu said.

"The bad economic news won't go away for a while," Chu said. "But demand should pick up by the end of the year, and I see prices drifting toward $55 a barrel in the second half."

In other Nymex trading, gasoline for April delivery was steady at $1.36 a gallon, while heating oil was little changed at $1.22 a gallon. Natural gas for April delivery was steady at $3.86 per 1,000 cubic feet.

Brent prices rose 86 cents to $44.99 on the ICE Futures exchange in London.

Yahoo! Finance.com

Washington prepares for big bank failure

A bill introduced in the Senate would give FDIC chief, Sheila Bair, a huge loan to handle 'emergency situations' in the banking sector.

The government is bracing for a big bank failure.

A bill introduced in Congress would give the FDIC, the agency that stands behind Americans' bank deposits, temporary authority to borrow as much as $500 billion from the government to shore up the deposit insurance fund.

The bill -- the Depositor Protection Act of 2009, backed by Senate Banking Committee Chairman Chris Dodd, D-Conn. and Sen. Mike Crapo, R-Idaho -- wouldn't change the status of individual bank accounts, which through the end of this year are insured up to $250,000.

But the Dodd-Crapo bill acknowledges what the financial markets have been signaling for the past month -- that the government must take the lead in a costly cleanup of the mess in the financial sector.

"I think it's a commendable start," said Simon Johnson, a former International Monetary Fund chief economist who tracks the crisis on his BaselineScenario.com blog.

Dodd said he introduced the legislation at the behest of other regulators, notably Federal Deposit Insurance Corp. chief Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner. All three recently wrote Dodd to support an emergency expansion of the FDIC's capacity to borrow from the Treasury.

"This mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system," Bernanke wrote in a Feb. 2 letter to Dodd.

The Senate bill is being introduced at a time of rising market stress about the health of the banking industry. Seventeen relatively small banks have already failed this year and 25 went under in 2008. Last year's failures included the July demise of mortgage lender IndyMac and the September collapse of Washington Mutual, which was the sixth-biggest depository institution in the nation at the time it failed.

Shares of Citigroup , the giant financial company that last week received a third round of government aid, have fallen 58% since the government outlined a plan to convert the bank's preferred shares to common stock. The stock even dropped below $1 Thursday.

The Citi plan aimed to ease market concerns about the bank's health. But fears have only increased, judging by the swoon in financial stocks this week and the sharp rise in the cost of protecting financial-sector debt against default.

Fear of a big collapse continues to rise

The Credit Derivatives Research counterparty risk index -- a measure of the annual cost of insuring the bonds of 14 global financial companies against default -- surged nearly 30% this week as investors rushed to protect themselves against possible defaults at giant institutions.

It now costs an average of $289,000 per year to buy insurance on $10 million's worth of bank debt, according to the CDR index. That's just shy of the $300,000 average premium in force the day the index hit its all time high -- Sept. 17, 2008.

That was the day after the government's $85 billion first bailout of AIG , two days after the failure of broker-dealer Lehman Brothers and a week before WaMu was seized by regulators.

The current degree of stress in the financial sector is "totally shocking," said Johnson, given the massive resources governments around the globe have devoted to reducing fears of a major collapse.

The financial fears point to the need for the Obama administration to produce a detailed plan of how it will deal with troubled too-big-to-fail institutions and bad assets in the banking sector, said Johnson, who teaches in the business school at MIT.

"If you don't do a systemic plan fast, you set up a target for speculators," said Johnson.

The market's reaction to Geithner's failure to produce an adequately articulated proposal as promised on Feb. 10 stands as a cautionary tale. The Dow Jones Industrial Average has dropped 20% since then.

FDIC may need to hit Congressional ATM

The insurance that the FDIC provides to bank depositors is funded by annual assessments on banks. But the fund has been depleted by a sharp rise in bank failures over the past year, and efforts to raise the fees that support the deposit fund have been complicated by the poor health of the banking industry.

The deposit fund's balance fell 64% in 2008 to $19 billion, putting deposit fund assets at just 0.4% of banking industry assets. That's barely a third of the 1.15% statutory minimum.

Despite the welcome signs that policymakers are coming to grips with the extent of the U.S. banking crisis, observers say officials have yet to make clear that they fully grasp the scope of the financial industry's problems.

A $500 billion loan to the FDIC "begins to approximate the maximum loss from resolving the top four banks," said Chris Whalen, a managing director at Institutional Risk Analytics, a financial research and hedge fund advice firm.

The five biggest U.S. bank holding companies - Bank of America , Citi, JPMorgan Chase , Wells Fargo and Wachovia, which is now owned by Wells - had domestic deposits of between $271 billion and $701 billion at the end of the second quarter of 2008, according to the most recent data available from the FDIC.

With credit costs, which reflect expenses tied to bad mortgage and credit card loans, on the way to doubling the levels reached in the 1991 recession, Whalen expects the cost of fixing troubled banks to hit $1 trillion.

Whalen adds that he believes regulators may have to swing into action in coming weeks. With bad loans rising sharply even at the better managed banks, the next round of financial reports from the most troubled banks, due out in April, could be truly horrific.

"Does anybody really want to see Citi's first-quarter numbers?" Whalen said.


CNN Money.com

Huge layoffs push joblessness toward double digits

Record layoffs propel jobless rate to 8.1 percent, surging toward double digits.

