Nov. 26 (Bloomberg) -- Billionaire Warren Buffett’s decision to increase his stake in financial companies led by Wells Fargo & Co. and U.S. Bancorp and avoid subprime lenders is paying off for Berkshire Hathaway Inc.
Berkshire’s bank-related investments rose 36 percent in the third quarter, while the 84-member Standard & Poor’s 500 Financials Index declined 0.1 percent. Berkshire, based in Omaha, Nebraska, ranked as the biggest shareholder of Wells Fargo and U.S. Bancorp at the end of September, according to data compiled by Bloomberg.
“In one word, I can sum it up: patience,” said William Frels, chief executive officer of Mairs & Power Inc. in St. Paul, Minnesota, which owns shares of Wells Fargo and U.S. Bancorp and has Berkshire stock in some client accounts. “Warren has the luxury of being able to exercise patience, where most of the other players are under the gun to make things happen and can’t sit around and wait for opportunities.”
A weighted basket of Berkshire’s financial stocks rose at an average quarterly rate of 2.3 percent during the past year through September, Bloomberg data show. The S&P financials dropped by an average 11.4 percent per quarter in the same stretch. The index slumped 60 percent this year as new home sales fell to the lowest in 17 years.
As chairman and chief executive officer of Berkshire, the 78-year-old Buffett makes most of the company’s investing decisions. Buffett, whom Forbes magazine calls the country’s wealthiest man, declined to comment for this story. Berkshire has gained at an average annual rate of 21 percent over the past two decades, exceeding the 12 percent advance of the S&P 500 Index.
Bank of America
Berkshire’s financial investments have dropped 32 percent since Sept. 30, excluding a $5 billion investment in Goldman Sachs Group Inc., reducing Buffett’s profits. The S&P financials index fell 41 percent in the period.
Berkshire’s third-quarter holdings, released this month, show the company trimmed its stake in San Francisco-based Wells Fargo by a tenth of one percent since June to 290.4 million shares, valuing the investment at $7.8 billion as of yesterday. Berkshire increased its holdings of Minneapolis-based U.S. Bancorp by 6.3 percent to 72.9 million shares. Berkshire kept its stake in New York-based American Express Co. at 151.6 million shares, remaining the credit-card company’s biggest investor.
The only financial company Berkshire moved away from in the third quarter was Charlotte, North Carolina-based Bank of America Corp., cutting its stake to 5 million shares from 9.1 million. Bank of America did what Buffett refused to do -- buy Countrywide Financial Corp., the subprime lender plagued by tumbling home prices and record foreclosures.
Goldman Sachs Investment
Buffett said in October 2007 that he “never came close” to acquiring Countrywide shares. He also has denied reports he considered buying part of Bear Stearns Cos., the New York-based securities firm later bailed out by JPMorgan Chase & Co.
“The fact that he was smart enough to take a pass on so many deals that have gone sour indicates that he correctly saw that things were going to get worse,” said Whitney Tilson, managing director of New York-based hedge fund T2 Partners LLC, which has been adding to its Berkshire holdings.
The Goldman Sachs investment has yet to bear fruit. Berkshire agreed to buy $5 billion of the New York-based company’s perpetual preferred shares on Sept. 23 and received warrants for another $5 billion at $115 a share. The stock has since tumbled 43 percent to $71.78. Still, Buffett will get a 10 percent annual dividend on the preferred securities.
Stock Plunges
Berkshire Class A shares dropped by 32 percent this year, and 12 percent in October, the worst month since 2000, as the company’s profit fell for four straight quarters. Berkshire gained $8,900 yesterday to $96,400 in New York Stock Exchange composite trading. The company’s other financial investments are M&T Bank Corp., SunTrust Banks Inc., Torchmark Corp. and Wesco Financial Corp.
Buffett wrote in a New York Times column that he’s buying U.S. stocks and may shift his personal investments into equities.
“He’s right,” said Frels, 69, who entered the investing business in 1962. “With the decline, U.S. stock prices appear quite reasonable.”
