Bailed-out insurer AIG again found itself in the crosshairs of bonus rage on Friday over its plans to pay $2.4 million in executive bonuses next week.
But the larger issue is how AIG will deal with its obligation to pay roughly $235 million still owed to employees of its crippled financial products division.
The contentious issue of the bonuses resurfaced late Thursday after The Washington Post reported that AIG was seeking the government’s consent to make a scheduled performance bonus payment of $2.4 million to 43 of its top-ranking executives.
But there’s still the $235 million in retention bonuses owed to about 400 employees of AIG’s Financial Products (FP) division that the company has to deal with. Public furor erupted in March when it was revealed that AIG had paid out $165 million of retention bonuses to those employees.
AIG put the issue before Kenneth Feinberg, the Obama administration’s pay czar. Feinberg is tasked with reviewing bonuses and retirement packages for the 100 highest-paid executives at AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), General Motors, GMAC, Chrysler and the now defunct Chrysler Financial.
A source close to the matter said Feinberg will be reviewing both the $2.4 million, as well as the much more controversial $235 million that is scheduled to be paid out to AIG-FP employees next year.
AIG-FP is the division that wrote insurance contracts on shaky derivatives that were at the root of the company’s near-collapse. In September, the government bailed out AIG with funds now worth up to $182 billion.
The $165 million of bonus payments in March was the second installment of a larger, $454 million retention plan for the FP employees. The first — $50 million — was made in 2008, before the company was bailed out by the government.
After the uproar in March, FP employees returned about a third of their bonuses, and a dozen workers resigned. The reaction from the public and Congress consumed AIG, Treasury and Federal Reserve officials, and called into question what to do with the last payment that is scheduled to go out in 2010.
Feinberg only has to review payments that were contracted beginning in 2009, so the $235 million in FP payments — contracted in 2008 — do not officially fall under his purview. Still, a source close to the matter said that AIG wants Feinberg to take a look at those bonuses to make sure the government is completely comfortable with the company’s compensation plan.
Feinberg was also asked to review the $2 cashadvance.4 million in performance bonuses set to be paid out to 43 of AIG’s top executives. That is part of a larger bonus pool of $121 million, the vast majority of which was paid out in March to the company’s most senior executives.
But with pressure mounting from Congress and the Obama administration, AIG restructured its bonus payments for the top 50 executives. The top seven AIG executives opted to forgo their bonuses. The other 43, set to receive $9.6 million in March, took home only half — $4.8 million — in March, and are set to receive $2.4 million July 15 and another $2.4 million Sept. 15.
Experts say asking Feinberg to review the bonuses takes the pressure off of AIG and turns Feinberg into a punching bag for criticism. Outgoing AIG Chief Executive Edward Liddy has said on many occasions that the public outrage about the bonuses has limited the company’s ability to move forward with its plan to repay the government.
"If you have the government OK the plan, it makes AIG look less like they’re flushing taxpayer money down the toilet," said Julie Grandstaff, managing director of insurance consultant StanCorp Investment Advisers. "There’s no way the poor guy who is reviewing all of this can win."
A Treasury spokesman would not comment directly on AIG’s bonuses, but suggested Feinberg can review those payments and the FP bonuses if he chooses, even though they were contracted in 2008, saying, "Mr. Feinberg has broad authority to make sure that compensation at those [seven] firms strikes an appropriate balance."
"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives," the spokesman added.
AIG declined to comment for this article.
Prof. Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the bailout, told CNNMoney.com that AIG’s lack of comment spoke to a larger disconnect between the insurer and the American public.
"If they’re not commenting, that makes me very nervous, because what I would like to hear is ‘no, that report is a mistake,’" Warren said. "Taxpayers are under enormous stress. There’s going to be trouble over this."
– CNNMoney.com senior writer Jennifer Liberto and anchor Poppy Harlow contributed to this report.
The Big Easy is making a big comeback. New Orleans has steadily won back some of the population it lost in the wake of Hurricane Katrina in 2005, according to a government report released Wednesday.
New Orleans lost more than half its residents during the deluge. Few large U.S. cities have ever had to cope with a disaster on that scale. Since then, it has been one of the country’s fastest growing cities.
Only a couple of instances can compare. Galveston, Texas, was also devastated by a hurricane in 1900, a storm that remains the most lethal natural disaster in U.S. history with a toll of about 6,000 deaths. And San Francisco was almost leveled by the earthquake and fire of 1906.
