Economic News Update October 26, 2009

Via Stuart Carlson

Comment:

There has been so much discussion for months now on too-big-to-fail. Recently, that has been turned into the hopeless term too-big-to-resolve. Political will is much of the problem, as are accounting nightmares, gambling addictions, mark-to-market accounting, and lack of transparency of toxic assets. (And if there were any fairness involved, the already aided bank's profits would be going straight to the taxpayer now.) For, at present, all we have is forbearance with stolen profits to all of the usual suspects.

Perhaps the solution could be found in some slow, controlled unwind of previous gambling bets over a scheduled time line with strict transparency and restrictions of future bets in place. There would also be well-defined capital requirements. Then, the too-big-to-fail institutions could become smaller and smaller and smaller through such graduated regulation.

Or, would this precipitate them all to teeter with red ink into the taxpayers hands to fulfill Paul Farrell's before 2012 demise prediction?

And why couldn't we just regulate higher down payment requirements for mortgages (20%), commercial real estate, and all other loans? Wouldn't that simple regulation make the entire system much more solvent? Perhaps, this, too, could be regulated according to an incremental time-line. But, it would drop lending to dangerously low levels for the banking industry. And it would slow this system that is based upon a must-grow-at-all-costs model. Not gonna happen through free will with this Congress and administration.


--Kalpa


Blog Notes:
By now, regular readers have no doubt noticed the change in format here. Feedback would be most welcomed - let me know what you do or don't like about it. Please, let me know if it is causing any problems with dial-up load times or any other issues. Along with the new format, I will be posting somewhat differently. I will not be including (much) commentary with the NEWS posts. Longer commentaries will be separate threads. And I'll be adding more short posts, similar to yesterday's.


....more earnings reports...

Verizon's quarterly earnings drop 30%
Weak Sales Push McGraw-Hill's Profit Down 14%



THE LATEST:


Worry About BofA Hurts Stocks

Stocks were mired in a broad slump Monday on renewed concerns that some big banks may have issues repaying federal bailout funds and as a slide in oil prices weighed on both energy and materials firms. After rallying about 100 points to start off Monday's session, the Dow Jones Industrial Average recently slid 109 points, or 1.1%, to 9863, pushing back below the psychologically important 10000 level....

Bankers gather in Chicago, face protests

A top banking industry group on Monday defended the practices of traditional banks while facing protesters who railed against Wall Street abuses....Protesters gathered outside the hotel hosting the convention on Sunday night, holding signs that said, "Hold Banks Accountable," and chanting for changes to the banking industry. "The big banks heard loud and clear tonight that taxpayers are fed up with them taking our money and using it to pay themselves outrageous profits and lobby against financial reform," the SEIU posted on its website....

U.S. NEWS:


U.S. bank chargeoff rate exceeds Depression

The rate of loan charge-offs by major U.S. banks has exceeded those seen in the early years of the Great Depression as the credit crisis continues to take a toll, Moody's Investors Service said on Monday. Bank charge-offs -- loans written off as uncollectable -- have reached $116 billion year to date, or 2.9 percent of outstanding loans on an annualized basis, Moody's said in a report. By comparison, bank charge-offs were about 2.25 percent in 1932, the third year of the Great Depression, Moody's said.

Charge-offs climbed to $45 billion in the third quarter from $40 billion in the second quarter and $31 billion in the first, Moody's said. On an annualized basis, charge-offs were about 3.4 percent of outstanding loans in the third quarter, matching the Great Depression peak in 1934, Moody's said....

The Spending Rolls On

The White House disclosed the other day that the fiscal 2009 budget deficit clocked in at $1.4 trillion, amid the usual promises to do something about it. Yet even as budget director Peter Orszag was speaking, House Democrats were moving on a dozen spending bills for fiscal 2010 that total 12.1% in more domestic discretionary increases. Yes, 12.1%.

Remember, inflation is running close to zero, or 0.8%.....These spending hikes do not include the so-called mandatory spending programs like Medicare and Medicaid, which exploded by 9.8% and 24.7%, respectively, in the just-ended 2009 fiscal year. All of this largesse is also on top of the stimulus funding that agencies received in 2009. The budget for the Environmental Protection Agency rose 126%, the Department of Education budget 209% and energy programs 146%.....Meanwhile, the spending machine rolls on, all but guaranteeing monumental future tax increases.

Bank failures hit 106 for year; many more are weak

It's a big number that only tells part of the story. The number of banks that have failed so far this year topped 100 on Friday — hitting 106 by the end of the day — the most in nearly two decades. But the trouble in the banking system from bad loans and the recession goes even deeper. Dozens, perhaps hundreds, of other banks remain open even though they are as weak as many that have been shuttered. Regulators are seizing banks slowly and selectively — partly to avoid inciting panic and partly because buyers for bad banks are hard to find.

