Federal Reserve Chairman Ben S. Bernanke's latest attempt to alleviate seized-up credit markets marks his most direct effort yet to repair the mortgage meltdown that poses the biggest threat to the economy.
The Fed pledged yesterday to lend, in return for mortgage debt, $200 billion of Treasuries to the securities firms that trade directly with the central bank. Officials told reporters later that the program may escalate from there as the central bank seeks to break the logjam in the home-loan market.
The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash. Bernanke and his colleagues are trying to halt a cycle in which the losses on mortgage investments cause banks to cut their lending, sending the economy into a deeper contraction.
“It is a strong attempt to stabilize a crisis,'' Henry Kaufman, president of Henry Kaufman & Co. in New York and the former chief economist at Salomon Brothers Inc., said in a Bloomberg Radio interview. “It is a further recognition that this credit crisis is deeper and wider, and has been exceedingly opaque, in contrast to earlier credit crises.''
Investors' unwillingness to hold mortgage-backed bonds amid record home foreclosures sent premiums on even Fannie Mae and Freddie Mac guaranteed assets to the highest in 22 years this month. The two government-chartered companies are the biggest sources of U.S. housing finance.
Evening Call
The Fed decided to act when the crisis spread beyond the securities backed by subprime loans, officials said on condition of anonymity. Policy makers gathered by conference call the evening of March 10 and voted to set up the new lending tool, spokeswoman Michelle Smith said in Washington.
“They see residential mortgage securities markets as the linchpin,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets Inc., who used to work at the Richmond Fed bank. “If they can get that normalized, it might resolve some of the other problems.''
Economists at Goldman Sachs Group Inc. and Nomura International Plc questioned how successful the new initiative would prove in easing the credit squeeze. It doesn't improve the solvency of some institutions or encourage looser lending standards, they wrote in reports today.
“We are not convinced that yesterday's move will solve all the multiple challenges facing credit markets and the financial system,'' said Fiona Lake, an economist at Goldman Sachs in London.
Market Reaction
Stocks climbed the most in five years and Treasuries slid after the Fed's announcement. The extra yield investors demand to buy mortgage-backed bonds guaranteed by Fannie Mae instead of 10-year Treasuries narrowed to 2.11 percentage points yesterday, from 2.28 percentage points the day before. The spread has still widened from 1.38 percentage point two months ago.
The spread was at 2.07 percentage points today. The dollar also retreated amid concern credit strains will continue. The U.S. currency fell to a record low of $1.5504 per euro faxless payday advances.
Under the new Term Securities Lending Facility, the Fed will lend Treasuries for 28-day periods in return for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The weekly auctions begin March 27.
More Flexible
Bernanke, 54, has enacted a series of measures to repair the strains in credit markets that erupted in August. Unlike the newest tool, the past steps added cash to the banking system, which affects the Fed's benchmark interest rate. The central bank had to withdraw the funds through operations with securities dealers to keep the rate from falling below the target.
By contrast, the TSLF injects liquidity by lending Treasuries, which doesn't affect the federal funds rate. That leaves the Fed free to address the mortgage crisis directly without concern about adding more cash to the system than it wants. The Fed has about $713 billion of Treasuries.
Direct purchases of mortgage-backed assets, as advocated by some analysts and investors, would affect the price of the securities, going against the Fed's aims, officials said yesterday. They said the goal is to get the market back to regular trading conditions rather than to target a level for spreads.
Discounted Values
Fed officials said they will work with the primary dealers, a group of 20 firms including Goldman Sachs and Merrill Lynch & Co., on setting discounts from face value of the mortgage securities submitted to the Fed.
“The innovation is essentially permitting the primary dealers to swap their illiquid assets for Treasuries,'' said Robert Eisenbeis, former head of research at the Atlanta Fed and chief monetary economist at Cumberland Advisors Inc. “Clearly, this is an attempt to break the logjam.''
Bernanke's first step in August was to reduce the charge on direct Fed loans to banks. He acknowledged later that the effort failed to reduce the “stigma'' surrounding borrowing at the so- called discount window.
The Fed in December introduced the Term Auction Facility, where it lends cash to banks in exchange for a variety of collateral. The central bank last week increased the size of its planned TAF auctions to $100 billion this month from a previously announced $60 billion.
Officials also aim to make $100 billion available through repurchase agreements, where the Fed loans cash to the primary dealers in return for assets including mortgage debt.
