Archive for July 31st, 2009

NEW YORK: Despite the Obama administration’s promises that any Clunker deals written this weekend would be honored, the National Automobile Dealers Association is advising its members to play it safe and not close any more deals until the program’s fate is clearer.”Regarding auto sales this weekend, one possible alternative is for dealers to take deposits in lieu of consummated sales with an eye toward legislative success next week,” NADA spokesman Charles Cyrill wrote in an e-mail.The House of Representatives allocated 2 billion more on Friday to continue the program after it apparently burned through its original 1 billion budget in the week since its official July 24 start date. The measure faces opposition in the Senate, however.”We could have a legislative conclusion very quickly with the promise of more money for the program,” Cyrill said later by telephone. Until that’s settled, he said, the dealers’ organization is recommending that dealers proceed with caution.Since the rules of the program require dealers to render traded-in vehicles permanently inoperable before applying for their rebates, dealers whose applications are not honored could be left with no money and no vehicle to sell.Under the plan as enacted, vehicles purchased after July 1 will be eligible for refund vouchers worth 3,500 to 4,500 on traded-in gas guzzlers. The trade-in vehicle has to get a combined city and highway fuel economy rating of 18 miles per gallon or less.The program aims to help the struggling auto industry by taking inefficient cars off the road and spurring new sales.

Source:CNN

NEW YORK: Regulators shut down four regional banks Friday, the Federal Deposit Insurance Corporation said, bringing the total number of banks to fail in the United States to 68 this year.Friday’s bank closures will cost the FDIC fund 215.7 million, bringing the total cost for failed banks to 14.43 billion this year. That compares with 17.6 billion in all of 2008. First State Bank of Altus, based in Altus, Okla., was shut down and Herring Bank, headquartered in Amarillo, Texas, will take over all of the deposits of the failed bank. As of June 19, the First State Bank of Altus had total assets of 103.4 million and deposits of 98.2 million. The failed bank was the first to go down in the state of Oklahoma in 2009.0:00
/27:34Crisis in CapitalismMeanwhile, Integrity Bank, headquartered in Jupiter, Fla., was shuttered and Stonegate Bank, based out of Fort Lauderdale, Fla., will assume all of the deposits of Integrity Bank. As of June 5, Integrity Bank had total assets of 119 million and total deposits of 102 million. The failed Florida bank was the fourth to fail in the state so far this year. The third bank to go down Friday was the Peoples Community Bank, based in West Chester, Ohio. The First Financial Bank, National Association, headquartered in Hamilton, Ohio, will take over all of the deposits of the failed bank. The failed bank was the first bank to be closed in Ohio in 2009, and as of March 31, had total assets of 705.8 million and total deposits of 598.2 million.The fourth bank to fall Friday night was the First BankAmericano, based in Elizabeth, N.J., and the Crown Bank, of Brick, N.J. will take over the deposits. As of July 16, First BankAmericano had total assets of 166 million and total deposits of 157 million. The failed N.J. bank was the second bank in the state to fall in 2009.The number of bank failures so far in 2009 has more almost tripled last year’s total of 25.Smaller regional banks have been hammered in the downturn. Many of the banks failed because local residents and commercial real estate developers that took out loans have been unable to pay them back.

Source:CNN

CHICAGO (Reuters) — Illinois Attorney General Lisa Madigan filed suit Friday against Wells Fargo & Co., accusing the second-largest mortgage lender of steering blacks and Latinos into high-cost subprime loans.”As a result of its discriminatory and illegal mortgage lending practices, Wells Fargo transformed our cities’ predominantly African-American and Latino neighborhoods into ground zero for subprime lending,” Madigan said in a statement.High foreclosure rates resulted from the illegal sales practices, the state’s attorney general said.Meanwhile, white borrowers with similar incomes received lower-cost loans from Wells Fargo (WFC, Fortune 500), the fifth-largest U.S. bank, according to the lawsuit filed in Cook County Circuit Court.0:00
/9:00Protecting consumers from banksTwo black Chicago homeowners sued Wells Fargo Monday in federal court in the Northern District of California, accusing the San Francisco-based lender of racial discrimination in how it sets rates and fees. Their lawsuit seeks class-action status.The Illinois suit charged that a subsidiary, Wells Fargo Financial Illinois, misled borrowers in the state about their mortgage terms, misrepresented the benefits of refinancing, repeatedly refinanced or “flipped” loans, and used deceptive mailing and marketing tools to confuse borrowers.The suit asked the court to rescind all unfair contracts and grant full restitution to affected consumers. It also asked the court to impose civil penalties for violations.”Wells Fargo is disturbed that the Illinois attorney general has chosen to file a lawsuit based on a complete mischaracterization of our long-standing commitment to fair and responsible lending,” the bank’s spokesman, Kevin Waetke, wrote in an email.”The policies, systems, and controls we have in place – including in Illinois – ensure race is not a factor in the pricing or products we offer,” Waetke added.The case is The People of the State of Illinois v Wells Fargo and Company; Wells Fargo Bank, N.A.; and Wells Fargo Financial Illinois Inc., No. 09CH26434.