Going slow buys time. An economic recovery could save some banks that would otherwise go under. But if the recovery is slow and smaller banks' finances get even worse, it could wind up costing even more. This year's 106 bank failures are the most in any year since 181 collapsed in 1992 at the end of the savings-and-loan crisis....

FDIC's Bair sees consensus on "too big to fail"

Key officials and lawmakers are reaching a "growing consensus" on the need for a strong mechanism that would allow the government to dismantle troubled financial giants, the chairman of the Federal Deposit Insurance Corp said on Monday. Sheila Bair said administration officials, top bank regulators and lawmakers all agree that so-called resolution authority needs to be a priority so financial firms do not take on excessive risk, thinking the government will save them. "We need to end 'too big to fail,'" Bair said in remarks to the American Bankers Association annual convention....

Hedge Funds Edge Closer to Recouping Crisis Losses

The hedge fund industry is on the brink of recouping all its investment losses sustained during the credit crunch, placing many funds in a position to earn performance fees. By the middle of last week the average fund needed only a 2% gain to reach its value on June 30, 2007, at the height of the last boom, judging from several indexes from data provider Hedge Fund Research. At the current rate, the industry will be back above the highest level of two years ago late next month....

Layoffs hitting men hardest

...Some experts say it's even harder for men, who have befallen a whopping 82 percent of the job losses since the recession started, according to a New York Times article. Male-dominated fields, such as construction and manufacturing, were hit especially hard. On the other hand, women, who are more often employed in fields that slipped under the layoff cutting block -- such as health care and education -- have seen few changes in their careers.....Historically in recessions, a greater percentage of families are supported by women. The Bureau of Labor Statistics shows in its latest statistics, women held 49.8 percent of jobs.....a poll by the Rockefeller Foundation found that women now earn 57 percent of the college degrees, and make 75 percent of the buying decisions in the home.....

Arizona budget shortfall projection reaches $2B

Legislative budget analysts raised their estimate of Arizona's midyear budget shortfall to nearly $2 billion, up from approximately $1.5 billion. The growing shortfall, roughly a fifth of the budget, prompted calls to cut spending, increase taxes and raid voter-mandated programs....

Underemployed compound state's jobless troubles

....Because she works, Duran doesn't count in California's 12.2 percent unemployment rate. But her situation is captured by a broader measure, the underemployment rate, which, in addition to the jobless, includes people who could get only part-time work as well as those who want jobs but were too discouraged to look. The state Employment Development Department estimates that this underemployment rate hit 21.9 percent in September. That figure includes 1.9 million jobless Californians, 1.4 million people who had to work part time, and 865,000 adults loosely described as discouraged.....

Kansas faces big hole in school aid

New students in Kansas' public schools and declining property values have punched what could become a $70 million hole in the state's already shaky budget, a top education official confirmed Friday. Deputy Education Commissioner Dale Dennis said Kansas faces being short in its ability to meet its legal obligations for providing aid to its 293 school districts during their current academic year. That's true even though the state already has reduced its per-pupil aid by 4.8 percent this year....

Just 1-in-4 mortgage holders have much equity

First American CoreLogic reports that 26% of homeowners with a mortgage had substantial equity, or paper profit, in their properties at the end of June in the Los Angeles-Orange area. More data:

• 35% were underwater, owing more than their homes were worth.
• 39% were within 5% of being underwater.

....I should point out that 22% of Orange County homeowners who live in their home have no mortgage at all, according to a U.S. Census Bureau estimate for 2005 to 2007.

Here’s how O.C. compares to California and U.S.:

Area	No Mortgage	With Mortgage
OC	21.9%	78.1%
CA	23.8%	76.2%
USA	31.8%	68.2%

INTERNATIONAL NEWS:


Spain jobless rate stays at 17.9%

Spain's unemployment rate has remained at 17.9% in the third quarter, the highest in the European Union. The number of jobless now stands at 4.1 million, the country's statistics agency said....

Profit More Than Doubles at Tata Motors

Tata Motors Ltd , India's largest vehicle maker, beat forecasts as profits more-than- doubled on improved margins due to lower input prices and a recovery in demand as the financial crisis loosened its grip. The recovery was also aided by lower foreign exchange loss of 150 million rupees compared with 2.45 billion rupees a year ago....

Iceland says goodbye to the Big Mac

...Iceland's three McDonald's restaurants — all in the capital Reykjavik — will close next weekend, as the franchise owner gives in to falling profits caused by the collapse in the Icelandic krona....

Argentina launches new debt deal

Argentina plans to launch a new debt swap, which it hopes will end a long-running saga that started from a massive default eight years ago. Latin America's third-largest economy is trying to rebuild its reputation with international investors and sell bonds to raise money....

Postal strikes delay 40% of mail

The nationwide postal workers' strikes have delayed about 30 million letters, some 40% of a typical day's post, Royal Mail has revealed. Friday saw a second day of strikes, with delivery and collection workers walking out, following Thursday's 24-hour strike by mail centre staff.....

