DALLAS (AP) -- Southwest Airlines says it has a tentative three-year contract agreement with the Transport Workers Union.
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The Dallas-based discount carrier announced the tentative deal Friday night.
The agreement with workers in ramp operations and provisioning, plus freight agents, will be submitted to union members for approval.
TWU Local 555 represents nearly 7,780 Southwest workers.
Southwest Airlines Co. says the new agreement would run through June 2011.
The current contract began amendable on June 30, 2008. Contract talks began early last year.
2009年2月28日星期六
Berkshire reports a 96 percent drop in 4Q profit
OMAHA, Neb. (AP) -- Warren Buffett's Berkshire Hathaway Inc. reported a 96 percent drop in its fourth quarter profit because of largely unrealized losses of $3.25 billion on investments and derivative contracts.
The Omaha-based company released its results Saturday morning along with Buffett's annual letter to shareholders.
Berkshire reported net income of $117 million, or $76 per Class A share, in the quarter ending Dec. 31. That's down from net income of $2.95 billion, or $1,904 per share, in the same period a year ago.
The two analysts surveyed by Thomson Reuters expected Berkshire to report fourth quarter net income of $1,486.50 per share on average. The estimates typically exclude one-time items.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
Buffett said the retail businesses, such as the furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.
But he said Berkshire's utility and insurance businesses, which includes the insurer Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
Most of the investment losses that affected Berkshire's results were unrealized losses on long-term derivative contracts, some of which are tied to the value of stock market indexes.
Buffett has predicted the company's derivative contracts will ultimately be profitable partly because Berkshire has received $8.1 billion in premiums up front for them. That allows Berkshire to invest the premium money until the contracts start maturing a decade from now.
Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.
"If we lose money on our derivatives, it will be my fault," Buffett said.
Berkshire has to estimate the value of its derivatives every quarter. Buffett says he supports that mark-to-market accounting, but the formula used to estimate that value can produce absurd results for long-term contracts.
For the full year, Berkshire's net income fell to $4.99 billion, or $3,224 per share, down from last year's $13.21 billion, or $8,548 per share, in 2007.
Andy Kilpatrick, the stockbroker and author who wrote "Of Permanent Value: The Story of Warren Buffett," said Berkshire's results were still impressive given how they compare to the rest of the world.
"I would argue that he's more competitive than ever in the world," Kilpatrick said.
Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6 percent to $70,530 per share in 2008. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent decline in 2001.
But Berkshire's 9.6 percent decline still beat the S&P 500's 37 percent decline in 2008, the report said.
The Omaha-based company released its results Saturday morning along with Buffett's annual letter to shareholders.
Berkshire reported net income of $117 million, or $76 per Class A share, in the quarter ending Dec. 31. That's down from net income of $2.95 billion, or $1,904 per share, in the same period a year ago.
The two analysts surveyed by Thomson Reuters expected Berkshire to report fourth quarter net income of $1,486.50 per share on average. The estimates typically exclude one-time items.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
Buffett said the retail businesses, such as the furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.
But he said Berkshire's utility and insurance businesses, which includes the insurer Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
Most of the investment losses that affected Berkshire's results were unrealized losses on long-term derivative contracts, some of which are tied to the value of stock market indexes.
Buffett has predicted the company's derivative contracts will ultimately be profitable partly because Berkshire has received $8.1 billion in premiums up front for them. That allows Berkshire to invest the premium money until the contracts start maturing a decade from now.
Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.
"If we lose money on our derivatives, it will be my fault," Buffett said.
Berkshire has to estimate the value of its derivatives every quarter. Buffett says he supports that mark-to-market accounting, but the formula used to estimate that value can produce absurd results for long-term contracts.
For the full year, Berkshire's net income fell to $4.99 billion, or $3,224 per share, down from last year's $13.21 billion, or $8,548 per share, in 2007.
Andy Kilpatrick, the stockbroker and author who wrote "Of Permanent Value: The Story of Warren Buffett," said Berkshire's results were still impressive given how they compare to the rest of the world.
"I would argue that he's more competitive than ever in the world," Kilpatrick said.
Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6 percent to $70,530 per share in 2008. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent decline in 2001.
But Berkshire's 9.6 percent decline still beat the S&P 500's 37 percent decline in 2008, the report said.
Rules for the New Reality
Back in September, before we were all inured to the tottering nature of so many financial giants, investors were looking for someone to blame.
More from NYT.com:
• How About a Stimulus for Financial Advice?
• Coaches for a Game of Money
• Readers Weigh in With Tips on Jobs and Money
So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.
In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers.
All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect?
Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.
More from Yahoo! Finance:
• Why Index Funds Are Still Winners
• 5 New Investing Rules for Retirement
• The $38 Billion Shadow Stimulus
Visit the Retirement Center
But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.
What You Should Expect
A Long Look at Risk
Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.
An accurate assessment of risk is important. But you can view risk in many ways.
David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.
Then Mr. Jacobs moves to risk need. Need is driven by goals. Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.
Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”
A Balance Sheet Audit
Diversifying the risks in your portfolio is merely the beginning of the process. Burt Hutchinson, of Fischer & Hutchinson Wealth Advisors in Bear, Del., trained as an accountant before earning his certified financial planner designation. He believes in tax diversification too, across a range of savings vehicles with different tax rules.
He wants his firm to act as a sort of personal chief financial officer, looking at liabilities as well as assets and at spending as much as saving. “How are you tracking your cash flow?” he will ask. “Is it increasing? Decreasing? Do you have any idea where it’s going?” He says that a good financial planner should ask to see your tax return, not just your investment portfolio.
More from NYT.com:
• How About a Stimulus for Financial Advice?
• Coaches for a Game of Money
• Readers Weigh in With Tips on Jobs and Money
So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.
In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers.
All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect?
Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.
More from Yahoo! Finance:
• Why Index Funds Are Still Winners
• 5 New Investing Rules for Retirement
• The $38 Billion Shadow Stimulus
Visit the Retirement Center
But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.
What You Should Expect
A Long Look at Risk
Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.
An accurate assessment of risk is important. But you can view risk in many ways.
David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.
Then Mr. Jacobs moves to risk need. Need is driven by goals. Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.
Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”
A Balance Sheet Audit
Diversifying the risks in your portfolio is merely the beginning of the process. Burt Hutchinson, of Fischer & Hutchinson Wealth Advisors in Bear, Del., trained as an accountant before earning his certified financial planner designation. He believes in tax diversification too, across a range of savings vehicles with different tax rules.
He wants his firm to act as a sort of personal chief financial officer, looking at liabilities as well as assets and at spending as much as saving. “How are you tracking your cash flow?” he will ask. “Is it increasing? Decreasing? Do you have any idea where it’s going?” He says that a good financial planner should ask to see your tax return, not just your investment portfolio.
Berkshire has worst year, Buffett still optimistic
OMAHA, Neb. (AP) -- Warren Buffett remains optimistic about the prospects for his company and the nation even though Berkshire Hathaway Inc. turned in its worst performance in 2008 and the widely-followed investor says the economy will likely remain a mess beyond this year.
AP - In this May 21, 2008 file photo, U.S. billionaire investor Warren Buffett speaks during a news conference in ...
AP - In this May 21, 2008 file photo, U.S. billionaire investor Warren Buffett speaks during a news conference in ...
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Buffett used his annual letter Saturday to reassure shareholders that the Omaha-based insurance and investment company has the financial strength needed to withstand the current turmoil and improve after the worst showing of Buffett's 44 years as chairman and CEO.
Buffett wrote he's certain "the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."
In between the news of Berkshire's sharply lower profit and a thorough explanation of its largely unrealized $7.5 billion investment and derivative losses, Buffett offered a hopeful view of the nation's future.
He said America has faced bigger economic challenges in the past, including two World Wars and the Great Depression.
"Though the path has not been smooth, our economic system has worked extraordinarily well over time," Buffett wrote. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Buffett's letter appeared to mollify the concerns of many who follow the company, but it's not yet clear whether that will help Berkshire's Class A stock extend its rebound from the new five-year low it set last Monday at $73,500. On Friday, it closed up $250 at $78,600.
"If anything, I feel better than I did before I read it," Morningstar analyst Bill Bergman said. Berkshire's results could have easily been worse, he said.
But Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6 percent to $70,530 per share in 2008 -- the biggest drop since he took control of the company in 1965. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent drop in 2001 when insurance losses related to the Sept. 11 terrorist attacks hurt results.
Berkshire's Class A shares remain the most expensive U.S. stock, but they fell nearly 32 percent in 2008 and have declined 48 percent since setting a high of $151,650 in December 2007. That high came after an exceptionally profitable quarter that was helped by a $2 billion investment gain.
The S&P 500 fell 37 percent in 2008.
Within Berkshire, Buffett said the company's retail businesses, including furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year. Net income for those businesses slipped 3 percent to $2.28 billion, and Buffett said they will likely continue to perform below their potential in 2009.
But he said Berkshire's utility and insurance businesses, which includes Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
The Des Moines, Iowa-based utility division, MidAmerican Energy Holdings, contributed $1.7 billion to Berkshire's net income in 2008 thanks to more than $1 billion in proceeds from MidAmerican's failed takeover of Constellation Energy. That's up from the $1.1 billion utility profit that Berkshire recorded in 2007.
The insurance division, which also includes reinsurance giant General Re, contributed $1.8 billion in earnings from underwriting -- a drop of 17 percent from 2007. Buffett praised Geico CEO Tony Nicely's efficiency and his ability to increase Geico's market share to 7.7 percent of the auto insurance market last year.
"As we view Geico's current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere," Buffett wrote.
Overall, Berkshire's 2008 profit of $4.99 billion, or $3,224 per Class A share, was down 62 percent from $13.21 billion, or $8,548 per share, in 2007.
Berkshire's fourth-quarter numbers were even worse. Buffett's company reported net income of $117 million, or $76 per share, down 96 percent from $2.95 billion, or $1,904 per share, a year earlier.
Buffett devoted nearly five pages of his letter to shareholders to explaining the role derivatives played in the company's investment losses last year.
The derivatives Berkshire offers operate similar to insurance policies. Some of them cover whether certain stock market indexes -- the S&P 500, the FTSE 100 in the United Kingdom, the Euro Stoxx 50 in Europe and the Nikkei 225 in Japan -- will be lower 15 or 20 years in the future. Others cover credit losses at groups of 100 companies, and some cover credit risks of individual companies.
Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.
Analyst Justin Fuller, who works with Midway Capital Research & Management in Chicago, said he thinks the details Buffett offered about Berkshire's derivatives will help.
Fuller said two key things make Berkshire's derivatives different from the complex financial bets of the same name that other companies have used. Berkshire requires most payment upfront, so there's little risk the other party to the derivative will fail to pay. And Berkshire won't take part in derivatives that require the company to post substantial collateral when the value of the contract falls.
"I think laying those out as plainly and simply as he did with examples should calm investors' fears about derivatives," said Fuller.
Berkshire has received $8.1 billion in payments for derivatives which can be invested until the contracts expire years from now.
But Berkshire has to estimate the value of its derivatives every quarter. Buffett said he supports that mark-to-market accounting, but the Black-Scholes formula used to estimate that value tends to overstate Berkshire's liability on long-term contracts.
"Even so, we will continue to use Black-Scholes when we are estimating our financial-statement liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might offer would engender extreme skepticism," Buffett wrote.
Buffett said he made at least one major investing mistake last year by buying a large amount of ConocoPhillips stock when oil and gas prices were near their peak.
Berkshire increased its stake in ConocoPhillips from 17.5 million shares in 2007 to 84.9 million shares at the end of 2008. Buffett said he didn't anticipate last year's dramatic fall in energy prices, so his decision cost Berkshire shareholders several billion dollars.
Buffett says he also spent $244 million on stock in two Irish banks that appeared cheap. But since then, he's had to write down the value of those purchases to $27 million.
But Buffett also had several investing successes in 2008.
Berkshire committed $14.5 billion to fixed income investments in Goldman Sachs Group Inc. and General Electric Co. Those investments carry high interest rates and give Berkshire the option to acquire stock in those companies.
To fund those investments, Buffett said he had to sell some of Berkshire's holdings in Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips even though he would have rather kept that stock.
"However, I have pledged -- to you, the rating agencies and myself -- to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations," Buffett said.
In that regard, Berkshire should be OK because the company finished 2008 with $24.3 billion cash on hand. That's down significantly from the $37.7 billion the company held at the end of 2007, reflecting the investments Buffett made during the year.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
AP - In this May 21, 2008 file photo, U.S. billionaire investor Warren Buffett speaks during a news conference in ...
AP - In this May 21, 2008 file photo, U.S. billionaire investor Warren Buffett speaks during a news conference in ...
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{"s" : "brk-a,ge,gs,jnj,ko","k" : "c10,l10,p20,t10","o" : "","j" : ""}
Buffett used his annual letter Saturday to reassure shareholders that the Omaha-based insurance and investment company has the financial strength needed to withstand the current turmoil and improve after the worst showing of Buffett's 44 years as chairman and CEO.
Buffett wrote he's certain "the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."
In between the news of Berkshire's sharply lower profit and a thorough explanation of its largely unrealized $7.5 billion investment and derivative losses, Buffett offered a hopeful view of the nation's future.
He said America has faced bigger economic challenges in the past, including two World Wars and the Great Depression.
"Though the path has not been smooth, our economic system has worked extraordinarily well over time," Buffett wrote. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Buffett's letter appeared to mollify the concerns of many who follow the company, but it's not yet clear whether that will help Berkshire's Class A stock extend its rebound from the new five-year low it set last Monday at $73,500. On Friday, it closed up $250 at $78,600.
"If anything, I feel better than I did before I read it," Morningstar analyst Bill Bergman said. Berkshire's results could have easily been worse, he said.
But Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6 percent to $70,530 per share in 2008 -- the biggest drop since he took control of the company in 1965. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent drop in 2001 when insurance losses related to the Sept. 11 terrorist attacks hurt results.
Berkshire's Class A shares remain the most expensive U.S. stock, but they fell nearly 32 percent in 2008 and have declined 48 percent since setting a high of $151,650 in December 2007. That high came after an exceptionally profitable quarter that was helped by a $2 billion investment gain.
The S&P 500 fell 37 percent in 2008.
Within Berkshire, Buffett said the company's retail businesses, including furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year. Net income for those businesses slipped 3 percent to $2.28 billion, and Buffett said they will likely continue to perform below their potential in 2009.
But he said Berkshire's utility and insurance businesses, which includes Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
The Des Moines, Iowa-based utility division, MidAmerican Energy Holdings, contributed $1.7 billion to Berkshire's net income in 2008 thanks to more than $1 billion in proceeds from MidAmerican's failed takeover of Constellation Energy. That's up from the $1.1 billion utility profit that Berkshire recorded in 2007.
The insurance division, which also includes reinsurance giant General Re, contributed $1.8 billion in earnings from underwriting -- a drop of 17 percent from 2007. Buffett praised Geico CEO Tony Nicely's efficiency and his ability to increase Geico's market share to 7.7 percent of the auto insurance market last year.
"As we view Geico's current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere," Buffett wrote.
Overall, Berkshire's 2008 profit of $4.99 billion, or $3,224 per Class A share, was down 62 percent from $13.21 billion, or $8,548 per share, in 2007.
Berkshire's fourth-quarter numbers were even worse. Buffett's company reported net income of $117 million, or $76 per share, down 96 percent from $2.95 billion, or $1,904 per share, a year earlier.
Buffett devoted nearly five pages of his letter to shareholders to explaining the role derivatives played in the company's investment losses last year.
The derivatives Berkshire offers operate similar to insurance policies. Some of them cover whether certain stock market indexes -- the S&P 500, the FTSE 100 in the United Kingdom, the Euro Stoxx 50 in Europe and the Nikkei 225 in Japan -- will be lower 15 or 20 years in the future. Others cover credit losses at groups of 100 companies, and some cover credit risks of individual companies.
Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.
Analyst Justin Fuller, who works with Midway Capital Research & Management in Chicago, said he thinks the details Buffett offered about Berkshire's derivatives will help.
Fuller said two key things make Berkshire's derivatives different from the complex financial bets of the same name that other companies have used. Berkshire requires most payment upfront, so there's little risk the other party to the derivative will fail to pay. And Berkshire won't take part in derivatives that require the company to post substantial collateral when the value of the contract falls.
"I think laying those out as plainly and simply as he did with examples should calm investors' fears about derivatives," said Fuller.
Berkshire has received $8.1 billion in payments for derivatives which can be invested until the contracts expire years from now.
But Berkshire has to estimate the value of its derivatives every quarter. Buffett said he supports that mark-to-market accounting, but the Black-Scholes formula used to estimate that value tends to overstate Berkshire's liability on long-term contracts.
"Even so, we will continue to use Black-Scholes when we are estimating our financial-statement liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might offer would engender extreme skepticism," Buffett wrote.
Buffett said he made at least one major investing mistake last year by buying a large amount of ConocoPhillips stock when oil and gas prices were near their peak.
