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Bernanke gets a second term

2010-01-29T07:44:00.001-08:00

Federal Reserve Chairman Ben Bernanke was confirmed for a second term Thursday by the U.S. Senate.

The final confirmation vote was 70-30. Minutes earlier, more than enough senators, 77, voted to end a filibuster on the nomination in a procedural move that required 60 votes.

The vote, which occurred just three days before Bernanke's first term was scheduled to end, came after heavy lobbying by Democratic leaders and the Obama administration. President Obama, himself, made calls last weekend. And Senate Majority Leader Harry Reid, D-Nev., lobbied Republicans to make sure he had enough votes.

Despite the strong showing, Bernanke won his confirmation by one of the smallest margins of all time for a Fed chairman. Often the confirmation of a Fed chairman is so overwhelming and uncontroversial, it's done by a voice vote.

In 1983, then-chairman Paul Volcker was confirmed for a second term by a vote of 84-16, considered one of the more controversial confirmation votes at the time. Bernanke's second-term vote was far slimmer.

The controversy came through in the debate, which grew impassioned on both sides.

"This is not some assistant undersecretary of some other agency, this is the central bank chairman of the most important central bank in the world," Sen. Christopher Dodd, D-Conn., said in the last speech of the day on the issue. "It's a critically important component in continuing our path to economic recovery. We will bear the collective responsibility of failing to meet that obligation if we walk away. . . by continuing this filibuster or defeating this nominee."

But several Republicans and Democrats countered that Bernanke deserves much of the blame for the current economic situation.

"Our present economic problems are no accident," said Sen. Richard Shelby, R-Ala., a key lawmaker who works with Dodd on financial legislation. "Dr. Bernanke's Federal Reserve played a key role in setting the stage for the financial crisis we're in now."

Several senators, including Sen. Barbara Boxer, D-Calif., Sen. Sheldon Whitehouse, D-R.I., and Sen. George LeMieux, R-Fla., voted to end the filibuster blocking the confirmation vote but then voted against Bernanke's second term.

"He sat there, and said everything was fine. Everything was fine and everything was wonderful. Everything was OK," said Boxer, who is up for re-election this fall. "If Mr. Bernanke is confirmed, and I expect he will be, I hope he will listen to what a lot of us are saying here, and turn his attention to Main Street."

The Bernanke vote was a particularly tough one for the Senate.

The Senate is sensitive to growing voter frustration that Washington did a better job getting Wall Street back on its feet than Main Street.

Bernanke is largely seen as a symbol of Wall Street, even though many credit him for saving the economy from falling into a second Great Depression.

At least a half dozen Democrats, including several up for re-election this November, voted no on Bernanke. But the vote garnered some Republican support.
0:00 /1:59Politics cloud Bernanke decision

"The past decade was the worst decade in modern times," Sen. Bernie Sanders, an independent from Vermont who votes with the Democrats, said on the Senate floor. He is among a handful of senators from both parties who delayed Bernanke's confirmation.

"Why do you want to re-appoint somebody who not only failed at his job as chairman of the Fed, in terms of safety and soundness, but was the author the Bush economy?" Sanders asked.

Ohio State is No. 1 - in president's pay

2010-01-18T06:51:00.000-08:00

Ohio State University is No. 1 again -- but instead of the gridiron or hardwoods, the school tops the list of U.S. public college presidents' pay for the second year in a row, according to a study published Monday.

The Chronicle of Higher Education said E. Gordon Gee, Ohio State's president, took home $1.6 million last year, up from $1.3 million in 2008.

Gee's office did not immediately respond to calls requesting comment.

Mark Emmert, president of the University of Washington, was the second highest paid executive in the survey, with total compensation of $905,004 last year. Patrick Harker, president of the University of Delaware, came in third with $810,603.

The Chronicle, a Washington-based publication focusing on education, said Gee is one of "a growing number" of presidents that have given money back to their institutions, saying he donated $320,850 to help endow a scholarship fund.

The Chronicle surveyed total compensation, including salary and benefits, for top executives at 185 public universities.

Gee is the only public university president earning more than $1 million. By contrast, The Chronicle reported in November that 23 presidents of the nation's top private universities took home more than $1 million in 2008, the most recent year surveyed.

The survey found that compensation for public university execs overall increased at a much smaller rate in 2009 than in recent years. The median total compensation for chief executives last year was $436,111, up 2.3% from 2008. After adjusting for inflation, however, compensation rose 1.1%.

The relatively small increase comes after total compensation rose between 7.6% and 18.9% each year since 2005.

But as the economy soured and many public universities were forced to hike tuition and eliminate courses, the issue of executive compensation became a sore spot for many schools, said Jeffrey Selingo, editor of The Chronicle.

"Steadily rising pay packages of public university chiefs riled parents, students and politicians, especially as tuition increases also had been hefty from year to year," Selingo said in a statement.

The survey also showed that base salaries stopped growing last year for more than one-third of the chief executives, while 10% of them experienced a decline in total compensation.

The Chronicle also surveyed compensation at 64 community colleges nationwide and identified Eduardo Padrón, president of Miami Dade College, as the highest paid.

Padrón's pay package totaled $548,459 last year. He was followed by Michael McCall, president of the Kentucky Community College and Technical College System, at $532,907.

Retail sales take a fall in December

2010-01-14T06:43:00.001-08:00

Retail sales fell in December, the government reported Thursday, putting a damper on hopes that the holiday shopping season was strong.

The Commerce Department said total retail sales fell 0.3% to $353 billion last month, compared with November's upwardly revised 1.8% jump. Economists surveyed by Briefing.com had anticipated that December sales would grow 0.5%.

Consumer spending accounts for two-thirds of U.S. economic activity, and related reports such as retail sales are closely watched to determine whether a recovery is underway.

Sales excluding autos and auto parts fell by 0.2% from November. Analysts expected sales ex-autos to jump 0.3%.

Given that the economy was so weak 12 months ago, the year-to-year increase was strong. December 2009 retail sales jumped 5.4% compared to the same month in 2008.

"[It's not] clear how much of this reflects a catch-up from the fantastically depressed post-Lehman period ... and how much represents a sustainable, if very modest, upturn," said Ian Shepherdson, economist at High-Frequency Economics, in a research note. "We suspect more of the latter."

The December data are not enough "to reach a definitive verdict" on the holiday sales season, Shepherdson said. The January report will be "hugely important" as well because it reflects holiday gift card spending and post-holiday sales.

Total sales for 2009 retreated 6.2%

Stocks in broad-based rally

2009-12-10T11:33:00.000-08:00

Stocks rallied Thursday afternoon as reports showing a decline in the pace of foreclosures and a narrowing of the trade gap helped offset a mixed reading on the jobs market and a seesawing dollar.

The Dow Jones industrial average (INDU) rose 62 points, or 0.6%, with more than three hours left in the session. The S&P 500 index (SPX) added 6 points, or 0.6%. The Nasdaq composite (COMP) gained 12 points, or 0.6%.

Gains were broad based, with 26 of 30 Dow stocks rising, led by commodities and consumer names. Gainers included Alcoa (AA, Fortune 500), Chevron (CVX, Fortune 500), Walt Disney (DIS, Fortune 500), Johnson & Johnson (JNJ, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500).

Stocks had risen more sharply in the first minutes of trade, with the Dow adding as much as 107 points on the weak dollar. But the dollar turned positive versus the euro and yen, causing stocks to trim some gains.

The weak dollar has helped stocks rally over the past nine months, with the S&P 500 now up 62% from 12-year lows hit on March 9. The weaker dollar has given a boost to dollar-traded commodity shares and the stocks of companies that do a lot of business overseas and therefore benefit from a weaker greenback.

But in the last few weeks, the dollar has zigzagged and so have stocks. Stocks have also been volatile due to the lighter trading volume this month, with many investors opting to coast through year end rather than shake up their portfolios at the end of the tumultuous year.

"We've come an awfully long way in 12 months, both in terms of equity markets and in terms of bonds," said Mark Travis, president and CEO at Intrepid Capital Funds. "I think at this point people are starting to pause and you're not likely to see much of a change in direction for the last few weeks of the year."

Stocks gained Wednesday as the falling dollar boosted commodity stocks and a rise in wholesale inventories and an upgrade of 3M provided some optimism.

Jobs market: The number of Americans filing new claims for unemployment rose last week to 474,000 from 457,000 in the previous week, the Labor Department reported. Economists expected claims to fall to 455,000, on average, according to a Briefing.com survey.

However, continuing claims, the number of Americans receiving benefits for a week or more, declined more than expected. Continuing claims fell to 5.157 million from 5.460 million in the previous week. Economists expected 5.450 million claims.

Economy: Foreclosure filings fell 8% in November from October, according to RealtyTrac, an online marketer of foreclosed properties. That means November is the fourth month in a row in which foreclosure filings have dropped.

But foreclosures are still up 20% from a year ago.

Treasury Secretary Timothy Geithner is speaking before the Congressional Oversight Panel about the government's bailout of the financial system. On Wednesday, Geithner said the Troubled Asset Relief Program (TARP) will be extended through Oct. 2010. It had been set to expire at the end of this month.

Also Wednesday, the Congressional Oversight Panel said that while TARP helped stabilize the banking system, it failed to boost spending or stop foreclosures.

In other news, the Commerce Department reported that the nation's trade gap narrowed in October to $32.9 billion from a revised $35.7 billion in September, thanks to a jump in exports. Economists thought it would widen to $36.8 billion, on average.

The flow of funds report from the Federal Reserve is due around noon. The report is likely to show that household net worth continued to fall in the second quarter, along with home values.
0:00 /5:17Make money in 2010

Companies: Ciena (CIEN) posted a wider-than-expected fiscal fourth-quarter loss as a result of rising costs. The networking gear maker also forecast better-than-expected revenue in the current quarter. But investors focused on the loss, sending shares lower in active Nasdaq trading.

AOL (AOL) began trading Thursday after completing its spinoff from (CNNMoney.com parent) Time Warner (TWX, Fortune 500) Wednesday, ending what is considered to be one of the worst mergers in corporate history. Shares fell 2%.

Warehouse club operator Costco (COST, Fortune 500) posted fiscal first-quarter earnings of 60 cents per share versus 65 cents a year ago, in line with analysts' estimates.

Market breadth was positive and volume was moderate. On the New York Stock Exchange, winners topped losers two to one on volume of 330 million share. On the Nasdaq, advancers beat decliners by a narrow margin on volume of 690 million shares.

World markets: Overseas markets were mixed. In Europe, London's FTSE 100 rose 0.6%, the German DAX rose 0.6% and France's CAC 40 rose 0.5%. Asian markets ended lower.

Commodities: Gold prices rallied and oil prices dipped, giving up bigger morning gains after the dollar turned positive. Dollar-traded oil and gold prices tend to move in the opposite direction of the dollar.

COMEX gold for February delivery rose $5.70 to $1,126.60 an ounce. Gold closed at an all-time high of $1,218.30 an ounce last week.

U.S. light crude oil for January delivery fell 37 cents to $70.30 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices fell, raising the yield on the 10-year note to 3.48% from 3.42% late Wednesday. Treasury prices and yields move in opposite directions.

More bumps ahead for Chrysler

2009-06-10T15:47:00.001-07:00

Chrysler, which has endured more perils than Pauline, announced Wednesday that it has finalized its global alliance with Fiat, its last obstacle to emerging from bankruptcy.

Everyone in Auburn Hills who still has a job must feel relieved. In the past 24 hours, Chrysler had endured a challenge from secured creditors that wound up in the Supreme Court, as well as opposition from 789 of the dealers whom it is terminating.

Charged with running the new Chrysler Group LLC is a leadership team varied enough to resemble one of those old Hollywood World War II bomber crews.

At the top are chairman C. Robert Kidder, an American industrialist, and CEO Sergio Marchionne of Fiat, an Italian industrialist. The nine-member board consists of four directors chosen by the U.S. government and one by the Canadian government, three Fiat directors, and one from the United Auto Workers union. Among the groups left unrepresented: unhappy buyers of Chrysler products; legacy representatives from former owners Daimler and Cerberus; Bob Lutz, Tom Gale, and other members of Chrysler's 1990s "dream team;" and of course those 789 angry dealers.

Give Marchionne points for candor. In a news release, he admits that the alliance "does not solve every issue faced by the automotive industry today." But in the same breath, he praises the alliance as possessing "first class technology, a devoted workforce, improved efficiency and an unyielding passion for building great cars."

He's been busy, so I guess he didn't have time to read the Obama administration's report on Chrysler published March 30. A number of points:

* Far from possessing great technology, Chrysler spends just over 3% of its revenue on R&D vs. 4%-5% for Toyota and Honda. The government believes that Chrysler "will struggle to comply with increasing fuel efficiency standards."

* Chrysler may have a devoted workforce, but it's certainly a small one. The report found that Chrysler dedicates only half as many engineers to each vehicle platform as GM does. That limits its ability to innovate and develop new product.

* Using fewer engineers may boost efficiency in product development but it doesn't help manufacturing efficiency. The Obama auto team found that increased flexibility in manufacturing is critical but "Chrysler has not invested significantly in common architectures and flexible plant manufacturing capacity."

* Apparently, quality is not one of the ingredients in "a passion for building great cars." Chrysler's current quality scores "significantly lag competitors," according to the Obama team. Since 40% of its quality problems are design related, they typically don't get fixed until a new model is developed. Evidence suggests that Fiat is also a laggard in this category.

At this point in its history, Chrysler is the foster child of the auto industry. It was abused by Daimler, which didn't understand how to nurture its creative strengths. And then it was starved by Cerberus, which had dreams of rebuilding an industrial icon that turned into a nightmare when auto sales cratered.

To use an even harsher metaphor, Chrysler looks like war-torn Europe, trying to rebuild after World War II. Its plants have been shut down for weeks, supplies of cars and parts have been dwindling, and employees have been fleeing, either voluntarily or otherwise.

If Marchionne can produce his own Marshall plan to rebuild this company, he will have pulled off the greatest automotive turnaround since Carlos Ghosn rescued Nissan a decade ago. Or since Lee Iacocca saved Chrysler in 1979 and again in 1991.

It will take hard work, inspiration, and a good deal of luck. A good place to start would be a sober assessment of Chrysler's strengths and weaknesses that can be translated into a compelling sales proposition for potential customers. Chrysler needs to leave its old illusions behind as it goes forward in tandem with Fiat.

Stocks get high on Lowe's

2009-05-18T20:22:00.000-07:00

Stocks rallied Monday, with the Dow adding 350 points after positive news about the U.S. housing market, including an upbeat profit forecast from Lowes, as well as an upgrade of Bank of America, encouraged investors to step back into the market after last week's selloff.

The Dow Jones industrial average (INDU) gained 235 points, or nearly 2.8%. The S&P 500 (SPX) index rose 3% to close above 900, bringing the average back into positive territory for the year. The Nasdaq composite (COMP) advanced 3.1%.

Stocks slumped last week after worse-than-expected reports on retail sales, housing and weekly jobless claims put investors on the defensive.

But a big rally in Indian markets helped set Monday's bullish tone early on. The buying gained momentum in afternoon trading with retail and banking shares gaining ground.

"I think we're seeing a bounce after the weakness last week," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. "For investors who think the market is going to continue higher, now might be a good time to get back in at prices that are a bit lower."

Tuesday brings readings on new home construction and building permits in April. Companies reporting quarterly results include Dow components Home Depot (HD, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500).

Housing: Lowe's (LOW, Fortune 500), the No. 2 home-improvement retailer, projected a higher fiscal second-quarter profit after posting a 22% decline in the first quarter that still managed to top analysts' forecasts. Shares rose 8%.

"The housing issue is front and center in the economic recovery," said Quincy Krosby, chief investment strategist at The Hartford. "Lowe's is a major player in that space and their comments are important."

Two private reports helped bolster confidence in the housing market. The National Association of Home Builders said its index of homebuilder confidence rose for the second month in a row. Separately, the NAHB said home prices are at their most affordable in nearly two decades.

Banking: Shares of financial services companies got a boost after Bank of America (BAC, Fortune 500) was upgraded to "buy" by Goldman Sachs (GS, Fortune 500). Analysts said the bank will be able to raise needed capital thanks to gains in mortgage and capital markets activity. BofA gained 10%.