Nov. 26 (Bloomberg) -- Orders for U.S. durable goods fell twice as much as forecast in October as the credit freeze deepened and sales tumbled.
The 6.2 percent drop in bookings of goods meant to last several years was the biggest in two years and followed a revised 0.2 percent decrease in September, the Commerce Department reported today in Washington. A separate report from Commerce showed consumer spending fell by the most since the 2001 recession.
Companies are likely to keep cutting back as sales slump. Regional reports have shown further weakness in manufacturing this month as access to credit dried up, indicating declines in business investment will hurt economic growth through the rest of the year and into 2009.
``Businesses are accelerating the pace of jobs cuts and canceling investment plans,'' Michelle Meyer, an economist at Barclays Capital in New York, said before the report. ``The economy appears to have fallen into a deep recession.''
A Labor Department report showed that initial claims for unemployment insurance last week slipped to 529,000 from 543,000 the prior week, while remaining close to the highest level since 1992.
Treasuries Rally
Treasuries, which rose earlier in the day, stayed higher after today's reports. Yields on benchmark 10-year notes fell to 3.09 percent at 8:48 a.m. in New York, from 3.12 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index dropped 1.6 percent to 839.20.
Economists projected orders would fall 3 percent after a previously reported 0.9 percent increase in September, according to the median of 72 forecasts in a Bloomberg News survey. Estimates ranged from a drop of 6.5 percent to a gain of 0.5 percent.
Excluding demand for transportation equipment, which tends to be volatile, orders dropped 4.4 percent, also more than anticipated and the biggest decline since January 2002. Those bookings were projected to fall 1.6 percent, according to the Bloomberg survey.
Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, decreased 4 percent, the biggest decline in almost two years. Shipments of those items, used in calculating gross domestic product, fell 2.4 percent following a 1.6 percent gain in September.
Transport Orders
Bookings for transportation equipment fell 11 percent, today's report showed. Orders for commercial aircraft dropped 4.7 percent and those for automobiles declined 4.5 percent.
Boeing Co., the world's second-largest commercial planemaker, said it received 14 orders for aircraft in October, down from 41 the previous month. A strike by 27,000 machinists at the Chicago-based company probably hindered demand. The walkout was resolved on Nov. 1.
Auto-industry figures released this month showed cars and light trucks sold at a 10.6 million annual pace in October, the lowest since April 1991.
National manufacturing reports signaled broad declines in bookings as companies failed to secure financing for big purchases. Manufacturing contracted in October at the fastest pace in 26 years, the Tempe, Arizona-based Institute for Supply Management reported earlier this month.
Regional Reports
Regional reports indicate the decline in manufacturing is accelerating. The New York Fed's general economic index fell this month to the lowest level since record-keeping began in 2001. The Philadelphia Fed said manufacturing in its region shrank at the fastest pace in 18 years.
Today's report may lead some economists to lower forecasts for growth in the fourth quarter. Preliminary figures on gross domestic product from the Commerce Department yesterday showed the economy contracted at a 0.5 percent annual rate from July through September. It was the second drop in a year and the biggest since the 2001 recession.
U.S. lawmakers postponed until December a vote on whether to give American automakers $25 billion in new federal loans. Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi gave the companies a Dec. 2 deadline to present restructuring plans.
A slowdown in consumer spending and business investment is causing manufacturers to cut back. Fleetwood Enterprises, the third-largest U.S. maker of recreational vehicles, said it's closing 8 of its 24 plants because of reduced demand for travel trailers and factory-built housing.
``In the current economic climate, it is essential that we match our production to demand,'' Chief Executive Officer Elden Smith said in a Nov. 24 statement. ``We must position Fleetwood to operate profitably under the present and foreseeable business circumstances.''
Nov. 26 (Bloomberg) -- The Federal Reserve's new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren't sure they want more debt.
Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed's new liquidity through deposits at the central bank.
``We are sort of spitting in the wind,'' said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. ``Banks won't be throwing a lot of loans out there when they fear -- rationally -- those loans may not be paid back.''