Berkshire increased its stake in ConocoPhillips from 17.5 million shares in 2007 to 84.9 million shares at the end of 2008. Buffett said he didn't anticipate last year's dramatic fall in energy prices, so his decision cost Berkshire shareholders several billion dollars.
Buffett says he also spent $244 million on stock in two Irish banks that appeared cheap. But since then, he's had to write down the value of those purchases to $27 million.
But Buffett also had several investing successes in 2008.
Berkshire committed $14.5 billion to fixed income investments in Goldman Sachs Group Inc. and General Electric Co. Those investments carry high interest rates and give Berkshire the option to acquire stock in those companies.
To fund those investments, Buffett said he had to sell some of Berkshire's holdings in Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips even though he would have rather kept that stock.
"However, I have pledged -- to you, the rating agencies and myself -- to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations," Buffett said.
In that regard, Berkshire should be OK because the company finished 2008 with $24.3 billion cash on hand. That's down significantly from the $37.7 billion the company held at the end of 2007, reflecting the investments Buffett made during the year.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
10 Best And 10 Worst U.S. Housing Markets
The cities that are showing signs of stabilization and those that continue to unravel.
Wishing you'd left the game earlier is a time-honored Las Vegas tradition. Today, that's true not only for gamblers but for homeowners there. The last time Las Vegas properties were worth more than the average mortgage? August 2003.
Blame overbuilding and risky loans, a gambling mentality or even the desert sun, but based on recent results from the S&P/Case-Shiller home price index, which measures metro home prices in 20 cities through December 2008, Las Vegas is the weakest market in the country. Prices are dropping quickly (down 4.81% since last month and 33% in the last year), the pace of decline is accelerating at the third-fastest rate in the nation, and based on lost equity, homeowners are out 65 months of mortgage payments.
All signals that things aren't likely getting better any time soon.
"Vegas is a market unto its own," says Steve Cesinger, chief financial officer at Dewberry Capital, an Atlanta-based real estate investment firm. "I don't know what those guys were drinking when they thought all this building made sense. If it does work out soon, then there's some force out there in the universe that I'm not aware of."
The S&P/Case-Shiller home price index, released monthly, examines repeat home sales in 20 metro markets, including the city core and surrounding suburbs. This means that while prices in tony San Francisco neighborhood Pacific Heights might be holding up, the net effect of including a bankrupt suburb like Vallejo brings down the metro area's score. Each city's score is assigned based on the price difference from 2000, which is scored as 100. So San Francisco's score of 130.12 means prices are up 30.12% from 2000. It still has the potential for a further fall, given the 31% year-over-year drop.
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Forbes also analyzed monthly declines and year-over-year declines in home prices to determine where prices were falling fastest and where those drops were picking up momentum. It's not a good thing for San Diegothat prices from November 2008 to December 2008 fell 2.13%, but as prices declined by 2.29% from October to November, and 2.44% from September to October, the speed with which prices are falling is slowing.
That slowing rate of decline, also seen in places such as Denver, Washington, D.C., and Boston, helped rank those cities as some of the stronger markets in the country.
Contrast that with Minneapolis, where prices fell just 0.96% from September to October, but by December, the rate of month-to-month declines had jumped to 4.6%, an unwelcome acceleration.
Next, to rule out places in complete depression, we looked at how many months of equity homeowners have lost. Places like Detroit (-2.98%) and Cleveland (-2.07%) haven't declined as quickly over the last month as Seattle (-3.63%) or Charlotte (-2.55%), but that's because prices in those two Rust Belt cities are so depressed it's difficult for them to fall any further. Detroit and Cleveland homeowners have lost 141 and 92 months of equity, respectively, whereas Seattle and Charlotte prices have only declined for the last 39 and 33 months, respectively.
One other factor to consider with the Case-Shiller numbers is that the index tracks repeat home sales. That means cities like Tampa and Miami, which are notorious for overbuilt new inventory and high numbers of foreclosures, perform better on the index than they ought to, as those two factors are not tracked.
"Case-Shiller doesn't take into account new construction or foreclosure sales," says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. "In some of these markets, I'm not sure how you can ignore new construction or foreclosures."
Another city with foreclosure and new construction problems is Phoenix, where bad loans have mounted and mortgage delinquencies, a forebearer of foreclosures, have risen.
"It's pretty gruesome," says Anthony Sanders, a finance professor at Arizona State University. He points to delinquencies as a major problem and a sign that the Valley of the Sun won't be bouncing back any time soon. In Phoenix, seriously delinquent loans--those that haven't been paid in 90 days--have increased from 3.5% to 27.3% for subprime loans since this time in 2005. Adjustable-rate mortgages that are seriously delinquent have gone from less than 1% to 20.2% in the same period.
With those problems looming on the horizon in many cities across the country, Obama might need more ammunition than his proposed $75 billion foreclosure prevention package offers.
Then again, even in a boom-bust capital like Los Angeles, if you bought in 2000, paid your mortgage on time and are still in your home, you've seen a 71.5% price appreciation. There's something to be said for that kind of responsible, long-term investor.
NY022509.jpg
© Shutterstock
New York, N.Y.
In Depth: Best U.S. Housing Markets
No one is making a great deal of money in real estate right now, but that doesn't mean all cities are feeling the same amount of pain. Using data released Feb. 24 from the S&P/Case-Shiller home price index, we examined 20 cities in the U.S. on the basis of how fast home prices are falling, whether or not that descent is picking up speed or slowing down, and how many months of lost equity homeowners have endured. The data covers the period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year numbers. Our list of the 10 best-performing cities is followed by the list of the 10 worst performers.
Best, No. 1: New York, N.Y.
Index score: 183.5
Prices were last this low: November 2004
Month-to-month drop: -1.72%
Year-over-year drop: -9.19%
Deceleration rank: No. 9
Best, No. 2: Washington, D.C.
Index score: 176.34
Prices were last this low: April 2004
Month-to-month drop:-2.18%
Year-over-year drop: -19.24%
Deceleration rank: No. 3
Best, No. 3: Charlotte, N.C.
Index score: 122.41
Prices were last this low: April 2006
Month-to-month drop: -2.55
Year-over-year drop: -7.19
Deceleration rank: No. 13
Best, No. 4: Portland, Ore.
Index score: 158.5
Prices were last this low: September 2005
Month-to-month drop: -2.53%
Year-over-year drop: -13.14%
Deceleration rank: No. 11
Best, No. 5: San Diego, Calif.
Index score: 152.16
Prices were last this low: October 2003
Month-to-month drop: -2.13%
Year-over-year drop: -24.84%
Deceleration rank: No. 1
Click here to see the full list of the best U.S. housing markets.
LasVegas022509.jpg
© Shutterstock
Las Vegas, Nev.
In Depth: Worst U.S. Housing Markets
Worst, No. 1: Las Vegas, Nev.
Index score: 131.4%
Prices were last this low: August 2003
Month-to-month drop: -4.81%
Year-over-year drop: -32.98%
Deceleration rank: No. 18
Worst, No. 2: Phoenix, Ariz.
Index score: 123.93
Prices were last this low: September 2003
Month-to-month drop: -5.06%
Year-over-year drop: -33.96%
Deceleration rank: No. 15
Worst, No. 3: Detroit, Mich.
Index score: 80.93
Prices were last this low: April 1997
Month-to-month drop: -2.98%
Year-over-year drop: -21.66%
Deceleration rank: No. 8
Worst, No. 4: Minneapolis, Minn.
Index score: 127
Prices were last this low: April 2002
Month-to-month drop: -4.6%
Year-over-year drop: -18.45%
Deceleration rank: No. 20
Worst, No. 5: San Francisco, Calif.
Index score: 130.12
Prices were last this low: April 2002
Month-to-month drop: -3.81%
Year-over-year drop: -31.24%
Deceleration rank: No. 2
Click here to see the full list of the Worst U.S. Housing Markets.
Source: S&P/Case-Shiller home-price index, released Feb. 24, 2009. Methodology: Rate of home price increase or decrease was calculated by examining data covering the time period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year results.
Wishing you'd left the game earlier is a time-honored Las Vegas tradition. Today, that's true not only for gamblers but for homeowners there. The last time Las Vegas properties were worth more than the average mortgage? August 2003.
Blame overbuilding and risky loans, a gambling mentality or even the desert sun, but based on recent results from the S&P/Case-Shiller home price index, which measures metro home prices in 20 cities through December 2008, Las Vegas is the weakest market in the country. Prices are dropping quickly (down 4.81% since last month and 33% in the last year), the pace of decline is accelerating at the third-fastest rate in the nation, and based on lost equity, homeowners are out 65 months of mortgage payments.
All signals that things aren't likely getting better any time soon.
"Vegas is a market unto its own," says Steve Cesinger, chief financial officer at Dewberry Capital, an Atlanta-based real estate investment firm. "I don't know what those guys were drinking when they thought all this building made sense. If it does work out soon, then there's some force out there in the universe that I'm not aware of."
The S&P/Case-Shiller home price index, released monthly, examines repeat home sales in 20 metro markets, including the city core and surrounding suburbs. This means that while prices in tony San Francisco neighborhood Pacific Heights might be holding up, the net effect of including a bankrupt suburb like Vallejo brings down the metro area's score. Each city's score is assigned based on the price difference from 2000, which is scored as 100. So San Francisco's score of 130.12 means prices are up 30.12% from 2000. It still has the potential for a further fall, given the 31% year-over-year drop.
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Visit the Real Estate Center
Forbes also analyzed monthly declines and year-over-year declines in home prices to determine where prices were falling fastest and where those drops were picking up momentum. It's not a good thing for San Diegothat prices from November 2008 to December 2008 fell 2.13%, but as prices declined by 2.29% from October to November, and 2.44% from September to October, the speed with which prices are falling is slowing.
That slowing rate of decline, also seen in places such as Denver, Washington, D.C., and Boston, helped rank those cities as some of the stronger markets in the country.
Contrast that with Minneapolis, where prices fell just 0.96% from September to October, but by December, the rate of month-to-month declines had jumped to 4.6%, an unwelcome acceleration.
Next, to rule out places in complete depression, we looked at how many months of equity homeowners have lost. Places like Detroit (-2.98%) and Cleveland (-2.07%) haven't declined as quickly over the last month as Seattle (-3.63%) or Charlotte (-2.55%), but that's because prices in those two Rust Belt cities are so depressed it's difficult for them to fall any further. Detroit and Cleveland homeowners have lost 141 and 92 months of equity, respectively, whereas Seattle and Charlotte prices have only declined for the last 39 and 33 months, respectively.
One other factor to consider with the Case-Shiller numbers is that the index tracks repeat home sales. That means cities like Tampa and Miami, which are notorious for overbuilt new inventory and high numbers of foreclosures, perform better on the index than they ought to, as those two factors are not tracked.
"Case-Shiller doesn't take into account new construction or foreclosure sales," says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. "In some of these markets, I'm not sure how you can ignore new construction or foreclosures."
Another city with foreclosure and new construction problems is Phoenix, where bad loans have mounted and mortgage delinquencies, a forebearer of foreclosures, have risen.
"It's pretty gruesome," says Anthony Sanders, a finance professor at Arizona State University. He points to delinquencies as a major problem and a sign that the Valley of the Sun won't be bouncing back any time soon. In Phoenix, seriously delinquent loans--those that haven't been paid in 90 days--have increased from 3.5% to 27.3% for subprime loans since this time in 2005. Adjustable-rate mortgages that are seriously delinquent have gone from less than 1% to 20.2% in the same period.
With those problems looming on the horizon in many cities across the country, Obama might need more ammunition than his proposed $75 billion foreclosure prevention package offers.
Then again, even in a boom-bust capital like Los Angeles, if you bought in 2000, paid your mortgage on time and are still in your home, you've seen a 71.5% price appreciation. There's something to be said for that kind of responsible, long-term investor.
NY022509.jpg
© Shutterstock
New York, N.Y.
In Depth: Best U.S. Housing Markets
No one is making a great deal of money in real estate right now, but that doesn't mean all cities are feeling the same amount of pain. Using data released Feb. 24 from the S&P/Case-Shiller home price index, we examined 20 cities in the U.S. on the basis of how fast home prices are falling, whether or not that descent is picking up speed or slowing down, and how many months of lost equity homeowners have endured. The data covers the period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year numbers. Our list of the 10 best-performing cities is followed by the list of the 10 worst performers.
Best, No. 1: New York, N.Y.
Index score: 183.5
Prices were last this low: November 2004
Month-to-month drop: -1.72%
Year-over-year drop: -9.19%
Deceleration rank: No. 9
Best, No. 2: Washington, D.C.
Index score: 176.34
Prices were last this low: April 2004
Month-to-month drop:-2.18%
Year-over-year drop: -19.24%
Deceleration rank: No. 3
Best, No. 3: Charlotte, N.C.
Index score: 122.41
Prices were last this low: April 2006
Month-to-month drop: -2.55
Year-over-year drop: -7.19
Deceleration rank: No. 13
Best, No. 4: Portland, Ore.
Index score: 158.5
Prices were last this low: September 2005
Month-to-month drop: -2.53%
Year-over-year drop: -13.14%
Deceleration rank: No. 11
Best, No. 5: San Diego, Calif.
Index score: 152.16
Prices were last this low: October 2003
Month-to-month drop: -2.13%
Year-over-year drop: -24.84%
Deceleration rank: No. 1
Click here to see the full list of the best U.S. housing markets.
LasVegas022509.jpg
© Shutterstock
Las Vegas, Nev.
In Depth: Worst U.S. Housing Markets
Worst, No. 1: Las Vegas, Nev.
Index score: 131.4%
Prices were last this low: August 2003
Month-to-month drop: -4.81%
Year-over-year drop: -32.98%
Deceleration rank: No. 18
Worst, No. 2: Phoenix, Ariz.
Index score: 123.93
Prices were last this low: September 2003
Month-to-month drop: -5.06%
Year-over-year drop: -33.96%
Deceleration rank: No. 15
Worst, No. 3: Detroit, Mich.
Index score: 80.93
Prices were last this low: April 1997
Month-to-month drop: -2.98%
Year-over-year drop: -21.66%
Deceleration rank: No. 8
Worst, No. 4: Minneapolis, Minn.
Index score: 127
Prices were last this low: April 2002
Month-to-month drop: -4.6%
Year-over-year drop: -18.45%
Deceleration rank: No. 20
Worst, No. 5: San Francisco, Calif.
Index score: 130.12
Prices were last this low: April 2002
Month-to-month drop: -3.81%
Year-over-year drop: -31.24%
Deceleration rank: No. 2
Click here to see the full list of the Worst U.S. Housing Markets.
Source: S&P/Case-Shiller home-price index, released Feb. 24, 2009. Methodology: Rate of home price increase or decrease was calculated by examining data covering the time period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year results.
Peanut butter recall bites smaller businesses
MILWAUKEE (AP) -- To Betsy Sanders, the nationwide salmonella outbreak tied to peanut butter has been a hurricane. Her tiny cookie dough business is the debris.
Reimbursing customers for recalled products has already cost her Dough-To-Go Inc. business as much as $7,000, she says -- a big chunk for a company that turned little profit last year. She also has 2,500 pounds of peanut butter that she can't use because it came from Peanut Corp. of America -- the company that was the source of the outbreak and that has since filed for bankruptcy protection.
"We're the victim, too," said Sanders, who started the business off an idea her son had at age 12. "We've done nothing wrong and we're doing everything we can to make sure everyone's safe."
With at least nine deaths suspected of being tied to the outbreak, hundreds of people sickened and thousands of products recalled, companies from name brands like Kellogg Co. down to small ones like Dough-To-Go have been affected. But while big companies have equally large public relations departments, smaller ones have limited budgets and fewer ways to cope.
The timing could hardly be worse, as the recession has already crimped how much people are spending.
Sanders, who has run the Santa Clara, Calif.-based business for 26 years with her son, said she's worried about the half of her sales -- which reached a total of $1.7 million last year -- that come from school groups like the PTA or marching bands for fundraisers that help pay for uniforms and school trips.
The peak selling season for that starts next month. But parents could be leery of buying anything at all with peanut butter.
The outbreak has already forced the maker of Detour energy bars, Forward Foods LLC, to file for Chapter 11 bankruptcy protection. The Minden, Nev.-based company plans to stay in business but needs money to pay to replace recalled products.
Meanwhile, even companies that didn't have to recall products still have plenty to worry about.
Jarred peanut butter sales have been tumbling, even though that category has generally not been involved in the recalls. In the four weeks ending Jan. 24, about 33.8 million pounds of peanut butter in jars were sold -- a 22 percent drop from the same period last year.
It's too soon to tell, whether those kinds of declines are because stores are pulling items off the shelves or because consumers are turning away from peanut butter products, said Todd Hale, senior vice president for consumer and shopper insights at Nielsen.
"Generally speaking, any time we have a scare like this, there are probably more manufacturers that are hurt than should be," he said.