New Orleans is now growing rapidly. Its population is up 8.2% in the 12 months that ended July 1, 2008, gaining 23,740 people to 311,853, according to the Census Bureau. That still leaves it well below its pre-storm population of 484,674.
For sheer numerical increase, New York City trumped the birthplace of jazz. During the same 12-month period, Gotham added nearly 53,500 residents, more than any other city. That represented a growth rate of only 0.6%.
Following New York City were Phoenix, which added 33,184 residents (2.1%) to a total of 1,567,924, and Houston, up 33,063 to 2,242,193 (1.5%).
The top percentage winners, after New Orleans, were Round Rock, Texas, part of the Austin metropolitan area, which grew by 8.2% to 104,446; Cary, N.C., which gained 6.9% to 129,545; and Gilbert, Ariz., which swelled by 5% to 216,449.
New York retained its position as the largest U.S. city by far. Its nearly 8.4 million folks crammed into 303 square miles is more than twice the number of people who live in sprawling Los Angeles, the nation’s second biggest city with 3,833,995 people.
Chicago, once the nation’s second city, has fallen nearly a million behind Los Angeles with 2,853,114.
Most old Midwestern and Northeastern cities have shrunk in population since World War II as heavy industry waned in importance to the overall economy online payday loans. Much of the growth in these areas occurred in suburban towns and were not counted in central city population figures.
Meanwhile, many Sun Belt towns exploded with growth as job opportunities in new technology industries proliferated. Northerners, including retirees, also moved south and west, lured by the warmer winters and relaxed life styles.
Among old-line cities, New York has been one of the few to buck this trend. In the years since the last census in 2000, it has gained 355,056 residents, a substantial gain and more than the total number of people who live in St. Louis.
The highest rate of growth since 2000 was reported by McKinney, Texas, which more than doubled to 121,211 from 54,369. Gilbert, Ariz., was second with an 88.7% jump to 216,449.
Few losers
Of the 25 largest cities, only a handful experienced population loss.
Detroit, suffering from the turmoil in the auto industry, fell 0.5% to 912,062. The population of Philadelphia dipped slightly to 1,447,395 from 1.446,631. Baltimore dropped 0.5% to 636,919 and Memphis fell at about the same percentage rate to 660,651.
There have been some changes this year to the 25 largest cities.
For one thing, Denver moved into 24th place with 598,707 residents. It replaced Nashville, which dropped out of the top 25.
In addition, Dallas (1,279,910) edged past San Diego (1,279,329) to eighth place from ninth. San Francisco also moved up to 12th place; its population (808,976) surpassed Jacksonville (807,815).
And Austin (757,688) blew past Columbus (754,885) to 15th. Charlotte (687,456) leapfrogged Memphis (669,651) to 18th and El Paso (613,190) passed Boston (609,023) to 21st.
A federal appeals court upheld a 2-year-old ban on Monsanto Co.’s genetically modified alfalfa in a case a biotech food opponent calls a "turning point" in the regulation of such crops.
The ruling by the 9th U.S. Circuit Court of Appeals on Wednesday leaves Creve Coeur-based Monsanto with two options. It can appeal the case to the U.S. Supreme Court or hope for regulatory approval after the Agriculture Department completes a comprehensive environmental review.
"The ruling is disappointing, both to our company and the growers," said Garrett Kasper, a Monsanto spokesman.
However, Monsanto said a dissenting opinion by one of the three judges provides a "sound argument" if the case is appealed to the Supreme Court.
Monsanto got regulatory approval for biotech alfalfa in 2005. A year later, two alfalfa-seed farms and a coalition of environmental groups sued the government, challenging the decision to approve the crop without
requiring an environmental impact statement.
The groups cited concerns that conventional and organic alfalfa could be contaminated through cross-pollination, preventing crops from being sold. They also claimed biotech crops have led to overuse of herbicides and given rise to "super weeds" resistant to glyphosate, the active ingredient in Roundup.
A U.S. District Judge in San Francisco issued an injunction that banned the planting of biotech alfalfa after March 30, 2007. By then, more than 260,000 acres of the Roundup Ready alfalfa had been planted payday loans in one hour.
Monsanto intervened on the government’s behalf after the injunction, joined by Forage Genetics Inc., an alfalfa breeder that licensed the technology.
Nationwide, 23 million acres are devoted to growing alfalfa, most of which is used as animal feed.
But biotech opponents say the case is much broader because it marks the first time a thorough environmental review has been required for regulatory approval of a genetically modified crop.
Such a study will help regulators and the public understand any risks associated with crops that are genetically engineered to help farmers ward off weeds and pests, they say.
