Airlines’ Cry For Help
July 11th, 2008Help us help you, airlines pleaded with customers, asking them to urge Congress to keep down fuel prices by curbing speculation.
Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S.
July 10th, 2008By Dawn Kopecki and Shannon D. Harrington
July 10 (Bloomberg) — Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, fell to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government rescue.
Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac’s decline creates “challenges'’ for the company’s plan to raise $5.5 billion.
Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don’t have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.
“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'’ Poole, 71, who left the Fed in March, said in the interview yesterday.
Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.
McCain
The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.
Senator John McCain, the presumptive Republican presidential nominee, said the federal government can’t allow them to fail.
Fannie Mae and Freddie Mac “are vital to Americans’ ability to own their own homes,'’ McCain said in response to a reporter’s question during a campaign stop at a diner in Livonia, Michigan. “They will not fail; we cannot allow them to fail.'’
Fair value accounting measures a company’s net worth if it had to liquidate all of its assets to repay liabilities. Fannie Mae and Freddie Mac, both of which have the implicit backing of the government, make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans.
Stock Price Target
Fannie Mae slumped $1.64 to $13.67 at 11:15 a.m., extending declines for the year to 66 percent. Freddie Mac tumbled $2.17 to $8.09, taking its 2008 slide to 76 percent. UBS AG analysts led by Eric Wasserstrom in New York increased their estimates for losses at Freddie Mac and cut their price target for the stock to $10 from $28 after meeting with Freddie Mac’s chief financial officer Anthony Piszel and controller David Kellerman, according to a report today.
Fannie Mae and Freddie Mac have raised a combined $20 billion since December to cover losses of more than $11 billion generated since the credit crisis began last year. Freddie Mac has yet to raise a planned $5.5 billion, scheduled for mid-year.
Paulson, Bernanke
U.S. Treasury Secretary Henry Paulson told lawmakers in Washington today that he’s been assured by the regulator for Fannie Mae and Freddie Mac that the companies have enough capital.
The Office of Federal Housing Enterprise Oversight “has made clear that they are adequately capitalized,'’ Paulson said in testimony to the House Financial Services Committee. Federal Reserve Chairman Ben S. Bernanke also appeared.
The Treasury has been discussing what to do if Fannie Mae and Freddie Mac fail for months as part of its contingency planning, the Wall Street Journal reported today, citing three people familiar with the matter. The government doesn’t expect the companies to fail and it doesn’t have a rescue plan in place, the Journal said.
“At some point we’re going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,'’ Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television yesterday. “We’re getting to that point where a decision has to be made by Washington.'’
`Well-Capitalized’
The government is counting on Fannie Mae and Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, to help revive the housing market. Congress lifted growth restrictions on the companies, eased their capital requirements and allowed them to buy bigger “jumbo mortgages'’ to spur demand for home loans as competitors fled the market.
“We are managing our business and maintaining a capital position that will allow us to fulfill our congressionally chartered mission now and in the future,'’ Brian Faith, a spokesman for Fannie Mae, said.
Poole is “a long-time critic,'’ said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.
“Freddie Mac is doing exactly what Congress intended when it chartered the company and, more recently, when it passed the Economic Stimulus Act,'’ McHale said. “We are well capitalized and positioned to continue to serve our vital housing mission.'’
Government Ties
Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies’ charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.
The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.
“We know in a crisis the Federal Reserve tap would be open,'’ said Poole, now a senior fellow at the Cato Institute.
The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government’s unwillingness to allow “large, systemically important'’ financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.
“I worry about those institutions,'’ retired Richmond Fed President Alfred Broaddus said. “They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don’t know how you do it other than extend money and the public takes the loss.'’
$20 Billion Raised
The companies have access to the Fed’s so-called Fedwire payments system allowing them to access funding if needed, said Vincent Reinhart, the Fed’s chief monetary-policy strategist from 2001 until September 2007.
They can withstand the slump in part because most of their investments are mortgages made before 2006 when lending standards were tighter, making them less likely to default, said Eileen Fahey, a Chicago-based analyst at Fitch Ratings.
“We do not believe they are technically insolvent,'’ Fahey said. “People seem to lose sight of the fact that a majority of the mortgages that they are holding and are guaranteeing were originated pre-2006.'’
Comments by the companies’ regulator this week that they are adequately capitalized also eased concern, said Lawrence Yun, chief economist of the National Association of Realtors in Washington. The companies have about $80 billion of regulatory capital supporting $5.2 trillion of mortgages.
“Just given the size of the two companies, surely the government would not stand aside'’ and let them fail, Yun said.