Policy makers aim to kick-start markets for loans to students, car buyers, credit-card borrowers and small businesses with a new $200 billion program. Backed in part by the Treasury, the Fed will become a new buyer in the market for consumer loans at a time when many traditional holders of the assets, such as off-balance sheet bank units, have collapsed or been dissolved.
The announcement of the new efforts yesterday came amid rising criticism that officials were excessively focused on saving Wall Street firms, with the Citigroup Inc. rescue Nov. 23 the latest example. President-elect Barack Obama said repeatedly in the past two days he'll compose a plan to help ``Main Street'' as well as the financial industry.
1966 Powers
Obama and congressional Democrats have also pushed for a stronger response to the housing crisis. The Fed responded yesterday, invoking authority first granted in 1966 to buy $500 billion of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.
Along with a $100 billion plan to buy the corporate debt of Fannie, Freddie and federal home loan banks, the step marks the central bank's biggest foray into a type of quantitative easing. That's an unorthodox monetary policy tool that goes beyond setting short-term interest rates. The central bank has already cut its benchmark rate to 1 percent.
``Rates are going to be kept down for a long time, the Fed's balance sheet is going to be expanded for a long time,'' said John Ryding, chief economist at RDQ Economics, New York. ``It does, as we have argued, represent a very significant quantitative easing.''
Mortgage rates and yield premiums on Fannie and Freddie debt tumbled after the announcement. The average U.S. rate for a 30- year fixed mortgage ended at about 5.5 percent after starting the day at 6.38 percent, according to Bankrate Inc.
Markets React
The spreads on most of Fannie's and Freddie's $1.7 trillion of corporate debt and $4.1 trillion of mortgage-backed bonds over comparable Treasuries tumbled to the lowest levels since early October. The cost to protect against defaults on corporate bonds and on securities backed by commercial mortgages also declined.
The question remains whether the lower rates will have much impact on the flow of credit and the economy. While the Fed has expanded its balance sheet by $1.3 trillion so far, banks have left much of the liquidity on deposit at the central bank itself, as so-called excess reserves. The surplus stood at $604 billion on Nov. 19.
Bank regulators have tried to cajole lenders, saying they ``expect'' them to lend, in a guidance letter issued Nov. 12. The Fed's most recent quarterly survey of bank loan officers showed that 70 percent of domestic firms had tightened lending standards for their best mortgage borrowers in the third quarter, and 60 percent had raised standards on credit-card loans.
`Non-Functioning'
``The root of the problem is our securitization markets are non-functioning,'' said Josh Rosner, managing director at New York research firm Graham Fisher & Co. ``We have capital problems at the banks so they can't take over.''
While officials yesterday contested claims that the Fed is undertaking quantitative easing, they acknowledged that the central bank's new actions will result in another injection of funds into the system. Officials said their objective is to affect credit markets rather than to target money supply.
The Bank of Japan is the only major central bank to deploy quantitative easing in modern times, from 2001 to 2006. Current Governor Masaaki Shirakawa said in May that the policy ``was very effective in stabilizing financial markets,'' while at the same time it had ``limited impact'' in resolving Japan's economic stagnation of the time because banks wouldn't lend and companies wouldn't borrow.
Fed Meeting
Fed officials next meet on Dec. 16-17, when economists anticipate they will cut their target rate for overnight loans between banks to 0.5 percent. The central bank expanded the meeting to two days, making it likely that the Federal Open Market Committee will explore the options for conducting policy with rates near zero percent.
``We can't look back to recent history'' as a guide for what to do, Mark Gertler, a New York University economics professor who has collaborated with Fed Chairman Ben S. Bernanke on research, said in a Bloomberg Television interview. ``We really do have to make it up as we go along.''
Yesterday's announcements continue the trend of the Fed and Treasury taking on more risk with public money, while private sector balance sheets contract. Earlier this week, the two agencies and the Federal Deposit Insurance Corp. offered a backstop for a $306 billion portfolio of Citigroup assets.