Tolling grimly higher, the recession snatched more than 650,000 Americans' jobs for a record third straight month in February as unemployment climbed to a quarter-century peak of 8.1 percent and surged toward even more wrenching double digits.
The human carnage from the recession, well into its second year, now stands at 4.4 million lost jobs. Some 12.5 million people are searching for work -- more than the population of the entire state of Pennsylvania.

No one seems immune: The jobless rate for college graduates has hit its highest point on record, just like the rate for people lacking high school diplomas.

Employers also are holding hours down and freezing or cutting pay as the recession eats into sales and profits. If part-time workers who can't find full-time jobs are counted in, along with those who have simply given up looking, the rate would be 14.8 percent, the highest in records going back to 1994.

The wintertime blizzard of layoffs -- nearly 2 million lost jobs in just three months -- is destroying any hope for an economic turnaround this year while feeding insecurities among people who still have jobs as well as those who desperately want to find work.

"In this economy, if you have a family to feed like I do, beggars can't be choosers," said Greg Ovetsky, who lost his job at an information technology company two weeks ago.

Ovetsky, 37, of Staten Island, N.Y., said he'll take any position. "You can rest assured I'll say yes. Get a paycheck, get food on the table."

Across the country, Douglas Walch, 54, worries about losing his job as a park maintenance foreman because his employer of 15 years -- the city of Sacramento -- is preparing for layoffs.

"It's the worst I've ever seen it in my lifetime," Walch said.

President Barack Obama, barely a month into his own new job, acknowledged the layoffs were coming at an "astounding" clip but urged Americans to allow him time for his economic revival policies take root.

"This recovery plan won't turn our economy around or solve every problem," Obama said. "All of this takes time, and it will take patience."

For a day, Wall Street seemed to agree. Stocks seesawed up and down before finishing with a modest Dow Jones industrials gain of 32.5 points. Still the Dow was down a dispiriting 6.2 percent for the week.

The Labor Department's report, released Friday, showed pink slips nationwide hitting all categories -- blue-collar, white-collar, highly educated and not.

Employers slashed payrolls by a net total of 651,000 last month -- the third month in a row that job losses topped 600,000. It was the first time that's happened in government record-keeping dating to 1939.

"These are gargantuan declines," said Stuart Hoffman, chief economist at PNC Financial Services Group.

"Horrible," said Ian Shepherdson, chief economist at High Frequency Economics.

The unemployment rate leapt to 8.1 percent from 7.6 percent in January, the highest in more than 25 years. Some economists now predict the rate could hit 10 percent by year-end and peak at 11 percent or higher by the middle of 2010.

"The massive hemorrhage of jobs is reminiscent of the 1982 recession when the jobless rate hit 10.8 percent. Unfortunately, it will get much worse," predicted Sung Won Sohn, economist at the Martin Smith School of Business at California State University. "It is hard to see where the bottom is."

Besides the 12.5 million total for unemployed people in February, the number of people forced to work part time for economic reasons rose by a sharp 787,000 to 8.6 million. Those are people who would like to work full time but whose hours were cut back or were unable to find full-time work.

If those people -- along with discouraged workers -- were factored in, the rate would have been 14.8 percent in February.

The jobless rate for people with bachelor's degrees or higher jumped to 4.1 percent. And the rate for people without a high-school diploma climbed to 12.6 percent. Both are the highest in records dating to 1992.

The jobless rate for blacks rose to 13.4 percent, the highest since June 1993; the rate for Hispanics hit 10.9 percent, the highest since April 1993.

With no place to land, the number of "long-term unemployed" -- those out of work for 27 weeks or more -- climbed to 2.9 million, the most in records back to 1948.

Construction companies eliminated 104,000 jobs last month. Factories axed 168,000. Retailers cut nearly 40,000. Professional and business services got rid of 180,000, temporary-help agencies 78,000. Financial companies reduced payrolls by 44,000. Leisure and hospitality firms chopped 33,000.

The few areas spared: education and health services, as well as government, which boosted employment last month.

For those with jobs, employers kept a tight rein on hours. The average workweek in February stayed at 33.3 hours, matching the record low set in December.

Disappearing jobs and evaporating wealth from tanking home values, 401(k)s and other investments have forced consumers to retrench, driving companies to lay off workers. It's a vicious cycle in which all the economy's problems feed on each other, worsening the downward spiral.

A bit of positive economic news came from the Federal Reserve, which reported that consumer borrowing increased at an annual rate of $1.76 billion in the first month of the year. Still, the small rise is unlikely to shake economists' views that borrowing will remain weak this year as fearful consumers tighten their belts.

The economy contracted at 6.2 percent in the final three months of 2008, the worst showing in a quarter-century. Analysts believe the economy in the current January-March quarter is contracting at a pace between 5.5 and 6 percent or more.

A new wave of layoffs hit this week, with General Dynamics Corp., Northrop Grumman Corp., Tyco Electronics Ltd., and others announcing job cuts.

Obama is counting on a multipronged assault to lift the country out of recession: a $787 billion stimulus package of increased federal spending and tax cuts, a revamped bailout program for troubled banks and a $75 billion effort to stem home foreclosures.

But economists said the jobs situation seems to be killing any hopes for an economic recovery later this year as some had hoped.

"Faith in a rebound is running low no matter where you look these days," said Stephen Stanley, chief economist at RBS Greenwich Capital.


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Worst is yet to come for job market

This is the most brutal downturn in decades, but the unemployment numbers only show part of the pain.

It's no secret that the job market is bad.

The Labor Department will release its latest jobs report Friday. Economists surveyed by Briefing.com forecast that the unemployment rate rose to 7.9% in February and that 650,000 jobs were lost.