Girl Scouts of the USA, whose member troops sell a total of 200 million boxes of cookies a year worth $700 million, won't know for months what effect the nervousness had on its sales, said spokeswoman Michelle Tompkins. About one-fourth of its cookies contain peanut butter.
The group, which uses the proceeds of the cookie sales to fund trips and projects for its member troops, has been putting out news releases telling people that its products are not involved in the recall. Some scouts are even carrying official Girl Scout statements saying the cookies are safe when they go to make sales.
Total sales of cookies listing peanut butter in their description are slumping, according to Nielsen. The number of pounds sold of cookies with peanut butter in them tumbled 14.6 percent in that four-week period ending Jan. 24 compared to the prior year.
People like Nina Perez-Bauschka have put a lid on their peanut butter spending. The 34-year-old mother of two in Grayson, Ga. recently scraped her last jar clean and doesn't know what she's going to do now.
"I want to, but I'm afraid," she said of buying more peanut butter. "I know it sounds so silly, but I'm afraid."
Lance Inc., the maker of the nation's best-selling peanut butter crackers, saw its sales dip after the outbreak -- it won't say by how much -- but says they rebounded after the company launched a campaign to tell consumers its products are safe.
The Charlotte, N.C.-based company, whose 4,800 employees make it nearly one-twentieth the size of the nation's largest food maker, Kraft Foods Inc., went from doing practically no marketing in 2008 to taking out half-page ads in 50 newspapers, setting up a Web site -- http://www.lancecrackersaresafe.com -- and putting up a video on YouTube featuring Chief Executive Dave Singer talking about how the company makes peanut butter and its safety methods.
"I basically couldn't think of anything that could get in our way" after a multiyear turnaround effort, Singer said. "So when I found out about it, I was like 'Oh great.' But we'll get through this. There's always something you have to deal with. I just wish it wasn't this."
Dough-To-Go had to recall all of its varieties of peanut butter dough last month because Peanut Corp. was a supplier.
Scott Joiner, Sanders' son, said the recalls will most likely cost the 12-employee company at least $20,000 in unused product, unused peanut butter and to provide customers replacements. They'd like to be reimbursed by Peanut Corp., but figure that's unlikely since the Lynchburg, Va.-based company plans to liquidate its operations.
Meanwhile, Sanders doesn't know what to do with more than a ton of peanut butter that she can't use. Peanut Corp. won't come to reclaim it and she's waiting for authorities to tell her how she can dispose of it
Reimbursing customers for recalled products has already cost her Dough-To-Go Inc. business as much as $7,000, she says -- a big chunk for a company that turned little profit last year. She also has 2,500 pounds of peanut butter that she can't use because it came from Peanut Corp. of America -- the company that was the source of the outbreak and that has since filed for bankruptcy protection.
"We're the victim, too," said Sanders, who started the business off an idea her son had at age 12. "We've done nothing wrong and we're doing everything we can to make sure everyone's safe."
With at least nine deaths suspected of being tied to the outbreak, hundreds of people sickened and thousands of products recalled, companies from name brands like Kellogg Co. down to small ones like Dough-To-Go have been affected. But while big companies have equally large public relations departments, smaller ones have limited budgets and fewer ways to cope.
The timing could hardly be worse, as the recession has already crimped how much people are spending.
Sanders, who has run the Santa Clara, Calif.-based business for 26 years with her son, said she's worried about the half of her sales -- which reached a total of $1.7 million last year -- that come from school groups like the PTA or marching bands for fundraisers that help pay for uniforms and school trips.
The peak selling season for that starts next month. But parents could be leery of buying anything at all with peanut butter.
The outbreak has already forced the maker of Detour energy bars, Forward Foods LLC, to file for Chapter 11 bankruptcy protection. The Minden, Nev.-based company plans to stay in business but needs money to pay to replace recalled products.
Meanwhile, even companies that didn't have to recall products still have plenty to worry about.
Jarred peanut butter sales have been tumbling, even though that category has generally not been involved in the recalls. In the four weeks ending Jan. 24, about 33.8 million pounds of peanut butter in jars were sold -- a 22 percent drop from the same period last year.
It's too soon to tell, whether those kinds of declines are because stores are pulling items off the shelves or because consumers are turning away from peanut butter products, said Todd Hale, senior vice president for consumer and shopper insights at Nielsen.
"Generally speaking, any time we have a scare like this, there are probably more manufacturers that are hurt than should be," he said.
Girl Scouts of the USA, whose member troops sell a total of 200 million boxes of cookies a year worth $700 million, won't know for months what effect the nervousness had on its sales, said spokeswoman Michelle Tompkins. About one-fourth of its cookies contain peanut butter.
The group, which uses the proceeds of the cookie sales to fund trips and projects for its member troops, has been putting out news releases telling people that its products are not involved in the recall. Some scouts are even carrying official Girl Scout statements saying the cookies are safe when they go to make sales.
Total sales of cookies listing peanut butter in their description are slumping, according to Nielsen. The number of pounds sold of cookies with peanut butter in them tumbled 14.6 percent in that four-week period ending Jan. 24 compared to the prior year.
People like Nina Perez-Bauschka have put a lid on their peanut butter spending. The 34-year-old mother of two in Grayson, Ga. recently scraped her last jar clean and doesn't know what she's going to do now.
"I want to, but I'm afraid," she said of buying more peanut butter. "I know it sounds so silly, but I'm afraid."
Lance Inc., the maker of the nation's best-selling peanut butter crackers, saw its sales dip after the outbreak -- it won't say by how much -- but says they rebounded after the company launched a campaign to tell consumers its products are safe.
The Charlotte, N.C.-based company, whose 4,800 employees make it nearly one-twentieth the size of the nation's largest food maker, Kraft Foods Inc., went from doing practically no marketing in 2008 to taking out half-page ads in 50 newspapers, setting up a Web site -- http://www.lancecrackersaresafe.com -- and putting up a video on YouTube featuring Chief Executive Dave Singer talking about how the company makes peanut butter and its safety methods.
"I basically couldn't think of anything that could get in our way" after a multiyear turnaround effort, Singer said. "So when I found out about it, I was like 'Oh great.' But we'll get through this. There's always something you have to deal with. I just wish it wasn't this."
Dough-To-Go had to recall all of its varieties of peanut butter dough last month because Peanut Corp. was a supplier.
Scott Joiner, Sanders' son, said the recalls will most likely cost the 12-employee company at least $20,000 in unused product, unused peanut butter and to provide customers replacements. They'd like to be reimbursed by Peanut Corp., but figure that's unlikely since the Lynchburg, Va.-based company plans to liquidate its operations.
Meanwhile, Sanders doesn't know what to do with more than a ton of peanut butter that she can't use. Peanut Corp. won't come to reclaim it and she's waiting for authorities to tell her how she can dispose of it
Obama's budget: huge ambitions, huge obstacles
WASHINGTON (AP) -- Breathtaking in its scope and ambition, President Barack Obama's agenda for the economy, health care and energy now goes to a Congress unaccustomed to resolving knotty issues and buffeted by powerful interests that oppose parts of his plan.
Perhaps the only things as high as Obama's goals are the hurdles they must clear.
While tackling the economic crisis, he is asking Congress to enact contentious measures that have been debated, but not decided, in calmer times: cut subsidies for big farms; combat global warming with a pollution tax on industries; raise taxes on the wealthy; make big changes to health care, including lower reimbursements for Medicare and Medicaid treatments and prescription drugs.
Standing alone, any one of these proposals would trigger a brawl in Congress and fierce debates outside Washington. Obama wants the proposals done largely in concert, as an interrelated plan to undo major elements of Ronald Reagan's conservative movement.
Obama outlined the approach in a budget proposal Thursday, a sprawling road map that will require several hard-fought pieces of legislation.
He launched his campaign for the package Saturday with a fiery, populist radio and Internet address that depicted his critics as champions of "the interests of powerful lobbyists" and "the wealthiest few."
"I realize that passing this budget won't be easy," the president said, because it "represents a threat to the status quo in Washington."
"They're gearing up for a fight," he said. "So am I."
If his rhetoric was tough, the challenges he faces are downright daunting. The economy contracted by a stunning 6.2 percent in the final three months of 2008, its worst showing in a quarter-century. Obama says the crisis calls for gutsy actions, and many groups feel he has delivered.
"We're struck with how bold and courageous a budget it is," said James Horney of the liberal Center on Budget and Policy Priorities, which supports the president. "There are a whole lot of things that are going to be extremely difficult because there are very powerful vested interests out there that will fight them."
Obama is not simply proposing a budget that assumes a jaw-dropping deficit of $1.75 trillion this year, a quadruple increase from the year before. He's trying to redirect strong currents in American society.
The wealthiest 5 percent would pay a whopping $1 trillion in higher taxes over the next decade, while most others would get tax cuts. Industries would buy and trade permits to emit heat-trapping gases. Higher-income older people would pay more for Medicare benefits. Drug companies would receive smaller profits from the government. Banks would play a much smaller role in student loans.
Obama's climb is steep. Even with solid Democratic majorities in the House and Senate, he secured a $787 billion stimulus package only after accepting compromises that irked liberals but won the support of three Republican senators.
Not a single House Republican backed it. Judging from House GOP leaders' immediate condemnation of his budget blueprint, Obama can expect more of the same.
More troubling for him, however, are the divisions quickly emerging among Democratic, liberal and centrist constituencies that either backed the stimulus or stayed on the sidelines.
Democratic Rep. Collin Peterson of Minnesota, the House Agriculture Committee chairman, criticized Obama's plan to cut direct payments to farms with sales exceeding $500,000 a year. "Now is not the time" to reopen a recently passed farm bill, he said.
Sen. Arlen Specter of Pennsylvania, one of the stimulus bill's three Republican backers, said it is hard to see how Obama can meet his new deficit-reduction targets. He called Obama's chief energy proposal "entirely speculative" and urged the president "to forgo the tax increases" in the plan.
The U.S. Chamber of Commerce, which also backed the stimulus bill, said Obama's budget blueprint "appears to move in exactly the wrong direction. More taxes, heavy-handed regulations, and command-and-control government will not hasten recovery... You don't build a house by blowing up its foundation."
That sounded like a jab at Obama, who said Thursday: "There are times when you can afford to redecorate your house, and there are times when you have to focus on rebuilding its foundation."
Some Washington veterans say that if anyone can overcome the hurdles, it is Obama.
"He has such enormous popularity right now," said Scott Lilly, who spent 31 years as a congressional aide before joining the liberal-leaning Center for American Progress.
Obama's political gifts are extraordinary, Lilly said. No one expects the president to get everything he's asking for, he said, "but I think he could get a big share of it."
Pushing his tax and health proposals through the Senate Finance Committee "is going to be one hell of a fight," Lilly said. The committee chairman, Sen. Max Baucus of Montana, sometimes parts ways with Democratic leaders on important issues such as tax cuts and Medicare.
Stiff resistance awaits Obama at almost every turn.
"Class warfare" is how Republicans label his plan to raise taxes, starting in 2011, on households making more than $250,000 a year.
Some liberal-leaning foundations are unhappy about his proposed reduction in the tax deductibility of gifts to charity from wealthy people.
On health care, Obama wants to cut payments for Medicare and Medicaid, the government programs for the elderly, disabled and poor. Taking hits would be insurance companies, home health services, hospitals and drug manufacturers, all of which are powerful lobbies in Washington.
On energy, Obama wants to reduce greenhouse gases and raise money for clean-fuel technologies, such as solar and wind power, by auctioning off carbon pollution permits. The proposal, known as cap and trade, will lead to a bruising fight in Congress, which may be divided more by region than party.
William Kovacs, who oversees regulatory affairs for the U.S. Chamber of Commerce, says Obama is pushing too fast for such a dramatic policy change.
"Any support that there was for cap and trade from the business community," he said, was based on the assumption of "a long-term transition."
Some government veterans, however, think doubters are underestimating Americans' hunger for change. For example, every individual and institution is hurt by the ever-rising cost of health care, and many are ready to shake up the system to make it less expensive, said Bruce Reed, who oversaw domestic policy in Bill Clinton's White House.
"The country wants it, the economy needs it, businesses large and small know that they can't afford not to have it," said Reed, who now heads the Democratic Leadership Council, a center-left group. "I don't think a do-nothing caucus will get anywhere on health care."
Reed added, however: "Health care has always been the Middle East of domestic policy."
On energy, he said, "Congress ought to be able to pass a cap and trade bill. The rest of the industrialized world is doing emissions trading. A broad swath of American industry wants this question to be answered."
The president's agenda is vast and ambitious, Reed said, but the times call for it. After all, he said, "Obama didn't have the luxury of saying, 'I'll handle the economic crisis and then get back to you on the rest of America's future.'"
Perhaps the only things as high as Obama's goals are the hurdles they must clear.
While tackling the economic crisis, he is asking Congress to enact contentious measures that have been debated, but not decided, in calmer times: cut subsidies for big farms; combat global warming with a pollution tax on industries; raise taxes on the wealthy; make big changes to health care, including lower reimbursements for Medicare and Medicaid treatments and prescription drugs.
Standing alone, any one of these proposals would trigger a brawl in Congress and fierce debates outside Washington. Obama wants the proposals done largely in concert, as an interrelated plan to undo major elements of Ronald Reagan's conservative movement.
Obama outlined the approach in a budget proposal Thursday, a sprawling road map that will require several hard-fought pieces of legislation.
He launched his campaign for the package Saturday with a fiery, populist radio and Internet address that depicted his critics as champions of "the interests of powerful lobbyists" and "the wealthiest few."
"I realize that passing this budget won't be easy," the president said, because it "represents a threat to the status quo in Washington."
"They're gearing up for a fight," he said. "So am I."
If his rhetoric was tough, the challenges he faces are downright daunting. The economy contracted by a stunning 6.2 percent in the final three months of 2008, its worst showing in a quarter-century. Obama says the crisis calls for gutsy actions, and many groups feel he has delivered.
"We're struck with how bold and courageous a budget it is," said James Horney of the liberal Center on Budget and Policy Priorities, which supports the president. "There are a whole lot of things that are going to be extremely difficult because there are very powerful vested interests out there that will fight them."
Obama is not simply proposing a budget that assumes a jaw-dropping deficit of $1.75 trillion this year, a quadruple increase from the year before. He's trying to redirect strong currents in American society.
The wealthiest 5 percent would pay a whopping $1 trillion in higher taxes over the next decade, while most others would get tax cuts. Industries would buy and trade permits to emit heat-trapping gases. Higher-income older people would pay more for Medicare benefits. Drug companies would receive smaller profits from the government. Banks would play a much smaller role in student loans.
Obama's climb is steep. Even with solid Democratic majorities in the House and Senate, he secured a $787 billion stimulus package only after accepting compromises that irked liberals but won the support of three Republican senators.
Not a single House Republican backed it. Judging from House GOP leaders' immediate condemnation of his budget blueprint, Obama can expect more of the same.
More troubling for him, however, are the divisions quickly emerging among Democratic, liberal and centrist constituencies that either backed the stimulus or stayed on the sidelines.
Democratic Rep. Collin Peterson of Minnesota, the House Agriculture Committee chairman, criticized Obama's plan to cut direct payments to farms with sales exceeding $500,000 a year. "Now is not the time" to reopen a recently passed farm bill, he said.
Sen. Arlen Specter of Pennsylvania, one of the stimulus bill's three Republican backers, said it is hard to see how Obama can meet his new deficit-reduction targets. He called Obama's chief energy proposal "entirely speculative" and urged the president "to forgo the tax increases" in the plan.
The U.S. Chamber of Commerce, which also backed the stimulus bill, said Obama's budget blueprint "appears to move in exactly the wrong direction. More taxes, heavy-handed regulations, and command-and-control government will not hasten recovery... You don't build a house by blowing up its foundation."
That sounded like a jab at Obama, who said Thursday: "There are times when you can afford to redecorate your house, and there are times when you have to focus on rebuilding its foundation."
Some Washington veterans say that if anyone can overcome the hurdles, it is Obama.
"He has such enormous popularity right now," said Scott Lilly, who spent 31 years as a congressional aide before joining the liberal-leaning Center for American Progress.
Obama's political gifts are extraordinary, Lilly said. No one expects the president to get everything he's asking for, he said, "but I think he could get a big share of it."
Pushing his tax and health proposals through the Senate Finance Committee "is going to be one hell of a fight," Lilly said. The committee chairman, Sen. Max Baucus of Montana, sometimes parts ways with Democratic leaders on important issues such as tax cuts and Medicare.
Stiff resistance awaits Obama at almost every turn.
"Class warfare" is how Republicans label his plan to raise taxes, starting in 2011, on households making more than $250,000 a year.
Some liberal-leaning foundations are unhappy about his proposed reduction in the tax deductibility of gifts to charity from wealthy people.
On health care, Obama wants to cut payments for Medicare and Medicaid, the government programs for the elderly, disabled and poor. Taking hits would be insurance companies, home health services, hospitals and drug manufacturers, all of which are powerful lobbies in Washington.