The new programs bring the estimated total government commitment to ease credit to about $8.5 trillion, with $3.17 trillion being used to date.
`Too Early'
``It's too early to tell whether the lending has increased or not,'' David McCormick, Treasury undersecretary for international affairs, said in an interview with Bloomberg Television today. ``We certainly expect that it will.''
Under the new Term Asset-Backed Securities Loan Facility, the Treasury will use taxpayer funds to protect the Fed against the first $20 billion of losses, or 10 percent, of $200 billion in exposure to AAA rated securitized consumer debt.
``I am willing to believe that these things that are rated AAA might have a maximum 10 percent loss if the assets behind them never changed,'' said Ann Rutledge, a principal at R&R Consulting in New York, which specializes in structured finance. ``The collateral in credit card asset-backed securities changes.''
Ratings may be harder to judge when credit quality is deteriorating. Also, the government has less information than issuers, who could back the bonds with assets that pose the most risk of declining quality, Rutledge said.
Officials yesterday said the risk of loss is minimal, and noted that the Fed will put haircuts on the value of the ABS that it takes on. Treasury Secretary Henry Paulson said the mortgage debt purchases are a ``great investment for the taxpayer'' because the government already stands behind Fannie and Freddie.
Nov. 26 (Bloomberg) -- In turning to Clinton administration veterans for his economic team, President-elect Barack Obama is banking that people who had a role in the current financial crisis will be best able to fix it.
Timothy Geithner, Obama’s choice for Treasury secretary, was involved in the decision to let Lehman Brothers Holdings Inc. go bankrupt, which exacerbated a global credit-market freeze. Lawrence Summers, his pick for White House economic adviser, ran the Treasury when Congress repealed the Glass- Steagall Act, breaking down walls between commercial and investment banking.
Presidents have always sought experienced hands, even if those hands aren’t always clean. The most extreme example might be Franklin D. Roosevelt’s selection of stock speculator Joseph P. Kennedy as the first chairman of the Securities and Exchange Commission.
“Kennedy may have been the fox in the henhouse, but he knew where the holes in the henhouse were,” said John Steele Gordon, an economic historian. “You certainly need people with experience in a situation like this, people who know what the hell they are doing.”
Obama, 47, acknowledged as much yesterday in naming Peter Orszag, a member of President Bill Clinton’s National Economic Council, as the next budget director.
“Peter doesn’t need a map to know where the bodies are buried,” he said. “We are going to hit the ground running.”
Few Choices
Obama didn’t have a lot of experienced hands to choose from, given that Clinton is the only Democratic president since 1981, said Gordon, the author of “Hamilton’s Blessing, the Extraordinary Times of Our National Debt.”
“Presidents generally reach back to past administrations,” he said. “Secretary of the Treasury is not exactly an entry-level job.”
Obama’s immediate goals will be far different from Clinton’s. Urged on by Robert Rubin, who became his Treasury secretary, Clinton came to office in 1993 determined to raise taxes and cut spending to reduce the federal deficit, then at a record $290.4 billion.
Obama, who inherits a recession that could be long and deep, will increase the deficit with an economic-stimulus package that may be as large as $700 billion, according to aides and lawmakers.
Jared Bernstein, a senior economist at the labor-oriented Economic Policy Institute in Washington, said the new economic team’s connection to Clinton, 62, may be a benefit in selling that plan.
‘Added Credibility’
“They’re associated with Rubinomics, balanced budgets,” Bernstein said. “That may give them added credibility” in making the case that more spending is needed.
The association works two ways. At the Treasury, Rubin fought proposals to regulate credit derivatives. That stymied Geithner, 47, when, as president of the New York Federal Reserve Bank, he tried in 2005 to reform the market for the exotic financial products that helped bring on today’s financial crisis.
Rubin also helped negotiate legislation to repeal Glass- Steagall, a Depression-era law that limited commercial banks to taking deposits and making loans. As Rubin’s deputy and then successor at the Treasury, Summers helped shepherd the repeal into law, leading to the creation of megabanks such as Citigroup Inc. that could create and trade securities.