Financial holding company State Street (STT, Fortune 500) announced a $1.45 billion stock offering and said it would also offer non-guaranteed senior notes. The company said it plans to repay its government bailout funds.

Signs of life in California real estate

2009-04-03T09:35:00.000-07:00

No state has been harder hit by the housing bust than California.

It has piled up more foreclosures and has endured among the worst home-price declines. The median price of a single-family home sold in February was $247,590, down 41% from 12 months earlier, according to the California Association of Realtors (CAR).

And home construction in the Golden State has nearly vanished: December housing permits shrank to about a quarter of what they were during the boom years, according to the National Association of Homebuilders.
0:00 /3:17Housing on the rebound?

But there are signs that California's housing market may be coming out of this tailspin: Sales volume is increasing, investors are returning and inventory is shrinking.
Bringing back buyers

Low prices have brought out droves of buyers. In February, they purchased more than 600,000 homes, some 80% more than they bought in February 2007, according to CAR. And most of this activity is where prices are off 40% to 60% from their peaks.

In the Sun City area of Riverside County, for example, prices have fallen more than 35% over the past 12 months. Two-thirds of February's sales in the area were of foreclosed properties owned by banks, according to Chuck Whitehead, broker with Coldwell Banker Associated Brokers.

"The sales rebound is largely centered around areas that have experienced the biggest impact from the subprime crisis," said CAR chief economist Leslie Appleton-Young.
How low can home prices go in your city?

In more stable communities, where fewer homes were saddled with toxic mortgages, prices have not crashed as badly and sales are rebounding more slowly. But foreclosures still account for a significant portion of sales, according to Phil Jones, a broker with Coldwell Banker Coastal Alliance in Long Beach.

Most analysts foresee continued price declines in California, according to Nicholas Retsinas, director of Harvard's Joint Center for Housing Studies. "But [there'll be] a slowing of that decline, which portends the end of price drops."

That may already be happening in Long Beach, according to Jones. The measure he uses to judge market trends there, price per square foot, turned up in February, growing 5% to $360.

"Every one of my agents is very busy," Jones said.
Investing 2.0

Another positive sign that markets don't have much further to fall is that investors are returning to some markets.

"I spoke with one investor who is putting together a group of buyers and they're ready to get back into the market," said Jones. "They're planning to buy single-family homes in bulk."

John Dugan is one such investor. The San Francisco-based medical supplies salesman is using a portion of his Entrust Group-managed IRA to buy townhouses in the Sacramento area.

So far he's purchased three 840-square-foot, two-bedroom, one-bath duplexes. He paid just $35,000 to $80,000 a piece - down from their $180,000 to $200,000 selling prices a few years ago.

He paid cash for the first property and rents it out for $750 a month, a profit of $550 after dues and common charges. That's a 19% return on investment, without figuring on appreciation.

"This kind of pricing is something you only think of as Midwestern, not Californian," he said.
Supply dropping

The booming sales have whittled away existing home inventory to just six and a half months - down from 15 months a year ago.

"Typically, I would describe a normal market as having a six to seven month supply of homes," said Appleton-Young. "We have that now."

California's inventory now compares favorably with the rest of the nation, where there's a 9.7 month supply of homes on the market, according to the National Association of Realtors.

One wildcard, however, is that banks have kept many repossessed homes off the market. "Banks are spoon feeding them out very slowly so they don't overload the market," said Whitehead. But, he added, if they release a lot of properties during the heavy spring buying season, they "will be eaten right up by buyers."
Could the end be near?

All of those factors add up to a more optimistic forecast for California, which is seen as a harbinger of things to come for the rest of the country.

Appleton-Young said that while home prices should continue to decline for the rest of 2009, she predicts that the pace of decline will slow. In total, she's predicting a total loss of 19% for the year. But, "I think we could see home price stabilization by early next year," she said.

If that happens in California, it could spread to the rest of the hard-hit Sun Belt markets - and beyond.

"California was the pace setter for lots of the mortgage products that went toxic," said Retsinas. "The sense is if the problems can be addressed there, the rest of the country will follow."

Obama tax panel on treasure hunt

2009-03-27T08:41:00.001-07:00

President Obama has now added tax reform to his to-do list.

The administration said this week it will form a task force to propose ways to simplify the tax code, reduce evasion, close loopholes and make changes in corporate breaks.

One overarching end-goal: Raise revenue.

Obama isn't setting a revenue target but is placing two constraints on the task force's efforts: Members may not propose tax increases for 2009 and 2010; and beyond 2010, they may not propose tax increases on families making less than $250,000.

A major focus for the task force will be to reduce the estimated $300 billion-a-year tax gap -- the difference between what individual and corporate taxpayers owe and what they actually pay.

"Three hundred billion a year or more is a lot of money, and we are interested in being as aggressive as possible in trying to reduce that number," White House budget director Peter Orszag said.
Closing the gap

Reducing the tax gap is far easier said than done.

"Managing to make headway to reduce that gap often means difficult reforms," said James Poterba, president of the National Bureau of Economic Research and a member of President Bush's tax reform panel created in 2005.

The biggest reason for the gap is underreporting of income. There's a high rate of compliance when it comes to income reported by third parties, such as employers reporting workers' incomes on W-2s.

But the compliance is much lower in cases when there's no third-party reporting, such as with small business owners who do mostly cash transactions. The cash economy may account for over $100 billion of the annual tax gap, according to testimony from Nina Olson, the National Taxpayer Advocate.

The IRS is already working to improve compliance. For instance, starting in 2011, brokerages will be required to report taxpayers' cost basis when they sell a publicly traded security. That will make it easier for the IRS to verify capital gains income.

Boosting third-party reporting in areas where it is lacking means more work and expense for someone and almost certainly "will bump into [resistance] from those required to do the reporting," Poterba said.

Of course, the gap isn't all due to intentional tax avoidance. Some of it comes from honest mistakes by filers confused by a tax code that is almost universally acknowledged to be maddeningly complex.

Simplifying the code may actually help narrow the tax gap since currently "people don't perceive the tax code to be fair and that encourages non-compliance," said Len Burman, co-director of the Tax Policy Center.

The perception is that the code now allows too many people to escape paying their fair share. And where there are popular tax breaks to be had, they often come with Twister-like eligibility requirements that can qualify or disqualify tax filers seemingly arbitrarily. And where different credits or deductions target similar groups -- such as retirement savers or low-income workers with kids -- the rules for each are different.

The task force will be charged with suggesting ways to streamline those types of credits.

But what the task force may find is that behind every Byzantine requirement is a rationale and a group that lobbied for it.

"What looks like simplification to one person looks like a tax increase to another," Poterba said.

So, how much of the $300 billion-a-year tax gap can be recouped realistically?

Poterba says he's not sure. "There's not one magic bullet," he said, noting that it takes serious time and effort to change individual provisions in ways that make sense in the broader scheme of things.
Targeted changes more likely than overhaul

The members of the task force will come from the Presidential Economic Recovery Board, which is headed by former Federal Reserve Chairman Paul Volcker. It will present its proposals to Obama on Dec. 4.

Given the president's mandates and the many urgent priorities facing lawmakers, the task force's recommendations are likely to be less far-reaching than those of President Bush's tax reform panel. The Bush panel proposed ways to change and simplify not only individual tax measures but also considered alternative structures for the tax system.

"To get fundamental tax reform you really need the political stars to line up in just the right way. ... It also requires concentrated attention from the political process. It requires a fair amount of heavy lifting," Poterba said.

Those stars were not aligned when Poterba's panel put forth their proposals in November 2005. Nothing came of their report and Bush made little or no mention of it after the day it was presented. But tax experts praised the group's efforts, and Burman thinks there are a lot of ideas in their work that could serve as good starting-off points for Obama's task force.

Even if the Obama task force recommends only targeted changes to the tax code, the administration will still need to get the House and Senate on board in many cases.

It hasn't gotten off to the most auspicious start. The announcement of the task force appears to have come as a surprise to leading lawmakers, according to Congress Daily.

The top Senate Democratic tax writer indicated that the panel could be constructive, but he would prefer they offer a broad set of principles rather than specific tax changes.

"We'll certainly look at it, but we're the Congress, we'll do what we think makes sense," Senate Finance Chairman Max Baucus, D-Mont., told reporters.

"Springing a tax reform panel without talking to [leading tax writers on the Hill] is not politically astute," said Anne Matthias, director of research at Concept Capital. "But it doesn't mean [the panel's work] won't end up being important."

The Great Recession

2009-03-26T09:17:00.001-07:00

Is this the worst economy since the Great Depression? And what are the chances of the economy falling into another depression?

The answer to the first question is fairly clear. In most ways that matter to economists and average Americans, this is the worst economic crisis since the Depression.

The answer to the second question is not as clear. While the National Bureau of Economic Research officially declares the beginning and end of recessions, nobody does that for depressions.

Still, the general consensus of economists is that another depression is not likely. But the risks are greater than they were only a few months ago.
Why this recession is so bad

First things first: Even though it may seem obvious to most that this is the worst downturn since the Great Depression, the economy has experienced other serious recessions in the past, particularly in the mid-1970s and early 1980s.

But this recession dwarfs those two for several reasons.

In terms of length, the longest post-Depression economic decline was 16 months, which occurred in both the 1973-75 and 1981-82 recessions. This recession began in December 2007, which means that it will enter its 17th month next Wednesday.

The current recession is also more widespread than any other since the Depression. The Federal Reserve's readings show that 86% of industries have cut back production since November, the most widespread reduction in the 42 years the Fed has tracked this figure.

What's more, every state reported an increase in unemployment this past December, the first time that has happened in the 32 years that records for unemployment in each state have been kept.
0:00 /3:54Jobless - it feels so bad

"This is important because there's nowhere you can move to find a job," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

Finally, during the past nine months, the drop in household wealth has been larger since anything on record in the post-World War II period.
Why this won't be another depression

So far during this recession, the nation's gross domestic product, the broadest measure of economic activity, has dropped about 1.7%. Forecasts of experts surveyed by the National Association for Business Economics work out to about a 3.4% decline in GDP over the life of this recession.

To be sure, there already have been some quarters where the drop was much more severe. The government will report its final revision of GDP for the fourth quarter of 2008 and economists are expecting that report to show an annual rate of decline of 6.6%. And some economists think the drop in the first quarter could be even greater.

But measuring the drop in economic activity from top to bottom is how economists judge a recession's depth. And a 3.4% drop would be the worst since World War II, and far worse than the average recession in that period.

Still, that's a long way from the 26.5% drop in GDP that took place between 1929 and 1933.

One of the main reasons why economists think another depression could be avoided is that it will take more than just a sharp decline in consumer spending and household wealth to spark a depression.

Even though household net worth has fallen a record $11 trillion, or 18%, during the course of this recession, the broader economy can weather such a shock.

Historically, stock market crashes and bursting housing bubbles haven't necessarily led to depressions. It takes a variety of economic factors and policy decisions to turn a recession into something even more serious.

"I don't know if you can make a causal link between a loss of wealth and a depression," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.
Learning lessons of the 1930s

Significant policy changes since the 1930s will also cushion the blow.

Unemployment insurance, Social Security payments and larger government at the federal, state and local levels keep money flowing into the economy even as consumers and businesses pull back on their own spending.

"There's a lot more safeguards in place," said Keith Hembre, chief economist at First American Funds.

Hembre said the $787 billion stimulus bill passed by Congress in February will also spur more economic activity down the road.

In addition, the Federal Reserve, led by Great Depression expert Ben Bernanke, has pumped trillions of dollars into the economy with new lending programs the central bank has never tried before. That has swelled the supply of money. By way of contrast, the money supply tightened during the Great Depression.

There were many other policy mistakes made in the 1930s that economists say are not being repeated today, including stiff tariffs that killed international trade and government imposed limits on prices and production levels.

Even if Congress imposed "Buy American" provisions in the public works paid for by the stimulus bill, there is no call to move back to the strict protectionism of the 1930s or production and price controls.

"I'd like to think we've learned something, so in terms of policy we're doing better," said Achuthan.

Still, even if the United States does not enter another depression, that doesn't make the current economic crisis any less painful for many Americans. Also, few economists are predicting an end to the recession anytime soon.

Hembre said he is worried that the country could be in a period of prolonged economic stagnation similar so the so-called lost-decade that Japan suffered starting in the 1990s. He said continued weakness in housing and high debt levels by households and governments could hold the economy back for some time.

And some economists aren't completely ruling out another depression.

In a paper for the National Bureau of Economic Research last month, Harvard University professors Robert Barro and Jose Ursua put the chance of a minor depression (which they defined as a GDP decline of at least 10%) at about 20% and a 3% chance of a major depression (defined as a GDP drop of at least 25%). Moody's Economy.com is forecasting a 10% chance of a depression.

Stocks retreat after rally

2009-03-24T07:24:00.000-07:00

Stocks tumbled Tuesday morning as investors showed caution following the best day on Wall Street in four months.

The Dow Jones industrial average (INDU) lost 70 points, or 0.9%, in the early going. The S&P 500 (SPX) index lost 10 points, or 1.2%. The Nasdaq composite (COMP) lost 19 points, or 1.2%.

Investors are looking to Washington, where Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner are testifying at a Congressional hearing about the government's intervention at American International Group.

Stocks around the world soared Monday, boosted by the U.S. Treasury's plan to remove toxic assets from the balance sheets of banks. The Dow surged 6.8% while the S&P 500 rallied 7.1%. But investors may be ready for a rest after the dramatic advance. Full story

"It wouldn't be a big surprise if there was a negative hangover in the following session," said Ken Wattret, economist with BNP Paribas in London. "Given the scale of the preceding day, you would expect to see a decline.

But given Wall Street's gains over the last two weeks, Wattret detected a bit of optimism in the air, going forward.

"There's a feeling that we're getting to the end of the worse of the news," he said. But he noted that there's plenty to be pessimistic about, including skepticism over whether the toxic assets at the center of the government's plan - and the inspiration for Monday's rally - will ever rise in value.

Financial shares - leaders of the rally Monday - led the decline Tuesday, with Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) among the losers.
0:00 /01:34AIG back on lawmakers' minds

AIG hearing: Investors will be watching Bernanke and Geithner. Both will testify at a House Financial Services Committee hearing on AIG (AIG, Fortune 500), due to start at 10 a.m. ET. Full story

AIG has been given access to $182 billion in taxpayer funds in the past six months. Recently it paid out $165 million in retention bonuses to employees in the company's financial products division. Those bonuses were written into employee contracts written in early 2008.

But Dan Cook, senior market analyst at IG Markets in Chicago, believes the government has already wasted too much time on the topic of AIG bonuses - and Tuesday's hearing won't help the stock markets.

"We still have an opportunity to wreck the run we've been on with this AIG hearing," he said. "It's such an emotional issue, this AIG thing, but if you look at the [total] cost, it's a drop in the bucket."

World markets: Asian shares extended gains, rising to their highest level in two months. Japan's Nikkei added 3%. Major European markets were mixed in morning trading, with a decline in London's FTSE, but increases in the XETRA-DAX in Hamburg and the CAC in Paris.

Oil and money: Oil prices fell 55 cents a barrel to $53.25. The dollar rose versus the euro and the yen, but fell against the British pound.

U.S. seizes 2 big credit unions

2009-03-20T18:32:00.000-07:00

The federal government, in its latest effort to prop up the financial system, took over two big wholesale credit unions Friday with combined assets of $57 billion.

U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., were placed under conservatorship "to stabilize the corporate credit union system and resolve balance sheet issues," according to the National Credit Union Administration.

The administration is a federal agency that regulates, charters and supervises federal credit unions.

Neither of the failed institutions serve consumers directly. As corporate credit unions, they service the credit union system. Credit unions count 90 million members nationwide.

Members of the two credit unions will not experience any disruption in service and are free to make deposits and access funds, according to the regulator.

U.S. Central Federal Credit Union has about $34 billion in assets, with 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members.
0:00 /3:41Bypassing the banks

The board of the NCUA analyzed the health of the mortgage and asset backed securities held by all corporate credit unions starting on Jan. 28. The board determined that the two credit unions taken over had "an unacceptably high concentration of risk," according to the statement.

