Saturday, May 10, 2008

"Goldilocks economy" news roundup

Citigroup to shed nearly $500 billion in assets

Citigroup aims to shed between $400 billion and $500 billion of its $2.2 trillion in assets and grow revenue by 9 percent over the next few years as it tries to rebound from massive losses tied to deterioration in the credit markets.

The $500 billion in so-called "legacy assets" the bank intends to sell off or allow to mature include yet-to-be-named noncore businesses, as well as assets in Citigroup's securities and consumer banking segments. That includes mortgages and other real estate-related holdings.

Citigroup has already begun its winding-down process by writing down about $38 billion in soured debt since last summer, and setting plans to reduce its residential mortgage assets by $45 billion over the coming year. It has also sold businesses including CitiCapital, CitiStreet and Diners Club.

These moves arrived on top of huge stock sales to outside investors, including government funds in Singapore and the United Arab Emirates.

While others agreed that Citi had to sell assets, not everyone was certain how easy such a sale would be.

"I'm not sure they have half a trillion in good assets that someone wants to buy. But they're doing the obvious — they have no choice," said R. Christopher Whalen, managing director of consulting firm Institutional Risk Analytics.

A.I.G.’s Quarterly Loss Depresses Dow

The insurer American International Group helped send the Dow Jones industrial average down about 120 points after posting a $7.8 billion first-quarter loss that rekindled anxiety about the strained state of the global financial system.

“The news came as something of a surprise to some and a wake-up call to most that the financial service companies are not yet out of the woods,” said Philip J. Orlando, chief equity market strategist at Federated Investors

Delphi Corp. Reports 1st-Quarter Loss of $589 Million

Delphi Corp., the bankrupt former auto-parts subsidiary of General Motors Corp. said its first- quarter loss widened to $589 million as sales to its former parent declined.

The supplier, which failed to leave court protection as planned last month when an investor group pulled out, said shipments to GM fell 18 percent. The automaker's output in North America has been curtailed by a strike at supplier American Axle & Manufacturing Holdings Inc. that began on Feb. 26.

Delphi last month cut its 2008 earnings forecast because of falling U.S. vehicle sales. The supplier said today it will seek to increase the limit on its debtor-in-possession credit facility to $4.35 billion from $4.1 billion, subject to court approval

Gas jumps above $3.67, oil passes $126 on Venezuela concerns

Oil rose above $126 a barrel for the first time Friday, bringing its advance this week to nearly $10, as investors questioned whether a possible confrontation between the U.S. and Venezuela could cut exports from the OPEC member. Gas prices, meanwhile, rose above an average $3.67 a gallon at the pump, following oil's recent path higher.

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government. Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas. That appears to heighten the chances that the U.S. could impose sanctions on one of its biggest oil suppliers.

Oil prices also were boosted Friday by the dollar, which declined against the euro. The European Central Bank said it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar.

FedEx Lowers Profit Outlook on Higher Fuel Costs, Lower Demand

FedEx Corp., the second-largest U.S. package-shipping company, said fourth-quarter profit will miss its forecast after surging fuel prices raised costs by at least $100 million more than estimated.

Yesterday's forecast marked the second time FedEx pared its outlook this fiscal year under the strain of the rising price of oil, which set records each day this week, and a possible U.S. recession. United Parcel Service Inc., the largest U.S. shipper, last month lowered its forecast as well.

High fuel prices hurting airlines more than 9/11:

"The world has changed dramatically for the airline industry," said Scott Dickson, senior vice president and chief marketing officer at Oak Creek, Wis.-based Midwest Air Group Inc. (NYSE: MEH), which operates Midwest Airlines.

"This is probably a bigger shock to the airlines' systems than what happened after 9/11. This is going to bring some very fundamental change in the industry in terms of its size, its shape and its character, especially if these phenomenally high fuel prices continue for any length of time."

Fuel prices for airlines have risen 200 percent since 2000 and more than 60 percent over the last year, said Dickson, who spoke Thursday at the Public Policy Forum's Viewpoint luncheon at the Hilton Milwaukee City Center.

Eight airlines recently have gone out of business, in large part because of fuel costs, according to Dickson.

"There are carriers that have had aggressive growth plans that are now announcing zero or negative growth plans," he said. "I don't think any carrier in the industry has a growth plan for the next 18 months."

Housing Bailout Bill Seems to Be on Shaky Ground

Even as the housing foreclosure crisis deepens, legislation to rescue homeowners and their lenders appears to be in significant political jeopardy.

The bill, which passed the House on Thursday, is quickly becoming a casualty in a battle between the Bush administration, which says it opposes any taxpayer bailout that would only further encourage risky lending practices, and Democrats who say that homeowner assistance is the only way to contain the damage to the broader economy.

The Bush administration on Friday said it would only support legislation that did not require taxpayer funds. The Congressional Budget Office estimates that the House-passed measure would refinance as many as 500,000 homes over the next five years, at a cost to taxpayers of about $2.7 billion.

“Taxpayers shouldn’t be taking on the risk of foreclosure,” said Tony Fratto, a White House spokesman.

Under the voluntary plan that was approved by the House, borrowers at risk of default would be able to refinance their loans at a more affordable 30-year fixed-rate mortgage insured by the Federal Housing Administration.

In exchange for avoiding foreclosure, lenders would have to agree to reduce the principal balance. The borrowers would pay a monthly insurance fee that would go to a fund to protect taxpayers from losses. A consensus was emerging on Friday that if Congress adopted a measure, it would likely be far more modest than the one passed by the House, which itself has been criticized by housing groups for being too small.

Fannie to Aid Underwater Loans

Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being "underwater."

The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal -- something many lenders are reluctant to do. Fannie's refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.

We're saying to the consumer, 'You're not trapped any more,'" said Jeff Hayward, a senior vice president at Fannie.

The program will allow refinancing loans of as much as 120% of the property value. Fannie officials project that 150,000 households could qualify for such refinancings.

Rather than reducing the principal due on the loan and taking an immediate loss, Fannie is betting that these people will be able to keep up on their new loans and prices will recover.

The Ticking Credit Card Time Bomb

My guess is that many Americas continue to run up massive credit card debt because they have little intention of every paying it off. Since many who are underwater on the home loans, and behind on the auto and student loans see bankruptcy as a foregone conclusion, they see no downside to pilling on as much debt as possible while the taps remain open.

Those choking on credit card debt may also be taking cheer from the gathering government campaign to bail out over-leveraged homeowners. The sheer numbers of who are afflicted with spiraling monthly payments will make credit card relief a potent political issue for crusading Congressman and Presidential candidates. After all, there are few fundamental differences between those who borrowed too much to buy houses and those who made the same mistake with consumer goods. If the government bails out the former why not the latter? In fact, one reason some homeowners have such large mortgages is that they consolidated their credit card debts into their mortgages each time they refinanced. Why should renters be forced to pay off their credit card debts while homeowners have theirs forgiven?

Soon, as credit card delinquencies rise and losses on pools of securitized credit card debt mount, those supplying the credit will finally get wise to the fact they will never get their money back. As a result the market for such debt will dry up even more quickly than did the market for subprime mortgages. Cards will therefore be much harder to come by and will have much lower limits then they do today. Limited to only the cash in their wallets, Americans will finally be forced to dramatically curtail their spending, and the recession will finally gather serious momentum.


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