Still, as bad as those numbers are, some have argued that this jobs downturn is not as bad as the early 1980s. The unemployment rate peaked at 10.8% in late 1982.

But several experts say it would be a mistake to come to that conclusion. They argue that unemployment rate only hints at why this jobs downturn is worse than any since the Great Depression.

Steep decline

If the job loss forecasts for February turn out to be accurate, it would be the worst monthly drop since 1949.

It would also bring total job losses over the last six months to 3.1 million, the largest six-month job loss since the end of World War II.

Even adjusting for the large growth in the nation's job base in recent decades, this would be the biggest six-month job loss since 1975.

Economists say the steepness of this decline will make it tougher for the job market to improve any time soon. The increasing job losses create a downward spiral in which businesses, faced with lower demand because people can't afford to buy their products, lay off even more people.

"The dramatic hemorrhaging of jobs means we're in this for the long-haul," said Heidi Shierholz, economist with Economic Policy Institute, a Washington think tank supported by foundations and labor unions.

Another reason why this downturn is more painful is because the layoffs have come from companies in virtually all parts of the economy.

"There's no place to hide in terms of job losses," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. "And when measuring the impact of job losses, it's very important how pervasive the losses are. That's what makes this the worst since the Great Depression."

Achuthan points to something called the diffusion index of employment change, which showed that three out of four business sectors cut jobs in January.

According to Achuthan, this was the first time in the past 30 years when there were job losses in more than two-thirds of the sectors of the economy. When the recession started in December 2007, about 58% of industries were still adding jobs.

Long-term pain

Barring a major surprise, February will mark the 14th straight month of job losses, the third-longest streak since 1939.

This long period of job losses is swelling unemployment rolls to record levels and causing long-term unemployment to rise sharply.

In January, 3% of the nation's workers had been out of work for 16 or more weeks, with about half of that total being out of work at least six months. Several states' unemployment funds have run out money as a result.

And most economists think the job market woes are far from over. Many economists are projecting job losses through the end of the year.

But even when the job losses end, the unemployment rate is likely to continue rising. That's because the modest hiring that will follow the downturn won't be enough to make up for population growth and unemployed Americans who had become discouraged starting to look for jobs again.

With that in mind, Dean Baker, co-founder of the Center for Economic and Policy Research, said he thinks the unemployment rate will hit a peak of above 10% sometime in 2010.

Underemployed, or discouraged

Finally, economists caution that the unemployment rate only captures a portion of Americans unable to find full-time jobs. It doesn't count people working at part-time jobs but cannot find a full-time job, for example.

And the average number of hours worked per week is now at a record low, according to Labor Department readings.

The unemployment rate also doesn't count many people who tell the Labor Department they want to work but haven't looked for work recently.

The government has a so-called underemployment reading which counts people working part-time jobs for economic reasons rather than by choice, as well as some who have become discouraged from looking for work.

That measure hit 13.9% in January - the highest reading since the Labor Department started calculating it back in 1994.

But there are other discouraged job seekers who are not looking because they don't think they can find work, have decided to return to school, or for other personal reasons. Counting all of those people in the underemployment rate takes it to 15.7% in January.

Comparable figures aren't available from the Labor Department for the pre-1994 period, but there are full-year government estimates for those outside the labor force who wanted to work in earlier years.

Using those figures, the underemployment rate reached a high of 21.5% in November 1982. While that's higher than this January, it's probably not fair to compare the current reading to the worst result of that downturn since most believe this jobs crisis is far from over.

"No one is going to tell you we're at the trough," said Baker.


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European stocks mixed ahead of US jobs report

European markets mixed ahead of expected bleak US jobs report; Asia markets resume slide.

European markets were mixed Friday ahead of the publication of what is expected to be an especially bleak U.S. jobs report.

By noon in mainland Europe, Britain's FTSE 100 was up 0.1 percent at 3,533.59, Germany's DAX slipped 0.6 percent at 3,673.66, and France's CAC 40 dropped 0.9 percent to 2,547.76.

Investors were awaiting a U.S. Labor Department report later in the day that economists predict will show U.S. employers slashed 648,000 jobs in February -- more than the 598,000 cut in January.

If they are right, it would mark the worst month of job losses since the recession started in December 2007. It also would represent the single biggest month of job reductions since October 1949, when the country was just pulling out of a painful recession, although the labor force has grown significantly since then.

European shares had risen in early trading, with the FTSE gaining over 1 percent. This was "mostly short-term relief after the falls we have had," according to David Hussey, London-based Head of European Equities with MFC Global Investment Management.

"The market is today waiting for more evidence out of the States on payrolls, although that is a bit of a late indicator," he said.

"We have had a terrible run on the markets; it's been pretty much a one-way bet. People have been very bearish, the economic news has been bad. It kind of feels like we are in no man's land at the moment."

Wall Street was headed for a weaker open as stock futures traded lower. Dow futures were down 0.7 percent at 6,599, while Standard & Poor's 500 futures fell 0.3 percent to 684.20.

That comes after Asian stock markets resumed their downward and after Wall Street fell to its lowest levels in more than 12 years.

The Dow fell overnight by 281.40 points, or 4.1 percent, to 6,594.44, its lowest close since April 1997. The S&P 500 index dropped 30.32, or 4.3 percent, to 682.55, the lowest close since September 1996.

Investors, already deflated after Beijing failed to deliver new stimulus measures, were forced to grapple with a warning from General Motors that the struggling automaker may have to file for bankruptcy.

