Obama Stakes His Fortunes on Failed Banksters: Jonathan Weil

Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why?

Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.

More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a “big bath” charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor’s dumb mistakes. The company gets a fresh start with the investing public.

Obama could have taken the same approach with the banks the moment he took office, while he still had standing to blame the financial crisis on George W. Bush’s administration, stupid regulators, and corrupt lawmakers -- that is, everyone but himself.

Executive Order

He could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn’t yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong.

Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

The Obama administration’s “strategy,” for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them.

Taxpayers at Risk

The latest iteration of this policy is the Treasury Department’s Public-Private Investment Program. In short, struggling financial institutions will be encouraged to swap their most toxic mortgage-related assets with one another at inflated prices. The purchases will be financed by big government loans, so that taxpayers are at risk for the bulk of any losses.

If the government wanted transparency, it would force financial institutions to write down their bad assets now, and figure out afterward which companies deserve taxpayer support. Instead, the Treasury plans to recapitalize them first, keep their current financial condition hidden, and let their failed managers stay in their jobs.

The key assumption underlying this plan is that the declines in the values of these companies’ toxic assets are the result of private investors’ temporary reluctance to buy them, and that prices will rebound if Treasury can revive the markets where these assets trade.

Proper Values

The Treasury hasn’t explained why it believes the assets’ proper values are their original book values, rather than the prices unsubsidized investors are willing to pay for them. (This is one of the points made in an April 7 report by the U.S. bailout program’s Congressional Oversight Panel.) If Treasury’s hunch proves wrong, the government will need to rely on something other than a rising economy to restore the banks to solvency.

So why don’t Obama, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke force the banks to write down their troubled assets first, as a condition of government assistance? We can only speculate, because their explanations so far have made no sense.

Perhaps they’re scared the markets would panic if large, insolvent financial institutions started telling investors just how undercapitalized they are. There’s the distinct chance some of Obama’s advisers are beholden to failed banksters, because they used to work for them and may want to do so again someday.

Manpower Shortage

There also could be a manpower problem. The government might not have enough employees to seize all those sickly banks and supervise the process of winding them down. Probably, it’s some combination of those and other factors.

Why else would the Treasury tell the 19 biggest U.S. banks to undergo “stress tests” of their financial health, and then put the banks in charge of performing the tests on themselves? Those reasons also might help explain why regulators pressured the board that sets U.S. accounting standards to weaken the rules on mark-to-market accounting, so the banks could hide their losses and show more capital.

Whatever the case, as long as the government refuses to remove the cancer of zombie banks from our financial system, there’s little hope the U.S. will return to robust economic growth anytime soon. And the longer our wounded banks are allowed to stagger along with no end-game in sight, the greater the risk for Obama that voters will conclude he’s as responsible for blowing the cleanup as others were for causing the crisis.

Obama Says U.S. Will Consult With Pakistan on Terrorism Strikes

President Barack Obama said the U.S. will consult with Pakistan before raiding militant bases on Pakistani territory, as he called on leaders in Islamabad to be “much more accountable” in combating terrorism.

“If we have a high-value target within our sights, after consulting with Pakistan, we’re going after them,” Obama said in an interview on CBS television’s “Face the Nation” program yesterday. “But our main thrust has to be to help Pakistan defeat these extremists.”

The U.S. expects some accountability from Pakistan and its understanding of the “severity and the nature of the threat” from the terrorists.

Pakistan has told the U.S. it considers missile strikes on its territory counterproductive. The Pakistani government says it is doing all it can to combat militants and is pursuing a strategy of selective military action, coupled with political and economic development programs, to try to persuade tribal leaders to expel foreign fighters sheltering along the border with Afghanistan.

Thousands of Taliban and al-Qaeda members crossed into Pakistan’s tribal region after the U.S.-led invasion of Afghanistan in late 2001. The U.S. says al-Qaeda leaders have established bases in the area.

“Our plan does not change the recognition of Pakistan as a sovereign government,” Obama said in the interview taped on March 27. “We need to work with them and through them to deal with al-Qaeda. But we have to hold them much more accountable.”

Economic Aid

The U.S. will give Pakistan the “tools” to defeat al- Qaeda, the president said. Obama has endorsed legislation to increase economic and development aid to Pakistan to about $1.5 billion annually for five years in exchange for that country cracking down on militants.

“One of the concerns that we’ve had building up over the last several years is a notion, I think among the average Pakistani, that this is somehow America’s war and that they are not invested,” Obama said, according to a transcript. “That attitude, I think, has led to a steady creep of extremism in Pakistan and that is the greatest threat” to the government.

The U.S. must recognize that the task of working with Pakistan isn’t just military, he said. Development and aid assistance are part of the package.

Combating extremism both in Pakistan and Afghanistan involves a comprehensive strategy that “doesn’t just rely on bullets and bombs,” Obama said.

Sending Troops

It relies on “agricultural specialists, on doctors, on engineers, to help create an environment in which people recognize that they have much more at stake in partnering with us and the international community than giving in to some of these extremist ideologies,” he said.

Obama announced last week that he will send 4,000 more U.S. soldiers, in addition to the 17,000 military personnel he already has ordered for Afghanistan, to train Afghan forces to take a bigger role in providing security. The announcement came after a review of U.S. policy on Afghanistan and Pakistan.

Pakistan last week denied a report in the Wall Street Journal that it has given the U.S. “tacit permission” to use drones to attack militants. Pakistan’s Foreign Ministry said the government has told the U.S. it opposes such strikes.

U.S. missile strikes in Pakistan’s borderlands have been effective and more than half of an initial list of 20 top al- Qaeda leaders have been killed or captured during the past six months, the Journal reported.

Obama Defends Health Care, Education Budget Plans

President Barack Obama said he won’t scale back his plans to revamp the health-care and education systems in his proposed $3.6 trillion budget and challenged Republican critics to do more than “just say no.”

Obama, gearing up for a fight in Congress over his fiscal 2010 spending blueprint, met privately with the chairmen of the House and Senate budget committees before issuing a public rebuttal to Republicans who have criticized his plan as including too much spending at a time when deficits are ballooning.

“‘Just say no’ is the right advice to give your teenagers about drugs. It is not an acceptable response” to economic policies “proposed by the other party,” Obama said at the White House with Senate Budget Committee Chairman Kent Conrad of North Dakota and House Budget Committee Chairman John Spratt of South Carolina at his side.

“The American people sent us here to get things done and at this moment of enormous challenge, they are watching and waiting for us to lead,” he said.

Republicans and some Democrats have questioned whether Obama’s budget is too ambitious at a time when the budget deficit is projected to hit $1.75 trillion this year and the U.S. is in the midst of deepest recession in decades.

Future Plans

At issue are proposals including the economic impact of Obama’s $646 billion cap-and-trade system to control greenhouse gas emissions; how to pay for the president’s $634 billion health care initiative; the effect of Obama’s plan to limit the value of itemized tax deductions for those making more than $250,000 a year and a proposal to increase taxes, starting in 2011, on individuals earning more than $200,000 and on households earning more than $250,000.

Obama repeated his vow to halve the deficit by the end of his first term and said his budget will trim the growth of discretionary spending.

“What we will not cut back, however, are those investments that are directly linked to our long-term prosperity,” he said, citing his plans for health care, education and energy.

Republicans are largely united in opposing Obama’s budget.

“The president and his allies in Congress want to spend too much, tax too much, and borrow too much,” Senator Charles Grassley of Iowa said in the Republicans’ weekly radio address on March 14.