Policy makers are “trying to break into the adverse feedback loop'' they have warned about, said John Ryding, chief U.S. economist at Bear Stearns Cos. in New York. The market for mortgage-backed debt is “far and away the most important'' in the credit crisis, he said.
Fed Governor Frederic Mishkin cautioned March 4 about the risk of “an adverse feedback loop whereby financial disruptions cause investment and consumer spending to decline,'' which in turn prompts an even deeper credit rout.
China's inflation accelerated more than estimated to the fastest in 11 years as food prices jumped, adding pressure on the central bank to raise interest rates.
Consumer prices climbed 8.7 percent in February from a year earlier after gaining 7.1 percent in January, the statistics bureau said today. That was faster than the 7.9 percent median forecast of 22 economists surveyed by Bloomberg News.
Food costs soared 23 percent after the worst blizzards in half a century destroyed crops and snarled transport links, causing shortages. China, the biggest contributor to global growth, needs to weigh the threat from surging prices against the risk that rate increases and weakening export demand will trigger a sharp economic slowdown.
“They must raise interest rates big time — at least two to three percentage points this year,'' said Andy Xie, former chief China economist at Morgan Stanley, now in Shanghai.
Six rate increases last year pushed the key one-year lending rate to a nine-year high of 7.47 percent. The deposit rate is 4.14 percent, less than half the pace of inflation.
“We need to stay calm and take effective measures,'' the statistics bureau said in a statement. It will be “more difficult to control full-year inflation'' because of the storms, the bureau said. The government aims to cap price gains at 4.8 percent for 2008.
Stocks Fall
The CSI 300 Index of stocks fell 1.1 percent as of 11:30 a.m. in Shanghai on speculation that a rate increase will dent earnings. The yuan traded at 7.1059 versus the U.S. dollar from 7.1099 before the data was released. The yield on the benchmark 15-year bond rose 1 basis point to 4.17 percent.
Pork prices soared 63 percent from a year earlier, vegetables climbed 46 percent, and edible oil rose 41 percent, adding to the burden on the 300 million people estimated by the World Bank to be living in poverty.
“Food prices make up one third of the consumer price index but for poor households it makes up more than 50 percent of their household budgets,'' said Sherman Chan, a Sydney-based economist with Moody's Economy.com.
In January, the government ordered food companies such as Uni-President Enterprises Corp., an instant-noodle maker, and China Mengniu Dairy Co., a milk producer, to seek approval for any price increases.
Banks' Reserve Requirements
The central bank has pushed banks' reserve requirements to the highest ever to help cool the fastest-growing major economy after an 11.4 percent expansion last year first cash advance. China contributed 20 percent of global growth in 2007, according to an estimate by the International Monetary Fund.
Exports rose 6.5 percent in February, the least in almost six years, illustrating the risk from weakening demand as the global economy slows.
Non-food inflation was 1.6 percent, up from 1.5 percent in January. Excluding food and energy, prices rose 1 percent.
China's leaders may raise rates this week to signal their determination to fight inflation as legislators meet at the National People's Congress, said Ha Jiming, chief economist at China International Capital Corp. in Beijing. The March inflation rate is likely to be slower, Ha said.
Central bank Governor Zhou Xiaochuan said March 6 that there's room for more rate increases, although any decision is complicated by U.S. Federal Reserve cuts and the government's goal of increasing consumer spending.
China's `Weaknesses'
Raising rates when the Fed has cut them risks attracting more overseas investment into a financial system already flooded with cash from export sales. The government needs to tighten controls on inflows of so-called “hot money,'' Li Deshui, the former head of the statistics bureau, said March 8.
Economists are split on whether rate increases will do much to rein in prices.
“A rate hike does not help to increase the supply of food or the supply of pork,'' said Sun Mingchun, an economist with Lehman Brothers Inc in Hong Kong.
Liang Hong, senior economist with Goldman Sachs Group Inc. in Hong Kong, said rapid growth in the money supply was the main cause of inflation.
Gains by the yuan play a role in cooling inflation without being the largest factor, the central bank's Zhou said March 6. The currency has climbed 2.8 percent this year versus the dollar, after a 7 percent increase in 2007.
China's producer-price inflation accelerated to the fastest pace in more than three years in February, adding pressure for consumer prices to keep rising.
Despite Citigroup Inc.’s current troubles, many on Wall Street believe the bank is certainly down, but not for the count.
The Wall Street giant has been pummeled this week by investors and analysts alike after a large shareholder, Dubai International Capital, questioned its ability to survive without another major capital infusion. The stock is now trading at its lowest level in nearly a decade, and analysts are warning that more multi-billion writedowns are on the horizon.
