The government’s Christmas Eve pledge of unlimited financial aid to mortgage giants Fannie Mae and Freddie Mac is aimed at making sure the housing market doesn’t take another turn for the worse and cause the economic recovery to unravel.
This insurance policy taken out by the Treasury Department will help keep mortgage rates low, and may wind up being a gift of sorts to struggling homeowners and banks. But there’s a catch: the housing crisis is now likely to cost taxpayers much more.
The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion. It also eases restrictions on the size of the companies’ investment portfolios. That’s a reversal of the Bush administration’s September 2008 plan to shrink the size of the companies’ holdings of mortgage-backed securities.
The action, which didn’t need the approval of Congress, could position Fannie and Freddie to get more aggressive in dealing with the housing crisis, perhaps taking troubled mortgage investments off banks’ books.
"They’ve cleared the decks to use Fannie and Freddie as a vessel for whatever they want," says Edward Pinto, a housing consultant who served as Fannie’s chief credit officer in the late 1980s.
The Treasury could also lean harder on Fannie and Freddie to help troubled homeowners avoid foreclosures — and by extension the banks and other investors who own their mortgages.
Many economists and housing experts say an existing $75 billion government program to prevent foreclosures isn’t working fast enough, threatening the emerging signs of home price stability in many cities across the nation.
Boosting the firepower of Fannie and Freddie, which finance three-quarters of all new mortgages, also should help keep rates on home loans low just as the Federal Reserve starts dialing back its separate $1.25 trillion program aimed at doing just that.
That’s good news for the banking industry, which benefited in 2009 from homeowners refinancing their mortgages, says Jason O’Donnell, senior research analyst at Boenning & Scattergood Inc. "This is an initiative that spreads far beyond just Fannie Mae and Freddie Mac," he says.
But the trade-off is that the Treasury will have to cover much more than the $111 billion in losses at Fannie and Freddie it already has funded. Barclays Capital predicts the losses will range from $230 billion to $300 billion.
Both companies provide vital funding for home loans, buying mortgages from lenders, pooling them into bonds and selling them to investors with a guarantee against default.
While they traditionally backed loans to relatively safe buyers, they dramatically lowered their standards during the housing boom, and those loans are now defaulting in higher numbers.
If the administration leans on Fannie and Freddie to expand its foreclosure-prevention program, it would be pricey. If Fannie and Freddie were, hypothetically, to start forgiving a quarter of borrowers’ mortgage debt, that would cost another $125 billion to help 2.5 million to 3 million borrowers, estimates Barclays analyst Ajay Rajadhyaksha.
The Treasury Department says its only motivation is to make sure investors remain confident that Fannie and Freddie can keep doing their jobs of buying the bulk of mortgages made in the U.S. and turning them into investments.
More than 30 leading budget experts on Monday prescribed a course for deficit reduction that the nation needs to take if it wants to "buy some breathing room" to avoid a debt crisis.
In its report "Red Ink Rising," the Peterson-Pew Commission on Budget Reform called on Congress and the White House to commit to stabilizing the public debt to 60% of gross domestic product by 2018. Left unchecked, it’s on track to hit 85% by 2018, and then grow to 100% four years after that. By 2038, it could reach 200%.
To put those numbers in context, just before the economic crisis, public debt stood at 41% of GDP. The public debt — $7.72 trillion as of Dec. 11 - represents the money the United States owes its creditors. It does not include the $4.36 trillion the federal government owes itself because of all the revenue the Treasury has borrowed from federal programs such as Social Security and Medicare over the years.
The concern is that well before the public debt reaches 200% of GDP, fear of inflation — and its twin nemesis, a decline in the dollar — could cause investors to demand a higher return in exchange for buying U.S. Treasurys. And higher rates would make the U.S. debt load that much more onerous because the government is constantly refinancing the debt it already has on the books at whatever the going interest rates are.