Madoff accountant turns himself in

2009-03-18T09:05:00.001-07:00

David Friehling, accountant for Bernard Madoff, turned himself in on Wednesday to answer charges that he "rubber stamped" the Ponzi schemer's falsified numbers and lied about it, said federal prosecutors.

Friehling was charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports to the Securities and Exchange Commission, according to the U.S. Attorney for the Southern District and the Federal Bureau of Investigation.

If convicted, Friehling could face a sentence of up to 105 years.
0:00 /1:43Liquidating Madoff's assets

"Mr. Friehling is charged with crimes that represent a serious breach of the investing public's trust," said Acting U.S. Attorney Lev Dassin, in a prepared statement.

"Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff's business," said Dassin. "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money."

For his services, Madoff's firm paid Friehling about $12,000 to $14,500 per month between 2004 and 2007, the prosecutors said.

Friehling could not immediately be contacted by CNNMoney.com. A spokesman for the U.S. Attorney's office said he was unable to identify Friehling's lawyer.

Friehling is the first person after Madoff charged with having some connection to the world's biggest Ponzi scheme.

He was also an investor with Madoff's firm, according to prosecutors. They say Friehling and his wife had an account of more than $500,000.
Madoff appeals for bail

Bernard Madoff is trying to get out of jail again. He has been locked up since March 12, when he pleaded guilty in U.S. District Court to all 11 criminal counts related to his long-running, multi-billion dollar scheme. He has spent the entire time at the Metropolitan Correctional Center in lower Manhattan.

But Madoff believes he should get out of jail until June 16, when he faces sentencing of up to 150 years. On Thursday morning, he is scheduled to appear in the U.S. Court of Appeals for the 2nd Circuit to appeal the revoking of his $10 million bail.

The bail was taken out against his $7 million Manhattan apartment, as well as his wife's properties in Montauk, N.Y. and Palm Beach, Fla. Madoff had lived in luxury with his wife Ruth in the Manhattan apartment since his December arrest, avoiding jail even after investigators caught him mailing more than $1 million worth of diamond-studded jewelry to relatives.

Now, investigators are tallying up Madoff's assets, valued at well over $800 million, so they can be liquidated and allocated to the thousands of victims who entrusted his firm with their money. Investigators are still trying to determine how many people were victimized and how much money was stolen.

In court, Madoff confessed to running a Ponzi-style scheme, where he used fresh investments to pay off his more mature investors, while creating the appearance of legitimate returns. These investors received statements claiming that their accounts had grown in value. But in reality, Madoff said he never bought securities, and therefore never invested his clients' money.

AIG pledges to revamp bonuses

2009-03-15T09:40:00.000-07:00

Under pressure from the Treasury, insurance giant AIG - a recipient of at least $170 billion in federal bailout money - is scaling back bonuses and compensation for some of its top-earning employees.

CNN on Saturday obtained a letter from AIG Chairman and CEO Edward Liddy to Treasury Secretary Timothy Geithner, in which Liddy pledges to reduce 2009 bonus payments - which AIG refers to as "retention payments" - by at least 30 percent.

He also addresses steps to limit compensation in AIG Financial Products, the London-based unit responsible for issuing the risky credit default swaps - basically insurance against losses from bad loans - which on several occasions has brought the company to the brink of collapse.

In the letter, Liddy says the unit's 25 highest-paid contract employees will reduce their salaries to $1 this year and all other officers in the unit will reduce their salaries by 10 percent. Other "non-cash compensation" will be reduced or eliminated.

Liddy, who took the helm of the company in September after it had nearly failed, also refers to a conversation he had with Geithner last week, which the AIG chief describes as "a difficult one for me."

Liddy says in the letter that he personally does not receive a bonus, but that some bonus payments are unavoidable, because they are binding legal obligations of the company, and "there are serious legal, as well as business consequences for not paying."

Some of the bonus payments are due on Sunday, according to the letter.

During the conversation Wednesday, Geithner told Liddy that millions of dollars in bonuses to senior employees were unacceptable and needed to be renegotiated, according to a senior administration official.

While the bonuses were never a secret, the official told CNN, Geithner felt giving them "was still inappropriate, given the state of the economy and the recent restructuring of the AIG agreement."

Liddy, however, makes clear that he made the changes with trepidation, saying in the letter: "I would not be doing my job if I did not directly advise you of my grave concern about the long-term consequences of the actions we are taking today," specifying that the company will have trouble attracting and retaining "the best and the brightest ... if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."

The company, which lost a record $62 billion dollars in the fourth quarter of 2008, has more than 74 million insurance policies issued in 130 countries around the world.

GE loses top rating in downgrade

2009-03-12T08:32:00.000-07:00

Conglomerate General Electric Co. lost its perfect credit rating Thursday when rating agency Standard & Poor's downgraded the company.

S&P said it lowered the company's rating to "AA+" from "AAA," because it expects the worsening economy to cause GE's holdings to deteriorate in value. GE's finance arm GE Capital Corp. (GECC) also received a one-notch downgrade to AA+.

"We believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe," said Standard & Poor's credit analyst Robert Schulz. "This will result, in our opinion, in rising credit losses across key segments of finance portfolio."

The rating agency said that it still believes that GE is on solid footing, predicting that the multinational company will be able to generate about $2 billion in cash flow due to its huge reduction of its dividend to 10 cents from 31 cents late last month.

"We expect GE's commitment to maintaining very high credit quality, the still-solid prospects for many of its business segments (despite economic weakness), and the company's ample financial flexibility should continue to support the ratings at the current level and the stable outlook," added Schulz.

GE was one of only six American companies to hold AAA status. The five remaining are Berkshire Hathaway Inc. (BRK.A), Automatic Data Processing (ADP, Fortune 500), Exxon Mobil Corp. (XOM, Fortune 500), Johnson & Johnson (JNJ, Fortune 500) and Microsoft Corp (MSFT, Fortune 500).

An AAA credit rating allows a company to borrow at cheaper rates, but it also requires a significant amount of cash on hand, which GE was unable to maintain with its escalating debt.

GE said it will not change its business practices despite the downgrade, noting that it has taken steps to ensure that its balance sheet and liquidity position were bolstered.

"As we have previously said, we are prepared to fund the company as a double-A, but we will continue to run GE with the disciplines of a triple-A company, which means low leverage, high liquidity and strong risk disciplines," said Jeff Immelt, GE chief executive. "While no one likes a downgrade, this review and rating reaffirm the relative strength of the company."

John Bergenson, portfolio manager of Albion Management Group, said GE's downgrade was expected.

"It's not that much of surprise, because of their debt situation and the amount of fear that's out there," said Bergenson, who runs a mutual fund with GE as its top holding. "In the current environment, with that amount of debt, it's probably been due for a while."

Shares of GE (GE, Fortune 500) soared more than 11% in early trading. Bergenson said investors felt relief after worrying GE would be downgraded by several notches instead of just one.
Trouble with AAA rating

To maintain the rare AAA rating, experts say GE had to exert extra caution, costing the company billions of dollars in security measures.

"AAA has a sort-of saintly symbolism, -- usually only governments have AAA ratings," said Sylvain Raynes, principal of R&R Consulting, a company that helps clients value its securities. "A company that wants to be AAA is giving up on things that are important to most companies, like leverage and experimenting with new systems that could be fly-by-night."

Ann Rutledge, also of R&R Consulting, called the downgrade "a defining moment for GE," expecting more downgrades from other agencies to come, followed by GE's credit rating slipping even further in the future.

"No one is going to panic here," said Rutledge. "GE will have to pay a little more for capital, and the transcendental feeling of comfort and security is gone, but the impact is more qualitative and quantitative."

Still, when insurer American International Group (AIG, Fortune 500) lost its AAA rating in 2005, the company started on a downward spiral that forced it to raise more and more capital. Bond insurer Ambac Financial Group (ABK) lost its AAA rating in January of 2008, and its stock is currently trading at less than $1 a share.

"No one believed in AIG or Ambac, because they were houses of cards," said Rutledge. "But GE is so far away from not paying its bills, it's ridiculous. GE already began taking measures since it was put on credit-watch negative."

Bergenson thinks that GE needs to focus on finding a way to spin off its ailing GE Capital wing before it attempts to reclaim its AAA rating.

"The unfortunate situation GE is in is they bet too big on the AAA rating," he said. "I'm hoping that they just deal with what they need to within the company and forget about the AAA for the short-term. But it wouldn't surprise me if they break their back to get the AAA back."

Key global bankers' meeting reported

2009-03-08T07:52:00.001-07:00

Chief executives of leading Japanese, European and U.S. banks will meet in London to discuss the future of the financial system, the Nikkei newspaper reported Sunday, as the global financial crisis prompts a barrage of new regulatory proposals for the sector.

The Japanese business daily said the British government would host the meeting on March 24, after a Group of 20 (G20) finance ministers meeting in London next weekend and ahead of a summit of G20 leaders there on April 2.

The G20 summit of big developed and developing countries in London aims to put the world economy on a path to recovery, with banks facing strong calls for new regulations ranging from increased supervision of the financial sector to limits on executive bonuses.

Invitations to the meeting of bankers had been sent to leading institutions including JPMorgan Chase (JPM, Fortune 500) and HSBC (HBC), the newspaper said, without naming any sources.

Mitsubishi UFJ Financial Group president Nobuo Kuroyanagi would attend the meeting, which the paper said would discuss regulations to prevent further crises similar to the meltdown of the subprime mortgage market.

The London summit will follow last November's G20 crisis meeting in Washington, and aims to agree on coordinated actions to revive the global economy, regulate the financial sector and principles for reforming international financial institutions.

In the lead up to the summit, European leaders have called for tighter global banking supervision while President Obama has urged a sweeping overhaul of Wall Street regulations.

The European Commission's proposals range from tougher bank capital rules to streamlining supervision, more transparency in derivatives markets and proposals to penalize banks whose remuneration policies encourage excessive risk-taking.

China said Saturday it wanted a major say in talks about reworking the global financial order and there should be more power for developing countries in the International Monetary Fund and World Bank.

Obama to name experts for economic panel

2009-02-06T05:10:00.000-08:00

President Obama plans Friday to name business executives, academics and labor leaders to an advisory panel that will help guide his effort to rescue the economy and rebuild the shattered U.S. financial system.

Former Federal Reserve Chairman Paul Volcker was tapped by Obama in November to lead the Economic Recovery Advisory Board, which is modeled on a board created in the Eisenhower administration to advise the White House on intelligence matters.

Volcker is to join Obama for an 11:15 a.m. ET event to introduce the other 15 members of the economic panel.

According to the White House, the members will include Robert Wolf, chairman and chief executive of UBS (UBS) Group Americas, and Jim Owens, chairman and chief executive of Caterpillar Inc. (CAT, Fortune 500), and labor leaders such as Anna Burger, secretary-treasurer of the Service Employees International Union.

Penny Pritzker, chairman and founder of Pritzker Realty Group who was also the finance chair of Obama's presidential campaign, will sit on the board as will Laura D'Andrea Tyson, a former Clinton administration economist now at University of California, Berkeley.

The panel includes some officials who served Republican administrations, such as William Donaldson, who was SEC chairman under President George W. Bush and Harvard economist Martin Feldstein, who served in the Reagan administration.

The naming of the advisory board comes amid a slew of data showing soaring job losses and a deepening recession.

Economists are bracing for grim news when the Labor Department issues its January employment report at 8:30 a.m.

Analysts polled by Reuters predicted the data will show U.S. employers slashed another 525,000 workers from their payrolls after cutting 524,000 jobs in December.

Obama is prodding Congress to pass a more than $800 billion package of public works spending projects and tax cuts aimed lifting the economy out of recession.

Meanwhile, Treasury Secretary Timothy Geithner plans Monday to unveil a plan to quell turmoil in the banking system and revive frozen credit markets.

Obama has also said one of his key priorities is overhauling a Wall Street regulatory structure whose laxity he believes helped to set the stage for the financial meltdown.

When he announced the idea of the Economic Recovery Advisory Board in November, Obama said its intent was to help him avoid "insular" government decision-making.

"The walls of the echo chamber can sometimes keep out fresh voices and new ways of thinking -- and those who serve in Washington don't always have a ground-level sense of which programs and policies are working for people, and which aren't," Obama said.

Volcker is among several high-profile players advising Obama on economic policy. The team also includes Lawrence Summers, the former Treasury secretary who is now head of the National Economic Council, and current Treasury Secretary Geithner, who previously headed the New York Federal Reserve bank.

Another important aide is Christina Romer, chairwoman of the White House Council of Economic Advisers and an expert on the Great Depression.

Obama relied heavily on Volcker for advice during the campaign. The 81-year-old former Fed chief gave the Democrat's presidential bid a boost last year with an early endorsement.

As Federal Reserve chairman from 1979 to 1987 under former Presidents Jimmy Carter and Ronald Reagan, Volcker was credited with breaking the back of double-digit inflation through interest-rate rises.

Austan Goolsbee, a longtime Obama adviser, is serving as staff director and chief economist for the economic advisory panel. Goolsbee is also a member of the Council of Economic Advisers.

FDIC closes 1st Centennial Bank

2009-01-26T07:21:00.000-08:00

California banking officials closed the 1st Centennial Bank Friday, the Federal Deposit Insurance Corporation said in announcing the third bank failure this year.

The bank, which has just six branches, will be purchased by First California Bank of Westlake Village, California, the FDIC said.

As of Jan. 9, 2009, 1st Centennial had total assets of $803.3 million and total deposits of $676.9 million. Approximately $12.8 million of that exceeded the insurance limits, the FDIC said.

Three U.S. banks failed in 2007 while 25 were seized by officials in 2008 as a struggling economy and falling home prices took their toll on financial institutions. Only three banks failed in 2007 and none did in 2006 and 2005.

Executives at 1st Centennial were not immediately available for comment.

Microsoft slashes up to 5,000 jobs

2009-01-22T10:42:00.001-08:00

Software maker Microsoft Corp. announced Thursday it will cut up to 5,000 jobs in the next year and a half, or 5.5% of its global workforce, citing further deterioration of global economic conditions.

The company also posted lower fiscal second-quarter earnings that missed analysts' forecasts.

Microsoft will slash 1,400 positions immediately, with the rest of the cuts coming by June 2010. The company also said it will freeze employees' pay in 2009.

Microsoft said it will save about $1.5 billion in operating expenses and $700 million in 2009 capital expenditure from the job cuts and pay freeze.

"Economic activity slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact," said Chris Liddell, Microsoft's chief financial officer, on a conference call. "We are planning for economic uncertainty to continue through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year."

Thursday's was the first mass job cut announcement in Microsoft's 34-year history. Prior to the cuts, Microsoft had been hiring rapidly, growing its global workforce by 14% since September 2007. But even as it cuts staff, the company said it will continue to hire a few thousand employees in the current quarter, mainly in its online advertising division.

Many analysts on the conference call questioned whether Microsoft was cutting enough, given the strong headwinds it is facing in a tough economic environment. Some believe that more cuts could be on the way, as the company takes a slow approach to evaluate its capital situation.

"Obviously, no one has any real visibility as to how things are going to go," said Brent Williams, analyst at The Benchmark Co. "But if they cut too much, too fast, it's going to hurt them."

Shares of the company fell more than 9% in midday on the news.
Earnings disappoint

Microsoft (MSFT, Fortune 500) also announced second-quarter net income of $4.17 billion, down 11% from a year earlier. The company reported earnings per share of 47 cents, missing analysts' estimates of 49 cents, according to a consensus compiled by Briefing.com

The Redmond, Wash.-based company reported revenue of $16.63 billion for the quarter, up 2% from $16.37 billion a year earlier.

The software maker said software sales, including its Vista operating system, slumped 8% on weak PC sales as well as a continued shift toward lower-priced laptop computers.

Microsoft's Online Services division, which includes the online portal MSN and its online advertising sales, continued to lose money - $471 million in the quarter - even as that sector's sales were up 7% from the same quarter a year earlier. Microsoft continued to struggle to compete with rivals Google and Yahoo (YHOO, Fortune 500) in the online advertising business.