On energy, Obama wants to reduce greenhouse gases and raise money for clean-fuel technologies, such as solar and wind power, by auctioning off carbon pollution permits. The proposal, known as cap and trade, will lead to a bruising fight in Congress, which may be divided more by region than party.
William Kovacs, who oversees regulatory affairs for the U.S. Chamber of Commerce, says Obama is pushing too fast for such a dramatic policy change.
"Any support that there was for cap and trade from the business community," he said, was based on the assumption of "a long-term transition."
Some government veterans, however, think doubters are underestimating Americans' hunger for change. For example, every individual and institution is hurt by the ever-rising cost of health care, and many are ready to shake up the system to make it less expensive, said Bruce Reed, who oversaw domestic policy in Bill Clinton's White House.
"The country wants it, the economy needs it, businesses large and small know that they can't afford not to have it," said Reed, who now heads the Democratic Leadership Council, a center-left group. "I don't think a do-nothing caucus will get anywhere on health care."
Reed added, however: "Health care has always been the Middle East of domestic policy."
On energy, he said, "Congress ought to be able to pass a cap and trade bill. The rest of the industrialized world is doing emissions trading. A broad swath of American industry wants this question to be answered."
The president's agenda is vast and ambitious, Reed said, but the times call for it. After all, he said, "Obama didn't have the luxury of saying, 'I'll handle the economic crisis and then get back to you on the rest of America's future.'"
Jumbo Mortgages, Jumbo Headaches
Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.
President Barack Obama's housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country, though they can run as high as $729,750 in certain pricier markets, such as parts of California, New York and Hawaii.
Anything bigger is called a "jumbo" loan -- and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.
That's hurting borrowers like Pete Zipkin, who's the kind of affluent customer that banks once coveted. The 35-year-old technology executive -- who says he has a spotless credit record and at least 20% equity in his home -- has come up empty-handed in his search for a jumbo mortgage of more than $1 million for his recently built five-bedroom home in Alamo, Calif., near San Francisco.
Unable to find a fixed-rate mortgage when his construction loan expired last fall, Mr. Zipkin now has a variable-rate loan that adjusts monthly. The rate is currently 5%, but it can go as high as 12%. He says banks have turned him down in part because they are worried about falling home prices in California, even though price declines in Alamo, where the median home price is $1.3 million, have been less severe than in the rest of the state.
"If somebody has the income, the equity and the credit rating," they should qualify for a loan, Mr. Zipkin says.
'Buying Down' a Mortgage
Many homeowners in high-priced markets are experiencing similar difficulties, and are left with few options other than to raid their savings or retirement accounts and use the cash to "buy down" their mortgages. In some cases, home buyers need to put up a large down payment, often 25% or more, to qualify for a jumbo mortgage. Others are bypassing jumbos altogether and putting up enough cash to become eligible for a lower-rate conforming loan.
"Every single day I'm talking to people who have a jumbo loan, and I can't do anything for them," says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.
While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That's the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.
"If you have been able to ... save for a down payment, that to us speaks volumes about your character," says Bill Higgins, ING's chief lending officer.
Like most jumbo lenders, ING offers mainly "hybrid" adjustable-rate mortgages that carry a fixed-rate for five or seven years and then reset annually to an adjustable rate. ING is offering initial rates as low as 5.5% for a seven-year adjustable-rate jumbo mortgage. Last week, the average for a 30-year conforming mortgage was 5.22%, according to HSH Associates, a financial publisher.
Higher Rates
Jumbo borrowers have always paid slightly higher rates than conforming-loan borrowers, in part because luxury homes can be harder to sell quickly for their full price if a homeowner defaults. But the gap between jumbo and conforming loans, historically around 0.3 percentage point, is now about 1.55 points, with jumbo rates averaging about 6.77%.
Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.
Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. "The million-dollar-and-above market is sinking like a lead weight," Mr. Lazerson says.
Frustrated Buyers
That is frustrating potential buyers like Brandon Steele, a vice president of marketing for a food-products company, who was approved by his credit union for a $990,000 loan last year to buy a home in the Sherman Oaks section of Los Angeles. He had hoped to move his growing family out of the single-family house he has rented for the past four years and into a larger one. Those plans fell through when his credit union told him in December that they were getting out of jumbo lending.
"We thought we were being prudent by not jumping into the housing market when it was overinflated," he says. "It's a catch-22. Now that we want to purchase, we cannot get financing."
Mr. Steele says that he and his wife have high incomes and a solid credit rating, but that the money he had planned on using to make a larger down payment was lost in the stock market. He says his only option now is to wait for home prices to fall another 20% or to save an additional $100,000.
"Short of moving into a two-bedroom apartment or not funding my 401(k), I can't save that kind of money in a year," he says. "If you live in a high-cost area, there's a whole different standard. Everything's a jumbo loan." Mr. Steele says that for now, he's hoping his credit union, where he's been a customer for 10 years, will reinstate his pre-approved status and fund the loan.
The lack of financing is particularly acute in markets where rising home prices have made jumbo loans a necessity for even middle-class borrowers, such as New York City, coastal California and Washington, D.C. "If you own a $650,000 home in many parts of this country, you're not a wealthy person by any stretch, and you're being cut out of any relief," says Guy Cecala, publisher of Inside Mortgage Finance.
Around 4% of all borrowers have loans that exceed conforming limits, according to an estimate by First American CoreLogic. But that share rises in high-cost states such as California, at 17%, and New York, at 8%.
Some jumbo clients -- enticed by historically low conforming rates -- are willing to dip into their retirement savings to lower their balances. Neil Littman, for one, estimates that he'd save $300 a month if he paid $25,000 to bring his loan down to the $417,000 limit in Erie, Colo., a bedroom community about 30 minutes east of Boulder.
"Right now I'm trying to conserve cash, but to get the savings on the interest rate, I'm willing to put more money down," says the 38-year-old, a commercial real-estate broker.
Mr. Littman, who purchased his four-bedroom home in April 2007, laments the fact that the Boulder area doesn't have a higher conforming-loan limit. Median home prices in Boulder are nearly $650,000, though median prices for the county are much lower, at around $360,000.
Raiding the 401(k) Account
Other borrowers are raiding their 401(k) accounts in order to qualify for a cheaper mortgage. Jon Eisen, a San Diego mortgage broker, says that one of his clients -- a dentist with a $1 million jumbo loan -- is considering pulling $450,000 from a retirement savings account to pay down his "interest-only" adjustable rate mortgage, in which principal payments are deferred for a set period. That would allow him to refinance into a fixed-rate conforming loan.
Randy Kobata, who lives in Santa Monica, Calif., says he's considering taking $70,000 out of his savings to pay down his mortgage in order to get to the conforming limit. He isn't able to refinance his adjustable-rate jumbo loan from Washington Mutual Inc., now a unit of J.P. Morgan Chase & Co., because the value of his two-bedroom home has declined by $100,000 in the past two years. Meanwhile, the 31-year-old, who works in commercial real estate, has asked the bank for a rate reduction.
Rather than dip into savings to get a better rate, some advisers say, clients are better off holding tight. "If your home has lost 15% in two years, why pay down just to refinance?" says Craig Vogt, a mortgage broker in Brooklyn, N.Y. "It's like losing money two times."
Write to Nick Timiraos at nick.timiraos@wsj.com
Corrections & Amplifications: The stimulus bill enacted last week raises conforming loan limits for Boulder, Colo., to $460,000. This article failed to note the increase in loan limits from their previous level of $417,000.
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
President Barack Obama's housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country, though they can run as high as $729,750 in certain pricier markets, such as parts of California, New York and Hawaii.
Anything bigger is called a "jumbo" loan -- and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.
That's hurting borrowers like Pete Zipkin, who's the kind of affluent customer that banks once coveted. The 35-year-old technology executive -- who says he has a spotless credit record and at least 20% equity in his home -- has come up empty-handed in his search for a jumbo mortgage of more than $1 million for his recently built five-bedroom home in Alamo, Calif., near San Francisco.
Unable to find a fixed-rate mortgage when his construction loan expired last fall, Mr. Zipkin now has a variable-rate loan that adjusts monthly. The rate is currently 5%, but it can go as high as 12%. He says banks have turned him down in part because they are worried about falling home prices in California, even though price declines in Alamo, where the median home price is $1.3 million, have been less severe than in the rest of the state.
"If somebody has the income, the equity and the credit rating," they should qualify for a loan, Mr. Zipkin says.
'Buying Down' a Mortgage
Many homeowners in high-priced markets are experiencing similar difficulties, and are left with few options other than to raid their savings or retirement accounts and use the cash to "buy down" their mortgages. In some cases, home buyers need to put up a large down payment, often 25% or more, to qualify for a jumbo mortgage. Others are bypassing jumbos altogether and putting up enough cash to become eligible for a lower-rate conforming loan.
"Every single day I'm talking to people who have a jumbo loan, and I can't do anything for them," says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.
While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That's the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.
"If you have been able to ... save for a down payment, that to us speaks volumes about your character," says Bill Higgins, ING's chief lending officer.
Like most jumbo lenders, ING offers mainly "hybrid" adjustable-rate mortgages that carry a fixed-rate for five or seven years and then reset annually to an adjustable rate. ING is offering initial rates as low as 5.5% for a seven-year adjustable-rate jumbo mortgage. Last week, the average for a 30-year conforming mortgage was 5.22%, according to HSH Associates, a financial publisher.
Higher Rates
Jumbo borrowers have always paid slightly higher rates than conforming-loan borrowers, in part because luxury homes can be harder to sell quickly for their full price if a homeowner defaults. But the gap between jumbo and conforming loans, historically around 0.3 percentage point, is now about 1.55 points, with jumbo rates averaging about 6.77%.
Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.
Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. "The million-dollar-and-above market is sinking like a lead weight," Mr. Lazerson says.
Frustrated Buyers
That is frustrating potential buyers like Brandon Steele, a vice president of marketing for a food-products company, who was approved by his credit union for a $990,000 loan last year to buy a home in the Sherman Oaks section of Los Angeles. He had hoped to move his growing family out of the single-family house he has rented for the past four years and into a larger one. Those plans fell through when his credit union told him in December that they were getting out of jumbo lending.
"We thought we were being prudent by not jumping into the housing market when it was overinflated," he says. "It's a catch-22. Now that we want to purchase, we cannot get financing."
Mr. Steele says that he and his wife have high incomes and a solid credit rating, but that the money he had planned on using to make a larger down payment was lost in the stock market. He says his only option now is to wait for home prices to fall another 20% or to save an additional $100,000.
"Short of moving into a two-bedroom apartment or not funding my 401(k), I can't save that kind of money in a year," he says. "If you live in a high-cost area, there's a whole different standard. Everything's a jumbo loan." Mr. Steele says that for now, he's hoping his credit union, where he's been a customer for 10 years, will reinstate his pre-approved status and fund the loan.
The lack of financing is particularly acute in markets where rising home prices have made jumbo loans a necessity for even middle-class borrowers, such as New York City, coastal California and Washington, D.C. "If you own a $650,000 home in many parts of this country, you're not a wealthy person by any stretch, and you're being cut out of any relief," says Guy Cecala, publisher of Inside Mortgage Finance.
Around 4% of all borrowers have loans that exceed conforming limits, according to an estimate by First American CoreLogic. But that share rises in high-cost states such as California, at 17%, and New York, at 8%.
Some jumbo clients -- enticed by historically low conforming rates -- are willing to dip into their retirement savings to lower their balances. Neil Littman, for one, estimates that he'd save $300 a month if he paid $25,000 to bring his loan down to the $417,000 limit in Erie, Colo., a bedroom community about 30 minutes east of Boulder.
"Right now I'm trying to conserve cash, but to get the savings on the interest rate, I'm willing to put more money down," says the 38-year-old, a commercial real-estate broker.
Mr. Littman, who purchased his four-bedroom home in April 2007, laments the fact that the Boulder area doesn't have a higher conforming-loan limit. Median home prices in Boulder are nearly $650,000, though median prices for the county are much lower, at around $360,000.
Raiding the 401(k) Account
Other borrowers are raiding their 401(k) accounts in order to qualify for a cheaper mortgage. Jon Eisen, a San Diego mortgage broker, says that one of his clients -- a dentist with a $1 million jumbo loan -- is considering pulling $450,000 from a retirement savings account to pay down his "interest-only" adjustable rate mortgage, in which principal payments are deferred for a set period. That would allow him to refinance into a fixed-rate conforming loan.
Randy Kobata, who lives in Santa Monica, Calif., says he's considering taking $70,000 out of his savings to pay down his mortgage in order to get to the conforming limit. He isn't able to refinance his adjustable-rate jumbo loan from Washington Mutual Inc., now a unit of J.P. Morgan Chase & Co., because the value of his two-bedroom home has declined by $100,000 in the past two years. Meanwhile, the 31-year-old, who works in commercial real estate, has asked the bank for a rate reduction.
Rather than dip into savings to get a better rate, some advisers say, clients are better off holding tight. "If your home has lost 15% in two years, why pay down just to refinance?" says Craig Vogt, a mortgage broker in Brooklyn, N.Y. "It's like losing money two times."
Write to Nick Timiraos at nick.timiraos@wsj.com
Corrections & Amplifications: The stimulus bill enacted last week raises conforming loan limits for Boulder, Colo., to $460,000. This article failed to note the increase in loan limits from their previous level of $417,000.
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
2009年2月27日星期五
New Citi plan may serve as model but carries risks
WASHINGTON (AP) -- The government made another run at saving Citigroup Inc. on Friday, giving taxpayers a bigger stake in its fortunes with a plan that could become a model for saving the nation's most troubled big banks.
AP - A pedestrian passes by a Citibank in downtown Boston, Friday, Feb. 27, 2009. The U.S. government will exchange ...
AP - A pedestrian passes by a Citibank in downtown Boston, Friday, Feb. 27, 2009. The U.S. government will exchange ...
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BAC 3.95 -1.37
Chart for BK OF AMERICA CP
C 1.50 -0.96
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{"s" : "bac,c,wfc","k" : "c10,l10,p20,t10","o" : "","j" : ""}
But significant questions remain about whether the approach will succeed.
The plan does not address the central problem confronting Citi, toxic assets on its books, and leaves taxpayers more exposed to the ups and downs of the financial giant's stock.
It's the third time in five months the government has announced a major bailout for Citi, which has been struggling under the weight of losses tied to bad bets on mortgages, and it may not be the last. The government will swap the $25 billion in preferred stock from its earlier bailout money into common stock. This will boost the taxpayers' stake in Citi from 8 percent to 36 percent.
Similar rescue plans could be used at other ailing banks like Bank of America Corp. and Wells Fargo & Co. But analysts are skeptical of how effective they would be in the face of a weakened economy that will further depress the value of loans on the banks' books.
"Given how bad the economy is, there's no way on earth they won't see more of those loans go bad," said Dean Baker, co-director for the Center for Economic Policy and Research, a liberal think tank.
Douglas Elliott, a fellow at the Brookings Institution, said the government may take larger stakes in other troubled banks after regulators evaluate their balance sheets in coming weeks. Citigroup was in worse shape than its peers, he said, so the government will likely take smaller stakes in other banks.
Such bold government action is unlikely to be taken for small and medium-size banks, which generally have been far less exposed to the housing meltdown.
Investors were unhappy with the Citi deal, sending its shares plummeting 39 percent to a new 52-week low of $1.50. The Dow Jones industrials average fell 119 points to 7,063.
David Wyss, chief economist at Standard & Poor's in New York, said the sour market reaction was understandable given that the government is taking a bigger role in Citi and the shares of common stock are being diluted.
He said the administration is facing a serious financial crisis that lacks any easy solution.
"They are trying to avoid nationalization," Wyss said, "but at the same time they want to avoid repeating Japan's mistakes of the 1990s. Japan let the bad assets sit on the banks' books and rot."
Federal Reserve Chairman Ben Bernanke said this week that the government has no interest in nationalizing banks, which he defined as taking over management and wiping out shareholders.
The Treasury Department said the swap is contingent on private investors making a similar switch.
Citi said it has offered to swap up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 a share. That's a 32 percent premium over Thursday's closing price of $2.46.
The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange.
This week, the government began putting the largest U.S. banks through "stress tests" to determine their ability to survive if economic conditions deteriorate sharply. For the weakest, the government could apply rescues similar to the one it gave Citi. But the other banks could also receive additional capital injections.
The conversion of the government's Citi stock will give the bank more capital to withstand further economic weakness, satisfy regulators, eliminate the need to pay dividends and perhaps give investors confidence Citi will survive.
The transaction also frees Citi from having to buy back the preferred shares from the government. The preferred shares are similar to debt, and the banks were under pressure to essentially pay back the government in five years.
The government's big stake in the common stock means taxpayers will share in future gains or losses in the company's share price.