To stabilize the debt at 60% of GDP, the commission recommends policymakers negotiate a package of measures in 2010 that would begin to phase in by 2012, assuming the economy has recovered.
"To buy some breathing room, the United States must show its creditors that it is serious about stabilizing the federal debt over a reasonable timeframe. Both spending cuts and tax increases will be necessary," the commission wrote.
The mere act of signaling to creditors that a deficit-reduction plan is in place may have a positive economic effect, the group asserted.
"Improving [creditors’] expectations can lower investor perceptions of risk and thus the premiums that creditors demand for interest rates paid on U.S. assets," the report said.
In order for the plan to be perceived as credible, however, the commission believes there should be an automatic trigger to set in motion spending cuts and tax increases if a debt target set by lawmakers is missed in any given year instant payday loans.
"The goal of an enforcement mechanism is to be punitive enough to cause lawmakers to act but realistic enough that it can be enacted if necessary as a last resort," the commission wrote.
The commission’s members are a bipartisan collection of former directors of the Congressional Budget Office, the White House Office of Management and Budget, as well as former chairmen of the Senate and House Budget Committees and former U.S. Comptrollers General, among others.
Their estimates and suggestions are based on the assumptions that a number of current policies will remain in place. Among the assumptions are that the majority of the Bush-era tax cuts will be extended, that the reach of the alternative minimum tax will be reduced so as not to ensnare middle-income families, and that normal discretionary government spending will grow at the same rate as the economy, rather than inflation.
Easier said than done
The commission acknowledges that reducing U.S. debt levels will be neither quick or easy.
And their suggestions are certain to meet resistance from any number of quarters, including from those who fear Social Security and Medicare benefits will be cut drastically.
The growth in the spending for both of those entitlement programs and for Medicaid are growing faster than the GDP. Deficit hawks say permanent changes need to be made to ensure long-term solvency for the programs and fiscal stability for the federal budget.
"That does not mean, however, that the entire solution has to come from changes to [programs such as Medicare and Social Security] — or spending in general," the commission said. "To the contrary, government health and retirement programs will almost certainly have to grow as a share of the economy because of demographic and technological factors."
The bottom line is the commission believes changes to the entitlement programs are necessary but not sufficient. "We believe the problem is so large that nearly all areas of the budget will be affected," the report said.
Clayton-based Enterprise Bank & Trust has agreed to acquire the assets and deposits of a small Arizona bank that failed on Friday.
Valley Capital Bank in Mesa, Ariz., was closed Friday by state regulators.
The Federal Deposit Insurance Corp. was appointed as receiver. However, the FDIC reached an agreement with Enterprise Bank.
Valley Capital’s single branch in the Phoenix suburb will reopen Monday as a branch of Enterprise.
Enterprise paid the FDIC a 2-percent premium for the right to assume all the deposits of Valley Capital, the FDIC said. Enterprise agreed to purchase "essentially all" of the bank’s failed assets. Full details on the transaction were not available.
Valley Capital Bank had assets of about $40.3 million and total deposits of about $41.3 million as of Sept. 30.
As part of the deal, the FDIC and Enterprise Bank entered a loss-share agreement on about $30 million of Valley Capital’s assets, meaning the FDIC would absorb 80 percent of losses on loans and foreclosed properties.
The acquisition is small compared to Enterprise’s size, which is about $2.5 billion in assets. But it allows the bank to expand in Arizona, where Enterprise already has a loan production office in Phoenix easy payday loans.
Last year, Enterprise applied to open retail banking in Arizona, but the state’s banking regulators curtailed new charter approvals due to troubles in the Arizona real estate market. The bank later withdrew its application.
The deal "allows us now to operate as a full-service bank in Arizona through our new Enterprise Bank & Trust location in Mesa," Peter Benoist, President and CEO of Enterprise Financial Services Corp., the parent of Enterprise Bank, said in a statement. "Also, it enables us to open additional Enterprise locations in the greater Phoenix area, subject to the normal regulatory approvals."