Cost Questions

Still, some Democrats, including Conrad, are raising questions about the cost of Obama’s plan. Conrad last week said Obama’s plan to overhaul the health-care system “gives many of us great pause” because of the price tag.

The White House plans to send to Congress a detailed budget proposal by late April.

Democrats in the House and Senate are struggling to assemble a spending blueprint, called a budget resolution, in time for the April 15 deadline. The resolution doesn’t have the force of law but serves as a guide for tax and spending bills later in the year that reflect Obama’s priorities.

Obama is bracing for a fight, activating an all-out grass- roots campaign through the Democratic National Committee and a 13-million-member e-mail list built from his 2008 presidential candidacy to fight for his budget, the Washington Post reported yesterday.

G20 nations issue pledge to avoid protectionism

THE chancellor said last night that the “grave” global economic situation would not turn into a repeat of the Great Depression of the 1930s because of the actions being taken by governments to boost their economies and avoid a damaging trade war.

Alistair Darling, after chairing a meeting of the G20 finance ministers and central bankers in West Sussex, contrasted the readiness of countries to act now with their failure to do so during the 1930s.

The G20, which comprises the western industrial countries plus big emerging economies such as China, India, Brazil and Russia, issued a strong commitment against protectionism, saying they would fight all forms of it and maintain open markets.

They also signalled a clampdown on hedge funds, risky financial instruments and tax havens. Tim Geithner, America's Treasury secretary, said reform was vital so “we never face a crisis like this again”.

The finance ministers of the G20 countries, who between them account for 85% of the world economy, also pledged that they would take sustained action to end the global recession.

The meeting, which was intended to set the scene for the April 2 gathering of global leaders in London, papered over any differences of opinion.

“Decisive, co-ordinated and comprehensive action” had been taken to boost growth and cut unemployment, they said, and further action would be taken if necessary.

This could give Darling cover to announce a giveaway in his April 22 budget, but Treasury officials said no decisions had been taken on whether the pledge of action would result in further measures.

The chancellor, who had announced tax cuts and spending increases worth £20 billion in his November pre-budget report, has been playing down the prospect of additional action, although he has hinted at measures to help savers.

Darling said he welcomed the G20's commitment to take “whatever action is necessary” to end the global recession and added that it was vital to boost confidence as well as supporting the banking system.

He was backed up by Geithner who said the decisions taken yesterday would help to bring the recession to an end sooner.

As well as agreeing action to boost growth, the finance ministers and central bankers set out a framework for dealing with bank rescues and for future regulation. Hedge funds will be more closely regulated, as will the sophisticated derivatives' markets that had provoked the global financial crisis.

Last week Europe’s tax havens, including Liechtenstein, Luxembourg, Jersey and Switzerland, entered into information sharing agreements.

The communiqué glossed over underlying divisions between the countries over whether further public spending would help the recovery. While Britain and the United States have led calls for more fiscal stimulus measures, Germany and France have been more cautious.

Jobless Rate Above 10% Defines Recession as Bernanke Predicted

Sergio Barreto landed his first job out of college during the recession that began in 1990, as a mechanic for United Airlines. He survived the next one a decade later, selling semiconductor materials. This time, he may be out of luck.

Barreto, who has an engineering degree from San Jose State University and 12 years experience in the chip industry, has been out of work since he was laid off in December with a month’s severance pay from closely held CoorsTek Inc.’s sales office in Fremont, California.

“I was very surprised because I was one of the top sellers,” said Barreto, 46, whose wife gave birth to their second child in October. “I’m in survival mode.”

At least 4.4 million jobs have been claimed by the U.S. recession that began in December 2007, cutting across the country and the economy. Positions have been eliminated by employers as diverse as Microsoft Corp., KB Toys Inc., Dartmouth College and the nonprofit organization that produces “Sesame Street.”

“This recession is incredibly broad-based,” said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. “Parts of the country that have traditionally weathered recessions fairly well are being impacted.”

Contractions are usually centered in one sector or region, such as manufacturing in the Midwest in 1982, he said. This one, propelled by a credit crisis spawned by a real-estate slump, is simultaneously rooted in housing, financial services and auto manufacturing, he said.

Highest Since 1984

Unemployment climbed in January in every U.S. state except Louisiana, and the decline there, to 5.1 percent from 5.5 percent in December, was due to rebuilding from Hurricane Katrina, the Labor Department said.

The jobless rate topped 10 percent in four states, led by Michigan, where at 11.6 percent it was the highest since May 1984, according to data compiled by Bloomberg.

South Carolina, at 10.4 percent, and California, with 10.1 percent, also saw their steepest rates in a quarter-century. Unemployment in Rhode Island was 10.3 percent, greater than since at least 1976, according to the data.

Wyoming’s was the lowest in January at 3.7 percent.

An average unemployment rate of 10 percent for a period of time is “certainly well within the realm of possibility,” Federal Reserve Chairman Ben S. Bernanke said during congressional testimony on March 10.

‘Like a Cancer’

While that outcome isn’t the “central tendency” of Fed forecasters, the central bank is using that level in an adverse scenario model that will determine whether banks need more capital, Bernanke said.

Workers bearing the brunt span economic, social and regional lines, according to interviews conducted around the country. They include Mimi Bardet, who is losing a six-figure job this month after 23 years at Time Warner Inc.’s Warner Brothers in Burbank, California, and Tanya Jones, who moved back to subsidized housing in Trenton, New Jersey, and gave up her 2002 Ford Explorer after she lost a $1,500-a-week nursing-home job in November.

“It’s like cancer -- there are so many people who know somebody going through this,” said Lynne Bee, 52, of Lawrenceville, Georgia, who was fired as a dental office manager in January.

California, which led the nation in mortgage foreclosures last month, had the most job losses, with 79,300. Next were Michigan and Ohio, battered by the auto industry collapse, with 60,800 and 59,600, respectively.

‘More Discouraging’

Southern states where the population is rapidly growing through immigration or migration have also been hard hit as their shrinking economies can no longer absorb the labor force, Vitner said. Georgia and Florida each had an 8.6 percent unemployment rate in January, and neither state topped 6 percent in 2001, according to data compiled by Bloomberg.

“I’ve tried to shift around to different professions and change my work status, but it just keeps hitting different markets,” said Mark Risetter, 54, a Dallas machinist laid off six weeks ago from Atco Rubber Products Inc., which makes insulated ducts for homes.

For Risetter, who has leukemia that is in remission, it was the third job loss since 1982. “It’s more discouraging now than it’s been in the past,” he said.

At the height of the Depression in 1933, 24.9 percent of the workforce was unemployed and shantytowns of crates and abandoned cars sprang up, according to the Franklin D. Roosevelt Presidential Library in Hyde Park, New York.

‘Shocked’

In Sacramento, there’s an echo in the dirt along the American River, where more than 300 people have pitched tents. Fewer than a dozen tents were at the site a year ago, said Joan Burke, director of advocacy at Sacramento Loaves & Fishes, which provides food and medical services.

“These are people that haven’t been homeless before and are shocked to find themselves in this situation,” she said.

At Ministry of Caring in Wilmington, Delaware, 10.4 percent more meals were served last year than in 2007, some to people who once had steady jobs, said Brother Ronald Giannone, a Capuchin Franciscan friar and the nonprofit’s executive director.

“We’re seeing what I call the ‘new poor,’” he said. “The last thing in the world these people ever expected to do was to have to rely on our facilities to eat, but when it comes down to paying the utilities or buying food, they are opting to keep the lights on.”

One Exception

Delaware’s 6.7 percent unemployment rate is already higher than the 5.8 percent at which it peaked in the 2001 recession, said John Stapleford, a senior economist at Moody’s Economy.com who monitors mid-Atlantic states.