Financials were also hit, with Citigroup Inc. falling below $1 a share.

"You can buy Citi at the 99 cent store now," said Paul Schulte, a chief Asia equity strategist at Nomura International in Hong Kong. "It's nauseating. We keep grasping at straws to find hope, and the markets keep punishing us."

In Asia, the losses were somewhat more muted than the sharp declines in the U.S. overnight.

Japan's Nikkei 225 stock average fell 260.39 points, or 3.5 percent, to 7,173.10, while Hong Kong's Hang Seng shed 289.72, or 2.4 percent, to 11,921.52. South Korea's Kospi was off 0.3 percent at 1,055.03.

Shanghai's benchmark swooned 1.3 percent, Australia's stock measure was 1.4 percent lower and Singapore's key index shed 0.8 percent. Bucking the trend, markets in India and Taiwan gained 1.6 percent and 0.4 percent.

China has become a growing source of hope for many investors, helping buoy sentiment in Asia at a time when the region's export-driven economies are hurting as demand dries up in industrial Western countries.

A day after Beijing stopped short of announcing new stimulus plans, the government said Friday it sees signs economic growth is recovering and is watching closely to determine whether it needs to expand its huge stimulus effort.

"It really depends on the changing situation to determine whether we need additional investment," Zhang Ping, the chairman of the country's planning body, said in Beijing. He and central bank Gov. Zhou Xiaochuan said positive data showed Beijing's policies were working so far.

Analysts said the outlook for equities was not going to improve any time soon.

"I think the markets are going to continue to tread water," said George Kanaan, managing director at UBS in Sydney. "All the companies need to get more capital and that's going to hold markets relatively down until we go through the process."

Robert Howe of asset manager Geomatrix in Hong Kong said the latest bout of selling was likely part of the second of three phases in a bear market that could last another year and a half. He pointed out that stocks investors usually pour into during turbulent times, including utilities, staple goods and pharmaceuticals, were hit this week in both the U.S. and Asia.

"Sentiment is very negative," Howe said. "What we're seeing is defensive stocks are ... getting whacked, which tells us it might be close to the end of the capitulatory period of phase two."

Oil prices were higher in European trade, with benchmark crude for April delivery up $1.09 at $44.70 a barrel by late afternoon in Singapore on the New York Mercantile Exchange. The contract fell $1.77 overnight to settle at $43.61 a barrel.

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What went wrong

The IMF blames inadequate regulation, rather than global imbalances, for the financial crisis.

IN RECENT months many economists and policymakers, including such unlikely bedfellows as Paul Krugman, an economist and New York Times columnist, and Hank Paulson, a former American treasury secretary, have put “global imbalances”—the huge surpluses run by countries like China, with their counterparts in America’s huge current-account deficit—at the root of the financial crisis. But the IMF disagrees. It argues, in new papers released on Friday March 6th, that the “main culprit” was deficient regulation of the financial system, together with a failure of market discipline. Olivier Blanchard, the IMF's chief economist said this week that global imbalances contributed only “indirectly” to the crisis. This may sound like buck-passing by the world’s main international macroeconomic organisation. But the distinction has important consequences for whether macroeconomic policy or more regulation of financial markets will provide the solutions to the mess.

In broad strokes, the “global imbalances” view of the crisis argues that a glut of money from countries with high savings rates, such as China and the oil-producing states, came flooding into America. This kept interest rates low and fuelled the credit boom and the related boom in the prices of assets such as houses and equity, whose collapse precipitated the financial crisis. A workable long-term fix for the problems of the world economy would, therefore, involve figuring out what to do about these imbalances.

But the IMF argues that imbalances could not by themselves have caused the crisis without the ability of financial institutions to develop new structures and instruments to cater to investors’ demand for higher yields. These instruments turned out to be more risky than they appeared. Investors, overly optimistic about continued rises in asset prices, did not look closely into the nature of the assets that they bought, preferring to rely on the analysis of credit-rating agencies which were, in some cases, selling advice on how to game the ratings system. This “failure of market discipline”, the fund argues, played a big role in the crisis.

As big or bigger a problem, according to the IMF, was that financial regulation was flawed, ineffective, and too limited in scope. What it calls the “shadow banking system”—the loosely regulated but highly interconnected network of investment banks, hedge funds, mortgage originators, and the like—was not subject to the sorts of prudential regulation (capital-adequacy norms, for example) that applied to banks.

In part, the fund argues, this was because these were not thought to be systemically important, in the sense that banks were understood to be. But their being unregulated made it more attractive for banks (whose affiliates the non-banks often were) to evade capital requirements by pushing risk into these entities. In time, this network of institutions grew so large that they were indeed systemically important: in the now familiar phrase, they were “too big” or “too interconnected” to fail. By late 2007, some estimates of the assets of the bank-like institutions in America outside the scope of existing prudential regulation for banks, was around $10 trillion, as large as the assets of the American banking system itself.

Given this interpretation, it is not surprising that the IMF has thrown its weight strongly behind an enormous increase in the scale and scope of financial regulation in a series of papers leading up to the G20 meetings. Among many other proposals, it wants the shadow banking system to be subjected to the same sorts of prudential requirements that banks must follow. Sensibly, it is calling for regulation to focus on what an institution does, not what it is called (that is, the basis of regulation should be activities, not entities). It also wants regulators to focus more broadly on things that contribute to systemic risk (leverage, funding, and interconnectedness), the significance of some of which was probably under-appreciated until the collapse of Lehman Brothers and the subsequent chaos. And there is much more to be done, it suggests, involving cross-border banking, disclosure requirements, indices of systemic risk and international co-operation.