Record Spreads
Fannie Mae sold $3 billion of two-year notes yesterday to yield 74 basis points more than Treasuries. A basis point is 0.01 percentage point. That’s the widest spread since Fannie Mae first sold two-year notes in 2000 and triple what it paid in June 2006.
Fannie Mae’s spreads relative to two-year interest-rate swap spreads, considered a gauge of investors’ perception of credit risk, remain about 12 basis points below a four-year high that was reached in March, Bloomberg data show.
Fannie Mae debt was trading 13 basis points tighter than two-year swap spreads today compared with 2 basis points tighter on March 19, Bloomberg data show. Freddie Mac spreads are about 19 basis points tighter than swap spreads after trading at the same level as swaps on March 17. Swap spreads are the difference between interest-swap rates above Treasury yields.
Credit-Default Swaps
The price of credit-default swaps, contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac, doubled in the past two months to more than 80 basis points for the senior debt, according to London-based CMA Datavision.
The median credit-default swap on debt rated Aaa by Moody’s was 36 basis points as of yesterday, data from the rating firm’s strategy group show. It was 87 basis points for debt rated A3.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.
Mortgage applications down 2.1% last week: MBA
February 13th, 2008ORLANDO — Mortgage applications decreased a seasonally adjusted 2.1% last week compared with the previous week, as mortgage interest rates broadly increased, according to the Mortgage Bankers Association’s most recent survey, released on Wednesday.
Applications were up an unadjusted 65% in the week ended Feb. 8 compared with the same week in 2007, the Washington-based industry group reported.
Mortgage applications to refinance an existing loan were down 3.0% last week, compared with the previous week, according to the MBA survey. Applications to purchase a home eased a seasonally adjusted 0.3%.
The four-week moving average for all loans was up 3.9% on a seasonally adjusted basis, reflecting improvement in refinancing filings.
Refinancings accounted last week for 67.4% of all applications, down from 69.2% the previous week. Adjustable-rate mortgage applications increased to 9.9%, up from 8.8% the previous week.
The interest rate on a 30-year fixed-rate mortgage averaged 5.72% last week, up from 5.61% the previous week. The 15-year fixed-rate mortgage also rose, averaging 5.18%, up from 5.09%.
One-year ARMs averaged 5.72% last week, up from 5.62% the previous week.
The MBA survey covers about half of all U.S. retail residential mortgage applications.
Amy Hoak is a MarketWatch reporter based in Chicago.
By Amy Hoak, MarketWatch
The Greening of CES
January 5th, 2008Is this year’s Consumer Electronics Show going to be the largest carbon-neutral event in the world?
Think of the Consumer Electronics Show, the annual high-tech bacchanal in Las Vegas, and what may come to mind are the blinking lights, the hordes of attendees and exhibitors who have traveled millions of miles, a forest’s worth of brochures and promotional flyers–waste and more waste. In the past, there wasn’t much green awareness at the world’s largest gadget fest. Not anymore. This year, expect to see plenty of HDTVs equipped with efficient light-emitting diodes as their primary light source, more products powered by solar panels and even hand cranks. But even more impressive is that CES 2008 will be carbon neutral, making it the largest such event in the world.
… Newsweek
Berkshire to Pay $4.5 Billion for Pritzkers’ Marmon
December 26th, 2007Dec. 26 (Bloomberg) —
Billionaire Warren Buffett’s Berkshire Hathaway Inc. will pay $4.5 billion for 60 percent of Marmon Holdings Inc., adding another family run company that prospered without shareholder demands for short-term profits.
Chicago’s Pritzker family, which controls Global Hyatt Corp., built Marmon into a group with $7 billion in annual sales and 125 units including operations serving the railroad and energy industries. Operating income more than tripled from 2002 to 2007, Omaha, Nebraska-based Berkshire said in a statement yesterday.
Marmon has “businesses that are fairly niche-oriented where they have dominant positions established over time,'’ said Thomas Russo, who manages about $3.5 billion at Gardner Russo & Gardner in Lancaster, Pennsylvania and counts Berkshire as its largest holding. “They have a history under the Pritzkers of being liberated from the quarterly earnings game.'’
Buffett, 77, built Berkshire over four decades, buying out- of-favor stocks and manufacturers to transform a failing textile maker into a $210 billion holding company. His biggest investment last year was the $4 billion purchase of Iscar Metalworking Cos. from Israel’s Wertheimer family.
Marmon is “our kind of company,'’ Buffett said in an interview with CNBC today. “It’s in some very basic businesses but good businesses.'’