Nationally, the jobless rate moved to a 25-year high of 8.1 percent in February.

The rate will reach 9.4 percent this year and remain above last month’s rate through at least 2011, threatening the nation’s longer-term growth potential, according to the median forecast of economists surveyed by Bloomberg News.

One exception to the grim data is in Washington, D.C., and neighboring Maryland and Virginia. The Obama administration may create 100,000 jobs to help administer the $787 billion economic stimulus package, said Max Stier, who runs the Partnership for Public Service, a non-profit group that monitors government employment.

15,000 People

With federal spending in the metro area increasing in 2009, as it has every year since 1983, that is trickling into the local economy, according to the Center for Regional Analysis at George Mason University in Fairfax, Virginia.

Sales at Morton’s steakhouse in downtown Washington are up almost 3 percent from the same time a year ago, said Dan Festa, 41, the general manager. The restaurant has hired nine servers since December, he said.

Business at Washington’s Ritz-Carlton hotel is comparable to two years ago, before the recession hit, said Elizabeth Mullins, who oversees four of the chain’s hotels.

“So far, touch wood, we’re lucky to be in DC!” Mullins said. “I don’t want to rub it in, but I’m so glad to be here.”

Obama Nominates Three for Assistant Treasury Secretary Posts

President Barack Obama will make nominations for three assistant secretaries of the Treasury, where Secretary Timothy Geithner’s efforts to revive the economy have been hampered by vacancies in top posts.

Alan Krueger is the choice for economic policy, the White House said. David Cohen will be assistant secretary for terrorist financing and Kim Wallace for legislative affairs. Each currently serves as counselor to Geithner.

“With the leadership of these accomplished individuals and our whole economic team, I am absolutely confident that we will turn around this economy and seize this opportunity to secure a more prosperous future,” Obama said in a statement released by the White House yesterday.

The nominations still leave Geithner without any Senate- confirmed staff at the most senior levels of deputy and undersecretary as he tries to flesh out plans to remove bad loans from banks’ balance sheets. Geithner’s effort to staff his department received a new blow last week with the withdrawals of two potential nominees.

Former U.S. Securities and Exchange Commission member Annette Nazareth took herself out of the running to be Geithner’s deputy after concern about public scrutiny over her SEC work and frustration at the length of the selection process. International Monetary Fund official Caroline Atkinson pulled out of consideration for the Treasury’s top international job.

Princeton Professor

Krueger, the nominee for economic policy, is a professor of economics and public affairs at Princeton University. He previously served as chief economist at the Labor Department and holds a doctorate in economics from Harvard University.

Cohen until recently was a partner in the Washington law firm WilmerHale, where he focused on complex civil litigation, white-collar criminal defense and anti-money laundering counseling. He previously worked in Treasury as acting deputy general counsel and associate deputy general counsel.

Wallace was a managing director at Barclays Capital and head of its Washington Research Group. Before that he was a managing director at Lehman Brothers Inc. Wallace also worked as a legislative aide specializing in fiscal policy for then-Senate Majority Leader George Mitchell and as an analyst on the Senate Budget Committee.

Geithner has brought in some high-level aides to work in posts that don’t require Senate confirmation, including Gene Sperling, a former head of the White House National Economic Council under Clinton, and Lee Sachs, a former Clinton Treasury official. During the administrations of Clinton and George W. Bush, some top Treasury positions went unfilled for months.

‘Obama Bear Market’ Punishes Investors as Dow Slumps

President Barack Obama now has the distinction of presiding over his own bear market.

The Dow Jones Industrial Average fell 20 percent since Inauguration Day through yesterday, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

More than $1.6 trillion was erased from U.S. equities since Jan. 20 as mounting bank losses and rising unemployment convinced investors the recession is getting worse. The president is in danger of breaking a pattern in which the Dow rallied 9.8 percent on average in the 12 months after a Democrat captured the White House, according to data compiled by Bloomberg.

“People thought there would be a brief Obama rally, and that hasn’t happened,” said Uri Landesman, who oversees about $2.5 billion at ING Groep NV’s asset management unit in New York. “It speaks to the carnage that’s in the economy and the lack of confidence in the measures that have been announced.”

A bear market is defined as a decline of 20 percent or more.

Buying shares “is a potentially good deal” for long-term investors, Obama said March 3. He compared daily fluctuations to a tracking poll in politics and said he wouldn’t adjust his policies just to meet market expectations.

Congress last month enacted Obama’s $787 billion package of tax cuts and spending on roads, bridges and public buildings. His 2010 budget indicated the government’s financial rescue may need another $750 billion after an initial $700 billion.

Getting Cheaper

The Dow average dropped 31 percent since Obama’s election through yesterday. The 30-stock gauge traded at 8.04 times annual earnings, the cheapest since 1995 and down from 10.06 times on Inauguration Day.

Citigroup Inc. led the plunge, losing 71 percent. The government proposed taking a 36 percent stake in the New York- based bank, cutting the percentage owned by shareholders. Detroit-based General Motors Corp. tumbled 53 percent after the largest U.S. automaker said it needs more government aid.

“It’s the Obama bear market,” said Dan Veru, who helps oversee $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. “We don’t know what the rules are in so many different areas the government is touching.”

The Dow average today gained 32.50 points, or 0.5 percent, to 6,626.94.

Bank Losses

The U.S. economy contracted at a 6.2 percent annual rate in the fourth quarter, the most since 1982, the Commerce Department said last week. Unemployment jumped to 7.6 percent in January, the highest since 1992, as Americans fell behind on their mortgages and banks seized homes at a record pace.

Losses at financial companies worldwide that grew to about $1.2 trillion sent the Standard & Poor’s 500 Index to a 38 percent retreat last year, the steepest since 1937.

“Prospects for recovery in the financial sector, despite all the government help, still seem rather remote,” said John Carey, who manages about $8 billion at Pioneer Investment Management in Boston. “We’ve had a weak economy for a couple of years, and we aren’t seeing the stimulus working at this point. That is what weighs on investors’ minds.”

The Dow average took eight months to decline 20 percent following the inauguration of George W. Bush, reaching the level on Sept. 20, 2001, nine days after terrorists attacked the World Trade Center in New York and the Pentagon in Washington.

Herbert Hoover

The crash of 1929 occurred seven months into the administration of Herbert Hoover, who presided over an 89 percent plunge in the Dow between September 1929 and July 1932, the steepest retreat ever.

Only twice has the benchmark gauge slipped in the 12 months after the election of a Democratic president since 1900, after Woodrow Wilson’s victory in 1912 and Jimmy Carter’s in 1976.

The Dow entered its most recent bear market on July 2, 2008, when a 167-point decrease gave it a 20 percent loss from its record 14,164.53 on Oct. 9, 2007. Unlike the Standard & Poor’s 500 Index, the Dow’s rally from its November low of 7,552.29 fell short of a 20 percent bull market gain, ending at 19.6 percent.

“Obama should be listening to the stock market more than talking to it,” said Kenneth Fisher, the billionaire chairman of Woodside, California-based Fisher Investments Inc., which oversees $22 billion. “He hasn’t gotten out of the gate well.”

Obama Rescue Plan Said to Be Limited to Homeowners Most in Need

The Obama administration intends to limit the loan-modification portion of its $75 billion mortgage rescue plan to homeowners who have lost jobs, suffered a pay cut or face higher mortgage payments, according to two people briefed on the program.