Bank of Japan May Forecast Third Year of Deflation

The Bank of Japan will probably forecast this week that deflation will extend into fiscal 2011, an indication that borrowing costs are likely to stay near zero....

South Korean Economy Expands at Fastest Pace in Seven Years

South Korea’s economy grew at the fastest pace in seven years, stoking speculation the central bank will raise borrowing costs for the first time since the collapse of Lehman Brothers Holdings Inc. Gross domestic product increased 2.9 percent in the third quarter from three months earlier, when it expanded 2.6 percent, the central bank said today in Seoul.

That was the fastest since the first quarter of 2002 and compared with a median estimate of 1.9 percent growth in a Bloomberg survey. From a year earlier, GDP rose 0.6 percent. South Korea led a regional rebound with China and Singapore as companies including Hyundai Motor Co. and Samsung Electronics Co. reported surging profits, driven by exports....

Recession continues to grip Britain

The British economy sank deeper into its longest recession on record, with figures released Friday showing an unexpected fall in third-quarter gross domestic product that dashed hopes of a long-awaited turnaround here.

The severity and length of the British downturn underscore the uneven recovery taking place in the aftermath of the global recession, with the rebound in Europe particularly patchy. In the summer, the region's largest economies -- Germany and France -- became the first wealthy countries to emerge from recession. But other countries, including Britain, Ireland and Spain, are still struggling with far deeper problems including U.S.-style real estate busts and the bursting of financial asset bubbles.....

UK households 'lost 13pc of wealth in one year'

The huge impact of the economic turmoil on households in Britain has been revealed by new figures that show that household wealth in Britain fell by £844bn between 2007 and 2008, driven by sharp falls in house prices and the collapse of the stock market....

OTHER:


Federal Jobs: Easy to Spot, Hard to Get

The federal government's "help wanted" sign is up. The problem, applicants are finding, is getting in the door. More than a quarter-million federal workers are expected to be hired in the next three years, which makes the government attractive to job seekers at a time of 9.8% unemployment and shrinking private payrolls. But the government, it turns out, isn't very good at hiring. Its screening process has been making it hard for applicants, particularly young ones with less work experience and fewer government contacts, to move into federal jobs.

Rebate cards more a gift to retailers than consumers

...Industry estimates put the amount of rebates paid in plastic at $4.2 billion in 2008, up by more than 50 percent from the year before, a number that's expected to grow by even more this year. The cards work simply: Instead of a rebate check that is deposited into a bank account, the prepaid card is branded either with a store name, known as a closed-loop card, or a major credit-card logo, such as Visa or MasterCard, known as open-loop cards. The only way to redeem the funds is to buy something else, although a few rebates allow you the cash at an ATM....

Loaded propositions

Consumers are increasingly turning away from traditional bank accounts and credit cards in favor of a different form of plastic: prepaid cards. Consumers typically buy them from a retailer, load them with money -- sometimes from directly deposited paychecks -- and use them at checkout counters or to pay bills online. And the cards are advertised with a phrase rarely used by financial institutions since the beginning of the credit crisis: No credit check necessary.

So it's no wonder that in 2008, consumers loaded $8.7 billion on prepaid cards that carry Visa, MasterCard, American Express and Discover logos and can be used anywhere, up from about $4 billion the year before, according to Mercator Advisory Group, a research firm that focuses on the payments industry. Consumer advocates warn that the cards can carry an assortment of fees.....

Cash for Clunkers trade-ins piling up

Trade-ins from the Cash for Clunkers program are piling up and auto recyclers are seeking more time to meet the deadline for disposing of all those vehicles...."I've got a parking lot of almost 4,000 vehicles right now," said Harry Haluptzok, chief executive of John's Auto Parts in Blaine, Minn., near Minneapolis. His business typically dismantles 100 vehicles per week, but the workload has now more than doubled, and Haluptzok hired 10 more workers to keep up with all the extra vehicles.

Under the program, the cars are required to be crushed or shredded within six months of the date the vehicle is transferred from the dealership. Recyclers say the deadline, even a few months away, will be hard as they try to remove spare parts such as transmissions, front and rear axles, starters and alternators....."We're breaking that circle here by crushing good quality parts. We can't process them quick enough in six months."....

Newspaper circulation falling fast, down 10.6%

The decline in U.S. newspaper circulation is accelerating as the industry struggles with defections to the Internet and tumbling ad revenue. Figures released Monday by the Audit Bureau of Circulations show that average daily circulation dropped 10.6% in the April-September period from the same six-month span in 2008. That was greater than the 7.1% decline in the October 2008-March 2009 period and the 4.6% drop in the April-September period of 2008. Sunday circulation fell 7.5% in the latest six-month span. As expected, The Wall Street Journal has surpassed USA Today as the top-selling newspaper in the United States....

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