Berkshire, which had more than $45 billion in cash as of Sept. 30, is as prepared as it has “ever been'’ to buy a “big business outright,'’ Buffett told shareholders at an annual meeting in May. He’s said he’d be willing to spend as much as $60 billion on the right company.
Berkshire’s Gain
Berkshire dropped $180, or 0.1 percent, to $137,800 at 9:37 a.m. in New York Stock Exchange composite trading. The stock, which traded at $2,950 on Dec. 31, 1987, is poised to post its 17th annual gain in 20 years. The company is up 25 percent in 2007, outpacing the 5.1 percent gain for the Standard & Poor’s 500 Index.
The Marmon acquisition is set to be completed in the first quarter of 2008, with Berkshire acquiring the remainder of the company by 2014 at a cost based on future earnings.
Marmon employs 21,500 people, mostly in North America, the U.K., Europe and China, according to the company’s Web site. Its businesses include a dozen units that manufacture wire and cable products for energy and construction use.
The Chicago-based group also has a transportation-services operation that produces railroad cars and leases tank containers in China. Operating income was $794 million last year, according to the Web site.
`Ongoing Partnership’
The businesses “are not prone to widespread technical obsolescence,'’ Russo said. “They would have a relationship with their suppliers and customers that give them an ongoing partnership.'’
Berkshire had about 217,000 employees as of Dec. 31 in businesses ranging from auto insurer Geico Corp. and carpet manufacturer Shaw Industries to ice cream company International Dairy Queen Inc. and business-jet fleet operator NetJets Inc.
The Marmon takeover is the largest announced by Buffett since 2005, when Berkshire’s utility company agreed to buy PacifiCorp from Scottish Power Plc for $5.1 billion in cash and assume $4.3 billion in debt. Buffett has also been investing in railroads, disclosing in April that he purchased a $3 billion stake in Fort Worth, Texas-based Burlington Northern Santa Fe Corp., the second-largest railroad in the U.S. after Union Pacific Corp.
Buffett prefers buying companies outright rather than investing in stocks because “that way he can control the reinvestment decisions,'’ Russo said. “He would have the appetite and the balance sheet to underwrite almost limitless investments through their operating entities.'’
`Growth and Profitability’
Marmon has an “impressive record of growth and profitability,'’ Buffett said in the statement. “The decision to purchase and work out the details of this transaction was done without delay.'’
Berkshire spokeswoman Jackie Wilson and Chief Financial Officer Marc Hamburg didn’t return calls seeking comment. David Dees, a spokesman for Marmon, had no comment.
The Pritzker family has discussed breaking up its holdings since the 1999 death of Jay Pritzker, who began the hotel company in 1957 by buying the Hyatt House in Los Angeles. The family’s investments range from a global credit-check company to a maker of artificial joints. Marmon was acquired in 1953 by Jay and his brother Robert, according to the statement.
“This transaction is being done in the context of the previously reported restructuring of our family business interests,'’ Marmon Chairman Tom Pritzker said in the statement.
Hotels, Snuff
In August, the family said it would sell a minority stake in Global Hyatt to investors including Goldman Sachs Capital Partners for $1 billion. In 2006, the family agreed to sell snuff maker Conwood for $3.5 billion to Reynolds American Inc.
In January 2005, actress Liesel Pritzker and brother Matthew Pritzker settled a $2 billion suit accusing Tom Pritzker and other relatives of cheating them out of their inheritance.
The siblings claimed their trust-fund assets were being transferred to accounts benefiting other relatives and the family foundation. Terms of the deal weren’t disclosed.
Tom Pritzker was ranked by Forbes as the 117th wealthiest person in the U.S. with a net worth of $3 billion. Buffett was second with $52.4 billion, the magazine said.
Buffett will work with Tom Pritzker, Marmon Chief Executive Officer Frank Ptak and former CEO John Nichols over the next five to six years “in continuing to build Marmon,'’ Berkshire said in the statement.
The company’s largest purchase was the acquisition of General Re, the biggest U.S. reinsurance company. The stock deal was valued at $16 billion when it was completed in 1998.
`Simple’ Businesses
Buffett’s investment criteria include companies with “good returns on equity,'’ little or no debt, “simple'’ businesses that he can understand, and consistent earnings, he said in Berkshire’s latest annual report. Buffett doesn’t participate in auctions for companies and can tell prospective sellers within five minutes of an offer if he is interested in completing a deal, he said in the report on March 1.
The Marmon acquisition “was done just the way Jay would have liked,'’ Buffett said in the statement. “No consultants or studies.'’