Yet there is an underlying inconsistency here. The IMF’s version of “how it all happened” is a classic example of institutions gaming the regulatory system. It is impossible to anticipate all the possible ways in which regulations can be evaded. And while the wisdom of hindsight may make it appear blindingly obvious that non-bank financial institutions could become large enough to pose a risk to the entire system, surely this was not apparent to policymakers at the time. Increasing the scope of regulation may well prevent the precise problems that led to this crisis from recurring in the same way, but nothing prevents problems from morphing to evade the plethora of regulations that the fund is proposing. It is hard to shoot a moving target.

And what about those pesky imbalances? The IMF’s view, broadly speaking, is that without excessive risk-taking by financial institutions, which was aided by the absence of regulation, they would not by themselves have caused the meltdown. But equally, without the flood of money seeking returns, the risky financial instruments that the IMF is blaming for increasing systemic risk may not have grown and posed the risk that they did. Some blame the IMF’s policies during the Asian crisis for spurring Asian countries to build up enormous reserves. That may offer part of the explanation for why the Fund has come down so strongly on one side of the debate.

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Underinsured Americans: The cost to you

As the recession shrinks health care coverage for more households, experts warn of a double-whammy on all consumers.

Americans already shouldering the cost of millions of people without health insurance should brace for a double-whammy, thanks to a surge in the number of "underinsured" - consumers who have some but not enough health insurance coverage.

The problem, according to health care industry experts, is that the government and those with employer-based health plans will have to pick up the tab as more Americans are unable to pay their entire medical bill.

As the recession puts a bigger strain on consumers' wallets, many underinsured Americans either can't or won't pay the high deductibles and co-pays for treatment they receive in hospitals and emergency rooms.

Many people without adequate insurance are also delaying or forgoing medical care until it becomes an absolute emergency, said Dr. David Chin, managing partner of consulting firm PricewaterhouseCooper's Global Healthcare Research Institute.

By law, hospitals have to treat all emergency admission regardless of insurance.

"If the underinsured can't pay the bills, the hospital either writes it off as bad debt or shifts the cost to its charity care program," said John Pickering, principal and consulting actuary with consulting firm Milliman Inc.

"As bad debt increases, more hospitals are also shifting the cost of both the underinsured and insured to those who can pay," said Wynn Bailey, partner and health care expert with consulting firm AT Kearney. "That's the government, private insurers and the self-insured."

Bailey said hospitals are negotiating higher treatment rates with insurance companies to offset the bad debt.

In turn, commercial insurance providers are charging higher premiums to their clients, both businesses and individuals, to cover their cost increases. As businesses struggle their employee health care costs, they are shifting a higher percentage of overall premiums to their workers, charging higher deductibles, or encouraging greater use of generic drugs.

"It's a vicious cycle," said Pickering.

Bailey said he wouldn't be surprised if people with employer-based health insurance have to pay 5% to 10% more for their coverage over the next year or two.

Not tracked by government

One reason the exponential growth in underinsured Americans hasn't made headlines is because this group isn't yet tracked by the government, explained Sara Collins, economist and assistant vice president with health policy research group The Commonwealth Fund.

"It's harder to define the underinsured," Collins said.

The Commonwealth Fund defines underinsured as those who incur high out-of-pocket costs - excluding premiums - relative to their income, despite having coverage all year.

Using that measure in consumer surveys, Collins' firm estimates that 25 million adults under age 65 were underinsured in 2007.

More importantly, Collins pointed out that the number of underinsured increased 60% from 2003 to 2007. That compares with a 5.1% increase in the number of uninsured Americans - to about 46 million - over the same period, according to the U.S. Census Bureau.

"The 25 million [number] can still be an underestimate," Collins said.

What's also troubling, she said, is that the ranks of the underinsured are spreading across income levels and have seen the most rapid increases lately in middle-income households earning between $40,000 to $60,000.

Obama's plans

President Obama has made health care reform a top priority, detailing both a dramatic overhaul of the system in his budget and setting a White House "summit" on the issue Thursday.

Some of Obama's initiatives will provide short-term relief to both the uninsured and underinsured.

Specifically, the government will provide a 65% subsidy to businesses who continue COBRA premiums for laid off employees for a period of 9 months.

"But what happens after that period?," said Bailey. "Many people are wary about finding another job in a year in this economy."

Longer term, Obama last month extended the Children's Health Insurance Program Reauthorization Act which renews and expands health coverage by an additional 3 million children, to 11 million children.

Investments in health care technology will eliminate unnecessary costs and prevent duplicative care, Bailey said.

Also, in his budget, Obama proposed a 10-year health care reserve fund of $630 billion to "bring down costs and expand coverage."

Bailey has reservations.

That $630 billion "sounds like a lot of money. But total health care consumption this year is expected to be about $2 trillion," he said. "So is spending $630 billion a year enough to transform this gigantic beast?"

"Obama's proposals certainly are a start, but much more is needed," said Bailey.


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Obama budget hopes meet bailout rage

Government's rescue team goes before Congress, but budget hearings serve as forum for larger questions about consequences of financial fixes.

President Obama's economic A-team went to Capitol Hill on Tuesday to address questions about the administration's ambitious budget request.

But they also ended up being grilled on everything from the latest AIG bailout to the risk of propping up zombie institutions.