"This is a major victory for the public, for farmers and for the environment," said George Kimbrell, staff attorney for the Washington-based Center for Food Safety, a plaintiff in the case.
A draft copy of the environmental study on genetically modified alfalfa is expected later this year, according to the Agriculture Department. That will be followed by a public comment period and a final report.
Monsanto is still hopeful for government approval of Roundup Ready alfalfa and believes the results of the environmental impact statement could help with future reviews of new biotech crops.
Meanwhile, a lawsuit challenging the government’s approval of Monsanto’s Roundup Ready sugar beets is pending.
General Motors Corp said on Wednesday that a crucial bond exchange proposal failed to gain enough support and that its board of directors would meet to review the automaker’s options, clearing the path for what would be the largest U.S. industrial bankruptcy ever.
GM said in a statement that an offer to exchange $27 billion in bond debt for a 10 percent stake in a reorganized company by a midnight deadline had fallen far short of its debt reduction target set in consultation with the Obama administration.
The company said in a release that “substantially less” than the 90 percent threshold had been tendered and none of the exchange offers would be accepted.
The exchange had been seen as GM’s last hope to cut debt outside the kind of government-financed bankruptcy that has been underway for its smaller rival Chrysler since the end of April.
The automaker’s board could meet as soon as Wednesday to review options for the automaker, which has been kept in operation since the start of the year with $19.4 billion in emergency federal loans, representatives said.
GM’s bond exchange offer had been dogged by criticism since it was launched a month ago that it was an unfairly low payout made at the direction of U.S. officials more sympathetic to the competing claims of GM’s unionized workers and retirees.
GM shares, which could be worthless if the automaker files for bankruptcy, were down 10 percent at $1.29 in premarket trading. The shares have traded in a 52-week range of $18.18 to $1.00.
BLAME THE BONDHOLDERS?
Analysts said GM’s bondholders had tipped the company toward a near-certain bankruptcy that would rank as one of the largest and most complex reorganizations in U fastcash.S. history.
“I think the exchange offer was really a transparent attempt to blame bondholders for the bankruptcy rather than to accept responsibility for years of mismanagement and failure to anticipate things that should have been understood,” said Richard Tilton, a restructuring analyst at Covenant Review.
“I think the task force made that hurdle so high, they wanted them to go into bankruptcy. They see that as the solution,” independent auto industry analyst Erich Merkle said on Tuesday.
GM is widely expected to file for bankruptcy by June 1, the deadline set by President Barack Obama for the company to demonstrate its viability or seek refuge in bankruptcy court.
“GM today stands at the very brink of bankruptcy,” the United Auto Workers said in a document released on Tuesday that detailed terms for the sweeping concession agreement now before rank-and-file members for votes Wednesday and Thursday.
Ratification, which is widely expected, is a priority of the Obama administration’s autos task force, which wants GM to sew up big-ticket cost-cutting and other deals and demonstrate stakeholder unity ahead of any Chapter 11 filing.
Any major changes in the ownership structure of a new GM appeared unlikely as the government is ready to increase its planned stake — and its risk — from 50 percent to as much as 70 percent in order to further cut the company’s debt, the Wall Street Journal said on Tuesday.
U.S. consumer spending will falter after a first-quarter spurt and recover only gradually toward the end of the year, a monthly Bloomberg News survey showed.
Purchases will drop at a 0.5 percent pace from April to June and grow at an average 0.9 percent rate the next six months, according to the median of 51 projections in a survey taken from March 30 to April 8. The estimated 0.5 percent first- quarter gain would break the longest slide since 1991.
Soaring unemployment and tattered household finances are forcing Americans to pay off debt and save more, preventing the economy from gaining traction. What’s shaping up to be the worst global recession in the postwar era means companies are also cutting back and foreigners are buying fewer U.S.-made goods.
“We are going to have an economic recovery, but it won’t feel like one most of us are used to,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “The positive consumer numbers are being offset by a little weaker business investment and a lot weaker numbers on exports.”
Unemployment will end the year at 9.5 percent, a percentage point more than last month’s 25-year high of 8.5 percent, according to the survey median. Employers cut payrolls by 663,000 workers last month, and 5.1 million Americans have lost their jobs since the recession began in December 2007, the Labor Department reported last week.
Subdued spending will constrain the economy for much of the year. Gross domestic product fell at a 5 percent annual pace last quarter and will drop at a 2 percent rate in the following three months, according to the survey. The economy will then grow at a 0.4 percent pace in the third quarter, and only improve at a 1.5 percent rate in the last three months of 2009.