To contact the reporter on this story: Dan Kraut in New York at dkraut2@bloomberg.net
IRS orders FedEx to pay $319 mln
December 22nd, 2007NEW YORK (MarketWatch) — FedEx Corp. said late Friday that the Internal Revenue Service has ordered the company to pay back taxes and fines totaling $319 million for ground employees the firm misclassified as independent contractors.
The ruling covers 13,000 employees FedEx had in 2002, and the company said that the IRS is investigating the status of contractors hired between 2004 and 2006. That probe could lead to further penalties, the company said.
Earlier this week in a statement issued with the company’s quarterly earnings report, it said lawsuits filed in 24 states against FedEx
“FedEx Ground anticipates continuing challenges in its relationships with its contractors, which are expected to increase the cost of operations, and it’s reasonably possible that such cost increases could be material,” the company said.
FedEx said it will appeal the ruling.
In a prepared statement issued late Friday, International Brotherhood of Teamsters President Jim Hoffa said: “”What a great Christmas gift to FedEx Ground workers who have suffered under FedEx’s illegal independent contractor scam.”
The drivers are challenging FedEx to change its classification of their positions — they are treated as independent contractors — so they can obtain overtime wages, reimbursement and benefits.
Currently, FedEx requires contracted drivers to purchase or lease their trucks and pay for all operating expenses, including liability insurance, fuel, and maintenance. The lawsuits also seek reimbursement of business wages, deductions and damages as a result of FedEx’s alleged “misrepresentation and unfair business practices,” according to documents from lawyers representing the drivers. The suits claim FedEx takes illegal deductions from wages and fails to notify drivers of medical-leave rights.
Spending and Inflation in USA
December 21st, 2007Inflation grew in November at its fastest pace in two years, as sky-high oil prices pushed up the costs of other products, the Commerce Department said on Friday.
But consumer purchases rose a bigger-than-expected 1.1 percent, suggesting that the economy may not slow this quarter as much as some analysts had feared.
The rise in prices could make it harder for the Federal Reserve to cut interest rates at its next meeting. The Fed will likely focus on the annualized 2.2 percent rise in its preferred inflation index, which excludes the volatile costs of food and energy. Central bankers are said to prefer that the index, known as the P.C.E. deflator, remain below 2 percent.
Over all, inflation has risen 3.6 percent over the last 12 months, reflecting a sharp rise in prices since the summer.
The inflation bubble throws a curveball to the Fed, which has lowered interest rates three times this year as it seeks to avert a recession. There is little doubt the economy is gradually slowing, but lower interest rates can cause a flare-up in prices. The Fed now faces an economic landscape where its two goals — price stability and economic growth — may stand at odds with each other.
Despite a difficult decision ahead, central bankers could take some comfort in November’s strong spending figures. Consumer spending registered its largest increase in three years, compared with a 0.4 percent gain in October, though the uptick may only reflect the pre-holiday shopping rush.
“The demise of the U.S. consumer has been exaggerated,” wrote Marc Chandler, head of currency strategy at Brown Brothers Harriman, in a research note, though another analyst suggested Americans are “buying on fumes.”
Spending rose 0.5 percent in November when adjusted for inflation. Income levels also ticked up, 0.4 percent.
Moody’s Economy.com
November 19th, 2007Our Focus Moody’s Economy.com, a subsidiary of Moody’s Corporation, is a leading independent provider of economic analysis, data, and forecasting and credit risk services.
Our Clients Our worldwide client base includes the largest commercial and investment banks, insurance companies, financial services firms, mutual funds, governments at all levels, regulators, manufacturers, utilities, and industrial and technology companies.
Nobel Prize 2007
October 12th, 2007The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007 “for having laid the foundations of mechanism design theory” … Economics 2007
The Nobel Prize in Physiology or Medicine 2007 “for their discoveries of principles for introducing specific gene modifications in mice by the use of embryonic stem cells” …
The Nobel Prize in Physics 2007 “for the discovery of Giant Magnetoresistance” … Physics
The Nobel Prize in Chemistry 2007 “for his studies of chemical processes on solid surfaces” … Chemistry
The Nobel Prize in Literature 2007 “that epicist of the female experience, who with skepticism, fire and visionary power has subjected a divided civilization to scrutiny” … Literature
The Nobel Peace Prize 2007 “for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change” … Peace
In Pictures: Most Spectacular Sights in Google Sky
September 26th, 2007Want to boldly go all over the universe? With views of 100 million stars and 200 million galaxies, Google Sky lets you be a virtual space traveler with just a few clicks of a mouse. Here are some amazing images that are literally out of this world.
… PCWorld