Proposals like Obama's plans to reform federal efforts on health care and energy are big heaves in normal times. Now the president has to sell his budget at a time when many lawmakers are worried about the effectiveness of the government's expensive efforts to stem the economic and financial crises so far.

That was made abundantly clear as Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke and White House budget director Peter Orszag testified in hearings before the House and Senate.

"It's not a partisan attack on you when you hear some of us saying that we are very concerned about where we're going to be at the level of federal debt in the next five years ... a lot of that hinges on how successful the plans that you're putting out there are," Rep. Devin Nunes, R-Calif., said to Geithner at a House Ways and Means Committee hearing.

All three officials stressed in their comments that the country has to embark on a two-pronged mission:

• do all it can to combat the crises even though that means running up the deficit in the near term to record levels;\
• make efforts to put the country on a fiscally sustainable course for the long run.

"We need to act, both to address the dramatic shortfall in national output in the near term and to tackle the medium- and long-term deficits that would ultimately become a drain on the nation's potential for economic growth," Orszag told the House Budget Committee.

But lawmakers find some of the near-term fixes -- like Monday's overhaul of the rescue of giant insurer American International Group -- harder to swallow than others.

"Yesterday, after it was reported that AIG lost $62 billion last quarter, an estimated $460,000 per minute, the federal government offered AIG yet another check," Sen. Ron Wyden, D-Ore., asked Bernanke at the Senate Budget hearing. "Small businesses across the country, who played by the rules, paid their bills on time, can't get a line of credit, while AIG seems to have an open spigot for taxpayer money."

Bernanke was asked variations of that same question throughout the hearing.

"Our belief was that to allow the company to fail at this juncture, putting aside its huge adverse affects on the financial system and on the economy, would have greatly also impaired the ability of the government to recover the investments that have already been made in the company," Bernanke said.

Lawmakers on both sides of the aisle would welcome that. But until there's evident return on the government's investments in its rescue and stimulus ventures, all they will see is the potential for red ink.

Bernanke was asked how high a debt level the country can carry without jeopardizing the ability of the Treasury to borrow.

"It's hard to judge in an explicit way," he said, noting that countries can for short times carry high rates of debt relative to their GDP but that the United States will have to stabilize its debt-to-GDP ratio in order to be able to borrow at favorable rates.

But ultimately, Bernanke said, "maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance."



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UBS official to face Senate questioning

UBS official facing Senate panel's questions on thousands of US clients avoiding taxes.

An official of UBS AG on Wednesday will face questions from a Senate panel for the first time since Switzerland's biggest bank formally acknowledged responsibility for helping tens of thousands of American clients hide assets from the U.S. government.
In a cross-border battle, the Internal Revenue Service is trying to pry from UBS the names of as many as 52,000 wealthy Americans who maintain secret accounts with UBS. The bank maintains that turning over the account names would violate Swiss privacy law and jeopardize UBS' license to stay in business.

The Swiss government -- which is providing financial support to UBS as it struggles with massive losses stemming from the U.S. subprime mortgage crisis -- has refused to send a representative to Wednesday's Senate subcommittee hearing, in protest of the IRS lawsuit against the bank.

Cloak-and-dagger tactics said by the U.S. government to have been employed by UBS -- coded language in internal e-mails and memos, foreign shell companies and phony charitable trusts, use of pay phones and foreign area codes and credit cards -- will be on display at the hearing, which starts at 2:30 p.m. EST.

UBS allegedly staged training sessions so that "client advisers" could travel frequently to the U.S. -- on average 30 days a year each -- to consult with secret U.S. customers without attracting the attention of tax agents or law enforcement officials. The advisers were told to rotate the hotels they stayed in and to "protect the banking secrecy" if they were questioned by any authorities, according to excerpts of UBS internal documents filed in the IRS suit and provided by the subcommittee.

The dispute has prompted heated debate in Switzerland over the country's cherished banking secrecy, a tradition that has helped transform the nation into one of the world's richest.

The investigative panel of the Senate Homeland Security and Governmental Affairs Committee, led by Sen. Carl Levin, D-Mich., is voicing outrage at what it says is obstruction of the U.S. government by both UBS and the Swiss.

Levin said Tuesday the panel hopes to learn from UBS official Mark Branson the exact number of American account holders. Branson is the chief financial officer of the bank's global wealth management and Swiss bank division, based in Zurich.

"We've been stymied," Levin told reporters. "These are abuses that are unconscionable."

Now that UBS has acknowledged "participating in a scheme to defraud the United States government and its agency, the IRS," the bank rightfully should turn over the names of American clients, Levin said.

Karina Byrne, a UBS spokeswoman in New York, declined to comment.

UBS on Feb. 18 agreed to pay a hefty $780 million in fines and restitution for conspiring to help American citizens violate their country's tax laws by hiding assets -- estimated to be worth at least $14.8 billion -- from the U.S. government. In the deal struck in federal court in Fort Lauderdale, Fla., the Justice Department agreed to defer criminal prosecution of UBS in exchange for the payment of fines and restitution, and the names of up to 300 U.S. clients.

The bank says it has shut down the improper foreign-account business, and taken corrective measures to tighten its compliance and internal control systems.

The agreement didn't cover the much broader list of as many as 52,000 customer names now sought by the IRS, but both sides knew the U.S. government would ask for them.

In its civil suit against UBS, the IRS has asked a federal judge to enforce so-called "John Doe summonses" seeking information about the Americans' accounts. Another federal judge approved the summonses in July 2008, but UBS never complied.

By providing the 300 or so names, the bank says, it has complied with the summonses as fully as it can without violating Swiss law.