Gary Crittenden, Citigroup's chief financial officer, didn't rule out the need for even more capital, either from the private sector or government. In a conference call, Crittenden acknowledged that Citi could be forced to raise more money based on the result of its stress test.
The stock conversion will make the government the largest shareholder in Citigroup, but company officials said they still expect to call the shots. Vikram Pandit will remain as chief executive, but Citi will reshape its board of directors.
Baker, of the Center for Economic Policy and Research, said the government's efforts to avoid a takeover amount to "a further handout to Citigroup."
"We really should own it outright," he said, given that taxpayers have provided the company $45 billion in assistance, several times its market value.
Christopher Whalen, managing director of Institutional Risk Analytics, called the Citigroup plan "stealth nationalization" and said he would prefer that the government seize the big troubled banks outright and sell off their assets. The Federal Deposit Insurance Corp. has done that with dozens of smaller institutions since the crisis began.
Citi, one of the banks hardest hit by the ongoing credit crisis, has also received guarantees from the government that protect it from the bulk of losses on $300 billion of risky investments.
AP Business Writers Stephen Bernard and Madlen Read in New York, and Daniel Wagner, Martin Crutsinger and Jeannine Aversa in Washington contributed to this report.
AP - A pedestrian passes by a Citibank in downtown Boston, Friday, Feb. 27, 2009. The U.S. government will exchange ...
AP - A pedestrian passes by a Citibank in downtown Boston, Friday, Feb. 27, 2009. The U.S. government will exchange ...
Related Quotes
Symbol Price Change
BAC 3.95 -1.37
Chart for BK OF AMERICA CP
C 1.50 -0.96
Chart for CITIGROUP INC
WFC 12.10 -2.30
Chart for WELLS FARGO & CO NEW
{"s" : "bac,c,wfc","k" : "c10,l10,p20,t10","o" : "","j" : ""}
But significant questions remain about whether the approach will succeed.
The plan does not address the central problem confronting Citi, toxic assets on its books, and leaves taxpayers more exposed to the ups and downs of the financial giant's stock.
It's the third time in five months the government has announced a major bailout for Citi, which has been struggling under the weight of losses tied to bad bets on mortgages, and it may not be the last. The government will swap the $25 billion in preferred stock from its earlier bailout money into common stock. This will boost the taxpayers' stake in Citi from 8 percent to 36 percent.
Similar rescue plans could be used at other ailing banks like Bank of America Corp. and Wells Fargo & Co. But analysts are skeptical of how effective they would be in the face of a weakened economy that will further depress the value of loans on the banks' books.
"Given how bad the economy is, there's no way on earth they won't see more of those loans go bad," said Dean Baker, co-director for the Center for Economic Policy and Research, a liberal think tank.
Douglas Elliott, a fellow at the Brookings Institution, said the government may take larger stakes in other troubled banks after regulators evaluate their balance sheets in coming weeks. Citigroup was in worse shape than its peers, he said, so the government will likely take smaller stakes in other banks.
Such bold government action is unlikely to be taken for small and medium-size banks, which generally have been far less exposed to the housing meltdown.
Investors were unhappy with the Citi deal, sending its shares plummeting 39 percent to a new 52-week low of $1.50. The Dow Jones industrials average fell 119 points to 7,063.
David Wyss, chief economist at Standard & Poor's in New York, said the sour market reaction was understandable given that the government is taking a bigger role in Citi and the shares of common stock are being diluted.
He said the administration is facing a serious financial crisis that lacks any easy solution.
"They are trying to avoid nationalization," Wyss said, "but at the same time they want to avoid repeating Japan's mistakes of the 1990s. Japan let the bad assets sit on the banks' books and rot."
Federal Reserve Chairman Ben Bernanke said this week that the government has no interest in nationalizing banks, which he defined as taking over management and wiping out shareholders.
The Treasury Department said the swap is contingent on private investors making a similar switch.
Citi said it has offered to swap up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 a share. That's a 32 percent premium over Thursday's closing price of $2.46.
The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange.
This week, the government began putting the largest U.S. banks through "stress tests" to determine their ability to survive if economic conditions deteriorate sharply. For the weakest, the government could apply rescues similar to the one it gave Citi. But the other banks could also receive additional capital injections.
The conversion of the government's Citi stock will give the bank more capital to withstand further economic weakness, satisfy regulators, eliminate the need to pay dividends and perhaps give investors confidence Citi will survive.
The transaction also frees Citi from having to buy back the preferred shares from the government. The preferred shares are similar to debt, and the banks were under pressure to essentially pay back the government in five years.
The government's big stake in the common stock means taxpayers will share in future gains or losses in the company's share price.
Gary Crittenden, Citigroup's chief financial officer, didn't rule out the need for even more capital, either from the private sector or government. In a conference call, Crittenden acknowledged that Citi could be forced to raise more money based on the result of its stress test.
The stock conversion will make the government the largest shareholder in Citigroup, but company officials said they still expect to call the shots. Vikram Pandit will remain as chief executive, but Citi will reshape its board of directors.
Baker, of the Center for Economic Policy and Research, said the government's efforts to avoid a takeover amount to "a further handout to Citigroup."
"We really should own it outright," he said, given that taxpayers have provided the company $45 billion in assistance, several times its market value.
Christopher Whalen, managing director of Institutional Risk Analytics, called the Citigroup plan "stealth nationalization" and said he would prefer that the government seize the big troubled banks outright and sell off their assets. The Federal Deposit Insurance Corp. has done that with dozens of smaller institutions since the crisis began.
Citi, one of the banks hardest hit by the ongoing credit crisis, has also received guarantees from the government that protect it from the bulk of losses on $300 billion of risky investments.
AP Business Writers Stephen Bernard and Madlen Read in New York, and Daniel Wagner, Martin Crutsinger and Jeannine Aversa in Washington contributed to this report.
Wall Street slides after Citigroup-government deal
NEW YORK (AP) -- Wall Street ended another unforgiving month with a steep loss -- one that left the Dow Jones industrial average at less than half its record high.
The day's news unsettled investors. Citigroup Inc. agreed to turn over a big piece of itself to the government, a move that fanned worries that other banks would face crippling trouble with bad debt. General Electric Co. slashed its quarterly dividend by 68 percent. Both companies are part of the Dow Jones industrial average, which fell 119 points.
And the government's gross domestic product report showed that the economy fell at a 6.2 percent annual pace at the end of last year, a much faster than expected pace.
For investors, it all added up to a prolonged and increasingly painful recession.
"I don't think there is the confidence that the recovery is going to happen very quickly. It's going to take time," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
Some analysts said the market's slide could have been worse -- the major indexes finished well above their lows.
Dan Cook, senior market analyst at IG Markets in Chicago, said Wall Street's ability to show some recovery Friday despite the onslaught of bad news is a good sign.
"We have become somewhat callous to these news announcements," he said.
Nonetheless, the market's stats once again showed how troubled Wall Street and the economy are:
-- The Dow, at its lowest close since May 1, 1997, is now down 50.1 percent from its record high of 14,164.53 reached in October 2007. It came within 34 points of 7,000, a level it hasn't fallen below since October 1997.
-- The Standard & Poor's 500 index breached its Nov. 21 trading low of 741.02, which came during the height of the credit crisis. Friday's finish was the lowest for the index since Dec. 18, 1996.
-- The Dow's 11.7 percent loss in February was its worst since 1933, when it fell 15.6 percent, and its sixth straight monthly drop. The half-year slide totals 38.8 percent, the worst since 1932, when it fell 45 percent.
The S&P 500 index fell 11 percent for the month. It was the second-worst February for the index, topped only by an 18.4 percent slide in 1933. It was the index's fifth monthly drop in six months; it managed a slender gain of 0.8 percent in December.
-- The Dow Jones Wilshire 5000 index, which reflects nearly all stocks traded in America, lost 10.3 percent for the month, its worst slump since October. That's a paper loss of $1 trillion. Since its October 2007 peak, the Wilshire 5000 is down 52.7 percent, or $10.4 trillion.
The losses in the final session of the month came as Wall Street had been hoping that stabilizing Citigroup would help ease worries about the beaten-down bank stocks and remove some of their questions about the prospects for the industry.
But analysts said the loss to regular shareholders from the government's move touched off worries that other banks could see their shares hit as well.
Citigroup said before the opening bell that it agreed to a deal in which the U.S. government and private investors including the government of Singapore and Saudi Arabian Prince Alwaleed Bin Talal will convert their preferred stock in the struggling bank to common shares. The plan won't require additional money from the U.S. government, which holds an 8 percent stake in Citigroup and would own 36 percent.
"Citi has been a leading indicator the whole way down and the dilution that shareholders took today is sort of a leading indicator of what could happen to other banks, particularly the weak ones," said Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y.
Some sort of deal with the government had been expected much of the week. But Citi fell 96 cents, or 39 percent, to $1.50 as investors worried about how much their holdings in the company would be diluted by the changes.
GE, meanwhile, said late in the session it would cut its dividend to save $9 billion a year. The conglomerate has a big financing arm, so it often trades like a bank stock. Its shares fell 59 cents, or 6.5 percent, to $8.51.
The Dow fell 119.15, or 1.7 percent, to 7,062.93. The S&P 500 index fell 17.74, or 2.4 percent, to 735.09, and the Nasdaq composite index fell 13.63, or 1 percent, to 1,377.84.
The Russell 2000 index of smaller companies fell 3.93, or 1 percent, to 389.02.
Two stocks fell for every one that advanced on the New York Stock Exchange. Consolidated volume came to a heavy 8.44 billion shares, up from Thursday's 6.48 billion.
Wall Street was also shaken when the government's gross domestic product report showed that the economy fell at a 6.2 percent annual pace at the end of last year, a much faster than expected pace.
The Commerce Department figures on GDP, the worst since an annualized drop of 6.4 percent in the first three months of 1982, cast some doubt that the economy will begin to show signs of improvement by the end of this year, as many analysts have predicted. But the poor showing also could make it that much easier for readings in coming quarters to look by comparison, Cook said. Investors would welcome even a slowing pace of decline.
Health care stocks, normally an area of safety in weak economies, fell for a second straight day Friday after the White House released a budget proposal Thursday that calls for cutting some health care spending.
"This creates a lot of weakness in this market because if the safe-havens are not safe anymore it could convince a lot of people to say 'You know, I don't kneed to be in this market right now. I can just go to cash,'" Shacknofsky said.
Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.02 percent from 3 percent late Thursday. The yield on the three-month T-bill, considered one of the safest investments, was down at 0.25, compared with 0.26 percent from Thursday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 46 cents to settle at $44.76 a barrel on the New York Mercantile Exchange.
Britain's FTSE 100 tumbled 2.2 percent, Germany's DAX index fell 2.5 percent, and France's CAC-40 fell 1.5 percent. Earlier, Japan's Nikkei stock average rose 1.5 percent.
The Dow Jones industrial average closed the week down 302.74, or 4.1 percent, at 7,062.93. The Standard & Poor's 500 index fell 34.96, or 4.5 percent, to 735.09. The Nasdaq composite index fell 63.39, or 4.4 percent, closing at 1,377.84.
The Russell 2000 index, which tracks the performance of small company stocks, declined 21.94, or 5.3 percent, to 389.02.
The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended at 7,415.60, down 386.67, or 5 percent, for the week. A year ago, the index was at 13,945.130.
The day's news unsettled investors. Citigroup Inc. agreed to turn over a big piece of itself to the government, a move that fanned worries that other banks would face crippling trouble with bad debt. General Electric Co. slashed its quarterly dividend by 68 percent. Both companies are part of the Dow Jones industrial average, which fell 119 points.
And the government's gross domestic product report showed that the economy fell at a 6.2 percent annual pace at the end of last year, a much faster than expected pace.
For investors, it all added up to a prolonged and increasingly painful recession.
"I don't think there is the confidence that the recovery is going to happen very quickly. It's going to take time," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
Some analysts said the market's slide could have been worse -- the major indexes finished well above their lows.
Dan Cook, senior market analyst at IG Markets in Chicago, said Wall Street's ability to show some recovery Friday despite the onslaught of bad news is a good sign.
"We have become somewhat callous to these news announcements," he said.
Nonetheless, the market's stats once again showed how troubled Wall Street and the economy are:
-- The Dow, at its lowest close since May 1, 1997, is now down 50.1 percent from its record high of 14,164.53 reached in October 2007. It came within 34 points of 7,000, a level it hasn't fallen below since October 1997.
-- The Standard & Poor's 500 index breached its Nov. 21 trading low of 741.02, which came during the height of the credit crisis. Friday's finish was the lowest for the index since Dec. 18, 1996.
-- The Dow's 11.7 percent loss in February was its worst since 1933, when it fell 15.6 percent, and its sixth straight monthly drop. The half-year slide totals 38.8 percent, the worst since 1932, when it fell 45 percent.
The S&P 500 index fell 11 percent for the month. It was the second-worst February for the index, topped only by an 18.4 percent slide in 1933. It was the index's fifth monthly drop in six months; it managed a slender gain of 0.8 percent in December.
-- The Dow Jones Wilshire 5000 index, which reflects nearly all stocks traded in America, lost 10.3 percent for the month, its worst slump since October. That's a paper loss of $1 trillion. Since its October 2007 peak, the Wilshire 5000 is down 52.7 percent, or $10.4 trillion.
The losses in the final session of the month came as Wall Street had been hoping that stabilizing Citigroup would help ease worries about the beaten-down bank stocks and remove some of their questions about the prospects for the industry.
But analysts said the loss to regular shareholders from the government's move touched off worries that other banks could see their shares hit as well.
Citigroup said before the opening bell that it agreed to a deal in which the U.S. government and private investors including the government of Singapore and Saudi Arabian Prince Alwaleed Bin Talal will convert their preferred stock in the struggling bank to common shares. The plan won't require additional money from the U.S. government, which holds an 8 percent stake in Citigroup and would own 36 percent.
"Citi has been a leading indicator the whole way down and the dilution that shareholders took today is sort of a leading indicator of what could happen to other banks, particularly the weak ones," said Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y.
Some sort of deal with the government had been expected much of the week. But Citi fell 96 cents, or 39 percent, to $1.50 as investors worried about how much their holdings in the company would be diluted by the changes.
GE, meanwhile, said late in the session it would cut its dividend to save $9 billion a year. The conglomerate has a big financing arm, so it often trades like a bank stock. Its shares fell 59 cents, or 6.5 percent, to $8.51.
The Dow fell 119.15, or 1.7 percent, to 7,062.93. The S&P 500 index fell 17.74, or 2.4 percent, to 735.09, and the Nasdaq composite index fell 13.63, or 1 percent, to 1,377.84.
The Russell 2000 index of smaller companies fell 3.93, or 1 percent, to 389.02.
Two stocks fell for every one that advanced on the New York Stock Exchange. Consolidated volume came to a heavy 8.44 billion shares, up from Thursday's 6.48 billion.
Wall Street was also shaken when the government's gross domestic product report showed that the economy fell at a 6.2 percent annual pace at the end of last year, a much faster than expected pace.
The Commerce Department figures on GDP, the worst since an annualized drop of 6.4 percent in the first three months of 1982, cast some doubt that the economy will begin to show signs of improvement by the end of this year, as many analysts have predicted. But the poor showing also could make it that much easier for readings in coming quarters to look by comparison, Cook said. Investors would welcome even a slowing pace of decline.
Health care stocks, normally an area of safety in weak economies, fell for a second straight day Friday after the White House released a budget proposal Thursday that calls for cutting some health care spending.
"This creates a lot of weakness in this market because if the safe-havens are not safe anymore it could convince a lot of people to say 'You know, I don't kneed to be in this market right now. I can just go to cash,'" Shacknofsky said.
Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.02 percent from 3 percent late Thursday. The yield on the three-month T-bill, considered one of the safest investments, was down at 0.25, compared with 0.26 percent from Thursday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 46 cents to settle at $44.76 a barrel on the New York Mercantile Exchange.
Britain's FTSE 100 tumbled 2.2 percent, Germany's DAX index fell 2.5 percent, and France's CAC-40 fell 1.5 percent. Earlier, Japan's Nikkei stock average rose 1.5 percent.
The Dow Jones industrial average closed the week down 302.74, or 4.1 percent, at 7,062.93. The Standard & Poor's 500 index fell 34.96, or 4.5 percent, to 735.09. The Nasdaq composite index fell 63.39, or 4.4 percent, closing at 1,377.84.
The Russell 2000 index, which tracks the performance of small company stocks, declined 21.94, or 5.3 percent, to 389.02.
The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended at 7,415.60, down 386.67, or 5 percent, for the week. A year ago, the index was at 13,945.130.
Rules for the New Reality
Back in September, before we were all inured to the tottering nature of so many financial giants, investors were looking for someone to blame.
So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.
In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers.
All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect?
Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.
But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.
What You Should Expect
A Long Look at Risk
Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.
An accurate assessment of risk is important. But you can view risk in many ways.
David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.
Then Mr. Jacobs moves to risk need. Need is driven by goals. Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.
Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”
A Balance Sheet Audit
Diversifying the risks in your portfolio is merely the beginning of the process. Burt Hutchinson, of Fischer & Hutchinson Wealth Advisors in Bear, Del., trained as an accountant before earning his certified financial planner designation. He believes in tax diversification too, across a range of savings vehicles with different tax rules.
He wants his firm to act as a sort of personal chief financial officer, looking at liabilities as well as assets and at spending as much as saving. “How are you tracking your cash flow?” he will ask. “Is it increasing? Decreasing? Do you have any idea where it’s going?” He says that a good financial planner should ask to see your tax return, not just your investment portfolio.
So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.
In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers.
All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect?
Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.
But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.
What You Should Expect
A Long Look at Risk
Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.
An accurate assessment of risk is important. But you can view risk in many ways.
David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.
Then Mr. Jacobs moves to risk need. Need is driven by goals. Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.
Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”
A Balance Sheet Audit
Diversifying the risks in your portfolio is merely the beginning of the process. Burt Hutchinson, of Fischer & Hutchinson Wealth Advisors in Bear, Del., trained as an accountant before earning his certified financial planner designation. He believes in tax diversification too, across a range of savings vehicles with different tax rules.
He wants his firm to act as a sort of personal chief financial officer, looking at liabilities as well as assets and at spending as much as saving. “How are you tracking your cash flow?” he will ask. “Is it increasing? Decreasing? Do you have any idea where it’s going?” He says that a good financial planner should ask to see your tax return, not just your investment portfolio.
Roubini: Fully Nationalizing Citi and Bank of America Would Be Better
Friday's announcement the government will convert up to $25 billion of its Citigroup preferred stock into common equity represents Uncle Sam's third direct attempt to rescue the floundering bank.
The conversion would give the government up to 36% control of Citigroup stock and leave existing common shareholders with as little as 26% of the company's common stock. That explains why the stock tumbled 39% to $1.50 Friday despite CEO Vikram Pandit's strange declaration: "In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest."
Pandit's claim is "like saying you're half-pregnant," says Nouriel Roubini and economics professor at NYU's Stern School and chairman of RGE Monitor.
"The government has already taken over the financial system," Roubini says, noting U.S. policymakers have committed $9 trillion to rescue the financial system and already spent $2 trillion. "So let's stop the delusion about 'no nationalization.'"
Roubini, who has publicly advocated for temporary nationalization of insolvent banks, says fully nationalizing Citigroup and/or Bank of America would have a minimal effect on the Dow, which is a price-weighted average. More importantly, he believes full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac.
Tune in Monday as we'll have more from Roubini on:
* Why nationalization is the right course and Bill Gross is wrong.
* Why Ben Bernanke's "reasonable prospect" for a recovery in 2010 is unreasonable.
* What the Tresaury's ongoing "stress tests" of big banks means, and doesn't mean.
The conversion would give the government up to 36% control of Citigroup stock and leave existing common shareholders with as little as 26% of the company's common stock. That explains why the stock tumbled 39% to $1.50 Friday despite CEO Vikram Pandit's strange declaration: "In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest."
Pandit's claim is "like saying you're half-pregnant," says Nouriel Roubini and economics professor at NYU's Stern School and chairman of RGE Monitor.
"The government has already taken over the financial system," Roubini says, noting U.S. policymakers have committed $9 trillion to rescue the financial system and already spent $2 trillion. "So let's stop the delusion about 'no nationalization.'"
Roubini, who has publicly advocated for temporary nationalization of insolvent banks, says fully nationalizing Citigroup and/or Bank of America would have a minimal effect on the Dow, which is a price-weighted average. More importantly, he believes full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac.
Tune in Monday as we'll have more from Roubini on:
* Why nationalization is the right course and Bill Gross is wrong.
* Why Ben Bernanke's "reasonable prospect" for a recovery in 2010 is unreasonable.
* What the Tresaury's ongoing "stress tests" of big banks means, and doesn't mean.
10 Best And 10 Worst U.S. Housing Markets
The cities that are showing signs of stabilization and those that continue to unravel.
Wishing you'd left the game earlier is a time-honored Las Vegas tradition. Today, that's true not only for gamblers but for homeowners there. The last time Las Vegas properties were worth more than the average mortgage? August 2003.
Blame overbuilding and risky loans, a gambling mentality or even the desert sun, but based on recent results from the S&P/Case-Shiller home price index, which measures metro home prices in 20 cities through December 2008, Las Vegas is the weakest market in the country. Prices are dropping quickly (down 4.81% since last month and 33% in the last year), the pace of decline is accelerating at the third-fastest rate in the nation, and based on lost equity, homeowners are out 65 months of mortgage payments.
All signals that things aren't likely getting better any time soon.
"Vegas is a market unto its own," says Steve Cesinger, chief financial officer at Dewberry Capital, an Atlanta-based real estate investment firm. "I don't know what those guys were drinking when they thought all this building made sense. If it does work out soon, then there's some force out there in the universe that I'm not aware of."
The S&P/Case-Shiller home price index, released monthly, examines repeat home sales in 20 metro markets, including the city core and surrounding suburbs. This means that while prices in tony San Francisco neighborhood Pacific Heights might be holding up, the net effect of including a bankrupt suburb like Vallejo brings down the metro area's score. Each city's score is assigned based on the price difference from 2000, which is scored as 100. So San Francisco's score of 130.12 means prices are up 30.12% from 2000. It still has the potential for a further fall, given the 31% year-over-year drop.
Forbes also analyzed monthly declines and year-over-year declines in home prices to determine where prices were falling fastest and where those drops were picking up momentum. It's not a good thing for San Diegothat prices from November 2008 to December 2008 fell 2.13%, but as prices declined by 2.29% from October to November, and 2.44% from September to October, the speed with which prices are falling is slowing.
That slowing rate of decline, also seen in places such as Denver, Washington, D.C., and Boston, helped rank those cities as some of the stronger markets in the country.
Contrast that with Minneapolis, where prices fell just 0.96% from September to October, but by December, the rate of month-to-month declines had jumped to 4.6%, an unwelcome acceleration.
Next, to rule out places in complete depression, we looked at how many months of equity homeowners have lost. Places like Detroit (-2.98%) and Cleveland (-2.07%) haven't declined as quickly over the last month as Seattle (-3.63%) or Charlotte (-2.55%), but that's because prices in those two Rust Belt cities are so depressed it's difficult for them to fall any further. Detroit and Cleveland homeowners have lost 141 and 92 months of equity, respectively, whereas Seattle and Charlotte prices have only declined for the last 39 and 33 months, respectively.
One other factor to consider with the Case-Shiller numbers is that the index tracks repeat home sales. That means cities like Tampa and Miami, which are notorious for overbuilt new inventory and high numbers of foreclosures, perform better on the index than they ought to, as those two factors are not tracked.
"Case-Shiller doesn't take into account new construction or foreclosure sales," says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. "In some of these markets, I'm not sure how you can ignore new construction or foreclosures."
Another city with foreclosure and new construction problems is Phoenix, where bad loans have mounted and mortgage delinquencies, a forebearer of foreclosures, have risen.
"It's pretty gruesome," says Anthony Sanders, a finance professor at Arizona State University. He points to delinquencies as a major problem and a sign that the Valley of the Sun won't be bouncing back any time soon. In Phoenix, seriously delinquent loans--those that haven't been paid in 90 days--have increased from 3.5% to 27.3% for subprime loans since this time in 2005. Adjustable-rate mortgages that are seriously delinquent have gone from less than 1% to 20.2% in the same period.
With those problems looming on the horizon in many cities across the country, Obama might need more ammunition than his proposed $75 billion foreclosure prevention package offers.
Then again, even in a boom-bust capital like Los Angeles, if you bought in 2000, paid your mortgage on time and are still in your home, you've seen a 71.5% price appreciation. There's something to be said for that kind of responsible, long-term investor.
NY022509.jpg
© Shutterstock
New York, N.Y.
In Depth: Best U.S. Housing Markets
No one is making a great deal of money in real estate right now, but that doesn't mean all cities are feeling the same amount of pain. Using data released Feb. 24 from the S&P/Case-Shiller home price index, we examined 20 cities in the U.S. on the basis of how fast home prices are falling, whether or not that descent is picking up speed or slowing down, and how many months of lost equity homeowners have endured. The data covers the period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year numbers. Our list of the 10 best-performing cities is followed by the list of the 10 worst performers.
Best, No. 1: New York, N.Y.
Index score: 183.5
Prices were last this low: November 2004
Month-to-month drop: -1.72%
Year-over-year drop: -9.19%
Deceleration rank: No. 9
Best, No. 2: Washington, D.C.
Index score: 176.34
Prices were last this low: April 2004
Month-to-month drop:-2.18%
Year-over-year drop: -19.24%
Deceleration rank: No. 3
Best, No. 3: Charlotte, N.C.
Index score: 122.41
Prices were last this low: April 2006
Month-to-month drop: -2.55
Year-over-year drop: -7.19
Deceleration rank: No. 13
Best, No. 4: Portland, Ore.
Index score: 158.5
Prices were last this low: September 2005
Month-to-month drop: -2.53%
Year-over-year drop: -13.14%
Deceleration rank: No. 11
Best, No. 5: San Diego, Calif.
Index score: 152.16
Prices were last this low: October 2003
Month-to-month drop: -2.13%
Year-over-year drop: -24.84%
Deceleration rank: No. 1
Click here to see the full list of the best U.S. housing markets.
LasVegas022509.jpg
© Shutterstock
Las Vegas, Nev.
In Depth: Worst U.S. Housing Markets
Worst, No. 1: Las Vegas, Nev.
Index score: 131.4%
Prices were last this low: August 2003
Month-to-month drop: -4.81%
Year-over-year drop: -32.98%
Deceleration rank: No. 18
Worst, No. 2: Phoenix, Ariz.
Index score: 123.93
Prices were last this low: September 2003
Month-to-month drop: -5.06%
Year-over-year drop: -33.96%
Deceleration rank: No. 15
Worst, No. 3: Detroit, Mich.
Index score: 80.93
Prices were last this low: April 1997
Month-to-month drop: -2.98%
Year-over-year drop: -21.66%
Deceleration rank: No. 8
Worst, No. 4: Minneapolis, Minn.
Index score: 127
Prices were last this low: April 2002
Month-to-month drop: -4.6%
Year-over-year drop: -18.45%
Deceleration rank: No. 20
Worst, No. 5: San Francisco, Calif.
Index score: 130.12
Prices were last this low: April 2002
Month-to-month drop: -3.81%
Year-over-year drop: -31.24%
Deceleration rank: No. 2
Click here to see the full list of the Worst U.S. Housing Markets.
Source: S&P/Case-Shiller home-price index, released Feb. 24, 2009. Methodology: Rate of home price increase or decrease was calculated by examining data covering the time period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year results.
Copyrighted, Forbes.com. All rights reserved.
Wishing you'd left the game earlier is a time-honored Las Vegas tradition. Today, that's true not only for gamblers but for homeowners there. The last time Las Vegas properties were worth more than the average mortgage? August 2003.
Blame overbuilding and risky loans, a gambling mentality or even the desert sun, but based on recent results from the S&P/Case-Shiller home price index, which measures metro home prices in 20 cities through December 2008, Las Vegas is the weakest market in the country. Prices are dropping quickly (down 4.81% since last month and 33% in the last year), the pace of decline is accelerating at the third-fastest rate in the nation, and based on lost equity, homeowners are out 65 months of mortgage payments.
All signals that things aren't likely getting better any time soon.
"Vegas is a market unto its own," says Steve Cesinger, chief financial officer at Dewberry Capital, an Atlanta-based real estate investment firm. "I don't know what those guys were drinking when they thought all this building made sense. If it does work out soon, then there's some force out there in the universe that I'm not aware of."
The S&P/Case-Shiller home price index, released monthly, examines repeat home sales in 20 metro markets, including the city core and surrounding suburbs. This means that while prices in tony San Francisco neighborhood Pacific Heights might be holding up, the net effect of including a bankrupt suburb like Vallejo brings down the metro area's score. Each city's score is assigned based on the price difference from 2000, which is scored as 100. So San Francisco's score of 130.12 means prices are up 30.12% from 2000. It still has the potential for a further fall, given the 31% year-over-year drop.
Forbes also analyzed monthly declines and year-over-year declines in home prices to determine where prices were falling fastest and where those drops were picking up momentum. It's not a good thing for San Diegothat prices from November 2008 to December 2008 fell 2.13%, but as prices declined by 2.29% from October to November, and 2.44% from September to October, the speed with which prices are falling is slowing.
That slowing rate of decline, also seen in places such as Denver, Washington, D.C., and Boston, helped rank those cities as some of the stronger markets in the country.
Contrast that with Minneapolis, where prices fell just 0.96% from September to October, but by December, the rate of month-to-month declines had jumped to 4.6%, an unwelcome acceleration.
Next, to rule out places in complete depression, we looked at how many months of equity homeowners have lost. Places like Detroit (-2.98%) and Cleveland (-2.07%) haven't declined as quickly over the last month as Seattle (-3.63%) or Charlotte (-2.55%), but that's because prices in those two Rust Belt cities are so depressed it's difficult for them to fall any further. Detroit and Cleveland homeowners have lost 141 and 92 months of equity, respectively, whereas Seattle and Charlotte prices have only declined for the last 39 and 33 months, respectively.
One other factor to consider with the Case-Shiller numbers is that the index tracks repeat home sales. That means cities like Tampa and Miami, which are notorious for overbuilt new inventory and high numbers of foreclosures, perform better on the index than they ought to, as those two factors are not tracked.
"Case-Shiller doesn't take into account new construction or foreclosure sales," says Jonathan Miller, president of Miller Samuel, a Manhattan residential appraisal firm. "In some of these markets, I'm not sure how you can ignore new construction or foreclosures."
Another city with foreclosure and new construction problems is Phoenix, where bad loans have mounted and mortgage delinquencies, a forebearer of foreclosures, have risen.
"It's pretty gruesome," says Anthony Sanders, a finance professor at Arizona State University. He points to delinquencies as a major problem and a sign that the Valley of the Sun won't be bouncing back any time soon. In Phoenix, seriously delinquent loans--those that haven't been paid in 90 days--have increased from 3.5% to 27.3% for subprime loans since this time in 2005. Adjustable-rate mortgages that are seriously delinquent have gone from less than 1% to 20.2% in the same period.
With those problems looming on the horizon in many cities across the country, Obama might need more ammunition than his proposed $75 billion foreclosure prevention package offers.
Then again, even in a boom-bust capital like Los Angeles, if you bought in 2000, paid your mortgage on time and are still in your home, you've seen a 71.5% price appreciation. There's something to be said for that kind of responsible, long-term investor.
NY022509.jpg
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New York, N.Y.
In Depth: Best U.S. Housing Markets
No one is making a great deal of money in real estate right now, but that doesn't mean all cities are feeling the same amount of pain. Using data released Feb. 24 from the S&P/Case-Shiller home price index, we examined 20 cities in the U.S. on the basis of how fast home prices are falling, whether or not that descent is picking up speed or slowing down, and how many months of lost equity homeowners have endured. The data covers the period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year numbers. Our list of the 10 best-performing cities is followed by the list of the 10 worst performers.
Best, No. 1: New York, N.Y.
Index score: 183.5
Prices were last this low: November 2004
Month-to-month drop: -1.72%
Year-over-year drop: -9.19%
Deceleration rank: No. 9
Best, No. 2: Washington, D.C.
Index score: 176.34
Prices were last this low: April 2004
Month-to-month drop:-2.18%
Year-over-year drop: -19.24%
Deceleration rank: No. 3
Best, No. 3: Charlotte, N.C.
Index score: 122.41
Prices were last this low: April 2006
Month-to-month drop: -2.55
Year-over-year drop: -7.19
Deceleration rank: No. 13
Best, No. 4: Portland, Ore.
Index score: 158.5
Prices were last this low: September 2005
Month-to-month drop: -2.53%
Year-over-year drop: -13.14%
Deceleration rank: No. 11
Best, No. 5: San Diego, Calif.
Index score: 152.16
Prices were last this low: October 2003
Month-to-month drop: -2.13%
Year-over-year drop: -24.84%
Deceleration rank: No. 1
Click here to see the full list of the best U.S. housing markets.
LasVegas022509.jpg
© Shutterstock
Las Vegas, Nev.
In Depth: Worst U.S. Housing Markets
Worst, No. 1: Las Vegas, Nev.
Index score: 131.4%
Prices were last this low: August 2003
Month-to-month drop: -4.81%
Year-over-year drop: -32.98%
Deceleration rank: No. 18
Worst, No. 2: Phoenix, Ariz.
Index score: 123.93
Prices were last this low: September 2003
Month-to-month drop: -5.06%
Year-over-year drop: -33.96%
Deceleration rank: No. 15
Worst, No. 3: Detroit, Mich.