But sales grew in other areas. Revenue from its entertainment and devices division, which includes the Xbox 360, rose 3% over the same period a year earlier. Microsoft said holiday Xbox sales were strong, selling a record 6 million game consoles in the quarter.

The company also performed well in its server unit, with revenue growing 15% in that sector.

Still, some analysts question Microsoft's strategy of participating in seemingly every aspect of the tech market.

"In the short term, it's all about PC unit demand, but once they surmount that problem, they go back to their longer-term strategic issues: they can't match the speed, economics, or the quality and reliability of their competitors," said Williams. "They may ultimately suffer a fate worse than death - big, but irrelevant."
Weak sales likely to continue

Microsoft did not offer specific earnings and revenue guidance for the coming quarter "due to the volatility of market conditions going forward," but it said consumer, business and advertising sales will likely continue to decline for at least the next six months.

The company said Xbox sales will probably decline at least through June as well, as consumer confidence and spending wanes.

Microsoft also suggested that investors should not rely on previous fiscal 2009 estimates.

"The economy is resetting to a lower level of consumer spending due to reduced leverage in the economy," said Microsoft CEO Steve Ballmer on the conference call. "Consumers have less money to buy discretionary second and third PCs."

Microsoft's announcement comes a day after rival Apple Inc. (AAPL, Fortune 500) reported net income rose 2% in the most recent quarter, trouncing analysts' expectations. Ballmer noted that Apple's Macintosh computer sales were strong in the quarter, but he predicted that trend may drop off soon.

"The price premiums that people pay for Macs versus PCs will be looked at much more critically in the next two quarters," said Ballmer. "Neither the consumer nor business side is immune to the economic conditions."

Though Ballmer called the current economic dislocation "unprecedented," he called the recent downturn in the tech sector "just a pause."

"Nothing will stop the forward march of our industry or Microsoft," Ballmer said. "There will soon be renewed growth in the tech industry and certainly in Microsoft."

Google (GOOG, Fortune 500) is set to release its quarterly financial report after the market's close Thursday.

The case for bonds

2008-12-12T06:56:00.000-08:00

Boring is beautiful - or so it feels in this time of wild and crazy stock market swings. In this case we're talking about investment-grade corporate bonds, which are dirt-cheap right now for the same reason that stocks are: The market turmoil has pounded down their prices. The result is historic opportunities in bonds issued by blue-chip companies.

Right now investment-grade bonds maturing in ten years or longer are yielding an average 8.4%, according to Barclays, a remarkable 5.7 percentage points more than ten-year Treasuries. "Today's spreads are the highest we've seen since 1931," says economist Michael Darda of MKM Partners, a trading and research firm. Or as bond guru and PIMCO chief Bill Gross keeps saying, stocks are pricing in a recession, and bonds are priced for a depression. A depression isn't likely, so it's time to pounce.

In general, buying individual bonds isn't ideal. You'll need to go through a broker, and the commissions can be high. If you choose that route, you should buy at least four or five issues to diversify and stick with pummeled but steady performers like Verizon Wireless, Comcast, Xerox, and Altria, all of which offer yields of more than 8% on their ten-year bonds.

The best way to buy corporate bonds is through mutual funds. Since they own big baskets of bonds, you won't see your gains evaporate if a few holdings get downgraded or default, a major danger when you own individual issues.

Your choices fall into two broad categories. The first is for the cautious. It consists mostly of what amount to index funds; the securities are highly rated, and the expenses minimal, but the yields are relatively low. Here are two excellent choices: Vanguard Intermediate-Term Investment-Grade (VFICX). More than two-thirds of the holdings - including the likes of McDonald's and Medtronic - are rated A and above by S&P. Expenses are a tiny 0.2% and the 30-day yield stands at 7.5% (as of Dec 4). iShares iBoxx $ Investment Grade Corporate (LQD) tracks a fixed-income index for 100 household names. The portfolio is even more blue-chip than Vanguard's, and the yield is 7.3%.

The second category is for the more adventurous. The managers of these funds select lower-rated bonds that yield far more and even offer an extra kicker in capital gains. T. Rowe Price's Corporate Income Fund (PRPIX) concentrates on the lowest end of investment grade and favors high-yielding bank bonds - including J.P. Morgan's and Bank of America's - reckoning that government aid substantially reduces their risk. Its yield is 8.2%. For investors seeking bigger yields, there is Loomis Sayles Bond Fund (LSBRX). It focuses on beaten-down bonds in solid, noncyclical companies such as Kraft and Verizon. The current yield is a rich 11.2%.

For all the opportunities in corporate bonds, it's worth noting that both Treasury Inflation Protected Securities (TIPS) and municipal bonds are unusually good deals right now. In the case of TIPS, the principal is adjusted in line with the consumer price index, guaranteeing that you won't lose ground to inflation. The yield on ten-year TIPS issued in July is now 1.9%, or just 0.6 point lower than that of a ten-year Treasury, which doesn't offer inflation protection. You can buy TIPS through brokers like Schwab or at www.treasurydirect.gov. Fund investors have lots of attractive, low-expense choices, including Vanguard Inflation Protected Securities Fund (VIPSX) and T. Rowe Price Inflation Protected Bond (PRIPX).

Tax-free municipal bonds also offer extra wallop right now. Munis usually deliver lower yields than Treasuries, but the recent exodus to T-bills and bonds - and growing concerns about state credit ratings (hello, California) - has driven prices south and yields north. A triple-A-rated ten-year muni now yields 4.2%, compared with 2.5% for a Treasury. Add the tax savings, and the effective yield for someone in the highest federal bracket (35%) would be 6.5%. While defaults remain unlikely, we recommend eschewing individual bonds and single-state funds and going with funds that hold munis from across the country, such as Fidelity Tax-Free Bond (FTABX), which has an average annual return of 2.4% over the past five years, or Vanguard Long-Term Tax-Exempt (VWLTX) , which has an average five-year return of 1.8%. Like the TIPS and corporates, the munis are a tad drab; they're not the sort of glitzy investment you brag about at parties. But with their strong yields, that won't matter.

AIG owes Wall Street $10B - report

2008-12-10T08:14:00.000-08:00

Struggling insurance giant America International Group owes Wall Street firms $10 billion from trades that went sour, according to sources cited by The Wall Street Journal.

AIG (AIG, Fortune 500), which is now operating under government assistance, had not previously detailed these losses, which stemmed from speculative investments in mortgage and corporate debt assets, the Journal wrote on Wednesday. And now that those investments have gone south, the company must pay off its investment partners.

However, the Journal reported that an AIG spokesman told the paper that AIG defines the trades not as speculative but as "credit protection instruments." The spokesman also said the company believed it had already disclosed the exposure.

The government's $150 billion rescue package doesn't cover these losses, which raises questions about how AIG will pay off the debts, according to the Journal

Foreclosures soar 76% to record 1.35 million

2008-12-05T08:17:00.000-08:00

A record 1.35 million homes were in foreclosure in the third quarter, driving the foreclosure rate up to 2.97%, the Mortgage Bankers Association said Friday.

That's a 76% increase from a year ago, according to the group's National Delinquency Survey.

At the same time, the number of homeowners falling behind on their mortgages rose to 6.99%, up from 5.59% a year ago, the association said. The weakened economy and mounting job losses are expected to push that number even higher.

"We have not gone into past recessions with the housing market as weak as it is now, so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past," said Jay Brinkmann, MBA's chief economist.

Stocks stage rally

2008-11-18T09:53:00.001-08:00

Stocks rallied Tuesday afternoon as investors welcomed Hewlett-Packard's strong forecast and comments from government officials that the $700 billion bank bailout is working.

The Dow Jones industrial average (INDU) gained 1.7% around 3 hours into the session. The Standard & Poor's 500 (SPX) index added 1.1% and the Nasdaq composite (COMP) advanced 0.4%.

Stocks managed some gains after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke told a House committee that the bailout has been working to help stabilize the financial system, despite recent criticism. FDIC Chairman Sheila Bair is also speaking at the hearing.

Lawmakers are especially concerned by last week's decision to stop buying up bank's troubled assets and instead take ownership stakes in the firms. (Full story)

After all the recent dour news on the economy, investors were probably relieved that the officials were saying something positive, said Kenny Landgraf, principal and founder at Kenjol Capital Management.

"Their assessment seems to be that the bailout has helped," said Landgraf. "The news lately has been so negative that people are just glad they're saying something positive."

He said that Hewlett-Packard's forecast was also helping push stocks higher, with investors scooping up a variety of shares hit in the recent selloff.

Hewlett-Packard (HPQ, Fortune 500) forecast fiscal fourth-quarter profit that is above analysts' forecasts, despite the sagging economy. HP also lifted its fiscal-year 2009 forecast. It was welcome news for tech investors after both Intel (INTC, Fortune 500) and Cisco (CSCO, Fortune 500) warned about weaker sales in the current quarter.

Home Depot (HD, Fortune 500) reported weaker quarterly sales and earnings that nonetheless topped forecasts. The retailer also warned that 2008 earnings per share will plunge 24% from a year ago, due to the anemic consumer spending environment. Yet, investors focused on the positive and the stock rallied 6%.

Stocks slipped Monday in volatile trading on Citigroup's massive job cuts and a weak manufacturing report. The declines sent all three major gauges down by at least 2% and sent the Nasdaq to a fresh 5-1/2 year low.

Automakers: Also Tuesday, Congress begins debating whether to bail out the hard-hit industry with an additional $25 billion on top of the $25 billion General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler have already received.

Senate Democrats and President-elect Barack Obama are in favor of some kind of bailout, while many Republicans would prefer to see the companies file for bankruptcy, restructure and reemerge. (Full story)

Economy: The morning's economic news was far less buoyant than the stock market. Home prices plummeted in the third quarter by a record 9% versus a year ago, amid a flood of foreclosures. On the upside, bargain hunters have been scooping up properties in some of the hardest-hit areas.

A separate report showed that inflationary pressures remain moderate. Wholesale prices posted the sharpest monthly decline on record in October due to the collapse in oil prices over the last four months. But prices excluding food and energy, the so-called "core" reading, rose more than expected.

Other markets: In global trading, Asian markets tumbled and European markets rose in the afternoon.

The dollar gained versus the euro and the yen.

COMEX gold for December delivery rose 30 cents to $742.30 an ounce.

U.S. light crude oil for December delivery rose 53 cents to $55.48 a barrel on the New York Mercantile Exchange, the lowest close since January 2007.

Gasoline prices dipped another 1.9 cents to a national average of $2.068 a gallon, according to a survey of credit-card activity released Tuesday by motorist group AAA. The decline marks the 62nd consecutive day that prices have decreased. During that time, prices dropped by $1.78 a gallon, or 46.3%.

Bonds: Treasury prices gained, lowering the yield on the benchmark 10-year note to 3.61% from 3.65% late Friday. Treasury prices and yields move in opposite directions. (Full story)

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.13% from 0.08% Monday, with investors preferring to take a piddling return on their money than risk the stock market. In September, the 3-month yield reached a 68-year low around 0% as investor panic peaked.

Borrowing rates were little changed from the previous day, with the credit market continuing to stall after a month long improvement. The 3-month Libor rate fell to 2.22% from 2.4% Monday, while overnight Libor was unchanged at 0.4%, according to Bloomberg.com. Libor is a key bank lending rate.

Global markets advance

2008-11-03T04:59:00.000-08:00

Stocks around the world mostly rose Monday, a day before the U.S. presidential election.

U.S. futures, which give an indication of how markets may open when trading begins in New York, were narrowly higher.

European markets edged higher. In midday trading, Germany's DAX and the FTSE 100 in Britain were a shade higher. The CAC-40 in France was little changed.

Major markets in Asia advanced, with South Korea's KOSPI index closing up 1.4% after the government announced a plan to jolt the economy.

The Hang Seng index in Hong Kong finished the session up 2.7%. Markets in Tokyo were closed.

The gains overseas followed a strong finish on Wall Street on Friday. The Dow Jones industrial average, Standard & Poor's 500 and Nasdaq Composite all rose more than 1%.

The rally capped off a strong week at the end of one of the worst months in Wall Street history.

In October, the Dow lost nearly 1,526 points, its worst month ever, according to Stock Trader's Almanac data going back to 1901. On a percentage basis, the decline of 14.1% doesn't rank in the top 10.

The S&P 500 lost nearly 198 points, or 16.9% in the month, to post its worst month ever on a point basis and eighth worst ever on a percentage basis, going back to 1930.

The Nasdaq dropped 361 points, or 17.4% in October, tracking its seventh-worst month ever on a point basis and its fifth-worst month on a percentage basis, going back to its inception in 1971.

Investors are keeping their eye on upcoming rate decisions from the European Central Bank and the Bank of England. Both are expected to lower rates when they meet Thursday.

Central banks worldwide have been slashing rates to combat their weakening economies. The European Commission forecast Monday that the economy in the 15 countries that use the euro will barely grow next year

In the U.S., all attention is focused on the outcome of the presidential election, where the economy is the top issue on voter's minds.

Home prices see another record plunge

2008-10-28T07:32:00.000-07:00

Home prices fell in August for the 25th consecutive month and prices in 10 major markets plunged a record 17.7% year over year, according to a key index of real estate values released Tuesday.

The S&P Case-Shiller Home Price 10-city index dropped 1.1% for the month. The 20-city index recorded a record year-over-year decline of 16.6% with a 1% fall in August.

The indexes compare the sale prices of the same homes each year to determine price trends and are considered one of the most accurate home price gauges.

The hardest hit of all 20 cities on a year-over-year basis was Phoenix, where prices plummeted 30.7% during the past 12 months. Las Vegas prices plunged 30.6% and Miami sank 28.1%.

The cities that held up the best were Dallas, which saw a decline of just -2.7%, Charlotte NC (down -2.8%) and Boston (off -4.7%). No city showed a price gain during the last 12 months.

In August, San Francisco saw the biggest price declines, down 3.5%. Phoenix (-2.9) and Las Vegas (-2.4) also reported sizable losses for the month. Two cities showed gains in August; Cleveland prices rose 1.1% and Boston prices inched up 0.1%.
Price declines picking up

Of course, the August indexes don't reflect the financial market meltdown that hit in September and severely restricted access to credit, according to Richard DeKaser, chief economist for National City Corp (NCC, Fortune 500). He believes the pace of price declines has picked up since then.

"There are two explanations for these steeper declines," he said, "neither of which are encouraging. One is that the difficulty in obtaining credit has further constricted demand. The second is that home sellers are finally capitulating on prices. They've been holding out for months, refusing to sell except at their prices. Now they're throwing in the towel."

Indeed, the California Association of Realtors reported last week that home sales volume jumped a whopping 97% in September compared with the same period a year ago. But the median price of an existing home has fallen 41%.

If that trend spreads to other states, price weakness could last for many more months, even as sales volume picks up. What happens after that largely depends on the confidence bolstering effect of the government economic stimulus packages, according to DeKaser.

"I'm optimistic," he said. "More credit will be available and inventories will be reduced. The deterioration will give way to a more balanced market."

Regional banks get over $18 billion

2008-10-27T11:17:00.000-07:00

A diverse group of roughly a dozen regional banks announced Monday that they will get more than $18 billion in federal funds under the bailout program aimed at resuscitating the ailing sector.

Varied by size, region and specialty, most of the banks made their participation in the program known Monday morning although some disclosed it early as Sunday evening.

Among the first were two major Ohio-based players KeyCorp (KEY, Fortune 500) and Huntington Bancshares (HBAN), both of which said they had been approved to get money as part of the the Treasury's Capital Purchase Program. They will receive a total of $3.9 billion.

Others include Capital One Financial Corp. (COF, Fortune 500), Valley National Bancorp (VLY) and three Southern franchises - First Horizon National (FHN), Regions Financial (RF, Fortune 500) and SunTrust (STI, Fortune 500). Combined, the five will receive $11.7 billion.

Both the Seattle-lender Washington Federal (WFSL) as well as First Niagara Financial Group (FNFG), a small community bank headquartered just outside of Buffalo that operates some 114 branches said they would each get roughly $200 million.

Baltimore-based Provident Bancshares (PBKS) also was among those getting federal funds, as was City National (CYN), a Los Angeles bank, which got nearly $400 million from the government.