Treasury and housing officials, who announced the plan Feb. 18, are scheduled to release terms today. The program will lean heavily on government-seized finance companies Fannie Mae and Freddie Mac and require strict verification of financial hardship, said the people, who declined to be identified because details were still private.

President Barack Obama’s initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would be subsidizing homeowners financially capable of surviving the economic slump on their own. The plan is being refined to better assess homeowners in need, the people said.

“The industry is waiting to see the final plan,” said Faith Schwartz, executive director of the Hope Now Alliance, a group of mortgage lenders and servicers created at the behest of former Treasury Secretary Henry Paulson to increase loan modifications. “People want a uniform plan that is sustainable.”

Nicholas Strand, a mortgage-bond analyst in New York at Barclays Capital Inc., has said the limited details of the plan make it difficult to evaluate.

National Standard

The administration will outline a national standard for loan modifications as well as the program’s eligibility requirements and process for applying for aid, according to the Treasury’s Feb. 18 announcement and the people briefed on the plan. Borrowers who qualify may be able to lower their mortgage payments to as little as 31 percent of monthly gross income.

“You’re going to see a pretty good level of detail around safeguards and protections on eligibility and how we’re going to enforce those,” Treasury Secretary Timothy Geithner said during a hearing before the House Ways and Means Committee yesterday.

The Obama plan is divided into two main parts: helping about 4 million homeowners who are at risk of foreclosure to lower their monthly payments by modifying loan terms; and using Fannie and Freddie to refinance the loans of about 5 million Americans who owe more than their homes are worth.

The administration’s hardship requirements would apply only to borrowers seeking modifications, not refinancings.

Obama is seeking to help as many as 9 million Americans lower their mortgage payments to curb a jump in foreclosures. The U.S. housing market lost $3.3 trillion in value last year, and almost one in six owners with mortgages owed more than their homes were worth, according to a report last month by Zillow.com.

Record Foreclosures

A lack of credit and the record foreclosures are pushing property values even lower and keeping prospective buyers out of the market. Sales of previously owned homes, which account for about 90 percent of the housing market, fell in January to the lowest level since 1997, according to the National Association of Realtors. New-home purchases, which make up the rest, plunged to the lowest since the Commerce Department began keeping records in 1963.

For loan modifications, the Treasury will share the cost when lenders reduce monthly payments by forgiving a portion of the borrower’s mortgage balance, the government said.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 annually for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current, according to the plan. The cash will be applied to reducing the principal balance of the loan, according to a White House fact sheet.

Industry Payments

Mortgage servicers will get $500 and loan holders $1,500 to modify loans as an incentive for the industry to seek out borrowers at risk of falling behind on their payments.

The second part of the plan will have Fannie and Freddie refinance loans that the companies own or guarantee, without new appraisals. The government-run mortgage finance companies, seized by regulators in September, own or guarantee $5.2 trillion of the $12 trillion residential home loan market.

All institutions that receive future federal aid through the Treasury’s $700 billion Financial Stability Plan will be required to offer loan modifications.

Stocks Drop Worldwide, Treasuries Gain on Concern About Economy

Stocks fell worldwide, sending the Dow Jones Industrial Average below 7,000 for the first time since 1997, and Treasuries rose after Warren Buffett said the economy is in “shambles” and American International Group Inc. reported a $61.7 billion loss.

Berkshire Hathaway Inc. retreated 5.9 percent after reporting the worst annual drop in book value since Buffett took control in 1965. HSBC Holdings Plc sank 19 percent after announcing a rights offering, driving down lenders such as Bank of America Corp. Exxon Mobil Corp. declined for a fourth day as oil tumbled 9.4 percent.

“The bear market has only begun,” Robert Prechter, the founder of Gainesville, Georgia-based Elliott Wave International Inc. who predicted the 1987 stock market crash, said on Bloomberg Radio. “I don’t see the clear weather yet.”

The Dow average decreased 214.65 points, or 3 percent, to 6,848.28 at 11:48 a.m. in New York. The Standard & Poor’s 500 Index dropped 3.4 percent to 710.21. Europe’s Dow Jones Stoxx 600 Index tumbled 4.8 percent, its steepest loss of the year. Treasuries rose as investors sought a haven, driving the yield on 10-year notes down to 2.92 percent from 3.01 percent.

The MSCI World Index of stocks in 23 developed nations fell 4.2 percent and dropped as low as 719.42, the lowest intraday level since the Iraq War began in March 2003. The MSCI Emerging Markets Index slid 4.5 percent, while Hungary’s forint dropped after European Union banks spurned aid pleas for eastern Europe.

Worst Start to Year

The deepening global recession, a third government rescue for Citigroup Inc. and dividend cuts at companies from General Electric Co. to JPMorgan Chase & Co. have dragged the MSCI World Index to three consecutive weeks of declines. The benchmark has fallen 21 percent this year, adding to last year’s 42 percent slump.

Options investors are paying twice this decade’s average to protect against losses in U.S. stocks through 2011, signaling the bear market that already wiped out $10.4 trillion of equity value may last two more years.

“There’s a real panic in the markets, with some people wanting to buy long-term insurance at any price,” said Peter Sorrentino, who helps manage $16 billion, including $130 million in options at Huntington Asset Advisors Inc. in Cincinnati. “People have lost hope.”

Contracts to protect against a drop in the S&P 500 for two years cost $15,160 on the Chicago Board Options Exchange at the end of last week, compared with $6,875 in 2007, according to price-adjusted data compiled by Bloomberg. That shows traders expect the benchmark gauge for U.S. equities to fluctuate twice as much in the next two years as it has since 2000.

‘Freefall’

Berkshire Hathaway Class B shares lost 5.9 percent to $2,412. Berkshire, which owns stakes in companies from Coca-Cola Co. to American Express Co., posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.

Buffett said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.

HSBC and GE dragged a measure of financial stocks in the MSCI World Index to a 5.9 percent decline, the most among 10 industries.

HSBC tumbled 19 percent to 397 pence. Europe’s largest bank by market value said it plans to raise 12.5 billion pounds ($17.7 billion) in a rights offer, increasing concern that banks need more capital.

‘No Reason’

“You have almost no reason to own a bank stock,” Keith Wirtz, who helps oversee $20 billion as chief investment officer at Fifth Third Bancorp in Cincinnati, told Bloomberg Television. “There is too much turmoil.”

PNC Financial Services Group Inc. dropped 6 percent to $25.69. The fifth-largest U.S. bank by deposits slashed its dividend 85 percent, to 10 cents from 66 cents, to save $1 billion amid “extreme market deterioration.”

AIG advanced 17 percent to 49 cents. The insurer deemed too important to fail will get as much as $30 billion in new government capital in a revised bailout after posting a record fourth-quarter loss.

GE slid 8.5 percent to $7.79, falling below $8 for the first time since 1994. The only company left in the 30-stock Dow Jones Industrial Average from its founding in 1896 is adding to investor pessimism as credit analysts threaten to reduce its AAA rating. The company cut its quarterly dividend by 68 percent, to 10 cents from 31 cents, last week.

Commodities Slump

Raw-material producers in the MSCI World Index slid 5.6 percent, a decline that was second only to financial institutions among 10 industries. A measure of energy stocks lost 5.5 percent.

Freeport-McMoRan Copper & Gold Inc. sank 9.3 percent to $27.58 as the Reuters/Jefferies CRB Index of 19 commodities fell 4 percent.

Exxon, the world’s biggest oil producer, tumbled 2.6 percent to $66.16. Oil retreated 9.4 percent to $40.56 a barrel on the New York Mercantile Exchange, the biggest decline in a month.