Even after Dubai International backed off Thursday from its previous comments, saying it never expressed an opinion about Citigroup’s (C, Fortune 500) financial condition, shares closed down nearly 4.5 percent at $21.17.
After the closing bell, Citigroup said it is overhauling its residential mortgage business, reducing assets by $45 billion, or 20%, and halving the amount of new loans to be held in portfolio in the next year. It is also tightening underwriting standards and eliminating some higher-risk offerings, such as adjustable-rate subprime mortgages that adjust after two or three years.
This week’s turbulence has led some to wonder what lies ahead for the troubled titan and has renewed calls in some corners for a breakup.
While it’s certainly true the bank is going through tough times right now, it’s not teetering on the edge of collapse, analysts said. It has a strong global presence in growing markets, such as China. Also, its wealth management group, which was reorganized Monday, has contributed significantly to Citigroup’s profit margins.
"The solvency of the company is not the question," said banking analyst Kris Niswander, associate director of research at SNL Financial in Charlottesville, Va. "Citigroup is a strong company."
Citigroup Chief Executive Vikram Pandit said as much in a memo to employees on Wednesday. He reiterated that the bank is financially sound but is reviewing its operations. A spokesman declined to comment beyond the memo.
Pandit’s memo, however, did not ease investors’ concerns about what steps the relatively inexperienced CEO will take next http://payday-faxless.com. Pandit took over in December after his predecessor Charles Prince stepped down because of huge losses from the bank’s subprime portfolio.
"They have a perception problem," said Matt McCormick, bank analyst and portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "They will continue to face pressure until they clean up their act. Until they quantify the risk, I don’t see a lot of people going in aggressively."
Shareholders want to know how Citigroup plans to use the $22 billion in cash infusions it received recently from sovereign wealth funds in Singapore, Kuwait and from other investors, Niswander said.
The credit crisis is far from over for Citigroup and its Wall Street peers. The bank is expected to suffer a big uptick in losses in its consumer division, particularly in its credit card portfolio, when it reports first-quarter earnings on April 18.
"They need to be more concise and clearly state going forward how they will be operating and how they will deploy the capital," he said.
Breaking up the bank isn’t really an option, said Christopher Whalen, managing director of Institutional Risk Analytics in Torrence, Calif. Its institutional division needs the deposit base of the retail side to operate. Citigroup may be forced to put certain assets on the auction block, but it’s not an ideal time to do so because they’ll likely fail to command good prices.
And despite Pandit’s assertion that the bank is well capitalized, analysts say the bank will need even more to handle the downturn in its consumer business.
"They have to raise more money to deal with the real credit losses coming down the pike," Whalen said.
Warehouse club operator Costco Wholesale Corp. says its fiscal second-quarter earnings rose 31% from a year-ago period that was hurt by multiple charges.
The Issaquah, Wash.-based company said early Wednesday net income grew to $327.9 million, or 74 cents per share, from $249.5 million, or 54 cents per share, in a year-ago period which included $53.4 million in charges.
Sales increased 12% to $16.62 billion from $14.80 billion a year ago.
Costco matched the earnings-per-share expectations of analysts polled by Thomson Financial and was just below the consensus revenue prediction of $16.85 billion.
Warehouse club operators like Costco (COST, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500)’ Sam’s Club have seen meaningful sales and margin growth despite a challenging U.S check cash advance. economic backdrop against which many retailers have stumbled.
European finance ministers said they are “increasingly concerned'' the euro's advance to a record against the dollar risks deepening the economic slowdown in the region.
European officials need to be “vigilant, concerned,'' on the euro exchange rate, Luxembourg Finance Minister Jean-Claude Juncker told reporters as he arrived for a meeting of his European counterparts in Brussels today. “It's clear that we look at exchange-rate developments very closely and with some concern,'' Austrian Finance Minister Wilhelm Molterer said.
The euro has risen 16 percent against the dollar in the past year and reached a record $1.5275 yesterday, threatening to damp exports just as the U.S. slowdown dims Europe's economic-growth outlook. The euro's advance may add to pressure on the European Central Bank to cut interest rates even as inflation remains at a 14-year high.
ECB President Jean-Claude Trichet, who initially declined to comment yesterday, turned back to reporters to say that the U.S. government's “strong dollar'' policy is “very important.''
“In the present circumstances, I consider very important what has been affirmed and reaffirmed by the U.S. authorities, including the secretary of the Treasury and the president of the United States of America, according to whom a strong-dollar policy is in the interests of the United States,'' Trichet said.