Currently, Enterprise Bank has 11 branches in the St. Louis and Kansas City metro areas.
Besides Valley Capital Bank, the FDIC also on Friday took over Overland Park, Kan.-based SolutionsBank and Miami-based Republic Federal Bank. Those operations were acquired by other banks. The three failures brought the number of FDIC-insured institutions to fail in the nation this year to 133.
DUBAI, United Arab Emirates–Kuwait’s sovereign wealth fund said Sunday it booked a profit of $1.1 billion (U.S.) by selling the stake it took in Citigroup Inc. less than two years ago when the banking giant was strapped for cash.
The Kuwait Investment Authority said in a statement it sold the preferred shares after converting them to common stock for $4.1 billion. That works out to a gain of nearly 37 per cent on its $3 billion investment.
Calls to the Kuwait fund for further details went unanswered. A Citi spokesman declined to comment.
Gulf Arab countries’ sovereign wealth funds have been heavy investors in U.S. and European companies, using their oil wealth to buy large stakes in companies ranging from Citi to Germany’s Volkswagen AG and Mercedes-Benz parent Daimler AG.
The KIA joined other big investors – including the Government of Singapore Investment Corp. and long-time shareholder Prince Alwaleed bin Talal of Saudi Arabia – in pumping some $12.5 billion into New York-based Citi in January 2008. At the time, the bank was reeling from a huge drop in the value of its mortgage holdings.
At the same time it made its Citi investment the fund took a $2 billion stake in Merrill Lynch, which also needed cash as a result of the credit crisis.
Merrill was later bought by Bank of America Corp., which last week surprised investors by paying back $45 billion in federal bailout money. Analysts say that move puts pressure on Citi and other banks that tapped U.S. government aid to follow suit, even though they still could face further losses as consumers struggle to pay their bills.
The Kuwait fund’s move came as a surprise. In September, it said it had no intention of selling its holdings in either Citi or Bank of America in the short term because its investment policies are based "on a long-term vision."
Kuwait took its stake in Citi last year after another Gulf fund, the Abu Dhabi Investment Authority, paid $7.5 billion for a 4.9 per cent stake in the company.
ADIA’s holdings, known as "equity units," will begin to convert into ordinary shares starting in March next year.
A spokesman for the Abu Dhabi sovereign wealth fund, the world’s largest, declined to comment on plans for its Citi stake.
Kuwait’s fund is not the first major Gulf investor to cash in on the sharp rebound of western banks’ shares this year.
Abu Dhabi’s International Petroleum Investment Co. made a $2.5 billion profit in June by selling part of a stake it held in London-based Barclays. Then last moth, Qatar’s sovereign wealth fund, the British bank’s top shareholder, unloaded a stake worth about $2.25 billion.
Barclays turned to investors from Abu Dhabi and Qatar last November for a total injection of up to $12 billion to shore up its balance sheet rather than take on the British government as a major shareholder.
From the Star’s wire services
Experts on retail sales are obsessed with Thanksgiving weekend — particularly the Black Friday frenzy.
Most pundits agree that the start of the season was just ho-hum. But if you examine the details, you’ll come across all sorts of disagreement over exactly how things have gone. Why is it so hard to judge how many shoppers turned out, and how much they spent?
Here are some answers.
How important is Thanksgiving weekend as a predictor of the season?
The day after Thanksgiving is the traditional start of the season. In recent years, Black Friday has been the busiest shopping day of the year. But it’s not considered a predictor of the rest of the season, since it accounts for 10 percent of total holiday sales.
Still, pundits study the weekend’s receipts to decipher shoppers’ mind-sets. And if stores have a weak start, chances are slim that they will be able to make up for lost sales.
What makes this season’s kickoff particularly hard to assess?
One major factor is that stores have increasingly been hawking deals and offering expanded hours throughout November. That has likely diluted sales for the holiday weekend.
Parsing the data got even trickier because for the first time, major merchants offered early morning Black Friday specials on their websites at the same time as in their stores, as they aimed to compete with pure online retailers.