Collecting $1.9 billion was Northern Trust (NTRS, Fortune 500), a Chicago firm, which caters to affluent individuals and institutions.

Others outlined plans to apply for the program. Fifth Third Bancorp (FITB, Fortune 500), based in Cincinnati, said late Sunday that it applied for $3.4 billion and that it expects "our application will be approved shortly by Treasury."

In an effort to spur banks to lend to one another and loosen credit for consumers and businesses, regulators unveiled plans earlier this month to inject $250 billion into banks.

Nine of the country's largest financial institutions - including Citigroup, Bank of America, Goldman Sachs and Wells Fargo - were initially chosen to receive $125 billion. They are expected to take hold of the money sometime this week.

The remaining $125 billion was put up for grabs among thousands of other banks and thrifts nationwide.

PNC grabbed some of that money Friday when it announced it would get $7.7 billion from the government by selling preferred stock and related warrants, when it announced plans to buy embattled lender National City.

Regulators have stressed that there is plenty of money to go around for those banks that need capital, but it remains unclear just which banks and thrifts would be eligible.

In exchange for capital, banks must give up a stake to the U.S. government, but they also have to agree to pay a dividend on those shares and keep pay packages of their top executives in check. To top of page

Goldman Sachs to cut 3,260 jobs

2008-10-23T06:53:00.000-07:00

Goldman Sachs will cut 10% of its workforce, or 3,260 jobs, a source familiar with the investment bank's plans told CNN Thursday.

Financial firms have eliminated an estimated 110,000 jobs over the past year, through September, according to the latest employment figures from the Department of Labor.

But the pain has been particularly acute on Wall Street. Investment banks and brokerages there have shed about 11,000 jobs, according to the latest figures from the New York State Department of Labor.

Goldman Sachs (GS, Fortune 500) was one of eight leading banks in the nation that signed up for a government plan that would invest up to $250 billion in ailing financial institutions.

Sources familiar with the bailout plan said in mid-October that Goldman Sachs stood to receive $10 billion of that money to help stabilize the former stand-alone investment bank.

Goldman Sachs and Morgan Stanley (MS, Fortune 500) were the last remaining investment banks on Wall Street before federal officials granted the firms' requests to become bank holding companies last month.

The decision to become commercial banks came as rival brokerages Bear Stearns and Lehman Brothers collapsed in the fallout of the nation's credit crisis. The move allows both institutions to create commercial banking operations that can take deposits

Russia may divert oil to affect price

2008-10-22T07:53:00.000-07:00

Russia's top energy official said Wednesday that the nation may set aside an oil reserve to influence global prices - but won't cut output, news reports said.

Deputy Prime Minister Igor Sechin, who is in charge of the energy sector, said the government was considering creating an oil production reserve "which would allow it to work more efficiently with prices on the market."

Sechin would not name the amount of the reserves, but said they should be "enough to reach efficient pricing parameters," Russian news agencies reported.

He confirmed that Russia would not cut oil output, unlike OPEC nations which are expected to slash production by 1 million barrels.

OPEC Secretary General Abdullah al-Badri, in Moscow for talks with Russian officials, said Tuesday that he would not ask Russia to cut oil production as global prices fall. Analysts had said Russia was unlikely to agree to coordinated production cuts, given that it already is battling falling output as West Siberian oil fields mature.

Russia, the largest oil producer outside of the OPEC oil cartel, has seen its stock markets battered in recent weeks on the back of deepening fears of a global recession and plunging oil prices. The price of oil has more than halved since peaking at $147.

Back to school in a credit crunch

2008-10-21T08:16:00.000-07:00

Given the recent wave of lay offs, people around the country are contemplating their next step. Hiring has slowed. Job seekers are taking an average 4.5 months today to land a new gig, according to the Bureau of Labor Statistics. So more adults are thinking now is the time to return to the classroom.

So far this year the number of GMAT tests taken by hopeful biz school students is up 15% from 2006, according to the Graduate Management Admission Council. Applications for graduate school at Arizona State University have jumped by double digits, said ASU President Michael Crow at a recent New York panel dinner of college and university presidents.

But the credit crunch has made it tougher even for students to borrow. So will grad school hopefuls be able to get a loan?

Yes, says Kal Chany, author of "Paying for College without Going Broke" and president of the Manhattan based financial aid advisory firm Campus Consultants, as long as you know where to look. "If you're willing to sign on the dotted line and you don't have a dime, you can still go to law, medical or business school."

Skip private loans. You may be tempted to first turn to the private bank you borrowed from in college. Bad idea. That company may not offer graduate loans anymore, as many have exited the market altogether. The remaining lenders have tightened standards so severely that students with credit scores below 700 often will not qualify, says Kevin Walker, president and CEO of simpletuition.com, an online student loan comparison Web site. Even students with scores above that often need a co-signer with a score at least that high - rarely the case a few years ago, he says.

What's more, you'll generally pay higher fees and interest rates on private loans than you will with federal aid. Today private rates average about 13%, four percentage points or more above federal loans, estimates Mark Kantrowitz, publisher of FinAid.org, a financial aid information Web site. They are also typically variable, meaning you'll owe more when interest rates rise.

Start with Stafford loans. Fortunately, it is now possible to fully fund graduate school without any private money. In 2006 the government began providing graduate students enough federal aid to cover the entire cost - even living and transportation expenses. This government aid charges fixed interest rates.

To secure this assistance, first complete the FAFSA, the Free Application for Federal Student Aid. Your school may also require a separate form to apply for its aid, so be sure to ask. (Graduate students are typically considered independents, so even if the aid forms require your parents' financial details, their assets generally do not lower your federal aid, says Chany.) This information is used to determine if you qualify for need-based aid, such as Perkins or subsidized (the government pays the interest while you are in school) Stafford loans. Take them if you get them.

All students, regardless of need, can borrow up to $20,500 (medical students have higher maximums) total in subsidized and unsubsidized Stafford loans. These loans come with a fixed low rate of 6.8%, although you will typically have to pay a 3-4% fee, says Walker.

Finish with PLUS loans. If you need more than that, look to a graduate PLUS loan. It charges a fixed interest rate of 7.9% if your school allows you to borrow directly from the government, or 8.5% if you must go through a private bank. (Don't be confused. You are still securing a government-backed loan, but getting it from a private company.) Your school's financial aid office can recommend lenders.

You can borrow enough money in PLUS loans to fully cover the remainder of your education, including books and living expenses. Better yet, nearly all students will be approved for this loan - no co-signer needed. "There is a credit check, but as long as you don't have adverse credit history, you will qualify," says Chany. So you cannot be 90 days or more late on a debt payment (180 days on mortgage or medical bills) or have had a foreclosure, bankruptcy or tax lien in the previous five years. If you clear that test, consider yourself fully funded. To top of page

Stocks gain at open

2008-10-20T07:36:00.000-07:00

Stocks rallied Monday morning as investors welcomed signs that the lending market is improving and comments from Federal Reserve chief Ben Bernanke that the Congress should consider another stimulus plan.

The Dow Jones industrial average (INDU) rose over 200 points in the early going, while the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) also gained.

Also helping in the early going: a surprise rise in the September index of leading economic indicators.

Wall Street has been on a roller coaster ride. Last week the Dow posted its biggest ever one-day point gain as well as its second-biggest point loss ever. For the week, the blue-chip index and broader S&P 500 index ended nearly 5% higher.

The mood was upbeat overseas as investors cheered the latest moves in the worldwide effort to strengthen the banking sector. Shares in Europe and Asia advanced.

European shares rose in morning trading after the Netherlands said it would inject $13.4 billion into ING. Asian markets finished the session higher after South Korea said it would guarantee up to $100 billion in foreign-currency loans and pump billions into the banking sector.

Eyes on the economy: Fed chairman Bernanke was testifying about the economic outlook and financial markets at a House panel. In his prepared remarks, he urged Congress to consider a second economic stimulus plan to prevent a longer-lasting slowdown.

In economic news, the Conference Board released its report on leading economic indicators for September. This broad, general reading on the economy rose 0.3% versus forecasts for a drop of 0.3%, according to a consensus of economists from Briefing.com. LEI posted a revised decline of 0.9% the prior month.

Company news: Exelon (EXC, Fortune 500) said late Sunday it had made an all-stock bid worth $6.2 billion for NRG Energy (NRG, Fortune 500). The deal would create the biggest U.S. power company.

Yahoo (YHOO, Fortune 500) could be on the move after a report in the Wall Street Journal said the Internet portal is expected to disclose major cost cuts when it reports quarterly earnings Tuesday.

The Wall Street Journal also reported that General Motors' (GM, Fortune 500) hopes of a takeover of Chrysler are fading, because GM doesn't have enough money to make it happen.

The defense contractor Halliburton (HAL, Fortune 500) announced third-quarter earnings that beat expectations, at 76 cents per share. The toy company Hasbro (HAS) also beat projections, with earnings of 89 cents per share.

The toy company Mattel (MAT, Fortune 500) missed expectations, with 66 earnings per share. The drug maker Novartis (NVS) also missed projections, with earnings of 92 cents per share.

After the bell, American Express (AXP, Fortune 500) and Netflix (NFLX) are expected to report earnings. Analysts expect the credit card company to report earnings of 59 cents per share, according to consensus from Thomson FirstCall, and the DVD rental company is projected to report 31 cents per share.

Oil, currency: Crude gained $1.17 to $73.02 a barrel on the New York Mercantile Exchange. OPEC is expected to cut production quotas at a meeting later this week.

The dollar slipped against the euro and the British pound but rose against the yen.

The dark side of lower prices

2008-10-17T09:23:00.001-07:00

Stock prices have plunged in recent weeks. So have oil prices.

Most Americans probably see the former as terrible news and the latter as a ray of sunshine at a dark time.

But both could contribute to a growing concern among economists - deflation.

Simply put, deflation is the opposite of inflation: It's when prices for a wide range of products start falling, rather than rising.

And while consumers struggling with the high cost of gas and food might think the idea of deflation sounds attractive, economists almost universally agree that it would be very bad news.

"When prices start to fall because of lack of demand, they can go well below the cost it takes to produce products," said Bernard Baumohl, executive director of the Economic Outlook Group. "Companies have no alternative than to cut back production and lay off a lot of workers. That cuts demand more. You get this vicious downward spiral in prices."

Most economists point out that the current economic conditions do not yet suggest that deflation is present, or even imminent.

The Consumer Price Index, the government's key inflation measure, did show no rise in prices in September. But prices are still up 4.5% over the past 12 months.

Baumohl puts the risk of deflation about 10% to 15%, and no more than 20%. But he said only a month ago he would have thought the risk of deflation was less than 5%.

The credit market crisis, combined with the recent stock market declines and the plunge in home values over the past two years, is setting off the deflationary alarm bells for economists.

Paul Kasriel, chief economist with Northern Trust in Chicago, said most bouts of deflation have started with sharp declines in assets such as stocks or homes. That has tended to lead to a loss of value of collateral for loans and ultimately, large losses by lenders and very tight credit.

"I still don't think deflation is going to happen," said Kasriel, who puts the chance at between 10% and 30%. "But these are the initial conditions that lead to it."

In the United States, the worst period of deflation was the Great Depression.

While a recent CNN poll found 59% of Americans thinking that another depression is likely, most economists dismiss the threat of a depression. But they say deflation is something that gets them worried. And they are very careful using the word.

This week, San Francisco Federal Reserve Bank President Janet Yellen broke a taboo among Fed officials when she said in a speech that the economy "appears to be in a recession."

But in the same speech, she was reluctant to use the word deflation, even though she danced around the concept. She said falling commodity prices, job losses and weak demand for products were likely to "push inflation down to, and possibly even below, rates ... consistent with price stability."

Her reluctance to say deflation, even in a speech notable for the use of the word recession, doesn't surprise economists.

"Deflation is very scary, scarier than a recession, because once you get into it, it's hard to get out of," said David Wyss, chief economist for Standard & Poor's.

Wyss said deflation doesn't have to lead to a 1930s style depression, with double-digit declines in economic activity and unemployment of 25%.

But it can lead to the kind of extended economic pain seen in Japan's so-called "lost decade," a period that left Japan with little economic growth from the early 1990s until the middle of this decade.

"The Japanese had deflation during their lost decade when their banks were unable to create credit," said Kasriel.

The Fed's attention to the rising threat of deflation is encouraging, Kasriel said. The central bank has pumped hundreds of billions of dollars into the financial system to try to spur lending and support spending and prices.

This is a sign that inflation is no longer a concern for many Fed policymakers.

"It maybe premature to worry about deflation but it's long past the time to talk about inflation," Wyss said.

Kasriel added that American consumers should be concerned about deflation as well - even if lower prices sound like a good "problem."

"Sure, you feel like you're on top of the world when you pay less than $3 for gas," Kasriel said. "But it's not because we've discovered new oil reserves. It's because demand is very weak. It's a symptom of a global recession rather than a cause for hope of a quick recovery in the economy."

Warning: Extra yield - extra risk

2008-10-16T14:39:00.001-07:00

When you stash your cash away, you probably don't give that much thought to the risks involved. After all, it's safe, liquid cash - not shares of Lehman Brothers.

But with financial hurricanes pounding the markets and your portfolio, you want to be sure the money you need in the next year or two is tucked away in a truly safe haven.

So which of your cash accounts meet this definition? Not as many as you once believed. As it turns out, even money-market funds aren't as safe as you may have assumed.

But there has also been a scare in so-called cash alternatives, which are marketed to investors seeking slightly higher yields than traditional cash accounts provide.

Case in point: ultrashort bond funds. These funds invest in debt securities with extremely short maturities, ranging from three months to a year.

This should put them just one notch higher on the risk scale than money funds, which hold securities with average maturities of 90 days or less. Ultrashort bond funds, therefore, are designed to yield a bit more than money funds but with only a little extra risk.

At least that was the theory. Not only has the average ultrashort bond fund lost about 5% over the past year vs. a 2.6% average gain for taxable money funds, but some portfolios have been outright disasters.
Toxic cash funds

Among the funds that have stumbled badly: Schwab YieldPlus has lost a staggering 33.7% of its value over the past 12 months, while Fidelity Ultra-Short Bond fell 10.5%. Other hard-hit funds, including SSgA YieldPlus and Evergreen Ultra Short Opportunities, have been liquidated, and more are expected to close.

How is it possible that a bond fund that's supposed to be like cash suddenly loses as much as a stock?

In an effort to boost yields in this low-interest-rate environment, many of these portfolios invested in securities that were - you guessed it - backed by subprime mortgages. And when the subprime market imploded last year, the funds began sinking into the red.

At that point investors fled, which only worsened the losses since managers were forced to sell toxic securities at fire-sale prices to come up with enough cash to meet redemptions.

"These failures really call into question the future of the ultrashort bond fund category," says Morningstar analyst Miriam Sjoblom. "Investors looking for stability really should look elsewhere."

All of which may have you wondering where you can still find safety plus a decent yield - at least decent enough to outshine money funds and maintain your money's purchasing power.

Here are a couple of options, with the lowest-risk choice described first.
Cash-alternative alternatives

Bank CDs and money-market accounts For absolute safety, you can't beat the FDIC guarantees on CDs and money-market accounts managed by banks (not to be confused with money funds run by mutual fund companies).

Even if your bank goes under, you'll be covered for losses of up to $250,000 per person per financial institution. And even though the Federal Reserve has started reducing short-term interest rates, you can still find attractive yields, says Greg McBride of Bankrate.com.

Stable-value funds If you have a 401(k), you probably have a stable-value fund in your menu. Recently yielding about 4% on average, stable-value funds invest mainly in high-quality short- to intermediate-term bonds, which are guaranteed by insurers against loss, as well as interest-bearing contracts from insurance companies.

Are there any assurances these funds won't get burned by, say, mortgage securities? No, but the underlying investments are backed by insurers.

While that might give limited comfort in this financial melt-down, keep in mind that most stable-value funds invest not only in a diversified portfolio of debt but also in securities covered by several different insurers.

What's more, many 401(k) plans place trading restrictions on stable-value funds to prevent market timing. You can leave the fund, but you may have to park that money in a stock fund for a few months before being allowed back in.