Senior Adviser
After leaving the Treasury, Rubin, 70, became a senior adviser to the top executives at Citigroup, which on Nov. 23 became the latest financial institution to get a government bailout. U.S. regulators agreed to protect the bank from losses on $306 billion of troubled assets, including tens of billions related to its derivatives.
Critics say putting Rubin’s foxes back in charge of the henhouse violates Obama’s campaign promise to be an agent of change.
“Certainly you can’t get any farther away from a culture of change,” said Josh Rosner, a managing director at investment-research firm Graham Fisher & Co. in New York. “All of these folks are too tied to the roots of the problem.”
Geithner has been in the middle of the financial crisis since taking over as New York Fed president in 2003. He was the Fed’s chief liaison to the banking industry as subprime lending and securitization were taking off. Then last year, those securities began defaulting, threatening the stability of the banking system.
Takeover, Bailouts
Since then, Geithner has helped negotiate the takeover of Bear Stearns Cos. by JPMorgan Chase & Co., the bailouts of insurer American International Group Inc. and Citigroup, and the Lehman bankruptcy. Money markets froze, credit spreads soared and stocks tumbled after Lehman filed to liquidate on Sept. 15.
Bernstein said the Obama team’s involvement in the crisis may actually push them to take a stronger line on market risk. “You can bet they’ll be implementing new regulations, or making sure we implement the old ones.”
That doesn’t mollify some progressives who were hoping Obama’s election would mean a break from the emphasis Clinton and Rubin put on free trade and unfettered markets.
“The number of Clinton folks involved is somewhat surprising,” said Gabe Gonzalez, campaign director at the Center for Community Change, a grassroots organizing group based in Washington.
“The assumption we’re making is you’ve got a real crisis moment,” he said. “Regardless of what their policies may have been in the past, they’re going to have to respond to that.”
Nov. 26 (Bloomberg) -- Spending by U.S. consumers dropped in October by the most since the 2001 contraction, signaling the economy is sinking into a deeper recession.
The 1 percent decline in purchases followed a 0.3 percent drop in September, the Commerce Department said today in Washington. A separate report from Commerce showed business investment also tumbled last month.
The biggest consumer spending slump in three decades is likely to persist as home prices fall and job losses mount, threatening the holiday sales outlook at retailers from Zale Corp. to Best Buy Co. Faltering demand has caused the Federal Reserve, Treasury and President-elect Barack Obama to ratchet up plans to ease the credit crisis.
``Everybody is cutting back at the same time,'' Christopher Low, chief economist at FTN Financial in New York, said before the report. ``This takes us out of the generic recession category and puts us in the severe recession category.''
A Labor Department report showed that initial claims for unemployment insurance last week slipped to 529,000 from 543,000 the prior week, while remaining close to the highest level since 1992.
Treasuries, which rose earlier in the day, stayed higher after today's reports. Yields on benchmark 10-year notes fell to 3.05 percent at 8:38 a.m. in New York, from 3.12 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index fell 2.1 percent to 835.40.
Economists Forecast
Economists forecast spending would fall 1 percent, after according to the median of 72 estimates in a Bloomberg News survey. Projections ranged from declines of 0.4 percent to 2 percent.
The report showed incomes rose 0.3 percent after a 0.1 percent gain in September, and measures of inflation decelerated.
Orders for durable goods fell 6.2 percent last month, twice as much as forecast and the biggest drop in two years, Commerce reported separately.
Retailers are concerned about the November-December holiday season, which brings in one-third or more of annual revenue. Zale, the biggest U.S. jewelry chain by stores, yesterday rescinded its annual forecast, saying in a statement that it ``does not believe it can reliably gauge likely holiday performance or sales in the balance of fiscal 2009.''
Today's spending report also confirmed inflation is retreating as demand wanes. The price gauge tied to spending patterns fell 0.6 percent in October and was up 3.2 percent from the same month in 2007.