The MSCI EM Eastern Europe Index slumped 3.5 percent to 88.74. The forint dropped as much as 2.6 percent, the most since Jan. 30. European Union leaders rejected requests for a region- wide aid package, bowing to German concerns that it would put too much pressure on budget deficits in western Europe as the economy slumps.

Deere & Company and Caterpillar Inc. declined more than 6.5 percent after a government report showed spending on U.S. construction projects fell in January more than twice as much as forecast.

Construction Spending

The 3.3 percent decline followed a revised 2.4 percent drop the prior month that was larger than previously reported, the Commerce Department said. Economists had forecast construction spending would decrease 1.5 percent, based on a Bloomberg survey of economists.

The market remained lower even after the Institute for Supply Management’s factory index unexpectedly climbed to 35.8 in February from 35.6 the prior month. A reading of 50 is the dividing line between growth and contraction.

“The situation is very difficult and economic data isn’t stabilizing,” said Guillaume Duchesne, Geneva-based equity strategist at Fortis Private Banking, which oversees about $117 billion. “That justifies the negative spiral in the stock market.”

Volkswagen Will Cut 16,500 Temporary Jobs Worldwide This Year

Volkswagen AG, Europe’s largest carmaker, said it will cut all 16,500 temporary jobs in global operations as the recession and tight credit sap purchases.

“There’s no way around this,” Chief Executive Officer Martin Winterkorn said in an interview with Germany’s weekly Spiegel magazine published today. The financial crisis “is really brutal,” the CEO added. Company spokesman Stefan Ohletz confirmed Winterkorn’s published remarks by phone.

Responding to the worst car markets in almost two decades, Volkswagen shuttered five German factories this week, affecting two-thirds of its 92,000-strong German workforce. That’s on top of a three-day shutdown at the main plant in Wolfsburg.

Production is being cut after Volkswagen’s group vehicle deliveries plunged 21 percent in January, even with a line-up of models such as the Golf, Polo and Fox that is regarded as well- suited to customer requirements for smaller, less-costly and more fuel-efficient cars.

German car sales will probably drop 6.5 percent to 2.9 million vehicles this year, the lowest since reunification in 1990, according to Germany’s VDA automakers’ lobby.

Volkswagen has no plans at the moment to extend plant closures beyond the first quarter, sales chief Detlef Wittig said Feb. 6. The company has so far avoided cutting regular jobs and may rely on trimming weekly hours to adjust production as the economic slump stifles demand.

“I see no problems here for this year,” Winterkorn told Spiegel. “Only if things can’t continue on that basis, one may need to consider other steps.”

Volkswagen is scheduled to outline its business prospects for 2009 at the annual press conference on March 12.

Obama Expects Fight Over $3.55 Trillion Budget Plan

President Barack Obama said he expects a fight to get his $3.55 trillion budget through Congress because it will challenge longtime Washington interest groups and lobbyists.

The president said today the spending plan he submitted to Congress reflects the promises he made during the campaign to change the government’s priorities and take the nation in a new direction.

“I realize that passing this budget won’t be easy because it represents real and dramatic change,” Obama said in his weekly radio and Internet address that. “It also represents a threat to the status quo in Washington.”

Obama kicked off his budget fight during a week when the Standard & Poor’s 500 Index fell to a 12-year low as the government rescued Citigroup Inc. The Obama administration’s attempts to break the grip of the worst financial crisis in 70 years are unlikely to bring immediate relief as companies from General Motors Corp. to JPMorgan Chase & Co. cut payrolls.

Gross domestic product contracted at a 6.2 percent annual pace from October through December, more than economists anticipated and the most since 1982, according a report yesterday from the Commerce Department. Consumer spending, which comprises about 70 percent of the economy, declined at the fastest pace in almost three decades.

Taxing Wealthy Americans

Obama’s budget for the fiscal year starting Oct. 1 would increase taxes on the wealthiest Americans and some companies to fund tax breaks for lower- and middle-income workers, and investments in new energy technology, education and health-care.

Humana Inc., an insurer, was among the health-care stocks that declined last week on concern Obama will cut Medicare payments to insurers and raise rebates drugmakers must provide to Medicaid recipients.

Obama said today that he realizes his proposals “won’t sit well with the special interests and lobbyists who are invested in the old way of doing business.”

“I know they’re gearing up for a fight as we speak. My message to them is this: So am I,” the president, a Democrat, said. “The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I don’t.”

Obama’s budget would impose almost $1 trillion in higher taxes over the next decade on the highest-earning Americans -- families making more than $250,000 a year -- Wall Street financiers, U.S.-based multinational corporations and oil companies while cutting taxes for lower earners.

‘Fair and Balanced’

“During the campaign, I promised a fair and balanced tax code that would cut taxes for 95 percent of working Americans, roll back the tax breaks for those making over $250,000 a year, and end the tax breaks for corporations that ship our jobs overseas,” he said today. “This budget does that.”

He also said he will eliminate unnecessary programs and vowed his administration will go through the federal books “page by page, and line by line” to make cuts.

“This budget also reflects the stark reality of what we’ve inherited - a trillion dollar deficit, a financial crisis, and a costly recession,” Obama said.

Swiss Central Bank Head Roth to Retire at End of 2009

Swiss National Bank President Jean- Pierre Roth, who steered the nation’s economy during the worst financial crisis since the Great Depression, will retire at the end of the year after three decades at the institution.

Roth, 62, who has chaired the central bank since January 2001, informed the Bank Council of his decision on Friday, the Zurich-based SNB said in a statement today. A successor has not yet been named, SNB spokesman Werner Abegg said in a telephone interview.

Roth’s retirement comes as the country’s financial sector struggles to regain its footing amid a global crisis and the economy faces its worst recession since 1982. Roth has been at the helm of the bank throughout the turmoil, during which time the SNB took unprecedented coordinated measures with central banks worldwide and rescued the country’s biggest bank, UBS AG.

The fallout from the credit crisis “will be felt for a long time,” Roth said in his resignation letter. Recovering from recession and the reform of the international financial system “will demand the full attention of the SNB in the coming years,” he said.

‘Risk Taking’

“It’s a pity that he’s leaving,” said Jan Poser, chief economist at Bank Sarasin in Zurich. “He’s always warned about too much risk taking and he’s been proven right. He’ll go down in history as a good president.”

Roth joined the central bank in 1979 and has been a member of its three-person Governing Board since 1996, guiding Switzerland’s economy through the introduction of the euro currency in its biggest trading partners and the implementation of a new Swiss monetary policy concept in 2000.

Since 2001, Roth has chaired the Governing Board, which is responsible for monetary policy. The other two board members are SNB Vice-President Philipp Hildebrand and Thomas Jordan. Poser said Hildebrand is the “obvious choice” to succeed Roth.

“Somebody who understands the banking system is certainly needed,” he said. “But it’s also important to balance the whole committee. They need somebody who knows how bailouts work and how they don’t work.”

The council will recommend a successor for Roth and the decision must be approved by the Swiss government. In 2001, the government chose Roth to head the SNB, going against the Bank Council’s recommendation of Bruno Gehrig.

U.S. Treasury Said to Work on Aid for Auto Suppliers

The Obama administration is looking for a way to prop up struggling auto-parts suppliers, possibly through a lending facility to centralize aid to hundreds of companies, a person familiar with the matter said.

Finding a mechanism to offer assistance is pivotal, because there are so many partsmakers it would be difficult for the Treasury to administer loans directly, said the person, who asked not to be identified because the planning is private.