As a result, your fellow shareholders won't be able to create the same problems they did in ultrashort bond funds by forcing managers to sell at the worst possible time.

Stable-value funds have historically beaten intermediate government bond funds by more than two percentage points a year and intermediate bonds by half a point - and with far less risk, according to a study by the University of Pennsylvania's Wharton School.

Of course, there's no guarantee they'll continue to do so. But the study's co-author David Babbel, professor emeritus of insurance and risk management at Wharton, says, "Stable-value funds are still the best bet for the fixed-income portion of your 401(k).

Drill-baby-drill, meet $75 oil

2008-10-15T14:02:00.000-07:00

Drill-baby-drill!"

With the price of oil falling below $75 a barrel Wednesday - down about 49% from last summer's highs - the industry's battle cry is sounding less and less convincing.

But falling oil prices are not the only reason why the air is coming out of the drilling balloon. The credit crunch has hampered oil company's ability to fund big-ticket drilling projects. Meanwhile, the prices that producers pay for raw materials and labor remain high.

"Any project that assumed oil would average $100 over the next 10 to 20 years is being seriously reconsidered at this time," said Richard Ward, senior cost analyst at IHS Cambridge Energy Research Associates (CERA).

As recently as July, tapping deep water sources and extracting crude from Canadian oil sands - two very expensive production methods - were seen as economically viable ways to deal with the energy crisis. At that time, the price of oil was above $140 a barrel.

Now that the price has fallen below $75 a barrel, and could go even lower, many experts say the future of these projects is uncertain.

Prices. Oil companies are quick to point out that big drilling projects are long-term investments, which are not based on today's oil price, but on what they think the price will be in the future.

Indeed, some deep water projects have a life span of 20 to 30 years. And some producers expect to be mining Canada's oil sands for up to 40 years.

"Companies in the industry know that prices are volatile," said Ron Planting, an analyst at the American Petroleum Institute. "They probably did not plan projects that would only work at $140 a barrel."

Greg Stringham, a spokesman for the Canadian Association of Petroleum Producers, said most oil companies have kept their price scenarios below $100 a barrel.

While producers have had to make "massive adjustments to their budgets" in light of the decline in oil prices, companies are not backing out, Stringham said.

Mickey Driver, a spokesman for Chevron Corp. (CVX, Fortune 500), said the company has not "changed the scope of our current capital program," and that "we take a long-term view in our business planning."

A spokesman for Royal Dutch Shell (RDS.A) declined to comment because the company is in a 'quiet period' before they release quarterly results.

Still, if prices remain low for a prolonged period of time, many analysts expect oil companies to start cutting losses on some high-end projects.

For example, projects based in the Canadian oil sands, where it can cost about $70 to extract one barrel of marketable oil, could be among the first to feel the impact.

If the price of oil falls firmly below $60 a barrel, "you may see some consolidation in the Canadian oil sands," Ward said.

Given rapidly declining prices, tight credit conditions, high input costs and weakening demand - the outlook for bold new oil exploration is grim.

Companies that aren't able to weather a protracted low oil price scenario may find themselves selling operations.

"Expect some forced and unforced deals to be done," said Neal Dingmann, senior energy analyst at Dahlman Rose & Co. in Houston.

Credit. Falling oil prices are not the only economic challenge facing the oil industry.

Stringham points out that the credit crisis has hampered many oil producers ability to get affordable funding for big drilling operations.

While the credit markets have begun to show signs of a tentative thaw, the current climate remains difficult for borrowers.

Many of the oil industry's big offshore drilling projects are "highly levered," Dingmann said. And as long as credit remains tight, those projects will be on hold, he said.

Costs. In addition to credit concerns, oil companies are facing high costs for raw materials and labor.

Over the last four years, capital costs have increased more than 100% for the average exploration project, according to IHS/CERA data.

A sharp increase in the price of steel has been one of the biggest problems. The raw material is used to build drills, pipelines and tankers that make oil exploration possible.

Until recently, steel prices have been climbing along with copper and other key industrial materials.

But as the global economy slows, particularly in the developing world, steel prices on the London Metal Exchange have come down 60% from their July peak. And that could spell relief for oil producers.

Labor is another story.

The oil business is "the epitome of the boom-bust market," said Stephen Schork, independent analyst and publisher of the industry newsletter The Schork Report.

When the market was booming at the turn of the last century, labor was not a problem. But much of the industry's workforce left the business at the end of the last boom and went on to other careers, Schork said.

Given the dim prospects for a boom in the near future, those workers are not likely to return.

"They definitely have manpower shortage in the sector," Schork said.

Oil climbs above $84 a barrel

2008-10-14T08:06:00.001-07:00

Oil prices climbed above $84 a barrel on Tuesday on hopes the economic fallout from the financial crisis would be curbed by U.S. and European government pledges to pump capital into the banking sector.

Light, sweet crude for November delivery on the New York Mercantile Exchange was up $3.37 to $84.56 a barrel in electronic trading by middayn Europe. The contract rose $3.49 to settle at $81.19 on Monday.
Boost for banks

Markets have cheered signs that governments plan to inject money into major banks in an effort to recapitalize the ailing sector.

Tokyo's benchmark Nikkei 225 index jumped 14.25 percent Tuesday -- its largest ever one-day gain -- after the Dow Jones industrial average on Monday rose over 11%, its biggest daily rally since 1933.

"The bailout announcements have eased some of the deep-seated fear of a global meltdown and instilled a degree of confidence in markets," said Peter Luxton, analyst at Informa in London.

He warned, however, that oil prices are unlikely to rally much higher in coming days as doubts over global demand in the longer-term remain very much on traders' minds.

Oil fell to a 13-month low on Friday, settling at $77.70. Crude is down 44% since reaching a peak in mid-July as the credit crisis has steadily eroded the growth outlook for world economies.
Bailout plan

To counter any further trouble in the banking sector, the U.S. plans to spend an initial $250 billion of a $700 billion bailout buying stock in private banks, industry and government officials said Monday night. President Bush planned to announce the details later Tuesday.

That followed Monday's news that European governments were putting up over $2 trillion to safeguard their own banks and kick start credit markets back to life.

But analysts say the meltdown in financial markets may have already done its damage to global economic growth.

"The outlook for oil prices is still very much bearish as the risk of global recession -- or at least a global slowdown -- remains," said Luxton, who expects prices to drop to the $60 to $70 a barrel region next year.

He said prices may hover around the current levels until mid-November, when the OPEC meeting will be held. OPEC warned it intends to cut production to stop the decline in oil prices, but markets are uncertain how effective that will be.

"Demand is driving oil markets now," said Luxton.

He noted OPEC has a poor record of boosting prices with production cuts during economic downturns.

Meanwhile, other analysts are revising down forecasts. Goldman Sachs on Monday cut its year-end crude price forecast from $115 a barrel to $70.
Trading markets

In other Nymex trading, heating oil futures rose 5.28 cents to $2.39 a gallon, while gasoline prices gained 6.44 cents to $1.98 a gallon. Natural gas for November delivery rose 7.7 cents to $6.77 per 1,000 cubic feet.

In London, November Brent crude rose $2.92 to $80.38 a barrel on the ICE Futures exchange.

Oil recovers but demand worries remain

2008-10-13T18:23:00.001-07:00

Oil prices bounced back above $80 a barrel Monday after a group of European countries tried to restore economic confidence by promising to bail out major banks.

The sliding global economy pulled oil prices to a 13-month low on Friday as investors worried that cash-strapped businesses and consumers were cutting back on fuel consumption.

U.S. crude for November delivery settled up $3.49 to $81.19 a barrel in New York on Monday, following a pledge by euro-zone nations to provide capital and guarantee loans.

The Treasury Department also began laying out plans Monday to implement the government's $700 billion program to restore bank confidence and get money flowing through the economy again. The plan was signed into law 10 days ago.

There were also pledges by 15 Eurozone nations and the U.K. to stabilize their respective banking systems.

Demand problems: However, even if the efforts of the world's governments succeed in shoring up the global financial system, it may not restore demand right away, according to Rachel Ziemba, energy analyst at RGE Monitor.

Monday's rebound "may be a lull before the storm," said Ziemba. "Even if we have the stabilization of the financial markets and get the interbank markets flowing again, we're still likely in a global recession," she said.

"Chances are more than 50/50 that the world will see a global slowdown of some sort," added Chris Lafakis, associate economist with Moody's Economy.com.

Government efforts may contain the financial fallout, but demand for oil will probably continue to decline - just not as much, according Lafakis.

Demand for crude has tumbled as businesses and consumers in the United States, the world's largest oil user, began to cut back. Energy spending is often one of the first areas to see cuts when money is tight, according to analysts.

A government inventory report last week said that demand for gasoline had fallen by 5.3% over the four weeks ended Oct. 3, compared to a year earlier.

Goldman lowers forecast: The decline in demand prompted Goldman Sachs to cut its oil price forecast for 2008 to $70 from $115 a barrel. The bank also slashed its forecast for 2009 year-end prices to $86 from $123 a barrel.

"We clearly underestimated the depth and duration of the global financial crisis and its implications on economic growth and commodity demand," wrote Jeffrey Currie, senior energy economist at Goldman Sachs in a research note.

Falling demand was one of the factors in oil's fall from a record high of $147.27 a barrel in mid-July.

Gasoline: Retail gasoline prices have also followed suit, falling more than 4 cents to a national average of $3.206 a gallon from Sunday according to a daily survey by motorist group AAA.

Falling crude prices have sent gasoline down from a record average of $4.114 a gallon in July, and some experts have speculated that it could soon swing below $3 a gallon.

Gas prices: Down 10 cents in 2 days

2008-10-12T07:51:00.000-07:00

Gasoline prices extended their slide, dropping more than 4 cents a gallon and coming within 25 cents of breaching the $3 level, according to a daily survey of credit card swipes.

The decline comes as hurricane seson winds down. oil prices get roiled by anxiety over weakening demand and consumers remain wary about when the economic crisis will abate.

The average price of unleaded regular fell to $3.247 a gallon nationwide, down 4.4 cents from $3.291, according to the Daily Fuel Gauge Report issued by motorist group AAA. That brings the two-day total decline to 10.3 cents.

The price has now tumbled nearly 87 cents, or 21%, below the record $4.114 set July 17. And it's down about 43 cents from a month ago, but still remains some 49 cents, or 19%, higher from a year ago.

The average price has droppped below $3 a gallon in six states: Iowa, Kansas, Minnesota, Missouri, Ohio and Oklahoma, where gas was selling for $2.83 a gallon, on average.

Gasoline is highest in Alaska, at $4.133 a gallon, with Hawaii - at $4.079 - the only other state above $4 a gallon.

Gasoline prices had surged during the highly traveled summer season and as a series of hurricanes battered oil refineries in the Gulf of Mexico. But with hurricane season nearly over, prices began their slide.

Oil prices also have been moving sharply lower amid fears that the economic crisis, which has deepened globally, will have a severely adverse effect on demand.

Crude plunged to a 13-month low on Friday, ending down $8.89 to $77.49 a barrel. That's a far cry from the $147.27 a barrel seen in July.

And since oil prices make up about half of the price of gasoline, the slide in crude s good news for drivers.

The survey is conducted for AAA by Oil Price Information Service from credit card swipes at more than 85,000 service stations nationwide.

Pending home sales show surprise rise

2008-10-08T08:29:00.001-07:00

The National Association of Realtors says pending home rose 7.4% from July to August, an unexpected piece of positive news for the battered U.S. housing market.

The group said Wednesday its seasonally adjusted index of pending sales for existing homes rose to 93.4 from an upwardly revised July reading of 87. The reading was the highest since June 2007.

Wall Street economists surveyed by Thomson/IFR had predicted the index would fall to 84.9.

The index, which sunk to a record low of 83 in March, stood at 85.8 in August 2007.

Oil falls after inventory report

2008-10-08T08:28:00.001-07:00

The price of oil fell Wednesday after the government reported a sharp increase in the nation's supplies of crude and gasoline.

Light, sweet crude for November delivery was down $3.15 to $86.93 a barrel on the New York Mercantile Exchange. Oil had traded down about 75 cents just before the government figures were released.

In its weekly inventory report, the Energy Information Administration said the nation's stockpiles of crude oil rose by 8.1 million barrels last week. Analysts were expecting crude stocks to have fallen 1 million barrels, according to a survey of industry experts by energy research firm Platts.

Supplies of gasoline rose by 7.2 million barrels, compared to estimates of a 2 million barrel increase. And distillates, used to make heating oil and diesel fuel, fell by 500,000 barrels.

Distillates supplies were forecast to rise by 1 million barrels.

The price of oil rose above $90 earlier Wednesday after the Federal Reserve lowered its benchmark interest rate to 1.5% from 2%. The move was part of a coordinated effort by central banks worldwide to combat the credit crisis.

Stocks opened lower despite the Fed's emergency move. But the major indexes recovered in late morning trade.

The oil market has closely followed the stock market recently as investors look for signs of economic recovery that could signal renewed demand for oil and gas.

Silicon Valley's hottest startup

2008-10-03T08:02:00.000-07:00

Silicon Valley operates on potential. Employers may not like it, but talented engineers switch jobs like Pony Express horses so they can be at a company that has a shot at dominating the future. Google (GOOG, Fortune 500) and Apple (AAPL, Fortune 500) (after the return of Steve Jobs) were those kinds of companies. Today, places like Facebook have people lined up knocking on the door to get in.

In health science, Menlo Park, Calif.-based Pacific Biosciences is a company that startup people are willing to leave hefty jobs for because it sits on so much potential. "I can poach people from any company in the Valley," CEO Hugh Martin says with a smile, "and I am."

PacBio as it's known, is building a next generation gene-sequencing machine. The goal of the three-and-a-half-year-old company is to bring gene sequencing to the masses, making it fast and cheap enough to really deliver on the promise of personalized medicine. If PacBio can get it right, it will change healthcare as we know it. That's part of the reason its parking lot is overflowing with new employees (there are more than 200 people at the company). The other reason is that if it can pull it off, the company's investors and its employees stand to make a bundle.

Over the summer, PacBio raised $100 million in funding in its fifth round of financing. The company added Deerfield Management, Intel Capital and other new investors to its initial venture capital backers, which included, among others, Mohr Davidow Ventures and Kleiner Perkins Caufield & Byers. The money is being put toward commercializing the company's technology, which to simplify greatly, eavesdrops on the natural process of DNA replication to ultimately recreate all 6 billion base pairs contained in a complete human genome.

The key for PacBio is to scale up the speed and accuracy of its sequencer to rival nature. So far so good, says PacBio CTO Steve Turner. The PacBio machine has been working out on a little virus called PhiX174, which contains 5,800 base pairs, and has been the first organism to be fully sequenced by the startup's technology.

"The virus we are using for these tests is like a piece of exercise equipment," Turner says. "We can use it over and over to improve the system." The first commercial sequencing machine from PacBio is set to hit the market in 2010.

No bailout? Here's Plan B

2008-10-01T07:53:00.000-07:00

A day after the House's surprise defeat of a $700 billion financial rescue bill, talk grew louder about alternative government steps that could help battered credit markets and stave off broader problems in the economy.

Among the proposals policymakers are discussing: Change rules to ease the capital burdens on banks; make more FDIC insurance available to bank customers; and cut short-term interest rates.

"Every little bit helps," said Lyle Gramley, a former Federal Reserve governor who is now with policy research firm Stanford Group. "When you're in a situation we're in now, you use any tools that might work."

In fact, the first changes came late Tuesday afternoon in announcements by two principal agencies.

The Securities and Exchange Commission and the Federal Accounting Standards Board issued new guidance to companies about how to value securities when the market for them vanish.

The issue - how to put a value on assets that nobody wanted to buy - is central to the credit crisis. Banks and securities firms have written down $500 billion worth of mortgage-backed securities as home prices fell and foreclosures rose.

According to the new guidance issued Tuesday, when the market for such securities dries up, companies can value them based on their estimated future cash flow. Some experts blame the previous rules, known as mark-to-market, for the credit crisis.

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC. "It's way below their economic value. And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity."

But others argue the accounting change will come at a cost. They say without those strict rules, investors would be more reluctant to invest in banks - and make it even tougher for the banks to attract new capital.