Worst Since 1946
For the entire year, the world’s largest economy is projected to shrink 2.5 percent, the same as estimated last month and the worst performance since 1946.
“We’re ever so slowly climbing out of the depths of an extremely deep recession,” said Richard Yamarone, chief economist at Argus Research in New York. “You have stimulus in the pipeline and energy prices that are not restrictive.”
A gallon of regular gasoline at the pump has averaged $1.90 so far this year, down from a record $4 cheap credit report.11 in July 2008, according to AAA, the nation’s biggest motoring association. The drop has given consumers extra cash even as the loss of jobs causes incomes to soften.
Lots of Stimulus
President Barack Obama signed into law a $787 billion stimulus plan on Feb. 17 that included tax cuts and spending on infrastructure projects that he pledged will create or save 3.5 million jobs. The Treasury Department is also moving to repair the damaged financial system and lower record foreclosures, while the Federal Reserve is flooding markets with cash to boost borrowing and spending.
Fed Chairman Ben S. Bernanke last month said unemployment could top 10 percent in a worst-case scenario. Job cuts are spreading from manufacturers such as General Motors Corp. and Caterpillar Inc. to health-care operators and state and federal agencies. The central bank has brought its key lending rate close to zero and is buying Treasuries to push down borrowing costs and boost purchases of houses and cars.
Lower interest rates on mortgages and business loans led Bernanke to tell CBS Corp.’s “60 Minutes” on March 15 that he sees “green shoots” in some financial markets, and that the pace of economic decline “will begin to moderate.”
The threat of deflation, or an extended drop in prices, will lessen as the economy begins to grow again. Consumer prices will rise 1.2 percent this year, according to forecasts, after being almost stagnant in recent months.
Lid on Prices
Wal-Mart Stores Inc. is among merchants keeping inflation low. The world’s biggest retailer plans to sell more than 80 new products, including thin-crust pizza, under its store brand to draw in bargain hunters.
Some economists fear the surge in government spending and the trillions of dollars the Fed has pumped into financial markets will eventually cause prices to flare.
“Right now, it is too early to worry about inflation,” said Wachovia’s Silvia. “I am concerned longer term. Both Obama and Bernanke are going to be severely challenged to pull all this stimulus in once the economy starts to fully recover in the middle of 2010 and early 2011.”
The U.S. unemployment rate jumped in March to the highest level since 1983 and service industries shrank at a faster pace, indicating the economy remains trapped in what’s likely to be the longest recession since the 1930s.
Federal Reserve Vice Chairman Donald Kohn said both the Obama administration and central bank must remain “flexible and open” to further measures because the economy and financial markets aren’t “out of the woods yet.” The labor-market rout will make it tougher for President Barack Obama to follow through on his pledge to save or create 3.5 million jobs.
The economy lost 663,000 jobs in March, bringing losses since the slump began to about 5.1 million, the worst in the postwar era, Labor Department figures showed in Washington. The 8.5 percent jobless rate was consistent with the forecasts of 79 economists surveyed by Bloomberg News. The Institute of Supply Management’s non-manufacturing index unexpectedly dropped.
“We could continue to see a few more months of really bad employment numbers before it starts to ease,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. Behravesh projected the jobless rate will peak between 10 percent and 10.5 percent in early 2010. “We aren’t there yet, but we are getting closer to a bottom,” he said.
Treasuries, Stocks
Treasuries slumped after the jobs report was no worse than what economists had forecast, with benchmark 10-year note yields rising as 2.84 percent at 11:42 a.m. in New York, up from 2.77 percent late yesterday. The Standard & Poor’s 500 Stock Index fell 0.3 percent to 831.82.
Job cuts have been spreading from manufacturers such as Johnson Controls Inc. and Dana Holding Corp. to service providers like International Business Machines Corp. and even the U.S. Postal Service.
In addition to cutting jobs, companies also reduced hours for those still on payrolls. The average number of hours worked fell to 33.2 per week, down six minutes from February and the fewest since records began in 1964.
Revisions subtracted 86,000 workers from January payrolls while February’s drop of 651,000 was not revised.
The last time the unemployment rate was at 8.5 percent was in November 1983, when the economy was recovering from the 1981- 82 recession that pushed the rate to almost 11 percent. Then Fed Chairman Paul Volcker boosted interest rates to quell soaring inflation following the 1970s fuel crisis.