Help for unprofitable suppliers would widen the government’s role in the auto industry after lending $17.4 billion to General Motors Corp. and Chrysler LLC. Automaker purchasing chiefs met with President Barack Obama’s auto task force Feb. 23 to discuss how to prevent partsmaker failures, people briefed on the session have said.

“They’re very actively looking at the issues and they’re very aware of the urgency of the matter,” said Neil De Koker, president of the Original Equipment Suppliers Association trade group, in an interview yesterday.

Suppliers such as Visteon Corp., Lear Corp. and Tenneco Inc. have said they support a U.S. aid effort. An administration official said the Treasury, which is running Obama’s auto industry assistance efforts, hasn’t made any decisions about the partsmakers.

“A number of options” are being studied, said De Koker, who wouldn’t give details. The group, which represents more than 400 companies, also met with the task force on Feb. 23, he said.

Aid Request

De Koker’s trade group and the Motor & Equipment Manufacturers Association requested about $18.5 billion in aid from the Treasury Department on Feb. 13, four days before GM and Chrysler asked for as much as $16.6 billion more in loans.

Without federal assistance, a wave of bankruptcies would force some suppliers to close and damage a U.S. auto industry struggling with the worst domestic sales since the early 1980s, according to the groups.

De Koker said his trade group told the task force of the urgency of suppliers’ financial needs, because extended production shutdowns in December and January by GM, Chrysler and Ford Motor Co. have left the partsmakers with a dearth of sales.

As many as one-third of the more than 4,000 U.S. auto suppliers face “imminent financial distress,” De Koker’s group has said. Many are closely held companies with less revenue than the publicly traded partsmakers, the association has said.

The Feb. 13 proposal from the supplier groups asks the government to back payments promised by GM, Ford and Chrysler so partsmakers can use the so-called receivables as loan collateral. The plan also seeks funding so automakers can pay suppliers faster, as well as a government guarantee of commercial loans for the parts companies.

The Treasury announced guidelines on Dec. 31 for aid to the auto industry that would let officials provide funds to any company they deem important to making or financing cars. That broadened access to the Troubled Asset Relief Program beyond loans previously approved for GM, Chrysler and lender GMAC LLC.

Slumping sales have dragged many of the biggest U.S. partsmakers to losses and caused some to breach their loan covenants or put them at risk of doing so.

Visteon said this week it may not be able to stay in compliance with its credit terms and may need to renegotiate, Tenneco amended a covenant at a higher interest rate, and Lear is renegotiating debt agreements after falling out of compliance.

Obama’s $75 Billion Foreclosure Plan Spells Relief for Bankers

President Barack Obama offered $75 billion of relief yesterday to homeowners facing foreclosure. He also gave bankers a reprieve.

Some lenders, including New York-based JPMorgan Chase & Co., have worried that proposed “cramdown” legislation giving judges the power to modify mortgages of those who file for bankruptcy would increase the number of filings. Obama, who said yesterday he supports a cramdown law, signaled that it would only be a last resort for struggling borrowers.

“Allowing cramdowns is a bad idea,” said Andrew Sandler, a partner in the Washington office of law firm Skadden, Arps, Slate, Meagher & Flom LLP, whose clients include mortgage companies. “Obama’s program has the potential to reduce the number of bankruptcies. The fewer loans that go to bankruptcy and are subject to cramdowns the better.”

Lenders that have large amounts of other types of consumer loans, such as home equity and credit cards, could suffer further losses because bankruptcy judges are likely to wipe out that debt, Paul Miller, analyst at Friedman, Billings, Ramsey Group Inc., said in a Jan. 26 research note.

“That’s what scares a lot of people, especially anybody that has second liens,” he said in an interview yesterday. “The mortgage industry does not want cramdowns because it’s going to open up a Pandora’s box.”

The foreclosure plan is part of a broader $275 billion proposal announced by Obama. The $75 billion would reduce monthly payments for borrowers, help homeowners with loans owned or backed by Fannie Mae and Freddie Mac to refinance at lower rates, and provide incentives to the industry. The government committed to buy up to $200 billion of preferred stock in each of the two housing lenders, twice as much as previously pledged.

Jamie Dimon

JPMorgan Chase Chief Executive Officer Jamie Dimon said in an interview that modification in bankruptcy will be “the last resort, not the first resort.” He called Obama’s plan an “elegant” way for homeowners to have recourse if they’re unable to change loan terms by any other means. JPMorgan held $352.4 billion in consumer loans on its books in the retail bank at the end of the fourth quarter.

Obama’s support for changing the bankruptcy rules is intended to help “borrowers who have run out of options,” according to a White House fact sheet released yesterday.

“My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair-market value -- as long as borrowers pay their debts under a court-ordered plan,” Obama said yesterday in Mesa, Arizona.

Instability

The bankruptcy change has come under criticism from investors and analysts who say modifying loan terms would add more instability to the market for debt packaged into securities.

“Cramdowns encourage more people to consider bankruptcy,” said Andrew Harding, who helps manage $20 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland. “It might sound good to the politicians, but it’s certainly not something that behooves the securitized market.”

Mortgage securities that are rated AAA were sold with the expectation they would be the last to suffer losses, said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine. Once those securities take losses, their value will have to be marked down, he said.

Lenders may also pass on higher rates to consumers as risk increases, said David Olson, president of Wholesale Access Mortgage Research, a research firm based in Columbia, Maryland, and a former Freddie Mac economist. “You are saying that contracts can be broken, which is a dangerous concept,” he said.

Foreclosures

U.S. foreclosures reached 274,399 in January, the 10th straight month in which more than a quarter-million filings were processed, according to RealtyTrac Inc., the Irvine, California- based provider of real estate data. Last year, more than 2.3 million homeowners faced foreclosure proceedings, an 81 percent increase from 2007, and analysts say that number may soar to as many as 10 million in coming years.

The Obama plan would cut mortgage payments for as many as 9 million struggling homeowners and work with banks to reduce payments to 31 percent of a borrower’s monthly income.

“The refinancing pieces of the plan open up a new tool or opportunity for many consumers across America who really didn’t have refinancing as a viable option before,” said Mike Heid, co- president of Wells Fargo Home Mortgage in Des Moines, Iowa. “It’s a very comprehensive, very thoughtful plan that will go a long way towards helping stabilize housing in America.”

Bank of America Corp. and Citigroup Inc. said in statements they supported the government’s initiative. Citigroup, which has taken $45 billion in government funding and a $301 billion backstop on assets, said in January it supported giving bankruptcy judges the ability to alter loan terms.

In a Feb. 11 hearing before the U.S. House Financial Services Committee, chief executives of seven large banks said that while they supported modifying loans, they didn’t share Citigroup’s view that bankruptcy courts should have the leeway to change payments.

U.K. Budget Surplus Smallest Since 1995 as Taxes Fall

Britain had a 3.3 billion-pound ($4.7 billion) budget surplus in January, the smallest for the month for 14 years, as the financial crisis ravaged bank profits and the recession worsened.

The surplus, normal for a month when the government collects more than a tenth of its annual tax revenue, compares with 13.9 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 15 forecasts in a Bloomberg News survey was 7 billion pounds.

The figures highlight the damage inflicted by the credit crisis as Prime Minister Gordon Brown confronts the biggest budget deficit since modern records began in 1970. Revenue is falling as a housing bust deepens and losses mount at financial firms. Brown has pledged billions in tax cuts and spending to counter the slump.

“The January numbers were very disappointing,” said David Page, an economist at Investec Securities in London. “The sharp fall in tax revenue reflects the downturn in the economy, but this scale of fall was much worse than expected.”