"Does that make you less attractive as a public company? Absolutely," said Art Hogan, chief market analyst at Jefferies & Co.

The SEC wasn't the only regulator busy taking action on Tuesday. The Federal Deposit Insurance Corp. proposed raising the cap on bank deposits insured by the FDIC.

"A temporary broadening of the FDIC's guarantee will provide some additional needed confidence in the marketplace," said Sheila Bair, FDIC chairman.

Presidential candidates Barack Obama and John McCain had called for raising the limits earlier in the day.

The current limit - $100,000 in most instances - has been unchanged since 1980 despite inflation. It protected as much as 82% of deposits in 1991 but today it only covers 63%.

Raising the cap could stem a potential run on deposits by bank customers, particularly businesses, who fear losing their money. Such fears led to the collapse of Washington Mutual (WM, Fortune 500) and Wachovia Bank (WB, Fortune 500) in the past week.

Kicking the tires on other fixes
The SEC and FDIC changes announced Tuesday are not the only ideas being discussed in Washington and among economists. Some others:

Change federal requirements that force banks to keep a certain level of cash on hand for every dollar they lend out.
Give banks the chance to exchange loan notes for FDIC notes, which be more valuable and allowing the banks more flexibility to make loans.
Purchase on a massive scale mortgage-backed securities issued by finance giants Fannie Mae and Freddie Mac.
Extend limits on short sales of financial sector stocks.
Cut the fed funds rate - the Federal Reserve's target for short-term lending - perhaps all the way to zero, or in coordination with rate cuts by other central banks around the globe.
Clearly, the controversial $700 billion bailout package - which would give the Treasury Secretary authority to buy distressed assets - is not the only way to unfreeze troubled credit markets.

But it's also true that none of the proposals is without downsides and dissenters.

Gramley, the former Fed governor, questions the wisdom of getting rid of mark-to-market accounting. He would rather see the FDIC and other regulators relax their rules governing the ratio banks must maintain between capital and loans on their books. Those rules are choking off credit to good customers, he said.

Gramley said he knows of a businessman with strong credit and a $20 million net worth who was rejected for a renewal of a $1.8 million business loan.

"The bank told him, 'Our regulators are requiring us to improve our capital ratios, but we can't raise capital because the market is shot,' " Gramley said.

Former FDIC chairman Isaac argues that changing capital ratio requirements or easing other regulations would only lead to deeper problems down the road. "That simply doesn't play well," he said.

Big bailout still looms
Meanwhile, the Bush administration's push for its big rescue plan continued on Tuesday.

"The alternatives are good - I don't think they do any harm," said Brian Gardner, the Washington analyst for KBW, an investment firm specializing in financial services. "But none of them are as powerful as the rescue package would be."

The Senate plans to vote on the $700 billion bank rescue plan Wednesday evening. Stocks rallied on Tuesday as investors believed that Congress will still approve the bill. Credit markets stayed very tight and banks are still reluctant to lend to one another.

And even advocates of the bailout plan concede that the alternate measures may yet be needed if passage of the bill does not unfreeze credit markets.

"It doesn't fix everything," said Hogan. "It doesn't force the institutions to lend to each other or lend to consumers and businesses. That's why they'll hold onto these alternatives. I think you need to keep dry powder if you have to use them in the future."

This isn't just a Wall Street bailout

2008-10-01T07:52:00.000-07:00

The backlash against the bailout worked. The House rejected the controversial $700 billion rescue plan on Monday.

But considering that the Dow plummeted nearly 800 points - its worst one-day point drop in history - will there now be a backlash against the backlash?

"Many of the folks writing their congressmen last week to say they were against the plan may have looked at their 401(k)s this morning and are rethinking their position," said Bill Knapp, investment strategist with MainStay Investments, an asset manager based in New York.

Talkback: Should Congress pass a new version of a bailout or just do nothing?
Sure, stocks rebounded a bit Tuesday. But make no mistake. If Congress doesn't come up with some new plan to address this credit crisis, we could be faced with more gut-churning market drops.

I stated last week why I thought the bailout was a necessary evil and I still feel that way.

I understand why people are angry. I'm angry. I am not happy that the government is in this position because of reckless behavior by banking executives, investors, lax regulation by the government and, yes, even consumers.

And I even can concede that there is a lot of merit to the claims by critics that we should let the market sort out the country's credit problems. In free markets, companies should be allowed to fail. And clearly, the market and government let Lehman Brothers fail.

However, in the wake of the Lehman bankruptcy, things just got worse and more dominos fell ... AIG, Washington Mutual, Wachovia, etc.

The crisis is now so pronounced that doing nothing is not really a viable option. And what infuriates me to no end is the refusal by some members of Congress and taxpayers to recognize that the consequences of doing nothing will mean more economic hardship for all Americans, not just bank CEOs, traders and New York City.

Let Wall Street burn. Let Wall Street die. Let Wall Street go bankrupt. That's what people opposed to the bailout are saying over and over.

Don't get me wrong. Wall Street deserves a lot of the blame for the mortgage mess. But it's overly simplistic and flat-out wrong to suggest that this is just a New York or Wall Street problem.

There are a lot of companies that have either already collapsed or are nearing the precipice of failure as a result of the credit crunch ... and many of them are located far from lower Manhattan. That means many jobs are on the line and they aren't just the jobs of traders, blue-blood investment bankers and CEOs.

Washington Mutual (WM, Fortune 500), which became the largest bank to fail in history last week, is based in Seattle and has more than 2200 branches across 15 states. Wachovia (WB, Fortune 500), which dumped its banking assets to Citigroup (C, Fortune 500) in a fire sale Monday, is headquartered in Charlotte, N.C.

National City (NCC, Fortune 500), which many investors are betting could be the next bank to go under, is based in Cleveland. Shares of two other big Ohio banks - Cleveland's KeyCorp (KEY, Fortune 500) and Cincinnati-based Fifth Third (FITB, Fortune 500) - also got pummeled Monday.

SunTrust (STI, Fortune 500), which lost nearly a quarter of its value Monday, is an Atlanta institution. Regions Financial (RF, Fortune 500) plummeted more than 40% on Monday. That bank is based in Birmingham, Ala.

A bank bailout plan of some sort might not stop other banks from going under but it could certainly help minimize the pain in the industry.

"If we had a bailout, it would lessen the likelihood of further bank failures. We may have some more down the pipeline but we would have less with a bailout," said Robert Dye, senior economist for PNC Financial Services Group in Pittsburgh.

If more banks get scooped up by larger rivals or just flat-out go under, that could lead to more job losses in the financial industry. That's not good news for the broader economy.

Fears about more bank collapses have also led to chaos in the credit markets as banks are afraid to lend to each other, which makes them less willing to extend credit to businesses. That, eventually, will be felt by consumers.

"The core of the problem is with credit markets, which is one step removed from Main Street. The average guy and gal is not seeing this yet but if you are a business, you are facing highly elevated costs to borrow money," Dye said.

"And Main Street will definitely feel this eventually. We'll also see higher rates for credit cards and other consumer loans. The cost of credit will rise dramatically," Dye added.

Dye also said that if more businesses start to feel a major cash pinch, they are very likely to cut back on hiring and may even start to layoff workers.

That would add to the this year's 600,000 job losses. In turn, that could intensify the economic slowdown by causing sharp pullbacks in consumer spending.

On top of all that, the current stock market chaos does nobody any good.

I'm not trying to cheerlead the market higher. Many stocks, particularly in the banking sector, should be trading much lower.

But the credit crisis has spilled over into the broader market, hitting shares of many quality companies that are still financially healthy. As a result, $1.2 trillion in stock market value was wiped out in the wake of Monday's sell-off.

That's bad news for more than just hedge fund managers - it hurts the millions of Americans that actively manage their investment portfolios as well as the millions more who have 401(k)s or IRAs for retirement as well as 529 plans to save for their kids' college tuition.

"It's easy to point the finger at the credit crunch being just a Wall Street problem. But it's much more pervasive than that so that's why it's imperative that this be addressed," said Knapp, the investment expert. "If a rescue plan doesn't pass we will see markets sell off further."

Dye agreed. He said the biggest problem with the bailout is that it would in some fashion, allow some companies off the hook for egregiously bad decisions. Nobody is happy about that.

But doing nothing just so that Wall Street can suffer is not the answer either.

"People don't want to reward bad behavior. But we don't want to cut off our nose to spite our face here," Dye said. "This will hurt Main Street very quickly."

Bush: Congress must act

2008-09-30T08:17:00.000-07:00

President Bush said Tuesday he was "disappointed" by the House's rejection of the $700 billion bailout plan and urged Congress to take action to save the economy.

"Unfortunately, the measure was defeated by a narrow margin," Bush said in a brief televised address at the White House. "I'm disappointed by the outcome, but I assure our citizens, and citizens around the world, that this is not the end of the legislative process."

Bush said he expects lawmakers to move forward with legislation. The House is adjourned for the Jewish holiday Rosh Hashanah and is not scheduled to return to session until Thursday at noon. The Senate is in session on Tuesday.

Senate Majority Leader Harry Reid, D-Nev., said that he would meet with some key Democratic senators - including Senate Banking Committee Chairman Christopher Dodd, D-Conn. - working on a bailout plan.

For his part, Bush said the nation is facing "the real prospect of economic hardship."

"Our economy is depending on decisive action from the government," Bush said. "The sooner we address the problem, the sooner we can get back on the path of growth and job creation. This is what elected leaders owe the American people, and I am confident that we'll deliver."

Bush is meeting with his team Tuesday morning to review options, a senior Bush administration official told CNN. On Monday night, White House staffers were in contact with Republican congressional leaders and Democratic staffers, the official said.

The official said that even Republicans who oppose the plan understand the seriousness of the situation and "want to get this done."

The Senate's lead Republican, Sen. Mitch McConnell, R-Ky., said Tuesday that lawmakers will pass a bill. "I want to reassure the American people that we intend to pass this legislation this week," he said.

On Tuesday, Bush spoke to Sens. Barack Obama and John McCain about the financial crisis, according White House spokesman Tony Fratto. The presidential candidates "offered ideas and reaffirmed what they have said publicly - that this is a critical issue that needs to be addressed," Fratto said.

Stock market reaction
The bailout package, a collaboration of Treasury Secretary Henry Paulson and leaders from both parties, was rejected by the House in a 228-205 vote Monday. Two-thirds of Republicans and about one-third of Democrats voted against the bill.

Following the defeat, the Dow Jones industrial average dropped 777 points, its biggest one-day point decline ever. The decline of nearly 7% was the largest percentage decline since the Black Monday crash of 1987.

The bill, if approved, would have allowed the federal government to buy troubled mortgage-related investments from finance companies, freeing them up for lending, to pull the economy out of its credit freeze. Proponents of the bill believe it would prevent the United States from sliding into a serious financial crisis, but opponents saw it as an unbearable burden to taxpayers and a rescue for Wall Street.

"That, no question, is a large amount of money," said Bush, referring to the $700 billion. "We're also dealing with a large problem. But to put that in perspective, the drop in the stock market yesterday represented more than a trillion dollars in losses."

Genworth soars on possible spin off

2008-09-30T08:16:00.000-07:00

Mortgage insurer Genworth Financial Inc. said Tuesday that it is considering various strategic alternatives for its U.S. mortgage-insurance business including a possible spin off, sending shares sharply higher in premarket activity.

"We have demonstrated that, in the current stressed U.S. housing environment, our U.S. Mortgage Insurance business continues to operate from a more sound financial position and lower risk profile than any other U.S. mortgage insurer," said Michael D. Fraizer, chairman and chief executive, in a statement.

"At the same time, progress in our international, wealth management, retirement, life and long-term care insurance businesses has been overshadowed by concerns about the future of U.S. mortgage insurance," he added.

Commercial paper
Genworth (GNW, Fortune 500) said it has reduced its commercial paper borrowings to $79 million, and maintains more than $800 million in cash and cash equivalents at the holding company.

The company also carries nearly $4 billion of cash and cash equivalents in its operating companies, and maintains substantial credit facilities, Genworth said.

Over the past couple of weeks, Genworth's stock has been hit hard by concerns about its mortgage exposure in the wake of the collapse of American International Group Inc.

Earlier this month, the government stepped in and provided AIG with a two-year $85 billion loan to help keep it in business. As one of the world's largest insurers, AIG teetered on the brink of bankruptcy as it looked for fresh cash to help shore up its balance sheet, which was facing a liquidity crunch amid the continued downturn in the credit markets.

Reinsurance business
Last week, Genworth management provided an update regarding its U.S. mortgage insurance business. The company is considering reinsurance transactions, asset transfers from outside the U.S. and joint ventures to boost capital, management said on a call with analysts.

Shares of Genworth spiked $1.49, or 30%, to $6.49 in premarket activity. The stock, which finished Monday's trading at $5, has ranged from $3.51 to $32.33 over the past year.

Record 16% drop in July home prices

2008-09-30T08:15:00.000-07:00

A closely watched index released Tuesday showed home prices tumbling by the sharpest annual rate ever in July, but the rate of monthly declines is slowing.

The Standard & Poor's/Case-Shiller 20-city housing index fell a record 16.3% in July from a year earlier, the largest drop since its inception in 2000. The 10-city index plunged 17.5%, the biggest decline in its 21-year history.

No price gains
Prices in the 20-city index have plummeted nearly 20% since peaking in July 2006. The 10-city index has fallen more than 21% since its peak in June 2006.

No city in the Case-Shiller 20-city index saw annual price gains in July, the fourth straight month that has happened.

However, the pace of monthly declines is slowing, a possible silver lining. Between May and July, for example, home prices fell at a cumulative rate of 2.2% - less than half the cumulative rate experienced between February and April.

But there's "no evidence of a bottom," said David M. Blitzer, chairman of the index committee at S&P.

Trouble in Vegas
Las Vegas prices plunged the most at nearly 30%, with Phoenix diving 29% and Miami 28%. Prices in the seven cities in the Sunbelt all fell between 20% and 30% from a year ago.

Only seven cities showed positive or flat returns from June to July, down from nine that showed month-over-month gains in June. Atlanta, Boston, Dallas, Denver and Minneapolis all posted positive returns for three months or more.

Apple bruised in downgrades

2008-09-29T13:02:00.000-07:00

Apple (AAPL) got hit with a pair of downgrades Monday as analysts see a weaker consumer taking a big bite out of the computer-maker’s growth rate.

RBC and Morgan Stanley analysts slapped Apple with neutral ratings, down from buy, on concerns that the slumping economy will put a chill on sales of Mac notebooks and desktop computers.

Citing a IQ/Changewave survey, RBC noted that 40% of consumers questioned said they “plan on spending less on electronics in the next 90 days,” RBC analyst Mike Abramsky wrote in the note. This is the weakest outlook ever measured in these surveys, Abramsky wrote.

Apple shares fell 16% in morning trading Monday in the wake of the reports, as investors get a sobering view of how popular consumer devices can lose momentum in a faltering economy.

The growing credit crisis has helped deflate consumer confidence and force delays in purchases of items like new computers and flat-screen TVs. The problem for Apple, writes Kathryn Huberty in a downgrade of Apple to neutral Monday, is that not only is PC sales growth slowing but the one area shrinking less is the under-$1,000 price range where Apple is absent.

Add the slowdown in PC sales to the higher costs of iPhone production, and Huberty says there will be a dramatic drop in Apple’s profit growth. Huberty cut her Apple earnings growth projection for the year to 6%, well below the 9% analysts’ consensus average.

Apple is not recession proof, RBC’s Abramsky writes.

Not surprisingly, investors have taken flight from stocks in some of the stronger players as the market jitters spread across nearly all sectors. Apple shares are down 35% and smartphone rival Research in Motion (RIMM) is down 47% in the past month.

RIM’s disappointing outlook Thursday confirmed that the once hot smartphone segment is cooling just as the larger mobile phone market grinds into slow gear, not just in the U.S., but globally as Nokia (NOK) recently pointed out.

Dollar gains as European banks falter

2008-09-29T13:01:00.001-07:00

The U.S. dollar rose against other major currencies Monday as turmoil in the European economy undercut the euro and the pound.

The 15-nation currency fell to $1.4468 in New York, down from $1.4615 on Friday.