Payroll Forecast
Payrolls were forecast to drop by 660,000, according to the median of 80 economists surveyed by Bloomberg News. Estimates ranged from losses of 525,000 to 750,000. Forecasts for the jobless rate ranged from 8.2 percent to 8.7 percent.
“The hope and expectation is that things will get a little less dire in the second quarter as various stimulus efforts kick in,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc classic car insurance. in New York, who used to work at the Fed.
Today’s report showed factory payrolls fell by 161,000 after declining 169,000 in the prior month. Economists forecast a drop of 160,000. The decrease included a loss of 17,500 jobs in auto manufacturing and parts industries.
The manufacturing slump that began more than a year ago may intensify should General Motors Corp. be forced into bankruptcy, economists said. As many as 1 million additional auto-industry jobs may be lost and unemployment would climb to 11 percent, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.
Auto Slump
The auto slump has already rippled through the industry. Johnson Controls, a maker of car interiors and batteries, said last month it will shut 10 factories and cut about 4,000 jobs. Dana, the truck-axle manufacturer that exited bankruptcy in 2008, said it will boost its payroll reduction to 5,800 this year, 800 more than previously announced.
“We are taking the difficult actions necessary to survive,” Dana’s Chief Executive Officer John Devine said in a March 16 statement.
Service industries, which include banks, insurance companies, restaurants and retailers, cut 358,000 workers after a 366,000 decline in February. Financial firms cut payrolls by 43,000, after a 44,000 decrease the prior month. Retail payrolls decreased by 47,800 after a 50,800 drop.
The ISM’s services index, which covers almost 90 percent of the economy, fell to 40.8, the lowest level of the year, from 41.6 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.
The measure was projected to increase to 42, according to the median forecast in a Bloomberg News survey of 67 economists. Estimates ranged from 38 to 45.
Fewer Orders
The ISM index of new orders fell to 38.8 from 40.7 the prior month, and its gauge of employment dropped to 32.3 from 37.3.
For many Americans, this employment slump has been an unfamiliar experience. Sarah Opple, 42, was fired in February from a sales position at Gaylord Hotels in Chicago after holding a series of jobs in the hospitality industry since she was 17 years old. “It’s more real to me now,” she said in a March 26 interview. “This recession is way more tangible than the others. It makes everyone feel they could be next.”
Since taking office Jan. 20, Obama has enacted a series of measures aimed at stemming the recession. He signed into law a $787 billion stimulus plan on Feb. 17 that included spending on infrastructure projects to boost hiring.
The Treasury Department is also moving to repair the damaged financial system and lower record foreclosures, while the Fed is flooding markets with cash to boost borrowing and spending.
The Federal Reserve has taken the primary role in determining how much new capital the nation’s biggest banks need to weather the economic slump, people familiar with the matter said.
Putting the Fed in charge may help ease concern that different assessments by different agencies would lead to some firms being judged less strictly than others. Treasury Secretary Timothy Geithner has said he anticipates the results, due at the end of April, will result in “large” capital needs for some companies, offering investors a way of differentiating between weaker and stronger lenders.
Fed examiners are deployed alongside counterparts from three other agencies that oversee parts of the 19 banks that are involved in the so-called stress tests.
“You could argue this is a systemic risk issue and it is good to have another regulator step in and assert a uniform set of standards,” said Kevin Fitzsimmons, analyst at Sandler O’Neill & Partners LP in New York, and a former bank examiner at the Federal Reserve Bank of Boston. “The Fed has its hands on every institution that is a holding company.”
All 19 of the firms under scrutiny, from American Express Co. and GMAC LLC to SunTrust Banks Inc. and Citigroup Inc., are bank holding companies, giving the Fed an overarching role.
‘Consistency’ of Tests
Geithner unveiled the stress tests on Feb. 10. They were billed as a comprehensive set of standards for the financial system’s most important banks, regardless of their regulator. He stressed “consistency” and “realism” in congressional hearings that week.
While U.S. regulators don’t intend to publish the details of their stress tests, the results will effectively become known once it is determined how much capital each bank is required to raise. Under the terms of the February plan, firms will be given six months to raise the funds either from private investors or the government.
The tests are designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets, which have hampered lending to consumers and businesses. Officials aim to have the first purchases of the toxic assets by private investors financed by the government within weeks of the conclusion of the capital-need assessments.
“Banks are going to have an incentive” to sell their devalued assets because they want to “go raise private capital from the markets,” Geithner said in an interview with NBC’s “Meet the Press” March 29.