Inflation Measure
The Fed's preferred gauge of prices, which excludes food and fuel, was unchanged. In the 12 months ended in October, the measure was up 2.1 percent, the smallest year-over-year gain since February.
Adjusted for inflation, spending fell 0.5 percent, a fifth consecutive decline. The last time price-adjusted spending dropped as many months in a row was in 1990-91.
The decrease in spending combined with the increase in incomes pushed the savings rate up to 2.4 percent from 1 percent in September.
Today's report showed inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 3.8 percent last month. Purchases of non-durable goods decreased 0.6 percent, and spending on services, which account for almost 60 percent of all outlays, climbed 0.2 percent.
Quarterly Slide
Consumer spending dropped at a 3.7 percent annual pace in the third quarter, more than the government had previously forecast and the biggest plunge since 1980, revised Commerce figures showed yesterday. The economy shrank 0.5 percent, also faster than initially estimated.
The freeze in credit is restricting purchases of expensive goods from cars to homes. To lure buyers, Ford Motor Co., the second-biggest U.S. automaker, said it will offer employee pricing to all buyers from Nov. 19 through Jan. 5, on almost all 2008 and 2009 Ford, Lincoln and Mercury brand models.
The Fed yesterday announced two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. Upon taking office next year, Obama is likely to propose an economic-stimulus package three times larger than the one contemplated only weeks ago, with the main focus on infrastructure projects, aides and lawmakers said this week.
Nov. 26 (Bloomberg) -- President-elect Barack Obama named former Federal Reserve Chairman Paul Volcker to head a new White House economic board that will propose ways to revive growth as the U.S. grapples with an “economic crisis of historic proportions.”
“At this defining moment for our nation, the old ways of thinking and acting just won’t do,” Obama said at a news conference in Chicago, his third in as many days.
Volcker, 81, will be chairman of the President’s Economic Recovery Advisory Board. The panel’s top staff official will be Austan Goolsbee, a University of Chicago economist who will also be a member of the president’s Council of Economic Advisers.
The panel, which will include experts from outside government, will meet about once a month and periodically brief Obama with advice on how to shore up financial markets. Volcker’s position will be part-time.
“Sometimes policymaking in Washington can become too insular,” Obama said. “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.”
Treasury Secretary
Volcker, who throttled the economy to crush inflation in the 1980s, was an adviser to Obama during the presidential campaign. He was a candidate for Treasury secretary, a job that went to Federal Reserve Bank of New York President Timothy Geithner.
Volcker was appointed Fed chairman in August 1979 as the U.S. experienced a “crisis of confidence” under President Jimmy Carter.
With the president hobbled by a hostage crisis in Iran, long lines at gas stations and inflation of more than 10 percent, Volcker unleashed interest rates and began to clamp down on the quantity of money in the banking system.
Volcker has voiced his contempt for Wall Street’s risk- management and is likely to come to the job ready to impose tougher restrictions.
Banks have taken at least $685 billion in credit losses and write downs in a crisis that began with soaring default rates on high-risk mortgages and ended up redrawing the entire U.S. financial landscape.
Nov. 26 (Bloomberg) -- Spending by U.S. consumers dropped in October by the most since the 2001 contraction, signaling the economy is sinking into a deeper recession.
The 1 percent decline in purchases followed a 0.3 percent drop in September, the Commerce Department said today in Washington. A separate report from Commerce showed business investment also tumbled last month.
The biggest consumer spending slump in three decades is likely to persist as home prices fall and job losses mount, threatening the holiday sales outlook at retailers from Zale Corp. to Best Buy Co. Faltering demand has caused the Federal Reserve, Treasury and President-elect Barack Obama to ratchet up plans to ease the credit crisis.
``Everybody is cutting back at the same time,'' Christopher Low, chief economist at FTN Financial in New York, said before the report. ``This takes us out of the generic recession category and puts us in the severe recession category.''
A Labor Department report showed that initial claims for unemployment insurance last week slipped to 529,000 from 543,000 the prior week, while remaining close to the highest level since 1992.