That helped boost online sales on Thursday and Friday, which rose 11 percent compared with a year ago, according to comScore Inc same day payday loans., an Internet research company. Also, more stores, like Old Navy, were open on Thanksgiving.
"Black Friday was definitely expanded. It wasn’t as concentrated," said Bill Lewis, executive vice president of Karabus Management, a retail advisory firm. He noted that heavy online buying likely depressed store traffic.
What type of data has been out there in recent days? Any contradictions?
The National Retail Federation released data on spending and traffic late Sunday, based on an online poll of 5,000 shoppers. The group extrapolated that total spending reached $41.2 billion for Thursday through Sunday, up 0.5 percent from a year ago; it reported 195 million people were visiting stores and websites, compared with 172 million a year ago.
Meanwhile, research firm ShopperTrak released data that showed customer counts actually declined 1.1 percent for the Friday-through-Sunday weekend, but showed sales were up a more robust 1.6 percent.
When will we get a full picture of the start of this year’s holiday season?
Major retailers’ individual sales reports should offer some sense, even though most figures exclude online business.
Sales may have risen only slightly on Black Friday as U.S. shoppers sought deals on electronics, toys and clothes, but retailers appeared to have been better-prepared to protect margins against tepid results.
At the start of the U.S. holiday shopping season on Friday and through the weekend, both discount chains like Wal-Mart Stores Inc and higher-end stores like Saks Inc seemed to have lured more spending and avoided steep discounts, retail consultants and executives said on Sunday.
Specialty apparel chains, however, may face another tough year as they relied on heavy promotions to draw shoppers.
“Going through the mall on Friday, the stores that had not been doing as well — AnnTaylor, Limited, Gap — were very aggressively promoting,” said Jeff Edelman, director of retail and consumer advisory services at RSM McGladrey.
“Saks, which had low inventories, Bloomingdale’s, which had low inventories, were maybe 25 percent off or 30 percent off, and it was on selected items,” he said. “It’s not as if the entire store was on sale as it was last year.”
Edelman expects holiday sales to be flat this year, but he said he expected profits for most retailers to be higher.
For a graphic on U.S. holiday sales trends, click here
For a Reuters Insider segment on holiday sales, click on link.reuters.com/wuj63g
Data released on Saturday showed that sales rose a scant 0.5 percent on Black Friday, the day after Thanksgiving. Shoppers interviewed across the country said they were lured by bargains, but many said they would stick to their budgets and avoid purchases if they could not find a good deal.
Bill Taubman of Taubman Centers Inc said that anecdotally in his 24 malls, it appeared that traffic and spending rose in the high single-digit to low double-digit percentage range on Friday. On Saturday, business slowed, and it appeared to rise in the mid to low single-digit range.
“You’re seeing a little bit of a barbell — the low end of stores are clearly recovering and the high-end stores are also recovering against a low base,” he said.
That does not mean consumer spending is rebounding to levels in 2007, before a global financial crisis and recession.
“You’re clearly down on a two-year run rate,” Taubman said. But he added, “margins are going to be extremely good because (retailers) have been careful about what they bought.”
ShopperTrak said retail sales rose to $10.66 billion on Black Friday, which often is the single-busiest shopping day of the holiday season and can set the tone for the weeks leading up to Christmas on December 25.
In 2008, Black Friday sales measured by ShopperTrak rose 3 percent compared with the prior year’s Black Friday. Last year’s entire holiday season marked the worst performance in nearly 40 years. The firm stuck by its forecast for total holiday sales to rise 1.6 percent this year compared with 2008.
Banks that are considered too large to fail should be dismantled rather than “coddled,” Dallas Federal Reserve Bank President Richard Fisher said on Thursday.
Large-scale government bailouts of institutions like insurer American International Group have generated widespread controversy following last year’s global financial meltdown.