Revenue typically pours in during January, much of it from financial services firms as banks pay tax on their profits and their employees receive annual bonuses. This year, bonuses are forecast to have fallen by as much as 60 percent, according to the Centre for Economics and Business Research.

Tax Receipts

Tax income fell 11 percent, with cash receipts of corporation tax falling 24 percent, income tax dropping 4.3 percent and value-added tax plunging 11 percent, reflecting a 2.5 point cut in the sales levy since Dec. 1. National insurance contributions, a payroll tax, slipped 2.9 percent. Spending rose 6.7 percent as the highest unemployment in a decade led to a 15 percent jump in net spending on social benefits.

In the first 10 months of the fiscal year, the deficit soared to 67.2 billion pounds from 23.1 billion pounds a year earlier. The Treasury says the gap will peak at 118 billion pounds, or 8 percent of gross domestic product, in the year through March 2010. The European Commission yesterday warned that may be an underestimate.

A measure of the cash entering and leaving the Treasury showed a budget surplus of 25.1 billion pounds. Economists forecast 7.7 billion pounds. The surplus reflects a transfer of funds from one part of the public sector to another relating to the 20 billion-pound recapitalization of Royal Bank of Scotland Group Plc.

Credit Crunch

The housing and banking booms underpinned almost 16 years of expansion until the economy stalled in the second quarter, helping Brown to fund pledges to boost investment in services and cut poverty during his decade as finance minister. Until the credit crunch took hold, financial services firms contributed about 14 percent of all U.K. tax revenue.

As the economy heads for its deepest recession in at least three decades, polls put the governing Labour Party as much as 20 points behind the opposition Conservatives with 16 months to go before Brown has to hold the next general election.

Net debt rose to 40.4 percent of GDP in January, the highest in 11 years. Including financial-sector interventions, it fell to 47.8 percent from 49.5 percent in December.

The statistics office said today that Lloyds Banking Group Plc, 43 percent government-owned after a 17 billion-pound cash injection, became a public company on October 13.

G-7 Says ‘Severe’ Downturn to Persist, Vows to Reverse Slump

Group of Seven finance chiefs vowed to tackle a “severe” economic downturn that will persist for most of 2009 without spelling out new steps to do so.

The G-7’s finance ministers and central bankers said in a statement released after talks in Rome yesterday that they were working to restore confidence in markets and revive the world economy. They predicted the full effect of individual rescue packages will “build over time.”

“We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector,” the statement said. “The stabilization of the global economy and financial markets remains our highest priority.”

The policy makers met after reports this week showed Germany’s economy contracted the most in 22 years in the fourth quarter and U.S. consumer confidence neared its lowest since 1981. With the worst global slump since World War II battering state finances, International Monetary Fund Managing Director Dominique Strauss-Kahn said he expects more countries to need emergency aid.

That’s putting governments and central banks under greater pressure to end the malaise. U.S. Treasury Secretary Timothy Geithner urged initiatives that are “forceful and sustained for a period that matches the likely duration of the crisis” and noted a “a much greater scale of urgency and commitment” within the G-7.

At a Loss

The authorities are still at a loss on the best course of action 18 months after the credit crisis broke out. That’s left them pursuing a disjointed approach as the global economy deteriorates further and companies from Microsoft Corp. to Nissan Motor Co. cut jobs.

U.S. stocks fell the most this week since November, extending the Dow Jones Industrial Average index’s decline since the start of the year to 11 percent.

“The statement ticks all the right boxes, but as expected does not go beyond generic statements of principle and commitments that we have heard before,” said Marco Annunziata, chief economist at Unicredit MIB in London. “The commitment to act in a coordinated way flies in the face of the rather uncoordinated approach that followed similar commitments last October.”

Geithner, a former Treasury undersecretary in the Clinton administration, returned to the G-7 stage after a week in which investors complained his $2 trillion plan to revive lending lacked detail. His colleagues yesterday urged him to push ahead.

“On paper it looks great and the principles are certainly very good,” said French Finance Minister Christine Lagarde. “The essential thing is now to implement it.”

Congress Sends Obama $787 Billion Stimulus Package

Congress gave final approval to a $787 billion economic-stimulus package that imposes stricter limits on executive pay and bonuses at companies receiving Federal bailouts than those proposed by the Obama administration.

The Senate late yesterday voted 60 to 38 to approve the legislation. Three Republicans joined Democrats in favor of the measure. Earlier in the day the House passed the bill, 246 to 183, with no Republicans in favor. The votes give Barack Obama the first major legislative victory of his presidency.

“This historic step won’t be the end of what we do to turn our economy around, but rather the beginning,” Obama said in his weekly address today. “The problems that led us into this crisis are deep and widespread, and our response must be equal to the task.”

Democrats predict the plan will save or create 3.5 million jobs and help pull the nation out of the most severe recession in 70 years. The package also restricts executive compensation at all companies receiving assistance from the Treasury Department’s Troubled Asset Relief Program, not just those receiving “exceptional” aid as the Obama administration announced last week. The legislation limits bonuses and other incentive pay at those companies on a sliding scale according to how much federal aid they take.

Bonus Restrictions

Bonus restrictions will be imposed on senior executive officers and the next 20 highest-paid employees at companies that receive more than $500 million from TARP. Companies receiving between $250 million and $500 million will face restrictions on bonuses to their senior executive officers and their next 10 highest-paid workers. The limits will apply to the top five employees at companies receiving between $25 million and $250 million.

Companies such as Bank of America Corp., the largest U.S. lender, have been under political pressure to justify executive bonuses when they have received government aid. U.S. lawmakers on Feb. 11 prodded chief executives of Citigroup Inc. and seven other banks that got federal bailout money to increase the flow of credit and ease public anger over how the lenders used taxpayer funds.

The stimulus plan’s costliest item is a $400 payroll tax cut for individuals and $800 for couples. Retirees, disabled veterans and others who don’t pay payroll taxes will get a $250 payment. The bill also includes an alternative minimum tax cut.

Objections to Spending

Republicans argued that the bill contains too much government spending and, because of that, won’t do enough to boost the economy.

“I think everyone in this chamber on both sides of the aisle understands we need to act,” said House Minority Leader John Boehner, an Ohio Republican. “But a bill that’s supposed to be about jobs, jobs, jobs has turned into a bill that’s all about spending, spending and spending.”

The measure needed 60 votes to pass the Senate. The three Republicans voting for the bill in that chamber were Arlen Specter of Pennsylvania and Susan Collins and Olympia Snowe, both of Maine. Senator Edward Kennedy, a Massachusetts Democrat who is battling brain cancer, didn’t vote and one of Minnesota’s Senate seats remains vacant.

Most senators had left the chamber’s floor hours before the final tally was announced. The vote was held open for five hours until Senator Sherrod Brown, an Ohio Democrat, returned from his home state to cast the deciding vote for the bill. Brown had been in Ohio following the death of his mother earlier this week.

Business Tax Breaks

Businesses won several tax breaks, including faster write- offs for equipment purchased in 2009 and incentives for companies that produce and invest in renewable resources such as solar and wind power. A business tax break pushed by the U.S. Chamber of Commerce will ease near-term tax burdens on companies and buyout firms that restructure debt without entering bankruptcy.

Senator Judd Gregg, the New Hampshire Republican who withdrew this week as Obama’s commerce secretary nominee, voted against the plan. In a statement, he called it a “so-called stimulus plan” that “has become sidetracked by misplaced spending and a lack of attention to the true problems facing the nation.”