Price of Assets
Still, it’s unclear whether most of the big banks will be willing to sell loans and securities at prices that may be below the current valuations on their balance sheets.
Bank of America Corp. Chief Executive Officer Kenneth Lewis said in a Bloomberg Television interview March 27 that the pricing of the assets is “going to be the key” determinant of his bank’s participation online cash advance.
Citigroup CEO Vikram Pandit told reporters after a group of bank chief executives met with President Barack Obama March 27 that “we want to do whatever it takes” and work with officials “to promote a recovery.”
All of the 19 banks are bank or financial holding companies, according to the Federal Deposit Insurance Corp.’s Web site. Some of them have units overseen by the FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision.
OCC spokesman Kevin Mukri referred to prior Treasury statements noting that federal supervisors would coordinate in the tests.
OTS Ouster
Geithner removed OTS Acting Director Scott Polakoff last week amid concern about how the agency handled accounting for capital raised by banks it oversaw. John Bowman, the deputy director and chief counsel, was named acting director, becoming the third OTS chief so far this year.
The OTS failed to uncover “unsafe and unsound” practices at Pasadena, California-based IndyMac Bancorp Inc., an audit concluded last month. The Treasury’s inspector general disclosed on Jan. 30 that the OTS permitted IndyMac and four other unidentified lenders to improperly backdate a capital infusion, which helped them avoid regulatory restrictions.
“If these stress tests are going to be meaningful, as they should be, then banks are going to require more capital,” Patrick Cave, a former Treasury official who is now chief executive officer of Cypress Group LLC, said in an interview on Bloomberg Television. He added that the administration is right to pursue a “tough love” approach to any further assistance.
Economic Projections
Regulators’ assessments are based on two scenarios for the economy. The “baseline” forecast projected a 2 percent economic contraction and an 8.4 percent jobless rate in 2009, followed by 2.1 percent growth and 8.8 percent unemployment in 2010.
The “alternative more adverse” scenario had a 3.3 percent contraction in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth and 10.3 percent jobless in 2010.
The Treasury estimates it has about $135 billion left in the $700 billion financial-rescue fund enacted in October. Banks who already received government funding also could get a capital boost if the Treasury agrees to convert its preferred shares into common equity. Obama administration officials haven’t said when they may need more rescue money and ask for congressional authorization.
St. Louis bankers are a sour lot these days. Profits are down. More borrowers can’t pay their debts. Bank stocks are as popular as hay fever during the first week of spring.
But amid the gloom, bankers are seeing glimmers of hope that the economic slump in St. Louis may be nearing the bottom. And once the recession passes, they’re counting on a return to a more financially conservative era, in which both bankers and their customers will be tighter with a buck.
"A lot of things, albeit small things, are showing signs of life" said Robert Witterschein, president of Southwest Bank. "People are starting to feel a little bit better. I’m thinking maybe the worst was the fourth quarter."
Local banks largely avoided major investments in subprime mortgage securities, which morphed into toxic waste on bank balance sheets. Still, they have seen rising foreclosures, even among prime mortgages. Several banks also took hits on loans to bankrupt developers. Other borrowers have weakened as well.
Now, bankers are detecting some stirring amid the housing wreckage.
Bottom fishers are appearing, an early sign of revival. On the suburban fringes, investors are buying new but unsold houses in bulk from distressed developers.
Such purchases are on the low end of the market, among houses selling for about $120,000, says Peter Benoist, chief executive of Enterprise Financial, parent of Enterprise Bank & Trust in Clayton.
The investors may be counting on a new $8,000 federal credit for first-time homebuyers to boost sales.
Several developers went broke over the past year when they could no longer keep up the payments on land they purchased for development. Now, a few builders are starting to shop for lots again, said Benoist, whose bank specializes in serving small and mid-size businesses.
These are "early, early, early" signs that a bottom may be near for the local economy, Benoist says.
Industrial companies in St. Louis seem to be holding up better than expected, bankers say. They cut back sharply on production last fall, which is helping them wait out the slump.
DROPPING PROFITS
After an awful year, bankers are anxious for any sign of improvement. Of the 25 largest banks operating in St. Louis, 20 saw their profits drop last year as more borrowers defaulted.
Seven banks lost money. The losers include big super-regionals based elsewhere, such as Regions Bank of Alabama and National City of Cleveland, which is being taken over by PNC Financial of Pittsburgh.
Among St. Louis-based banks, First Banks lost $241 million, largely through misadventures in California residential real estate. The bank had to be shored up with capital injections from the federal government and from its owners, the Jim Dierberg family.