Treasuries, which rose earlier in the day, stayed higher after today's reports. Yields on benchmark 10-year notes fell to 3.05 percent at 8:38 a.m. in New York, from 3.12 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index fell 2.1 percent to 835.40.
Economists Forecast
Economists forecast spending would fall 1 percent, after according to the median of 72 estimates in a Bloomberg News survey. Projections ranged from declines of 0.4 percent to 2 percent.
The report showed incomes rose 0.3 percent after a 0.1 percent gain in September, and measures of inflation decelerated.
Orders for durable goods fell 6.2 percent last month, twice as much as forecast and the biggest drop in two years, Commerce reported separately.
Retailers are concerned about the November-December holiday season, which brings in one-third or more of annual revenue. Zale, the biggest U.S. jewelry chain by stores, yesterday rescinded its annual forecast, saying in a statement that it ``does not believe it can reliably gauge likely holiday performance or sales in the balance of fiscal 2009.''
Today's spending report also confirmed inflation is retreating as demand wanes. The price gauge tied to spending patterns fell 0.6 percent in October and was up 3.2 percent from the same month in 2007.
Inflation Measure
The Fed's preferred gauge of prices, which excludes food and fuel, was unchanged. In the 12 months ended in October, the measure was up 2.1 percent, the smallest year-over-year gain since February.
Adjusted for inflation, spending fell 0.5 percent, a fifth consecutive decline. The last time price-adjusted spending dropped as many months in a row was in 1990-91.
The decrease in spending combined with the increase in incomes pushed the savings rate up to 2.4 percent from 1 percent in September.
Today's report showed inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 3.8 percent last month. Purchases of non-durable goods decreased 0.6 percent, and spending on services, which account for almost 60 percent of all outlays, climbed 0.2 percent.
Quarterly Slide
Consumer spending dropped at a 3.7 percent annual pace in the third quarter, more than the government had previously forecast and the biggest plunge since 1980, revised Commerce figures showed yesterday. The economy shrank 0.5 percent, also faster than initially estimated.
The freeze in credit is restricting purchases of expensive goods from cars to homes. To lure buyers, Ford Motor Co., the second-biggest U.S. automaker, said it will offer employee pricing to all buyers from Nov. 19 through Jan. 5, on almost all 2008 and 2009 Ford, Lincoln and Mercury brand models.
The Fed yesterday announced two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. Upon taking office next year, Obama is likely to propose an economic-stimulus package three times larger than the one contemplated only weeks ago, with the main focus on infrastructure projects, aides and lawmakers said this week.
Tuesday, November 25, 2008
Fed Commits $800 Billion More to Unfreeze Lending (Update5)Nov. 25 (Bloomberg) -- The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.
The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.
With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers hope the initiatives will bring down the interest rates on mortgages and consumer loans, offsetting the withdrawal of private-sector financing.
“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”
The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and Federal Home Loan Banks after the yield premiums on those securities jumped. It will also buy up to $500 billion of mortgage-backed securities issued by Fannie, Freddie and Ginnie Mae, a government agency that insures bonds.
Fannie and Freddie have about $1.7 trillion of corporate debt outstanding and $4.1 trillion of mortgage-backed securities.
Mortgage Rates
Rates on home loans haven’t fallen even after the Fed cut its key interest rate and yields on benchmark Treasuries tumbled. Average 30-year mortgage rates were 5.98 percent yesterday, little changed from the 2007 average of 5.95 percent, according to bankrate.com.
In that time, the Fed has cut its target rate for overnight loans between banks by 4.25 percentage points, to 1 percent. Bernanke said in a November 2002 speech that as the rate approached zero, the central bank could consider buying mortgage bonds or U.S. Treasuries to finance government spending.
Fannie and Freddie bonds rallied after the announcement. The yield premium on Fannie Mae’s five-year debt over similar- maturity Treasuries tumbled 0.34 percentage point, to 1.02 percentage point, by 2 p.m. in New York, according to data compiled by Bloomberg. Treasuries rallied, with yields on two- year notes tumbling 0.13 point to 1.15 percent, while the 10-year yield dropped 0.25 point to 3.08 percent.