Wednesday's hearing is the latest in an extensive series by the Senate panel examining offshore tax abuse, which is estimated to cost the United States $100 billion a year in lost tax revenue.

Recovering tax revenue has taken on amplified urgency amid the economic crisis, when the federal deficit is expected to balloon to nearly four times the highest level in history as hundreds of billions of dollars are spent on the bailout for financial institutions and the economic stimulus plan.

Also testifying will be IRS Commissioner Douglas Shulman, who has warned U.S. taxpayers hiding money overseas that it was time to come clean with the agency.

"People who have hidden unreported income offshore need to get right with their government. They should come forward and take advantage of our voluntary disclosure process," Shulman said last month.

On Tuesday, Treasury Secretary Timothy Geithner said President Obama supported legislation authored by Levin that would tighten U.S. tax laws and close loopholes to fight offshore tax-haven abuses.

The president's support "greatly improves the chances of an offshore tax bill becoming law this year ... (and) sends a strong signal to tax havens that this administration is not going to tolerate the kind of offshore tax abuses that have been draining" the Treasury, Levin said.


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American International Group: In a state

Despite another rescue for AIG, problems at the state-owned insurer weigh heavily on the markets.

AT EACH lurch downwards in the financial crisis, American International Group (AIG) has played an infamous starring role. Yet again, as the Dow Jones Industrial Average closed below 6,800 on Monday March 2nd, its lowest level in almost 12 years the company deemed to be too big to fail has proven almost too big to rescue.

Once the world’s largest insurer, now AIG is in the record books for all the wrong reasons. On Monday it revealed the biggest quarterly loss of any company in American history, at $61.7 billion, down from a loss of $5.3 billion in the fourth quarter of 2007. Much of the red ink stemmed from misplaced bets in the credit-derivatives markets; what it called “market-disruption related” lost the insurer $25.9 billion, which is more than the combined loses in the fourth quarter of both Merrill Lynch and Citigroup, two of America’s biggest banking casualties.

AIG’s losses, though shockingly large, could have been worse. Its problems mainly stem from the insurance coverage it provided to banks on devilishly complex structured products. According to Creditsights, a research firm, the loss of value in these so-called super senior credit-default swaps (CDSs), as well as the company’s operating businesses, was no worse than expected.

But the results had threatened to trigger a downgrade by the credit-rating agencies, which would have required AIG to post billions of dollars more of collateral to back its CDS exposures. This provoked another of those feverish weekends at the Treasury and the Federal Reserve that were so prominent in the closing months of the Bush administration, as the authorities scrambled to find a new way out for AIG.

The upshot was the firm’s fourth bail-out since the Fed first threw it an $85 billion lifeline in September and took a 79.9% stake in the company in return. The announcement, issued on the same day as the fourth-quarter earnings, marks quite a substantial softening of the terms of that rescue package, as well as providing up to $30 billion in new capital. It removes the coupon on $40 billion of government equity injected into AIG in November and lowers the interest rate on the Fed’s credit line. While the new plan pacifies the credit-rating agencies for the moment, and provides some solace to AIG’s creditors and counterparties, it provides little reason for taxpayers to hope that much of the cost of this colossal bail-out—by far the biggest so far in the crisis—will be recouped.

In exchange for cancelling a $34.5 billion debt to the New York Fed, the government will receive preferred stakes in two Asia-based AIG subsidiaries, American International Assurance and American Life Insurance, as well as interests in life-insurance businesses in AIG’s home country. The two Asian units have performed well, but efforts to sell American International Assurance have recently drawn a blank, partly because of the severity of the global crisis and the lack of funding for buyers. The government clearly believes that rather than offloading them in a fire sale, it is better to hold them and sell them at a better price when the market improves.

That is assuming they are well managed in the interim, however; so far government ownership appears to have done little to improve the rest of the business. Hopes that official backing would enable AIG somehow to fence off the troubled financial-services division where the CDSs are housed, allowing the other businesses to run more smoothly, have come to nothing. Edward Liddy, the AIG boss parachuted in by the government, said he was surprised by how bad things had turned out at the firm and in the economy in general. He offered no forecasts for the first quarter.

AIG’s tide of red ink makes the record so far of government support for stricken financial institutions, albeit one that bridges two administrations, even more depressing. Messy rescues of Citigroup and Bank of America have failed to staunch their losses. Fannie Mae and Freddie Mac, the two giant mortgage agencies that, like AIG, are also wards of the state, have continued to bleed. Fannie last week reported a $25.2 billion fourth-quarter loss. Freddie expects to seek up to another $35 billion in public funds when it announces results shortly that are expected to be disastrous. On Monday David Moffett, its chief executive, resigned six months after the government had given him the job. It was yet another reminder that problems for big financial firms continue to get worse even when they are wrapped in the forgiving arms of the state.

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HSBC's rights issue: Ruffled feathers

HSBC plans to raise $17.7 billion of equity—a sign of weakness or strength?

APOLOGIES are all the rage in banking now. As well as a general grovel on behalf of the industry, on Monday March 2nd HSBC said sorry for its original sin in 2003: buying Household, an American consumer-credit company that has since blown up. “With the benefit of hindsight, this is an acquisition we wish we had not undertaken,” the bank’s chairman said. Europe’s biggest lender by market value now hopes to draw a line under the affair by winding up the bulk of its American consumer-credit book. For good measure it also plans to raise $17.7 billion, in Britain’s biggest-ever rights issue and slash its dividend, after 15 years of consecutive double-digit growth.