The British pound was quoted at $1.8160, down from $1.8417. And the Japanese yen fell to ¥104.43 from ¥106.14.

The dollar's strength comes as the crisis on Wall Street appears to be spreading to the European financial system.

In Germany, government regulators and several banks tossed a multibillion euro line of credit to Hypo Real Estate Holding AG in move aimed at preventing the country's second largest commercial property lender from going under.

Meanwhile, the British government announced plans to nationalize troubled mortgage lender Bradford & Bingley, taking over the bank's $91 billion mortgage and loan books, in a bid to help stabalize the country's financial stability.

Over the weekend, the governments of Belgium, the Netherlands and Luxembourg partially nationalized Dutch-Belgian banking giant Fortis NV with a $16.4 billion rescue after investor confidence in the bank evaporated last week.

The news from Europe "made the market aware that the contagion was not just in the U.S.," said Amo Sahota, chief currency analyst at U.K.-based HiFX plc.

But the currency market's focus shifted to the United States later Monday after the government's proposed $700 billion intervention in the financial system fell short of the needed votes in the House.

"Now all eyes are back on the U.S.," Sahota said

Treasurys soar, credit pipes frozen

2008-09-29T12:59:00.000-07:00

Treasury prices soared Monday after a $700 billion economic rescue bill failed to pass in the House of Representatives, sending stocks into a tailspin.

Jitters about the depth of the credit crisis and whether the government would come to the rescue pushed investors toward the perceived safety of Treasurys, sending bond prices sharply higher.

Meanwhile, banks have the tap screwed down tightly on lending, keeping credit in a choke-hold.

Bailout: The House defeated the rescue bill Monday afternoon, following four hours of heated debate. The next steps were not immediately clear, but supporters were scrambling to put it up for another vote.

The proposed bailout plan would have pumped $700 billion into the economy in stages, with $250 billion available immediately. Lawmakers' goal was to jump-start the credit pipelines, facilitating lending between banks and to consumers.

But some market watchers wondered whether the plan was enough to fix the fundamental problems with the economy. "This bailout package is addressing the symptoms of the marketplace," said Andrew Brenner, senior vice president at MF Global. "It is not addressing the root," - the drop off in housing prices. As home values have plummeted, financial institution that were built on mortgages have buckled.

Before the U.S. markets opened, U.S. regulators said Citigroup (C, Fortune 500) will acquire the banking operations of Wachovia (WB, Fortune 500), the nation's fourth-largest bank. As part of the deal, Citigroup will acquire Wachovia's massive deposit network, as well as over $300 billion worth of Wachovia's loan portfolio and the company's debt.

Treasurys: Treasury prices soared Monday as investors looked for a safe-haven for their assets. After lawmakers rejected the bailout bill, investors pushed prices on the notes higher.

"We have a flight to safety from the stock market to the bond market," said Michael Cheah, senior portfolio manager at AIG SunAmerica. The Dow industrials were down more than 500 points, having plummeted more than 700 points earlier in the session.

The benchmark 10-year note rose 2 6/32 to 103 10/32, while its yield dipped to 3.59% from 3.85% late Friday. Bond prices and yields move in opposite directions.

The price on the 30-year bond jumped 4 1/32 to 106 2/32, and its yield fell to 4.14% from 4.36%.

The price on the 2-year note rose 29/32 to 100 22/32, while the yield fell to 1.63% from 2.12%.

The yield on the 3-month note fell to 0.39% from 0.85% Friday as prices on the short-term notes jumped. Yields on 3-month Treasurys have remained at very low levels as demand for the notes has increased amid the uncertainty in the financial markets.

The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

In order to pay for a costly rescue plan, the government would need to sell a lot more debt. Last week, the Treasury Department auctioned $34 billion in 2-year notes - the largest government debt auction in history - and $24 billion worth of 5-year notes. Both auctions attracted far more investor bids than there was debt made available.

Banks not sharing: Skittish investors have been holding onto their cash or hiding their assets in Treasurys, and nervous banks have been unwilling to lend money to other banks or to individuals.

"The other problem is that banks are not willing to lend money," said Cheah.

When banks don't loan money to each other readily, businesses and consumers see higher prices on loans, including mortgages and cars, and some can't get a loan at all. "Nobody going to lend anybody any money," said Cheah.

If banks do decide to lend, the borrower, be it a bank or consumer, will be slapped with a high premium.

For example, the Federal Reserve's key interest rate for banks lending to each other is at 2% but banks have been charging other banks nearly 4% to borrow money, said Cheah. Those high rates trickle down to customers, both individuals and companies.

Many companies will be able to draw on their lines of credit in the short term, said Cheah, but when that capital dries up, companies may find borrowing to be a challenge if the credit pipelines remain frozen.

Market gauges: Two market indicators of the price of borrowing showed a surge in the price of lending as banks seize up.

One market indicator that banks use to determine lending rates rose to an all-time high. The difference between the London interbank offered rate, or Libor, and the Overnight Index Swaps rose to a new record high of 2.20%, according to data reported by Bloomberg.com. The Libor-OIS "spread" measures how much cash is available for lending between banks. The bigger the spread, the less cash is available for lending.

In fact, the Libor rate on its own has been trending higher for some time as the European economy has stalled. The rate has stayed above 3% consistently during the past month - a level not seen since the start of this year. "The problems in Europe are much worse than they are in the U.S.," said Brenner.

And Europe is behind the U.S. in crafting its own rescue plan, which means a turnaround is likely still a ways off, according to Brenner. "The international marketplace has recognized that the U.S. is way ahead in terms of addressing the problems," said Brenner. "Over the weekend, you had 5 credit events in Europe where they had to step in and defend 5 different" financial institutions.

Dutch-Belgian bank and insurance giant Fortis and British mortgage lender Bradford & Bingley were bailed out by governments, and Germany's Hypo Real Estate Holding AG secured a credit line from several other banks.

Further evidence of the squeeze, the "TED spread," showed high prices of loans between banks. The TED spread measures the difference between three-month Libor and the three-month Treasury borrowing rates. By midday Monday, it reached the widest margin since at least 1982, topping 3.44%, according to Bloomberg.com. However, the measure had retreated to 3.16% later in the day.

The retreat was partly due to the Federal Reserve's move to bolster its access to liquid funds, which relieved some pressure, said Brenner.

Oil slips amid growing global woes

2008-09-29T07:31:00.001-07:00

Oil prices fell to near $103 a barrel Monday on concern that economic growth will slow across the globe despite a tentative agreement in Washington on a $700 billion bailout package to stabilize the U.S. financial system.

By midday in Europe, light, sweet crude for November delivery was down $3.50 to $103.39 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.13 Friday to settle at $106.89.

In London, November Brent crude fell $3.39 to $100.15 a barrel on the ICE Futures exchange.

Bailout plan goes to House
Congressional leaders and the White House agreed Sunday to a rescue of the ailing financial industry after lawmakers insisted on sharing spending controls with the Bush administration. The biggest U.S. bailout in history won the tentative support of both presidential candidates and goes to the House of Representatives for a vote Monday.

"The bailout package reduces the chance of a complete meltdown," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "But worries on the demand side will continue to weigh on oil prices."

The plan would give the administration broad power to use hundreds of billions of taxpayer dollars to purchase devalued mortgage-related assets held by cash-starved financial firms.

Congress insisted on a stronger hand in controlling the money than the White House had wanted. The government would take over huge amounts of devalued assets from beleaguered financial companies in hopes of unlocking frozen credit.

"It's still a crisis situation," Shum said. "The market is concerned about the depth and breadth of this global downturn."

JBC Energy in Vienna, Austria, also was cautious about the effects the rescue package could have on U.S. economic growth.

"The latest government reports show sales of new homes at a 17-year low in August and orders for durable goods falling stronger than expected," JBC said in a research note. "It is far from certain that (the bailout) will prevent an economic downturn."

Dollar stronger
Prices were also pushed down by a stronger dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell when the dollar strengthens.

While the dollar gained as details of the bailout package become known, analysts said the euro was weaker also because of growing economic problems in Europe.

"It is also a question of the euro losing ground due to a continued deterioration in the euro zone," said Olivier Jakob of Petromatrix in Switzerland. "With the rate of bank failures increasing in Europe and the economy slowing more rapidly than expected, pressure will continue to mount on the (European Central Bank) to lower (interest) rates."

The 15-nation euro fell Monday to $1.4361 from $1.4614 on Friday while the dollar rose to 106.23 yen from 106.01.

"The bailout should inject confidence in the markets in the short-term," Shum said. "Longer term, it increases money supply, inflation and likely weakens the dollar - all of which supports oil prices."

GM to build $370 million engine plant

2008-09-28T07:55:00.001-07:00

General Motors Corp. said Thursday it will build a new factory in Flint to make four-cylinder engines for the Chevrolet Volt rechargeable electric car and other models.

GM Chairman and Chief Executive Rick Wagoner said the new plant will build a 1.4-liter four-cylinder engine that will extend the range of the Volt, and a turbocharged version that will power the Chevrolet Cruze, a new compact car to be built in Lordstown, Ohio.

"This will be one of the places. You will be one of the teams that help GM lead into our second century," Wagoner told workers and government officials gathered for the announcement.

Production at the new $370 million plant will begin in 2010, and both cars are slated to go on sale in the same year.

Workers at the nearby Flint Engine North plant, which GM (GM, Fortune 500) is in the process of closing, said the announcement is good news for an area hard hit by auto job losses.

Although GM said the new plant won't create any new jobs, it will retain about 300 hourly positions, and workers said they are hopeful the new plant will create more employment in the industrial city about 50 miles northwest of Detroit.

"This also means that there's a future for our youth in this area," worker Jean Adams-Anderson said.

The state of Michigan on Tuesday approved $132.5 million in tax incentives for the automaker to spend $838 million on the new plant and to upgrade four other facilities, including the Detroit-Hamtramck assembly plant where the Volt will be built.

The Flint investment includes the 552,000-square-foot plant as well as machinery and other equipment. GM says it will invest another $21 million in tooling for its suppliers to support the new Flint factory.

The new plant will double its global production of GM's small four-cylinder engines by 2011, with more than half the increase going into North America.

The factory, GM said, will have 300 flexible work stations that will allow the company to build different four-cylinder engines without retooling.

GM's U.S. sales are down 18% so far this year due to a declining market and high gasoline prices that have caused a dramatic shift away from trucks and sport utility vehicles to smaller, more efficient cars.

The new plant will help GM roll out new models designed to adjust to the shift, which GM and other automakers say is permanent.

The struggling automaker has lost $57.5 billion in the past 18 months, including $15.5 billion in the second quarter. Its U.S. market share has fallen to about 23% this year from a peak of nearly 51% in 1962.

The company is banking on the much-ballyhooed Volt to be its car of the future, although it conceded this week that the Volt won't operate exactly as advertised.

GM initially said the Volt would be able to run 40 miles on its lithium-ion batteries, with a small internal combustion engine recharging the batteries to extend the range hundreds of miles. A top executive said the same thing as recently as last week.

But company spokesman Rob Peterson said Wednesday that engineers changed the design so the Volt engine will power a generator that would run the electric motor after the batteries are depleted. A small amount of power from the generator will recharge the batteries, but most will be used to directly run the car, he said.

He said bypassing the batteries is more efficient, and GM did not intend to deceive people by maintaining that he motor would only be used to recharge the batteries.

"At the end of the day, to the consumer, the vehicle will operate much the same way," he said.

GM to build $370 million engine plant

2008-09-27T09:33:00.000-07:00

Shakeup at Lord & Taylor

2008-09-27T09:31:00.001-07:00

Faced with a dismal climate for consumer spending, Richard Baker, a real estate mogul turned boy wonder of retailing, has set in motion a dramatic shakeup of his crown jewel, the Lord & Taylor department store chain.

Baker is replacing L&T's CEO Jane Elfers with Brendan Hoffman, a longtime Neiman Marcus executive. The management shake up is part of an ambitious plan to combine L&T's back office operations with those of two other retailers that Baker owns through his investment firm NRDC Equity Partners.

With forecasts calling for one of the worst holiday shopping seasons in nearly two decades and the credit markets in crisis, retailers are scrambling to rethink their strategies and conserve cash.

L&T has spent millions over the last few years to remodel stores and add trendier fashions in an effort to attract higher-end customers. Although the company has made some progress, L&T - like other retailers - is coming up against economic headwinds that will make managing expenses a greater priority going forward.

Baker, who was the subject of a Fortune Magazine profile in April, got his start building shopping centers anchored by Wal-Marts along the East Coast. He made the jump from real estate mogul to retail operator in June 2006, when his investment firm paid $1.2 billion - all but $100 million of it borrowed money - to buy Lord & Taylor from what was then called Federated Department Stores (now Macy's).

His shopping spree didn't end there. In February, Baker spent $100 million to acquire Fortunoff, a down at the heels furniture and jewelry chain, out of bankruptcy. He then launched Creative Design Studios, which makes apparel for Lord & Taylor and other stores. And in July, he bought Hudson's Bay, the large Canadian department store chain. Although an acquisition price was not disclosed, Baker said at the time of the deal that he planned to invest $500 million in a holding company, called Hudson's Bay Trading Company that would have oversight of all his retail operating companies.

The plan under discussion calls for back office functions such as computing and accounting to be combined at L&T, Hudson's Bay and Fortunoff -- potentially saving millions of dollars a year. "The executive reorganization enables the Hudson Bay Trading Company and its subsidiaries to generate sizeable economies of scale through improved purchasing, shared services and more efficient utilization of information technology including Internet retailing," according to the company's press release.

But making any changes heading into the all-important fourth quarter carry huge risks. Retailers typically save management shuffles until January, after the busy holiday shopping season when any disruption can magnify the possibility of operating snafus.

In choosing Hoffman to run L&T, Baker is betting on a well-regarded executive, but one who does not have recent experience running bricks-'n-mortar stores. Hoffman, who got his start in the L&T training program, has spent the last six years running the catalog and online operations for Neiman Marcus.

Elfers served as L&T's CEO since 2000, and is largely the architect of its turnaround strategy. According to Baker, her contract had expired. Elfers was not immediately available for comment.

McClatchy gains wiggle room

2008-09-27T09:29:00.000-07:00

Newspaper publisher McClatchy Co. has restructured its agreement with lenders in response to declines in advertising revenue.

McClatchy said Friday the amendment to its $1.175 billion credit facility will give it greater flexibility in two key areas - allowable leverage and interest coverage ratios.

In return, McClatchy says it is offering banks new security in collateral and higher pricing.

Pat Talamantes, the company's chief financial officer, says advertising revenue is being hurt by an economic downturn nationwide and the outlook for 2009 makes the new agreement necessary.

Last week, the company slashed 1,150 jobs because of the advertising woes, its second major round of reductions in three months

Delta to sell commuter seats by class

2008-09-27T09:22:00.000-07:00

Delta Air Lines Inc. said Friday it would offer first and economy class aboard its shuttle flights beginning Dec. 1.

Delta spokeswoman Betsy Talton said prices will vary by route, but first-class seats will generally cost $100 to $250 more than economy.

Delta said it would offer 14 seats in first class and 128 in economy after reconfiguring its MD-88 jets used in shuttle service.

Open-seating - without assigned seats - will remain in each class, the Atlanta-based airline said.

Delta said elite "Medallion" members of its SkyMiles frequent-flier program would be eligible for free upgrades to first class.

To promote the service, Delta said new and current SkyMiles members can earn double miles on shuttle flights on or before Dec. 15 between New York's LaGuardia Airport and Boston or Washington.

The airline said it is keeping perks such as free beer, wine, snacks and newspapers on the shuttle service and would expand selections in first class, where the seats will be wider and cocktails will be complimentary.

By next spring, Delta said, the entire shuttle fleet of nine planes will be equipped with high-speed Internet access and texting services through vendor Aircell's Gogo system for $9.95 per flight.

Lee Macenczak, Delta's executive vice president of sales and marketing, said dividing shuttle flights into two classes would give customers more options.

Delta said customers may see two-class service on some shuttle planes in November as the company completes the reconfiguration of its planes.

Delta (DAL, Fortune 500) shares fell 10 cents to $7.96 in afternoon trading.