Other banks with losses included Truman, Southern Commercial, St. Louis and Premier banks. Truman bank has signed an agreement with regulators calling for improvements in management and capital. Tiny Westbridge Bank was slapped with a more serious "cease and desist" order from regulators.
Among the Top 25, only five banks managed to make more money last year than in 2007. They were First National, Reliance, Midwest Bank Center, Carrollton Bank and Kansas City-based UMB.
All St. Louis-based banks remain "well capitalized" under federal guidelines, says Julie Stackhouse, a senior vice president in charge of banking supervision at the Federal Reserve Bank of St paperless payday loans. Louis. That means they are in no immediate danger of failure.
Still, she suspects that a few smaller banks might not survive the recession. About 140 banks now operate in St. Louis.
Small banks are under extra pressure from rising FDIC insurance rates, says Stackhouse, and they may try to team up with bigger partners.
Banks here are working through problems in the housing market, says Stackhouse.
But now local bankers are facing the other problems that come with a recession: Job losses and worried consumers lead to slower retail sales, which spills over into losses for commercial real estate operators.
Many analysts think that commercial real estate loans will be the next domino to fall for bankers, followed by rising credit card defaults.
The office market in St. Louis was never overbuilt, but shopping centers are "suffering greatly," says Benoist, of Enterprise Bank.
RETURN TO OLD MODEL
When the slump finally ends, the banking business will be headed back to the future.
"The world of banking will look like the world of banking 10 years ago," says Joe Stieven of Stieven Capital Advisors, and the dean of St. Louis bank analysts. "That was before Wall Street and the shadow banking system let the credit genie out of the bottle."
It was before Congress tore down the Depression-era wall that separated commercial banking from investment banking, letting giants such as Citigroup entangle themselves in capital markets around the world.
It was before the major explosion of loan securitization, in which piles of real estate loans and consumer debt were wrapped into bonds and traded. This let the people who made the loans pass the credit risk to other investors, who had no reliable way to tell if borrowers could pay their debts.
LOANS MADE THE
old-fashioned way
Securitization won’t go away. Before the crunch, that business provided nearly half the credit for consumers and business.
The expectation is that the market for prime securitized loans will recover. But the market for subprime loans — on houses, cars, credit cards — will remain buried, leaving less credit for those down on their luck.
The shadow banking system — a crowd of Wall Street firms, insurance companies and other non-bank lenders — will rise again, but it won’t be as big as in the past, bankers and analysts say. More loans will be made the old fashioned way — by banks that know their borrowers and keep their paper.
"The traditional banking system’s importance will increase, and actually that’s healthy," Stieven said. "Here in St. Louis, we want bankers to be funding good sound projects and saying no to unsound projects."
Banks will make fewer loans, but better ones, bankers say.
"Historically after recessions, banks will be more conservative. But probably not as conservative as they’re being right now," said Rick Bagy, president of First National Bank in Clayton.
jgallagher@post-dispatch.com | 314-340-8390
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BOSTON — Jeff Auxier plowed all his retirement savings into Auxier Focus Fund when he launched it nearly a decade ago. He also vowed to never sell any of his initial $1 million investment.
That pledge has paid off. Through last year, his nest egg — along with his initial clients’ stake — has grown 47 percent. And Auxier has made additional investments along the way.
But the 49-year-old’s commitment has become tougher to uphold lately. His $80 million large-blend mutual fund lost nearly 25 percent last year but still ranked in the top quartile of its category, thanks to some investments in recession-resistant stocks like Wal-Mart Stores. The downturn reduced what had been a $2.2 million investment at its peak to $1.6 million. This year, the fund is down another 9 percent.
With retirement decades away, Auxier still has no plans to reduce his stake. He says he couldn’t face up to his investors if he didn’t stick with it.
"There has to be a hook, where they can feel like, ‘OK, this manager has got skin in the game, they’re going to pay attention to my money because they’ve got money in there, too,’" Auxier said.
But managers like Auxier who "eat their own cooking" — the industry expression for managers who invest in their own funds — aren’t necessarily the rule.
Fifty-four percent of U.S. stock funds reported their managers held ownership stakes, according to research by Morningstar Inc. that examined disclosures through Oct. 1. That means nearly half the funds’ managers hadn’t invested as much as a single dollar.
Manager ownership is less common in other fund categories: 41 percent of foreign stock funds reported manager ownership, with 35 percent for taxable-bond funds; 30 percent for funds with a mix of stocks and bonds; and 22 percent for municipal bond funds.