Index score: 80.93
Prices were last this low: April 1997
Month-to-month drop: -2.98%
Year-over-year drop: -21.66%
Deceleration rank: No. 8
Worst, No. 4: Minneapolis, Minn.
Index score: 127
Prices were last this low: April 2002
Month-to-month drop: -4.6%
Year-over-year drop: -18.45%
Deceleration rank: No. 20
Worst, No. 5: San Francisco, Calif.
Index score: 130.12
Prices were last this low: April 2002
Month-to-month drop: -3.81%
Year-over-year drop: -31.24%
Deceleration rank: No. 2
Click here to see the full list of the Worst U.S. Housing Markets.
Source: S&P/Case-Shiller home-price index, released Feb. 24, 2009. Methodology: Rate of home price increase or decrease was calculated by examining data covering the time period between November 2008 and December 2008 for month-to-month results, and December 2007 to December 2008 for year-over-year results.
Copyrighted, Forbes.com. All rights reserved.
Economy moving in reverse faster than predicted
WASHINGTON (AP) -- The economy is moving in reverse faster than the government can measure.
AP - Kevin Callaghan of Missouri Valley, Iowa, delivers new Chrysler vehicles to a car dealer in Omaha, Neb., Friday, ...
AP - Kevin Callaghan of Missouri Valley, Iowa, delivers new Chrysler vehicles to a car dealer in Omaha, Neb., Friday, ...
The contraction for the fourth quarter of 2008 had been estimated at 3.8 percent just a month ago. Then the Commerce Department raised it to an astonishing 6.2 percent Friday -- the largest revision since the government started keeping records in 1976.
That was the economy's worst showing in a quarter-century and raised the prospect that the nation could suffer its worst year since 1946.
"Consumers are just hunkering down and saying 'game over,' and businesses in response are cutting back on investment and employment," said Brian Bethune, economist at IHS Global Insight. "It's a negative feedback loop."
Now in its second year, the recession is expected to stretch at least through the first six months of 2009, as shoppers slash spending in the shadow of hard times at home and aboard.
Companies, in turn, are being forced to cut jobs and production while resorting to other cost-saving measures to survive.
The Commerce Department's new report was also weaker than the 5.4 percent drop economists had expected.
The biggest culprit behind the record-breaking revision: Businesses actually cut inventories instead of building them as the government originally thought. That reduced -- rather than added to -- economic activity.
In addition, consumers pulled back even more on their spending -- which accounts for about 70 percent of national economic activity. U.S. exports suffered a bigger drop and businesses retrenched further.
Many economists lowered their forecast for this year's gross domestic product to show a deeper contraction of at least 2 percent. GDP, the value of all goods and services produced in the United States, is the best barometer of the country's economic health.
White House press secretary Robert Gibbs said the latest GDP figure "underscores the urgency with which the president feels we have to move to improve our economy."
The economy has not suffered a decline for a full year since 1991, and that was just by 0.2 percent.
If the new projections prove accurate, it would mark the worst annual showing since an 11 percent plunge in 1946.
"The slide in our economy is very severe and very broad across all industries and regions of the country," said Mark Zandi, chief economist at Moody's Economy.com. "It is about as dark an economic time that we've experienced since the 1930s."
Before Friday's report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter.
Given the fourth quarter's showing and the dismal state of the jobs market, some economists believe a decline of closer to 6 percent in the current quarter is possible.
The nation's jobless rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the rate to climb to close to 9 percent this year, and probably will stay elevated into 2011.
California's unemployment rate jumped to 10.1 percent in January, the state's first double-digit jobless reading in a quarter-century. The jobless rate announced Friday by the state Employment Development Department is well above the national jobless rate, and represents an increase from the revised figure of 8.7 percent in December.
On Wall Street, stocks fell Friday as investors reacted to a decision by Citigroup Inc. to turn over a big piece of itself to the government and a move by General Electric Co. to slash its quarterly dividend by 68 percent. Investors also paid close attention to the lower GDP figures.
The Dow Jones industrials fell more than 119 points to 7,062.93, its lowest close since May 1, 1997.
The faster downhill slide in the final quarter of 2008 came as the financial crisis -- the worst since the 1930s -- intensified. Both the new and the old fourth-quarter figures marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.
For all of 2008, the economy grew just 1.1 percent, weaker than the government initially estimated. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.
In the fourth quarter, consumers cut spending at a 4.3 percent pace. That was deeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980.
Businesses slashed spending on equipment and software at an annualized pace of 28.8 percent in the final quarter of last year. That was deeper than first reported and the worst showing since the first quarter of 1958.
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008.
In the long run, the reduction in new projects should aid the housing market's recovery as fewer properties for sale help increase competition and stabilize prices. But at the moment, a stable housing market appears months away.
A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.
AP - Kevin Callaghan of Missouri Valley, Iowa, delivers new Chrysler vehicles to a car dealer in Omaha, Neb., Friday, ...
AP - Kevin Callaghan of Missouri Valley, Iowa, delivers new Chrysler vehicles to a car dealer in Omaha, Neb., Friday, ...
The contraction for the fourth quarter of 2008 had been estimated at 3.8 percent just a month ago. Then the Commerce Department raised it to an astonishing 6.2 percent Friday -- the largest revision since the government started keeping records in 1976.
That was the economy's worst showing in a quarter-century and raised the prospect that the nation could suffer its worst year since 1946.
"Consumers are just hunkering down and saying 'game over,' and businesses in response are cutting back on investment and employment," said Brian Bethune, economist at IHS Global Insight. "It's a negative feedback loop."
Now in its second year, the recession is expected to stretch at least through the first six months of 2009, as shoppers slash spending in the shadow of hard times at home and aboard.
Companies, in turn, are being forced to cut jobs and production while resorting to other cost-saving measures to survive.
The Commerce Department's new report was also weaker than the 5.4 percent drop economists had expected.
The biggest culprit behind the record-breaking revision: Businesses actually cut inventories instead of building them as the government originally thought. That reduced -- rather than added to -- economic activity.
In addition, consumers pulled back even more on their spending -- which accounts for about 70 percent of national economic activity. U.S. exports suffered a bigger drop and businesses retrenched further.
Many economists lowered their forecast for this year's gross domestic product to show a deeper contraction of at least 2 percent. GDP, the value of all goods and services produced in the United States, is the best barometer of the country's economic health.
White House press secretary Robert Gibbs said the latest GDP figure "underscores the urgency with which the president feels we have to move to improve our economy."
The economy has not suffered a decline for a full year since 1991, and that was just by 0.2 percent.
If the new projections prove accurate, it would mark the worst annual showing since an 11 percent plunge in 1946.
"The slide in our economy is very severe and very broad across all industries and regions of the country," said Mark Zandi, chief economist at Moody's Economy.com. "It is about as dark an economic time that we've experienced since the 1930s."
Before Friday's report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter.
Given the fourth quarter's showing and the dismal state of the jobs market, some economists believe a decline of closer to 6 percent in the current quarter is possible.
The nation's jobless rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the rate to climb to close to 9 percent this year, and probably will stay elevated into 2011.
California's unemployment rate jumped to 10.1 percent in January, the state's first double-digit jobless reading in a quarter-century. The jobless rate announced Friday by the state Employment Development Department is well above the national jobless rate, and represents an increase from the revised figure of 8.7 percent in December.
On Wall Street, stocks fell Friday as investors reacted to a decision by Citigroup Inc. to turn over a big piece of itself to the government and a move by General Electric Co. to slash its quarterly dividend by 68 percent. Investors also paid close attention to the lower GDP figures.
The Dow Jones industrials fell more than 119 points to 7,062.93, its lowest close since May 1, 1997.
The faster downhill slide in the final quarter of 2008 came as the financial crisis -- the worst since the 1930s -- intensified. Both the new and the old fourth-quarter figures marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.
For all of 2008, the economy grew just 1.1 percent, weaker than the government initially estimated. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.
In the fourth quarter, consumers cut spending at a 4.3 percent pace. That was deeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980.
Businesses slashed spending on equipment and software at an annualized pace of 28.8 percent in the final quarter of last year. That was deeper than first reported and the worst showing since the first quarter of 1958.
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008.
In the long run, the reduction in new projects should aid the housing market's recovery as fewer properties for sale help increase competition and stabilize prices. But at the moment, a stable housing market appears months away.
A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.
Regulators close banks in Illinois, Nevada
NEW YORK (AP) -- Regulators on Friday closed Heritage Community Bank in Illinois, and Security Savings Bank in Nevada, marking 16 failures this year of federally insured institutions.
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The Federal Deposit Insurance Corp. was appointed the receiver of the banks.
Heritage Community Bank, based in Glenwood, Ill., had total assets of $232.9 million and deposits of $218.6 million as of Dec. 5. MB Financial Bank of Chicago agreed to assume all of Heritage's deposits, including those from brokers. All four of Heritage's branches will reopen on Saturday as branches of MB Financial.
Additionally, MB Financial agreed to buy $230.5 million in assets at a discount of $14.5 million. The FDIC will retain the remaining assets for a later sale. The FDIC and MB Financial also entered into a loss-sharing agreement in which MB Financial will share in the losses on about $181 million in assets.
Henderson, Nev.-based Security Savings Bank had total assets of about $238.3 million and deposits of $175.2 million as of Dec. 31. Las Vegas-based Bank of Nevada agreed to assume all of the deposits of Security Savings Bank, and purchase $111.3 million in assets. Security Savings' two offices will reopen Monday as Bank of Nevada branches.
The FDIC estimates that the cost to the deposit insurance fund from the closures will be about $100.7 million. Regular deposit accounts are insured up to $250,000.
The agency now expects bank failures will cost its insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion.
As unemployment rises and home prices fall, loan delinquencies and defaults are expected to keep soaring, which means bank failures are likely to escalate. The FDIC had 252 banks and thrifts on its list of troubled institutions at the end of 2008, up from 171 in the third quarter.
Facing a depleting insurance fund, federal regulators on Friday raised the fees banks pay and levied an emergency premium in a bid to collect $27 billion this year -- placing further burden on an already struggling industry.
The law requires the insurance fund to be maintained at a certain minimum level of 1.15 percent of total insured deposits. But it fell below that minimum in mid-2008.
Twenty-five U.S. banks failed last year -- including two of the biggest thrifts -- more than in the previous five years combined and up from only three failures in 2007.
As a result, the deposit insurance fund dropped to $18.9 billion at Dec. 31 -- the lowest level since 1987 -- from $52.4 billion at the end of 2007.
President Barack Obama this week outlined a budget that called for spending up to $750 billion more for additional financial industry rescue efforts on top of the $700 billion Congress has already approved. The government also confirmed it will buy preferred shares from banks that can be converted into common shares, and the Treasury Department began to "stress test" the country's biggest banks to determine which might need more capital if the economy eroded further.
On Friday, the government announced plans to increase its stake in beleaguered Citigroup Inc. to as much as 36 percent by converting its preferred stock to common stock. While the conversion will dilute current shareholders' investments, a wider equity base means better protection against future losses.
Still, the news offered little comfort to investors who are worried about the stability of other banks.
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Symbol Price Change
C 1.50 -0.96
Chart for CITIGROUP INC
{"s" : "c","k" : "c10,l10,p20,t10","o" : "","j" : ""}
The Federal Deposit Insurance Corp. was appointed the receiver of the banks.
Heritage Community Bank, based in Glenwood, Ill., had total assets of $232.9 million and deposits of $218.6 million as of Dec. 5. MB Financial Bank of Chicago agreed to assume all of Heritage's deposits, including those from brokers. All four of Heritage's branches will reopen on Saturday as branches of MB Financial.
Additionally, MB Financial agreed to buy $230.5 million in assets at a discount of $14.5 million. The FDIC will retain the remaining assets for a later sale. The FDIC and MB Financial also entered into a loss-sharing agreement in which MB Financial will share in the losses on about $181 million in assets.
Henderson, Nev.-based Security Savings Bank had total assets of about $238.3 million and deposits of $175.2 million as of Dec. 31. Las Vegas-based Bank of Nevada agreed to assume all of the deposits of Security Savings Bank, and purchase $111.3 million in assets. Security Savings' two offices will reopen Monday as Bank of Nevada branches.
The FDIC estimates that the cost to the deposit insurance fund from the closures will be about $100.7 million. Regular deposit accounts are insured up to $250,000.
The agency now expects bank failures will cost its insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion.
As unemployment rises and home prices fall, loan delinquencies and defaults are expected to keep soaring, which means bank failures are likely to escalate. The FDIC had 252 banks and thrifts on its list of troubled institutions at the end of 2008, up from 171 in the third quarter.
Facing a depleting insurance fund, federal regulators on Friday raised the fees banks pay and levied an emergency premium in a bid to collect $27 billion this year -- placing further burden on an already struggling industry.
The law requires the insurance fund to be maintained at a certain minimum level of 1.15 percent of total insured deposits. But it fell below that minimum in mid-2008.
Twenty-five U.S. banks failed last year -- including two of the biggest thrifts -- more than in the previous five years combined and up from only three failures in 2007.
As a result, the deposit insurance fund dropped to $18.9 billion at Dec. 31 -- the lowest level since 1987 -- from $52.4 billion at the end of 2007.
President Barack Obama this week outlined a budget that called for spending up to $750 billion more for additional financial industry rescue efforts on top of the $700 billion Congress has already approved. The government also confirmed it will buy preferred shares from banks that can be converted into common shares, and the Treasury Department began to "stress test" the country's biggest banks to determine which might need more capital if the economy eroded further.
On Friday, the government announced plans to increase its stake in beleaguered Citigroup Inc. to as much as 36 percent by converting its preferred stock to common stock. While the conversion will dilute current shareholders' investments, a wider equity base means better protection against future losses.
Still, the news offered little comfort to investors who are worried about the stability of other banks.
Jumbo Mortgages, Jumbo Headaches
Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.
President Barack Obama's housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country, though they can run as high as $729,750 in certain pricier markets, such as parts of California, New York and Hawaii.
Anything bigger is called a "jumbo" loan -- and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.
That's hurting borrowers like Pete Zipkin, who's the kind of affluent customer that banks once coveted. The 35-year-old technology executive -- who says he has a spotless credit record and at least 20% equity in his home -- has come up empty-handed in his search for a jumbo mortgage of more than $1 million for his recently built five-bedroom home in Alamo, Calif., near San Francisco.
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Unable to find a fixed-rate mortgage when his construction loan expired last fall, Mr. Zipkin now has a variable-rate loan that adjusts monthly. The rate is currently 5%, but it can go as high as 12%. He says banks have turned him down in part because they are worried about falling home prices in California, even though price declines in Alamo, where the median home price is $1.3 million, have been less severe than in the rest of the state.
"If somebody has the income, the equity and the credit rating," they should qualify for a loan, Mr. Zipkin says.
'Buying Down' a Mortgage
Many homeowners in high-priced markets are experiencing similar difficulties, and are left with few options other than to raid their savings or retirement accounts and use the cash to "buy down" their mortgages. In some cases, home buyers need to put up a large down payment, often 25% or more, to qualify for a jumbo mortgage. Others are bypassing jumbos altogether and putting up enough cash to become eligible for a lower-rate conforming loan.
"Every single day I'm talking to people who have a jumbo loan, and I can't do anything for them," says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.
While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That's the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.
"If you have been able to ... save for a down payment, that to us speaks volumes about your character," says Bill Higgins, ING's chief lending officer.
Like most jumbo lenders, ING offers mainly "hybrid" adjustable-rate mortgages that carry a fixed-rate for five or seven years and then reset annually to an adjustable rate. ING is offering initial rates as low as 5.5% for a seven-year adjustable-rate jumbo mortgage. Last week, the average for a 30-year conforming mortgage was 5.22%, according to HSH Associates, a financial publisher.
Higher Rates
Jumbo borrowers have always paid slightly higher rates than conforming-loan borrowers, in part because luxury homes can be harder to sell quickly for their full price if a homeowner defaults. But the gap between jumbo and conforming loans, historically around 0.3 percentage point, is now about 1.55 points, with jumbo rates averaging about 6.77%.
Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.
Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. "The million-dollar-and-above market is sinking like a lead weight," Mr. Lazerson says.
Frustrated Buyers
That is frustrating potential buyers like Brandon Steele, a vice president of marketing for a food-products company, who was approved by his credit union for a $990,000 loan last year to buy a home in the Sherman Oaks section of Los Angeles. He had hoped to move his growing family out of the single-family house he has rented for the past four years and into a larger one. Those plans fell through when his credit union told him in December that they were getting out of jumbo lending.
"We thought we were being prudent by not jumping into the housing market when it was overinflated," he says. "It's a catch-22. Now that we want to purchase, we cannot get financing."
Mr. Steele says that he and his wife have high incomes and a solid credit rating, but that the money he had planned on using to make a larger down payment was lost in the stock market. He says his only option now is to wait for home prices to fall another 20% or to save an additional $100,000.