`Clearly Responding'
“Trichet was clearly responding to the currency overshooting,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. “It's not a signal for intervention or a clear sign for policy easing just yet, but it may fast-track the debate on the ECB's Governing Council about a rate cut.''
The euro traded at $1.5220 at 6:35 p.m. Brussels time, up more than 4 percent this year against the dollar.
“Things are becoming exaggerated,'' ECB governing council member Guy Quaden told Belgian radio today. “It is up to the relevant authorities to assume their responsibilities and particularly for U.S. authorities, who repeat that they are in favor of a strong dollar but who should reaffirm their words.''
“I'm starting to be increasingly concerned and vigilant on the euro,'' Juncker told reporters late yesterday. “What we see at the moment is not so much a problem of a strong euro, but above all, it's a problem of a weak dollar,'' he told Luxembourg's RTL radio today.
`Problem of Connection'
French Finance Minister Christine Lagarde said “there is a psychological threshold; the `$1.50' has a symbolic character.''
The euro rose through that level for the first time last week after ECB Executive Board member Juergen Stark said he's “highly dissatisfied'' with euro-area inflation at a 14-year high and central-bank colleague Axel Weber said traders should shelve bets on ECB rate cuts cash advance loans. The dollar fell further after Federal Reserve Chairman Ben S. Bernanke told Congress on Feb. 28 that the decline is helping to narrow the U.S. trade deficit.
ECB council member Nout Wellink said Feb. 27 that the euro's appreciation to $1.45 hadn't hurt exports and the economy can cope with the higher exchange rate.
Still, Europe's economic expansion is cooling as the U.S. teeters near a recession. Euro-area growth slowed to 0.4 percent in the fourth quarter from 0.7 percent in the previous three months, with consumer spending dropping for the first time in six years, a report today showed.
`Taking Longer'
“This financial turmoil that started last August is taking longer than expected to return to a normal situation,'' Almunia told a press conference after today's meeting. “It's starting to spill over to the real economy. The impact is starting to take a toll on the growth figures.''
Slovenian Finance Minister Andrej Bajuk, who presided over today's meeting as his government holds the EU's rotating presidency, said sovereign wealth funds have helped ease the financial turmoil by injecting capital into banks. The ministers today debated whether to seek stricter controls on the state- owned investment vehicles.
“The EU is committed to maintaining the global investment environment based on the free flow of capital,'' Bajuk said.
Countries including Germany and France have called for regulations to ensure that foreign governments don't use the funds to obtain sensitive technology or interfere in policy. That hasn't been happening, according to advocates of code of conduct rather than legislation.
“Maybe the fears are not well founded,'' Bajuk said.
“Now is the time to act, before protectionist tendencies come to the fore,'' Almunia said. “But of course we are keen to have investment in our economies.''
Genesco Inc. and The Finish Line Inc. are close to a settlement that will dissolve the merger of the two companies.
The companies have jointly requested a one-day delay in the start of the New York solvency trial in anticipation of reaching an agreement among the parties relating to the proposed merger of Finish Line (NASDAQ:FINL) and Nashville-based Genesco (NYSE:GCO) and UBS's financing, according to a press release.
The press release says the terms of the settlement are expect to be as follows:
In June 2007 Genesco Inc. agreed to be acquired by Finish Line for about $1.5 billion in cash.
After a disappointing earnings report in August 2007, Finish Line began to pull out of the deal.
Billionaire Wilbur Ross has agreed to invest up to $1 billion in Assured Guaranty Ltd (AGO.N: Quote, Profile, Research), bypassing big bond insurers such as Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) in favor of a rival that has largely avoided the credit problems plaguing the industry.
Ross agreed to buy $250 million of common shares of Assured Guaranty and committed to purchase up to $750 million in additional stock at the company’s option. Shares of Assured Guaranty, the fifth-largest bond insurer, rose 12.6 percent to close at $25.65 on the New York Stock Exchange.
Assured Guaranty has stayed away from insuring repackaged subprime mortgages and other risky debt since late 2003, while competitors, including Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) guaranteed the securities and are expected to face billions of dollars of payouts in coming years.
Those expected payouts — which increased by some $650 million in January — could cost Ambac its top debt ratings no teletrack payday loans. Banks, regulators and others are working to raise new capital for Ambac, but those discussions are moving more slowly than hoped, people familiar with the matter said.