To learn whether fund managers are joining them for the bumpy ride, investors may want to pay more attention to fund annual reports due out around this time of year, and documents called Statements of Additional Information that may accompany fund prospectuses. Some reports will trumpet the fact that a fund manager is personally invested, and the additional statements disclose how much a manager invests.
Russel Kinnel, director of Morningstar’s mutual fund research, will be watching to see how many managers lately have maintained or increased their stakes, and how many jumped a sinking ship.
"It’s more important in a difficult time that you step up and have a major commitment to your fund," Kinnel said payday loans guaranteed no fax.
But Kinnel, an "eat your own cooking" advocate, advises investors shouldn’t put a manager’s level of personal investment ahead of other more important factors in making buy-or-sell decisions in funds. Considerations such as expense levels, long-term performance and manager experience rank higher.
Manager investment "doesn’t guarantee a manager won’t make a mistake; it’s more about a manager aligning their interests with yours," Kinnel said.
A manager of a fund that could be a core holding — one that’s broadly diversified in stocks designed to perform well over the long haul — should be expected to invest at least $500,000, Kinnel says, and ideally $1 million or more.
For more volatile niche funds designed to supplement core holdings, Kinnel suggests a manager hold at least $100,000.
There are exceptions: A manager of a fund investing in a single state’s municipal bonds shouldn’t be expected to invest if he doesn’t live in that state. That’s because such funds’ tax benefits only apply to residents.
Even considering such exceptions, Lipper Inc. fund analyst Jeff Tjornehoj argues it’s tough for most investors to decide how much investment is appropriate for a manager.
For example, factors such as age are worth considering, Tjornehoj said. An investor close to retirement may have less of a stomach for volatility than a young manager who can withstand ups and downs.
While Tjornehoj considers it a plus if managers invest in their funds, that factor "comes way down on the list of importance in a buying or selling decision," he said.
Still, it doesn’t hurt to know whether a fund manager feels your pain amid declining markets. Investors can find ownership information from a fund company’s website. Look for a fund’s Statement of Additional Information and search for a manager’s name to learn about their stake. The SEC and Morningstar also post such information at the following addresses: www.sec.gov/edgar/searchedgar/mutualsearch.htm and www.morningstar.com/goto/fundspy
Even then, you won’t find specific dollar figures. The SEC only requires funds to report whether managers’ stakes fall within one of seven ranges.
Bankruptcy filings rose 30% during the government’s 2008 fiscal year, which ended Sept. 30, according to figures released Monday by the Administrative Office of the U.S. Courts.
Total bankruptcy filings increased by 241,724 cases, or 30%, to 1.04 million in the 12 months between Oct. 1, 2007, and Sept. 30, 2008.
For the three months ended Sept. 30, total bankruptcies rose nearly 34% to 292,291, up from 218,909 in the same period last year. Fiscal fourth-quarter filings were up 60% from 182,973 in the previous quarter.
Non-business filings totaled just over 1 million for the year, up 30% from the 775,344 non-business filings in fiscal 2007. Business filings rose 49% to 38,651, up from 25,925 business filings in the previous 12-month period.
"The dramatic spike in both personal and business bankruptcies reflects an economy in distress," Samuel Gerdano, executive director of the American Bankruptcy Institution, said in a written statement.
Still, the 1.04 million filings for the 12 months ended in September are fewer than the 1.12 million filings the government fielded two years ago, for the 12 months ended in September 2006.
Bankruptcy filings surged in 2006 as businesses and individuals raced to file before the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 payday loans with no faxing.
Total filings dropped nearly 28% in fiscal 2007 as the 2005 act, which made it harder for individuals to receive Chapter 7 bankruptcy protection, went into effect. But this year’s tough financial environment ratcheted filings back up: Chapter 7 filings rose 40% to 679,982 in the 12 months that ended Sept. 30.
Chapter 7 bankruptcy is designed to give individual debtors a "fresh start" by discharging many of their debts. Under Chapter 7, a filer’s assets - minus those exempted by his or her home state - are liquidated and given to the creditors who are first in line for repayment. Any debts that remain are cancelled.
Another type of individual bankruptcy, Chapter 13, requires debtors to pay back their debts over time. Chapter 13 filings rose 14% this year to 353,828, up from 310,802 a year earlier.
Filings for Chapter 11 bankruptcy, which is aimed at assisting struggling corporations or partnerships, rose 40% to 8,799 from 5,888.
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