"Short of moving into a two-bedroom apartment or not funding my 401(k), I can't save that kind of money in a year," he says. "If you live in a high-cost area, there's a whole different standard. Everything's a jumbo loan." Mr. Steele says that for now, he's hoping his credit union, where he's been a customer for 10 years, will reinstate his pre-approved status and fund the loan.
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The lack of financing is particularly acute in markets where rising home prices have made jumbo loans a necessity for even middle-class borrowers, such as New York City, coastal California and Washington, D.C. "If you own a $650,000 home in many parts of this country, you're not a wealthy person by any stretch, and you're being cut out of any relief," says Guy Cecala, publisher of Inside Mortgage Finance.
Around 4% of all borrowers have loans that exceed conforming limits, according to an estimate by First American CoreLogic. But that share rises in high-cost states such as California, at 17%, and New York, at 8%.
Some jumbo clients -- enticed by historically low conforming rates -- are willing to dip into their retirement savings to lower their balances. Neil Littman, for one, estimates that he'd save $300 a month if he paid $25,000 to bring his loan down to the $417,000 limit in Erie, Colo., a bedroom community about 30 minutes east of Boulder.
"Right now I'm trying to conserve cash, but to get the savings on the interest rate, I'm willing to put more money down," says the 38-year-old, a commercial real-estate broker.
Mr. Littman, who purchased his four-bedroom home in April 2007, laments the fact that the Boulder area doesn't have a higher conforming-loan limit. Median home prices in Boulder are nearly $650,000, though median prices for the county are much lower, at around $360,000.
Raiding the 401(k) Account
Other borrowers are raiding their 401(k) accounts in order to qualify for a cheaper mortgage. Jon Eisen, a San Diego mortgage broker, says that one of his clients -- a dentist with a $1 million jumbo loan -- is considering pulling $450,000 from a retirement savings account to pay down his "interest-only" adjustable rate mortgage, in which principal payments are deferred for a set period. That would allow him to refinance into a fixed-rate conforming loan.
Randy Kobata, who lives in Santa Monica, Calif., says he's considering taking $70,000 out of his savings to pay down his mortgage in order to get to the conforming limit. He isn't able to refinance his adjustable-rate jumbo loan from Washington Mutual Inc., now a unit of J.P. Morgan Chase & Co., because the value of his two-bedroom home has declined by $100,000 in the past two years. Meanwhile, the 31-year-old, who works in commercial real estate, has asked the bank for a rate reduction.
Rather than dip into savings to get a better rate, some advisers say, clients are better off holding tight. "If your home has lost 15% in two years, why pay down just to refinance?" says Craig Vogt, a mortgage broker in Brooklyn, N.Y. "It's like losing money two times."
Write to Nick Timiraos at nick.timiraos@wsj.com
Corrections & Amplifications: The stimulus bill enacted last week raises conforming loan limits for Boulder, Colo., to $460,000. This article failed to note the increase in loan limits from their previous level of $417,000.
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
President Barack Obama's housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country, though they can run as high as $729,750 in certain pricier markets, such as parts of California, New York and Hawaii.
Anything bigger is called a "jumbo" loan -- and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.
That's hurting borrowers like Pete Zipkin, who's the kind of affluent customer that banks once coveted. The 35-year-old technology executive -- who says he has a spotless credit record and at least 20% equity in his home -- has come up empty-handed in his search for a jumbo mortgage of more than $1 million for his recently built five-bedroom home in Alamo, Calif., near San Francisco.
More from Yahoo! Finance:
• Why Landing a Low Mortgage Rate Will Cost You
• 10 Best Affordable Suburbs in the U.S.
• Is It Time to Refinance Your Home?
Visit the Loans Center
Unable to find a fixed-rate mortgage when his construction loan expired last fall, Mr. Zipkin now has a variable-rate loan that adjusts monthly. The rate is currently 5%, but it can go as high as 12%. He says banks have turned him down in part because they are worried about falling home prices in California, even though price declines in Alamo, where the median home price is $1.3 million, have been less severe than in the rest of the state.
"If somebody has the income, the equity and the credit rating," they should qualify for a loan, Mr. Zipkin says.
'Buying Down' a Mortgage
Many homeowners in high-priced markets are experiencing similar difficulties, and are left with few options other than to raid their savings or retirement accounts and use the cash to "buy down" their mortgages. In some cases, home buyers need to put up a large down payment, often 25% or more, to qualify for a jumbo mortgage. Others are bypassing jumbos altogether and putting up enough cash to become eligible for a lower-rate conforming loan.
"Every single day I'm talking to people who have a jumbo loan, and I can't do anything for them," says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.
While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That's the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.
"If you have been able to ... save for a down payment, that to us speaks volumes about your character," says Bill Higgins, ING's chief lending officer.
Like most jumbo lenders, ING offers mainly "hybrid" adjustable-rate mortgages that carry a fixed-rate for five or seven years and then reset annually to an adjustable rate. ING is offering initial rates as low as 5.5% for a seven-year adjustable-rate jumbo mortgage. Last week, the average for a 30-year conforming mortgage was 5.22%, according to HSH Associates, a financial publisher.
Higher Rates
Jumbo borrowers have always paid slightly higher rates than conforming-loan borrowers, in part because luxury homes can be harder to sell quickly for their full price if a homeowner defaults. But the gap between jumbo and conforming loans, historically around 0.3 percentage point, is now about 1.55 points, with jumbo rates averaging about 6.77%.
Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.
Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. "The million-dollar-and-above market is sinking like a lead weight," Mr. Lazerson says.
Frustrated Buyers
That is frustrating potential buyers like Brandon Steele, a vice president of marketing for a food-products company, who was approved by his credit union for a $990,000 loan last year to buy a home in the Sherman Oaks section of Los Angeles. He had hoped to move his growing family out of the single-family house he has rented for the past four years and into a larger one. Those plans fell through when his credit union told him in December that they were getting out of jumbo lending.
"We thought we were being prudent by not jumping into the housing market when it was overinflated," he says. "It's a catch-22. Now that we want to purchase, we cannot get financing."
Mr. Steele says that he and his wife have high incomes and a solid credit rating, but that the money he had planned on using to make a larger down payment was lost in the stock market. He says his only option now is to wait for home prices to fall another 20% or to save an additional $100,000.
"Short of moving into a two-bedroom apartment or not funding my 401(k), I can't save that kind of money in a year," he says. "If you live in a high-cost area, there's a whole different standard. Everything's a jumbo loan." Mr. Steele says that for now, he's hoping his credit union, where he's been a customer for 10 years, will reinstate his pre-approved status and fund the loan.
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The lack of financing is particularly acute in markets where rising home prices have made jumbo loans a necessity for even middle-class borrowers, such as New York City, coastal California and Washington, D.C. "If you own a $650,000 home in many parts of this country, you're not a wealthy person by any stretch, and you're being cut out of any relief," says Guy Cecala, publisher of Inside Mortgage Finance.
Around 4% of all borrowers have loans that exceed conforming limits, according to an estimate by First American CoreLogic. But that share rises in high-cost states such as California, at 17%, and New York, at 8%.
Some jumbo clients -- enticed by historically low conforming rates -- are willing to dip into their retirement savings to lower their balances. Neil Littman, for one, estimates that he'd save $300 a month if he paid $25,000 to bring his loan down to the $417,000 limit in Erie, Colo., a bedroom community about 30 minutes east of Boulder.
"Right now I'm trying to conserve cash, but to get the savings on the interest rate, I'm willing to put more money down," says the 38-year-old, a commercial real-estate broker.
Mr. Littman, who purchased his four-bedroom home in April 2007, laments the fact that the Boulder area doesn't have a higher conforming-loan limit. Median home prices in Boulder are nearly $650,000, though median prices for the county are much lower, at around $360,000.
Raiding the 401(k) Account
Other borrowers are raiding their 401(k) accounts in order to qualify for a cheaper mortgage. Jon Eisen, a San Diego mortgage broker, says that one of his clients -- a dentist with a $1 million jumbo loan -- is considering pulling $450,000 from a retirement savings account to pay down his "interest-only" adjustable rate mortgage, in which principal payments are deferred for a set period. That would allow him to refinance into a fixed-rate conforming loan.
Randy Kobata, who lives in Santa Monica, Calif., says he's considering taking $70,000 out of his savings to pay down his mortgage in order to get to the conforming limit. He isn't able to refinance his adjustable-rate jumbo loan from Washington Mutual Inc., now a unit of J.P. Morgan Chase & Co., because the value of his two-bedroom home has declined by $100,000 in the past two years. Meanwhile, the 31-year-old, who works in commercial real estate, has asked the bank for a rate reduction.
Rather than dip into savings to get a better rate, some advisers say, clients are better off holding tight. "If your home has lost 15% in two years, why pay down just to refinance?" says Craig Vogt, a mortgage broker in Brooklyn, N.Y. "It's like losing money two times."
Write to Nick Timiraos at nick.timiraos@wsj.com
Corrections & Amplifications: The stimulus bill enacted last week raises conforming loan limits for Boulder, Colo., to $460,000. This article failed to note the increase in loan limits from their previous level of $417,000.
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
Economy shrinks at fastest pace in 26 years
WASHINGTON (AP) -- The economy contracted at a staggering 6.2 percent pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession.
AP - Brandon Thelen of Omaha, unemployed for three months, right, is helped by a friend, Zach Johnson, as he ...
AP - Brandon Thelen of Omaha, unemployed for three months, right, is helped by a friend, Zach Johnson, as he ...
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The Commerce Department report released Friday showed the economy sinking much faster than the 3.8 percent annualized drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4 percent annualized decline economists expected.
A much sharper cutback in consumer spending -- which accounts for about two-thirds of economic activity -- along with a bigger drop in U.S. exports sales, and reductions in business spending and inventories all contributed to the large downgrade.
Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.
"Right now we're in the period of maximum recession stress, where the big cuts are being made," said economist Ken Mayland, president of ClearView Economics.
On Wall Street, stocks slid as investors second-guessed Citigroup Inc.'s plans to turn over a bigger piece of itself to the government in a move designed to keep the banking giant alive and bolster its capital in the face of growing losses amid the global recession. The Dow Jones industrials lost about 50 points in morning trading.
The new report offered grim proof that the economy's economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5 percent in the third quarter.
The faster downhill slide in the final quarter of last year came as the financial crisis -- the worst since the 1930s -- intensified.
Consumers at the end of the year slashed spending by the most in 28 years. They chopped spending on cars, furniture, appliances, clothes and other things. Businesses retrenched sharply, too, dropping the ax on equipment and software, home building and commercial construction.
Before Friday's report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter. However, given the fourth quarter's showing and the dismal state of the jobs market, Mayland believes a decline of closer to 6 percent in the current quarter is possible.
The nation's unemployment rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011.
A smaller decline in the economy is expected for the second quarter of this year. But the new GDP figure -- like the old one -- marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.
"It's going to be a challenging 2009," Scott Davis, chief executive officer of global shipping giant UPS, said Thursday while speaking at the U.S. Chamber of Commerce in Washington.
American consumers -- spooked by vanishing jobs, sinking home values and shrinking investment portfolios have cut back. In turn, companies are slashing production and payrolls. Rising foreclosures are aggravating the already stricken housing market, hard-to-get credit has stymied business investment and is crimping the ability of some consumers to make big-ticket purchases.
It's creating a self-perpetuating vicious cycle that Washington policymakers are finding hard to break.
To jolt life back into the economy, President Barack Obama recently signed a $787 billion recovery package of increased government spending and tax cuts. The president also unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump-start lending.
For all of 2008, the economy grew by just 1.1 percent, weaker than the government initially estimated. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.
With Friday's figures, Mayland lowered his forecast for this year to show a deeper contraction of just over 2 percent.
In the fourth quarter, consumers cut spending at a 4.3 percent pace. That was deeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980.
Businesses slashed spending on equipment and software at an annualized pace of 28.8 percent in the final quarter of last year. That also was deeper than first reported and was the worst showing since the first quarter of 1958.
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008.
A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.
Businesses also cut investments in inventories -- as they scrambled to reduce stocks in the face of dwindling customer demand -- another factor contributing to the weaker fourth-quarter reading. The government last month thought businesses had boosted inventories, which added to gross domestic product, or GDP.
GDP is the value of all goods and services produced in the United States and is the best barometer of the country's economic health.
Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a "severe contraction" and is likely to keep shrinking in the first six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system.
Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising.
That's partly because many analysts don't think the early stages of any recovery will be vigorous, and because companies won't be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power.
More job losses were announced this week. JPMorgan Chase & Co. on Thursday said it would eliminate about 12,000 jobs as it absorbs the operations of failed savings and loan Washington Mutual Inc. That figure includes 9,200 cuts announced previously and 2,800 jobs expected to be lost through attrition.
The NFL said Wednesday that the league dropped 169 jobs through buyouts, layoffs and other reductions. Textile maker Milliken & Co. said it would cut 650 jobs at facilities worldwide, while jeweler Zale Corp. said it will close 115 stores and eliminate 245 positions.
AP - Brandon Thelen of Omaha, unemployed for three months, right, is helped by a friend, Zach Johnson, as he ...
AP - Brandon Thelen of Omaha, unemployed for three months, right, is helped by a friend, Zach Johnson, as he ...
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C 1.75 -0.71
Chart for CITIGROUP INC
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ZLC 1.32 +0.11
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{"s" : "c,jpm,zlc","k" : "c10,l10,p20,t10","o" : "","j" : ""}
The Commerce Department report released Friday showed the economy sinking much faster than the 3.8 percent annualized drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4 percent annualized decline economists expected.
A much sharper cutback in consumer spending -- which accounts for about two-thirds of economic activity -- along with a bigger drop in U.S. exports sales, and reductions in business spending and inventories all contributed to the large downgrade.
Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.
"Right now we're in the period of maximum recession stress, where the big cuts are being made," said economist Ken Mayland, president of ClearView Economics.
On Wall Street, stocks slid as investors second-guessed Citigroup Inc.'s plans to turn over a bigger piece of itself to the government in a move designed to keep the banking giant alive and bolster its capital in the face of growing losses amid the global recession. The Dow Jones industrials lost about 50 points in morning trading.
The new report offered grim proof that the economy's economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other. The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5 percent in the third quarter.
The faster downhill slide in the final quarter of last year came as the financial crisis -- the worst since the 1930s -- intensified.
Consumers at the end of the year slashed spending by the most in 28 years. They chopped spending on cars, furniture, appliances, clothes and other things. Businesses retrenched sharply, too, dropping the ax on equipment and software, home building and commercial construction.
Before Friday's report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter. However, given the fourth quarter's showing and the dismal state of the jobs market, Mayland believes a decline of closer to 6 percent in the current quarter is possible.
The nation's unemployment rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011.
A smaller decline in the economy is expected for the second quarter of this year. But the new GDP figure -- like the old one -- marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.
"It's going to be a challenging 2009," Scott Davis, chief executive officer of global shipping giant UPS, said Thursday while speaking at the U.S. Chamber of Commerce in Washington.
American consumers -- spooked by vanishing jobs, sinking home values and shrinking investment portfolios have cut back. In turn, companies are slashing production and payrolls. Rising foreclosures are aggravating the already stricken housing market, hard-to-get credit has stymied business investment and is crimping the ability of some consumers to make big-ticket purchases.
It's creating a self-perpetuating vicious cycle that Washington policymakers are finding hard to break.
To jolt life back into the economy, President Barack Obama recently signed a $787 billion recovery package of increased government spending and tax cuts. The president also unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump-start lending.
For all of 2008, the economy grew by just 1.1 percent, weaker than the government initially estimated. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.
With Friday's figures, Mayland lowered his forecast for this year to show a deeper contraction of just over 2 percent.
In the fourth quarter, consumers cut spending at a 4.3 percent pace. That was deeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980.
Businesses slashed spending on equipment and software at an annualized pace of 28.8 percent in the final quarter of last year. That also was deeper than first reported and was the worst showing since the first quarter of 1958.
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008.
A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services.
Businesses also cut investments in inventories -- as they scrambled to reduce stocks in the face of dwindling customer demand -- another factor contributing to the weaker fourth-quarter reading. The government last month thought businesses had boosted inventories, which added to gross domestic product, or GDP.
GDP is the value of all goods and services produced in the United States and is the best barometer of the country's economic health.
Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a "severe contraction" and is likely to keep shrinking in the first six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system.
Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising.
That's partly because many analysts don't think the early stages of any recovery will be vigorous, and because companies won't be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power.
More job losses were announced this week. JPMorgan Chase & Co. on Thursday said it would eliminate about 12,000 jobs as it absorbs the operations of failed savings and loan Washington Mutual Inc. That figure includes 9,200 cuts announced previously and 2,800 jobs expected to be lost through attrition.
The NFL said Wednesday that the league dropped 169 jobs through buyouts, layoffs and other reductions. Textile maker Milliken & Co. said it would cut 650 jobs at facilities worldwide, while jeweler Zale Corp. said it will close 115 stores and eliminate 245 positions.
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