Ambac said that to preserve capital, it is cutting its dividend to a penny a share, and refraining from insuring repackaged debt for six months.
Because of questions about its ratings, Ambac said on Friday that it is at a “significant” disadvantage to competitors like Assured Guaranty.
Ross told Reuters he chose Assured Guaranty because his capital would be used for winning new business instead of making up for losses.
“The idea of this capital is to reposition the company, not to simply patch a hole,” Ross said in a telephone interview, adding that he was still in conversations with other bond insurers.
European economic confidence fell more than economists forecast in February on concern soaring food and energy costs will keep inflation at record levels even as the euro's strength threatens to slow economic growth.
An index of executive and consumer sentiment in the euro area declined to 100.1, the lowest since November 2005, from 101.7 in January, the European Commission in Brussels said today. Separate reports showed energy and food-price inflation accelerated last month and unemployment stayed at a record low.
Foods including wheat, soybeans and corn as well as crude oil rose to records this month. That has pushed up inflation and prevented the European Central Bank from cutting interest rates at a time when economic growth faces the additional threat of the euro's gains to an all-time high against the dollar.
“With record-high inflation and record-low unemployment, right now the European Central Bank can't afford to be pre- emptive on rates,'' said Marco Valli, an economist at Unicredit MIB in Milan. “However, once it will be clear that the downward trend in business sentiment is not temporary, they will be forced to move.''
Economists had forecast that confidence would fall to 101.2, according to the median of 31 forecasts in a survey by Bloomberg News. The industrial, services and construction components all declined, while the consumer measure was unchanged.
Record $1.5239
The euro slipped 0.1 percent to $1.5180 against the dollar as of 14:26 p.m. in Brussels, having earlier reached a record $1.5239.
Bonds advanced as signs of cooling economic growth spurred demand for the safest assets. The yield on the German 10-year bund, Europe's benchmark, declined 7 basis points to 3.93 percent, leaving it 7 basis points lower this week. Yields move inversely to bond prices.
Europe's economic expansion is cooling as the U.S. teeters near a recession and the euro's strength makes exports less competitive. The European Commission last week cut its forecast for 2008 euro-area growth to 1.8 percent from 2.2 percent. It raised its inflation forecast to 2.6 percent from 2.1 percent, which would be the highest since the euro's debut in 1999.
Higher oil and commodity prices are pushing up inflation and at the same time threatening economic growth by eroding confidence and consumers' spending power. Food-price inflation jumped to 5.4 percent last month, the highest since January 2002, from 4.8 percent in December, the statistics office said, while energy-price growth accelerated to 10.6 percent same day payday loans. Crude oil rose above $103 a barrel for the first time today.
Inflation Accelerated
Overall euro-area inflation accelerated to 3.2 percent from 3.1 percent in December, the highest in 14 years. That matched an initial estimate published on Jan. 31. The core rate of inflation, which excludes energy, food, alcohol and tobacco prices, eased to 1.7 percent from 1.9 percent.
Gains in food commodities have driven up costs for companies including Nestle SA, prompting them to increase prices. CSM NV, the world's largest supplier of ingredients to bakeries, said Feb. 27 that second-half net income fell 58 percent because of higher prices for raw materials and the dollar's drop against the euro.
The decline in the confidence measure in February was led by Italy and Spain, while the French measure also fell, according to today's European Commission report. The index for Germany, Europe's largest economy, rose for the first time in three months. That followed data this week showing German business confidence unexpectedly rose for a second month in February and retail sales increased in January.
Record Low
A separate report today showed that euro-area unemployment held at a record low of 7.1 percent in January, which may support consumer spending and help the economy weather the U.S. slowdown. The December reading was revised from an initial 7.2 percent.
ECB council member Nout Wellink this week said Europe's economy is in “rather good shape,'' while his colleague Axel Weber said investors betting on interest-rate cuts in Europe are underestimating inflation, which will not slow as much as previously forecast.
“The consensus expectation for interest rates on the market at the moment clearly underestimates, in my opinion, the inflation risks,'' Weber said. “In 2009, inflation will not slow as markedly as supposed.''
Weber's comments contrast with those of U.S. Federal Reserve Chairman Ben S. Bernanke, who this week said the Fed will act in a “timely manner'' to combat “downside risks'' to growth.
The ECB in December forecast that 2009 inflation would ease to 1.8 percent, below the central bank's 2 percent ceiling, from 2.5 percent this year. The bank is scheduled to publish new forecasts March 6, when its governing council holds its next meeting on interest rates.
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