Fisher suggested the only way of ensuring that such financial giants to not pose recurrent problems is by making them smaller.
“This means finding ways not to live with ‘em and getting on with developing the least disruptive way to have them divest those parts of the ‘franchise,’ such as proprietary trading, that place the deposit and lending function at risk and otherwise present conflicts of interest,” Fisher said in prepared remarks to the Cato Institute, a libertarian think tank low fee cash advance.
It was one of the strongest calls to date from a sitting Fed official for an actual breaking up of large financial institutions.
Fisher also said the too-big-to-fail problem hinders the effectiveness of monetary policy, perverting incentives and contributing to financial volatility.
Even as the central bank cut interest rates sharply to deal with the crisis, the borrowing costs for banks and consumers actually climbed.
“Those banks with the greatest toxic asset losses were the quickest to freeze or reduce their lending activity,” Fisher said. “Their borrowers faced higher interest rates and restricted access to funding.”
AXA Asia Pacific rejected a $10.3 billion bid from parent AXA SA and Australian rival AMP Ltd on Monday, an initial hurdle for the French insurer’s bold ambitions to expand in Asia.
AXA SA, Europe’s second-largest insurer it would raise $3 billion to buy out its Asian assets in a two-stage deal which would see AXA Asia Pacific sold to AMP, then divided on geographical lines with the Australian firm keeping the Australia and New Zealand assets and selling the Asian assets back to AXA SA.
But AXA Asia Pacific’s independent directors rejected the main plank of the deal saying the deal “significantly undervalued” the company.
AXA SA had tried to buy out the minorities in AXA Asia Pacific five years ago but was knocked back.
“They’ve obviously wanted to have at least some of the assets of AXA Asia Pacific for some time. They wanted to do it cheaply before and they’re probably wanting to do it cheaply again,” said Ross Barker, managing director of Australian Foundation Investment Co.
AXA Asia Pacific shares jumped 30 percent on news of the takeover bid, with the market punting on AMP and AXA improving the offer.
AXA SA holds its Asian operations through its stake in Australia-based AXA Asia Pacific Holdings but now wants to own these assets outright, doubling its exposure to Asian life insurance savings, including in China and India.
“The proposal has been received against the backdrop of recent weakness in global financial markets and before the growth of our Asian operations is fully reflected in our profitability,” AXA Asia Pacific Chairman Rick Allert said in a statement.
With the buyout, AMP would buy all of the shares in the Asia Pacific unit, including the parent’s 53 percent stake in a deal worth $10.3 billion, and then sell AXA Asia Pacific’s Asian assets back to the French parent.
“The Asian assets are attractive,” said Mark Daniels, head of Australian equities for Aberdeen Asset Management.
“That’s one of the reasons why you’d hold AXA (Asia Pacific). They’ve got a very good business in Hong Kong and other Asian businesses are coming on track,” Daniels added.
In a separate development, AXA’s 15.6 percent stake in China’s No.4 life insurer, Taikang, attracted foreign and domestic bidders, including Temasek and Blackstone, valuing the holding at more than $1 billion, sources told Reuters.
“A BIT LIGHT”
AMP’s cash-and-shares offer for all of AXA Asia Pacific, the first stage of the deal, implied a bid of A$5.34 per AXA Asia Pacific share, valuing the target firm at A$11.2 billion ($10.3 billion), based on AMP’s closing share price on Friday. AMP is offering a 26 percent premium to AXA’s close on Friday.
AXA’s shares surged 33 percent to close at A$5.70, their highest since the collapse of Lehman Brothers.
would have to commit to increasing their lending, too.
So far, that hasn’t happened. Bank of America’s small business lending has dipped 4.1% in the last five months. The Charlotte, N.C.-based megabank says the decrease stems from the recession’s grim effect on small businesses’ balance sheets. As a result, Bank of America has tightened its lending standards, according to spokesman Don Vecchiarello.
Increasing the max loan size: The second major component of the President’s proposal involves lifting the maximum on SBA loans.
