Tuesday, March 17, 2009

Economic News of Interest

Casino giant MGM Mirage loses $1.1B in 4th qtr

MGM Mirage officials said this month that they were worried the company may default on its debt as it finishes its largest casino project ever, the $8.6 billion CityCenter complex on the Las Vegas Strip.

The company said it will break its loan agreements this year unless the economy turns around and more people start gambling again

Goldman's share of AIG bailout money draws fire

American International Group funneled over $90 billion of taxpayer bailout funds to various U.S. and European banks, but the biggest beneficiary was politically connected Goldman Sachs Group Inc.

Suspicions of potential conflicts of interest and favoritism have been fueled by $12.9 billion AIG paid to Goldman Sachs -- where then-Treasury Secretary Henry Paulson had previously worked as chief executive -- in the months after the insurer was rescued by the government last September.

Goldman, for its part, has insisted it did not need the bailout money because it was "always fully collateralized and hedged."

AIG has also infuriated politicians -- including U.S. President Barack Obama -- with its plan to pay $165 million in bonuses to employees at the unit at the heart of its problems.

Still, the payments to counterparties like Goldman Sachs dwarfed the bonuses, and some experts contend that these companies should have been made to share some of the losses resulting from the giant insurance firm's near collapse.

GM chief: Automaker might not survive bankruptcy

Facing a March 31 deadline for the government to accept its restructuring plan and provide more taxpayer rescue money, General Motors Chief Executive Officer Rick Wagoner said Tuesday that a forced bankruptcy of the corporate giant could spell the end of the storied carmaker.

Wagoner, at a breakfast interview with a small group of Washington reporters, acknowledged that many industry analysts expect GM to be forced into a form of prepackaged bankruptcy from which it could emerge within months, but he warned that such a move would be risky and could prove disastrous.

GM would like another $4.6 billion in taxpayer support and a $12 billion line of credit. That's on top of $13.4 billion from taxpayers that it's already received. The new money is contingent on approval of its restructuring plans. Many Republicans in Congress, and a broad swath of industry analysts, argue that bankruptcy is necessary to get GM's costs under control.

After almost nine years as the CEO of a company whose health long has been synonymous with the health of the U.S. economy, Wagoner was candid about his predicament.

"Let me tell you, living hand to mouth is no fun for anybody," he said.

Caterpillar To Idle Nearly 2,500 More US Workers

Caterpillar Inc. (CAT) said it will lay off nearly 2,500 U.S. employees and close a plant in Georgia because of slumping demand for its construction equipment.

The bulk of the cuts are on top of 22,100 layoffs that the company announced in January. The company has already offered buyouts to about 25,000 U.S.-based employees, a reduction in work hours at some plants and pay cuts for management employees.

Citi's Chief Economist Leaves for Treasury Post

Citigroup Inc.'s chief economist is leaving the New York company for a job at the U.S. Treasury Department, according to an internal Citigroup memo.

Lewis Alexander, who has been at Citigroup since 1999 and before that worked at the Federal Reserve, will head to Treasury "to work on domestic financial issues," said the Citigroup memo, which was sent Tuesday.

According to a government official, Mr. Alexander will be a counselor to Treasury Secretary Timothy Geithner. Mr. Alexander and a Treasury spokesman weren't immediately available to comment Tuesday. A Citigroup spokesman declined to elaborate on the company's memo.

Mr. Alexander's optimistic economic forecasts colored executives' views that the U.S. was unlikely to face a prolonged slump.

"I think that's not going to spill over more broadly into the economy, and so I think we're going to have a normal kind of housing cycle that's going to last through the middle of this year," Mr. Alexander said in a Feb. 28, 2007, interview on PBS.

In the past five quarters, Citigroup has booked a total of more than $37 billion in net losses, largely stemming from the company's overexposure to the U.S. real-estate sector.

What the Fed's considering at this week's meeting

Economists expect the U.S. central bank to hold its target range for the benchmark overnight federal funds rate steady at zero to 0.25 percent, while indicating it will keep rates low for some time. Some expect the Fed to stress that it will ramp up the use of its balance sheet to support key credit markets.

As the meeting starts on Tuesday, the New York Federal Reserve Bank will begin accepting applications for the first batch of loans under the Term Asset-Backed Securities Loan Facility (TALF), which seeks to ease consumer and small business lending.

The program will start at an initial $200 billion, but the Fed has said it could be expanded to up to $1 trillion.

The Fed is expected to issue its policy statement around 2:15 p.m. EDT on Wednesday.

Obama Touts Budget as 'Economic Blueprint'

Ahead of what will be a contentious fight over his fiscal agenda, President Barack Obama pressed lawmakers to pass his $3.6 trillion budget proposal, saying the package makes "tough choices" and lays the groundwork for long-term growth.

The budget blueprint unveiled by the White House last month aims to slash the record federal deficit in half by the end of Mr. Obama's term (Hahahaha!), but also makes big investments in Mr. Obama's plans to overhaul the health-care system and follow through on other campaign promises. Republicans say the document relies on tax hikes and heralds the return of big government.

Freddie Mac: The Government's Next Black Hole?

AIG is to date the most expensive corporate bailout in American history, requiring $180 billion in government funds. But it may soon have competition. Last week mortgage giant Freddie Mac said it had lost $50 billion in 2008 alone. A look at the company's books suggests the government will have to spend at least triple that much to save the financial firm from collapse. If the housing market worsens, the tab could be even larger.

"Freddie's portfolio of [mortgage] insurance is more risky than the market was led to believe," says Paul Miller, an analyst at FBR Capital Markets. Sister company Fannie Mae lost even more last year, with $58.7 billion of red ink. But Fannie was better capitalized than Freddie going into the credit crunch. So even though Freddie by many measures is smaller than Fannie, the problems at Freddie will probably end up costing more.

In the cases of Freddie Mac and Fannie Mae there is no question where the money will come from as Freddie and Fannie were taken over by the government and put into conservatorship last fall.

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