“It’s very important that lending continue to be available” because “the economy is turning down pretty dramatically,” Treasury Secretary Henry Paulson said at a press conference in Washington. He also said $200 billion is just the “starting point” for the Fed’s program to buttress consumer and small-business loans.
Quantitative Easing
The Fed won’t be removing cash from other parts of the financial system to make up for the purchases, government officials told reporters on a conference call. They rejected any comparison with Japan’s so-called quantitative easing effort to combat deflation, saying that the Fed’s objective is to buttress credit markets rather than ramp up money.
“The aim of credit policy is focused on narrowing credit spreads, as opposed to expanding the money supply,” said Mark Gertler, a New York University economics professor who has collaborated with Bernanke on research. “The hallmark of this crisis is unusually high credit spreads which are dampening borrowing and spending across the economy.”
Under the Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion to holders of AAA rated asset- backed securities backed by “newly and recently originated” loans. Those include education-, car- and credit-card loans, and borrowing guaranteed by the Small Business Administration. The Fed hopes to have the TALF running by February.
Buyer Exodus
Private-sector ABS buyers have either disappeared or have shrunk their balance sheets, contributing to the market’s disruption, officials said. Traditional buyers included the structured investment vehicles, set up by Citigroup Inc. and other banks, that have been wound down in the crisis.
Even asset-backed securities that the government already stands behind have been hammered by the exodus of investors.
Bonds backed by payments on government-backed student loans made by the Federal Family Education Loan Program, or FFELP, are trading at 300 basis points more than the three-month London interbank offered rate, according to JPMorgan Chase & Co. data. The premium was 60 basis points in January.
“It can certainly improve credit conditions for consumers,” said Derrick Wulf, who helps manage $70 billion in mostly fixed-income assets at Dwight Asset Management Co. in Burlington, Vermont.
Beyond Banks
The asset-backed securities program is similar to the Fed’s effort to bring down the cost of financing for commercial paper, the short-term debt companies issue to finance payrolls and other expenses, because it goes beyond banks.
“What the Fed has been trying to do is get a sense of what works and what doesn’t work,” Wulf said. “One of the things that has worked is the commercial paper facility.”
“The cheaper that they could issue their debt, the more aggressively they should be able to buy mortgages in the secondary market,” said Alan Bosworth, director of agency trading at Vining Sparks in Memphis, Tennessee.
The Fed may hold the Fannie and Freddie debt and securities until they mature or sell them, with plans to be determined, government officials said on a conference call with reporters.
Treasury Buying
A separate Treasury program for buying debt linked with home loans has already quadrupled, from about $7 billion, a government official said on condition of anonymity.
The Treasury will provide $20 billion of “credit protection” to the Fed for the TALF, using funds from the $700 billion financial-rescue package. The Treasury said in a statement that the facility may expand over time and cover other assets, such as commercial and private residential mortgage- backed debt.
Under the TALF, the New York Fed will auction a fixed amount of loans each month for a one-year term. Assets will be held in a special-purpose vehicle. The program will stop making new loans at the end of next year unless the Fed Board of Governors extends the program.
Lenders providing credit under the TALF “must have agreed to comply with, or already be subject to,” executive- compensation restrictions in the October bailout law, the statement said.
Separately, in a sign of disagreement among Fed officials, seven of the 12 district banks opposed lowering the rate on direct loans to banks before the Oct. 28-29 policy meeting, the central bank said in meeting minutes released today.
Timing of Purchases
The Fed will start buying the direct debt of government- sponsored enterprises -- Fannie, Freddie and a dozen federal home loan banks -- through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.
Purchases of both types of debt “are expected to take place over several quarters,” the Fed said.
Treasury staffers are in regular communication with President-elect Barack Obama’s team, officials said. New York Fed President Timothy Geithner, Obama’s pick to be Treasury secretary, was involved in today’s plans, though not in a capacity with the new administration, officials said.
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