That may all sound like a disaster but, depressingly, HSBC is one of the best-performing banks in the western world right now. Its 2008 results were riddled with one-off items, but the bank still made an annual pre-tax profit of over $9 billion in a year when most peers made losses. Bad debts are rising outside America, but at a moderate rather than seriously alarming pace. HSBC’s share price has roughly halved in the past year--less catastrophic than many competitors, a few of whom have just entered the deadly embrace of their governments. Its deposits still exceed loans made, making it relatively less dependent on the whims of wholesale markets for funding.

One interpretation of HSBC’s capital raising is that it is keen to make the gap between it and unhealthy banks even wider. Its ratio of equity to tier-one capital will rise from 7% to 8.5% if the rights issue is completed. That is far above the level of America’s mega-banks (JP Morgan Chase sits at 6.4%) and exceeds Europe’s other big beast (Santander’s ratio is 7.2%). Extra capital will allow HSBC to grow as other cash-starved competitors are forced to shrink their businesses.

Acquisitions might even be on the cards as weak banks with global operations are broken up, as is already happening to Royal Bank of Scotland and seems likely to be Citigroup’s fate. Yet is HSBC’s capital position quite as it seems? The bank has a large portfolio of available-for-sale securities (mainly asset-backed instruments). Deducting the marked-to-market losses on this would reduce the tier-one ratio back below 7%.

On top of that HSBC faces continued losses in America as its winds down its consumer business there. The bank has quite rightly rejected calls to let this division, which it does not legally guarantee, default. But the ongoing financial burden could be heavy. This unit produced an underlying pre-tax loss of $7 billion in 2008--a couple more years like that would knock a sixth or so off HSBC’s core capital.

All of which suggests that HSBC is undertaking a balancing act. Although it hopes further realised losses in America and on its asset-backed securities will be limited, a rights issue leaves it prepared for the very worst. That is not a position of strength, at least in absolute terms. But very few other banks are even capable of raising equity from external investors right now: their only response to the worst-case scenario is to cross their fingers. HSBC does not look in a great state, but remains fit enough to be able to admit its weaknesses.

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Sources: AIG to get up to $30B more in Fed aid

American International Group to get up to $30 billion more in Fed assistance, sources say


Struggling insurer American International Group Inc. will receive up to $30 billion in additional federal assistance in the fourth government rescue of the company, people familiar with the matter told The Associated Press on Sunday
The new infusion is intended to prop up AIG -- once the world's largest insurer -- as it is expected to announce $60 billion in quarterly losses early Monday, a person said on the condition of anonymity because the discussions are still ongoing.

The company, which is considered too large to be allowed to fail, previously received about $150 billion in loans from the government, which currently holds an 80 percent stake in the company.

Under the new deal, the U.S. Treasury and the Federal Reserve would provide about $30 billion in fresh capital to AIG from the government's Troubled Assets Relief Program, or TARP. The money would be provided as a standby line of equity that AIG could tap as its losses mount, the person said.

AIG has already received $40 billion from TARP.

The new plan also calls for the Federal Reserve to take stakes in two international units, the person said.

Instead of paying back $38 billion in cash with interest that it has used from a Federal Reserve credit line, AIG now will repay that amount with equity stakes in Asia-based American International Assurance Co. and American Life Insurance Co., which operates in 50 countries.

The $20 billion to $25 billion remaining on the Federal Reserve credit line will be available for borrowing, the person said.

In order to strengthen the company, AIG also plans to combine its U.S. and foreign property-casualty insurance operations into a new unit, with a new name and separate management, the person said. About 20 percent of the property-casualty business would be taken public.

To further reduce its debt, AIG will turn $5 billion to $10 billion worth of debt into new securities backed by life insurance assets.

The decision to approve a third revision of the AIG bailout is a continued bet by the federal government that there would be even greater risk to letting AIG fail, a person familiar with the Treasury's decision told The Associated Press on Sunday.

Federal officials feared that a bankruptcy of AIG could be disastrous for the global economy, which is in worse shape than it was six months ago, the person said, requesting not to be named because the talks are ongoing. Talk of the new rescue package has been going on for several weeks, as the Treasury gained insight of AIG's quarterly performance, the person added.

AIG spokesman Nick Ashooh declined to comment on the rescue package. The Federal Reserve Bank of New York, which is handling the government loan, did not return requests for comment Sunday evening. Treasury Department spokesman Isaac Baker also declined to comment.

The company's board met Sunday to vote on the revised bailout plan.

Major credit rating agencies have already signed off on the deal, according to media reports. Without the support of the credit rating agencies, AIG would have faced crippling cuts to its ratings.

AIG has been forced to seek more help in part because of the ongoing recession and its falling stock price, now well under $1. Among its biggest problems: It can't sell assets to pay back government loans because the credit crisis is preventing would-be buyers from getting financing to complete such deals.

As of Feb. 13, AIG had sold interests in nine businesses.

In November, the U.S. government restructured previous loans provided to AIG, giving the company about $150 billion in total as part of a rescue package to help the insurer remain in business amid the worsening credit crisis. That package replaced earlier loans, including the original $85 billion lent in September, after it became apparent the insurer needed more funds.

Problems at AIG did not come from its traditional insurance operations, but instead from its financial services units, and primarily its business insuring mortgage-backed securities and other risky debt against default.

Shares of AIG closed at 42 cents on Friday. The stock, which traded at $49.50 a year ago, has lost nearly all of its value since the market meltdown began in September.

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