The stimulus plan provides a half-trillion dollars for jobless benefits, renewable energy projects, highway construction, food stamps, broadband, Pell college tuition grants, high-speed rail projects and scores of other programs. It raises the nation’s debt limit to about $12 trillion.

Unemployment

The U.S. labor market has lost 3.6 million jobs since the recession started in December 2007. Companies from Wal-Mart Stores Inc. to General Motors Corp. have announced cuts to their payrolls, highlighting the broad reach of the recession. FedEx Corp., the second-largest U.S. package-delivery company, said it will eliminate 900 jobs in its freight unit.

Other details of what provisions survived negotiations between the House and Senate were still emerging even as the plan headed for congressional passage.

Lawmakers dropped provisions barring funds from going to museums, arts centers and theaters. A ban on money to casinos, golf courses, zoos and swimming pools was retained. Lawmakers deleted provisions requiring businesses receiving stimulus funding to use E-Verify, a government program used to ensure workers are in the country legally.

CBO Report

The nonpartisan Congressional Budget Office said the stimulus package will cost $787 billion, rather than $789 billion lawmakers estimated earlier this week. The plan will pump $185 billion into the economy this year and $399 billion next year, the agency said.

“This country faces the greatest crisis that we’ve seen in terms of the economy since the ‘30s,” House Appropriations Committee Chairman David Obey, a Wisconsin Democrat, said as he urged passage of the bill. “The other tool normally available to us is monetary policy in the form of low interest rates through actions of the Federal Reserve. We’ve already fired that bullet -- the only bullet left is fiscal policy.”

Democrats released the text of the plan late the night before the vote, prompting complaints from Republicans they didn’t have enough time to review the legislation before voting on it.

“It is over a thousand pages,” said Representative Tom Price, a Georgia Republican. “It is physically impossible for any member to have read this bill.”

Economists such as Yale University’s Ray Fair say the first evidence that the legislation is working should be visible in consumer spending and retail sales, which they expect will stop declining around mid-year.

The next sign may come in business investment, as companies grow more confident about a pick-up in sales. The final signal of success would be a turnaround in employment.

Govt cuts rail fares as elections approach

NEW DELHI - The government unveiled modest cuts to most rail passenger fares on Friday with an eye on fast approaching national elections, but kept freight rates unchanged despite growing signs of strain in a faltering economy.

Rail Minister Lalu Prasad, using his trademark humour, rolled out the interim rail budget for the next fiscal year to March 2010, and said slowing economic expansion, higher wages for staff and lower passenger revenue growth could pull down net revenues.

But he announced 43 new trains and said the railways would pay a dividend of 53.04 billion rupees ($1.09 billion) to a cash-strapped government, which will outline its interim budget on Monday.

"The same railways which faced a paucity of funds for replacement of over-aged assets in 2001 ... have now surprised the whole world with a historic financial turnaround," Yadav told lawmakers.

Prasad forecast the railways -- one of the world's oldest and largest networks and which carries about 18 million people a day -- would load 910 million tonnes of freight in 2009/10, up 60 million tonnes from this fiscal.

Passenger traffic in a country of more than a billion people, for many of whom rail is the only affordable means of long-distance travel, was seen growing by around 7 percent.

Prasad heads a regional party which is a key member of the ruling Congress party-led coalition and with a general election due by May much of his speech focused on projecting the achievements of the past, touting a financial turnaround for the century-and-a-half-old network and cheaper fares.

The railways forms an integral part of Indian life carrying freight and passengers from icy heights of Kashmir to the sunny beaches of Kerala.

But financial markets were looking ahead, with the main share index rising 2 percent by early afternoon on hopes of further stimulus measures for the economy in Monday's mini budget, when rescuing flagging growth and stemming job losses are expected to take centre stage.

CHEAPER TRAVEL

The government estimates that growth in Asia's third-largest economy will slip this fiscal year to 7.1 percent from 9 percent or more in the past three years.

Data has already shown the global slowdown is hurting key sectors including exports, housing and manufacturing.

A full budget for 2009/10 will be presented by the government which forms after the polls, campaigning for which is heating up.

Cheaper class tickets for trips longer than 10 km (6 miles) and costing up to 50 rupees ($1) were reduced by one rupee, while more-expensive air-conditioned and ordinary seats on a range of trains were trimmed by up to 2 percent.

The railways has had to take on stiff competition from low-cost airlines in recent years, but job insecurity and costlier plane tickets have made many look again at rail travel.

The government said feasibility studies for operating "bullet trains" such as those which race travellers across parts of Europe and Japan had begun and a survey for 14 new lines had been undertaken.

Prasad said work had started on a dedicated freight corridor linking key areas of economic activity in the east of the country, while construction on a western line would begin later this month.

Financing for the project from a Japanese funding agency to the tune of 200 billion rupees would likely arrive by the end of 2009, the minister added.

India is on a drive to improve its creaky infrastructure and boost rail connectivity between industrial hubs and major ports to bolster economic expansion and improve supplies.

Govt needs to stimulate trade, boost demand - min

NEW DELHI - There is a need to stimulate trade, revive foreign investment inflows into India and boost the domestic economy, acting Finance Minister Pranab Mukherjee said at a conference on Thursday

Factory output falls; inflation drops

NEW DELHI - A fall in factory output at the end of 2008 and the prospect inflation could turn negative in coming months bolstered analysts' expectations for further interest rates cut by showing the pressure the economy was under.

Industrial output unexpectedly fell 2 percent in December from a year earlier, the second fall in three months and sharply below November's downwardly revised 1.7 percent, data showed on Thursday.

The median forecast in a Reuters poll of economists was for industrial output to rise by 1.3 percent.

"Clearly firms are still struggling with excess inventories and cutting production," said A. Prasanna, an analyst at ICICI Securities.

"While there is likely to be some improvement in output numbers in the current quarter, the overall economic outlook continues to be weak on the back of sluggish domestic demand and a collapse in external demand."

Manufacturing production fell 2.5 percent from a year earlier, data showed.

Separate data showed annual inflation fell to 4.39 percent at the end of January, its lowest in just over a year, close to expectations of a sizeable fall from the previous week's 5.07 percent as a fuel price cut took effect.

Inflation has tumbled from a peak near 13 percent last August, and economists said it would continue to fall for some time.

"We expect inflation to be negative for 4-5 months from mid-2009," said Siddhartha Sanyal, economist at Edelweiss Securities.

The data pushed down yields on the benchmark 8.24 percent 2018 bond by 3 basis points, and the partially convertible rupee fell slightly to 48.73/74 per dollar from 48.71/72.

DOUR SENTIMENT

October's 0.3 percent fall in factory output was the first in 13 years, and December's drop reinforced the sharp downturn in Asia's third-largest economy due to a credit squeeze and weak business sentiment in the final quarter of 2008.

"It clearly indicates the problem there in the manufacturing sector. We obviously expect the RBI to cut rates," Anubhuti Sahay, an economist at Standard Chartered Bank.

The central bank has cut its main short-term lending rate by 350 basis points to 5.5 percent since mid-October and has also slashed banks' cash reserve requirements by 400 basis points to 5 percent, to boost liquidity and provide impetus to growth.

A purchasing managers index showed manufacturing activity shrank for a third straight month in January as demand continued to be sluggish due to weak business and consumer confidence.

India's exports have contracted on an annual basis in three consecutive months since October, while imports have also slowed due to slowdown in economic activity.

The government expects the economy to grow 7.1 percent in 2008/09, a rate second only to China among major economies.

Yet that will still be the slowest growth in six years, and the analysts expect even slower growth in 2009/10, a marked slowdown from rates of 9 percent and above in the three years ending 2007/08.