"These are the type of loans that Joe and Doug used to expand this business and create new jobs," Obama said, referring to his hosts for the day, Metropolitan Archives co-owners Joe Incarnato and Doug Peters. "Larger loans will help more small business owners and franchisees grow."
However, the majority of small businesses looking for loans are not pushing up against the SBA’s loan ceiling. Of the 44,000 loans the SBA backed last year, fewer than 15,000 were for more than $150,000, according to SBA data.
That has some small business owners scratching their heads over the new initiatives. Chuck Blakeman, president of Denver-based small business advisory firm Team Nimbus West, blasted Wednesday’s announcements as "another photo op for politicians that does absolutely nothing to solve the crisis for small business owners."
To score an SBA loan, businesses still have to convince a bank to issue it. With SBA lending down sharply, that’s a daunting challenge. "Somebody please tell me how raising the limits on loans people can’t get is helping them," Blakeman said.
Obama left the door open to further intervention, if these new efforts don’t spark a turnaround.
"[There’s] no question that we have a long way to go," he said.
Telecom products maker Cisco Systems has entered a deal to buy wireless Internet infrastructure company Starent Networks for $2.9 billion, Cisco announced Tuesday.
Cisco will pay $35 per share for each share of the nine-year old Tewksbury, Mass.-based company, equal to about a 21% premium over Starent’s closing stock price of $29.03 on Monday.
Starent makes equipment for wireless providers such as AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500) to send large amounts of data to cell phones, smartphones and computers with mobile broadband modems.
"We are very pleased that Starent Networks will be joining the Cisco team," said John Chambers, Cisco’s chief executive, in a statement. "We believe their products and engineering talent will greatly benefit our service provider customers as they build out their mobile Internet offerings."
The company said the acquisition, which expected to be completed by June 2010, won’t yield any profit until 2012 and will actually dig into its earnings through 2011. But Cisco said the deal was important for the future of the company, as it expects global mobile data traffic to more than double every year through 2013. Both companies’ boards approved the deal.
Starent Networks is a nine-year old company with about 1,000 employees worldwide. Last year, the company reported revenue of $254.1 million, which was up 74% from the previous year. Starent went public in 2007.
"This is a great move for Cisco," said Zeus Kerravala, analyst at Yankee Group. "When you look at the broader networking landscape, it’s in wireless. Until now Cisco could talk a big wireless game, but couldn’t back it up."
Cisco is the world’s largest telecommunications equipment maker. But it has been losing market share in recent months to Alcatel Lucent (ALU), which analysts say was better positioned for wireless networking than Cisco.
Juniper Networks (JNPR), another telecom infrastructure competitor, was widely rumored to be bidding for Starent as well.
"This is an offensive and a defensive move for Cisco: it helps Cisco compete with Alcatel for wireless and keep a competitor away in Juniper," said Kerravala. "Now the question is what does Juniper do? There are no other big, independent wireless infrastructure companies left."
Tech industry wheelings and dealings have been heating up in the past two months, including several high-profile multi-billion acquisitions for major companies. Xerox (XRX, Fortune 500) bought Affiliated Computer Services (ACS, Fortune 500) for $5.7 billion in late September, Dell (DELL, Fortune 500) bought Perot Systems (PER) late last month for $3.9 billion, and Adobe (ADBE) purchased Omniture (OMTR) last month for $1.8 billion.
Cisco’s announcement on Tuesday also follows a separate $3 billion acquisition of Norwegian videoconferencing company Tandberg earlier this month.
Despite two back-to-back big acquisitions, Cisco said it is still looking to make more deals.
"We will continue to be aggressive driving acquisitions," said Ned Hooper, Cisco’s chief strategy officer, on a conference call with investors. "These deals tend to lump together … but we still feel that our cash level allows us to be very flexible."
Shares of Cisco (CSCO, Fortune 500) rose less than 1%. Shares of Starent (STAR) shot up 17%.
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