Source:CNN

NEW YORK: Honda Motor Co. said Friday it widened a previously announced recall to add 440,000 cars that could have a lethal airbag defect.Affected models include the 2001-2002 Honda Accord, 2001 Civic and 2002-2003 Acura TL.The potential defect has caused 6 known injuries and one known death, according to Honda spokesman Chris Naughton.The recall will require the driver’s side steering-wheel-mounted airbag inflator to be replaced. In some cars, the airbag inflators may over-pressurize the inflator mechanism as the airbag is deploying, which could cause the inflator casing to rupture, according to Honda. As a result the carmaker said, “Metal fragments could pass through the cloth airbag cushion material, possibly causing an injury or fatality to vehicle occupants.”Registered owners of the vehicles in question will receive a recall notice in the mail in the next few months to schedule a repair. Honda said the owners of cars most likely to have a problem will be contacted first. In the meantime, Honda owners can log onto the Web site www.owners.honda.com/recalls and click on the “Owner Link” to get a status of their recall. Acura owners should go to www.owners.acura.com/recalls and click on the “My Acura” link. –CNN Assignment Editor Alona Rivord contributed to this report.

Source:CNN

NEW YORK: A lot was supposed to happen on health reform before Congress went on summer vacation. Turns out, a lot didn’t. End result: The heavy lifting on health reform legislation has been pushed to the fall.A bipartisan group of six senators from the Senate Finance Committee was supposed to unveil its health reform bill — or at least an outline. But the group couldn’t resolve some outstanding issues such as how to make sure the health insurance structures they’re proposing end up being affordable.It’s also unclear whether the group will release a draft before the start of the Senate summer recess next Friday. That means the full committee, to say nothing of the full Senate, won’t begin to debate the proposal until the leaves start turning a lovely autumn orange.Meanwhile, House leaders had been promising a full floor vote on health reform before the congressional recess, which begins on Saturday. But that idea was tabled once it became clear that the last of the three committees — the Energy and Commerce Committee — wouldn’t report the bill out of committee until the 11th hour.That means the full House won’t take up a health reform bill before fall.So, with the finish line still far away, it’s too soon to tell the final shape that health reform would take. CNN’s Ed Henry put it best during his radio show: “It’s like covering Jello.”Until then, here’s an update on where things stand on some important questions: Will there be a public option? Who will pay for reform? When would it take effect?What’s the chance for a public option?Those who want a public insurance plan want it fiercely, saying it’s the only thing that can force private insurers to reduce costs and be more competitive. Those who oppose it are equally fierce, saying it would result in a government takeover of the heath care system.Truth is, there’s still not enough information in any of the proposals for either side to say definitively what the realities of a public option would be.Two major bills that lawmakers will consider — the tricommittee bill from the House and the bill put out by the Senate Health committee — propose a public health insurance option. That public plan would compete with private insurers on a health insurance exchange — or insurance supermarket — that the bills also propose.Among Democrats in the House, there is support for a public plan in theory. But progressive Democrats and fiscally conservative Democrats have different ideas as to what such a plan should look like. Republicans in the House, meanwhile, are almost universally opposed.In the Senate, meanwhile, a public option doesn’t appear to have sufficient support. So the bipartisan group on Senate Finance is expected to propose state and regional nonprofit health cooperatives to serve as a competitor to private insurers.The cooperatives would be owned and governed by the consumers who join them. But they would receive seed money from the federal government. It’s not clear whether the co-ops would hire doctors full-time to serve members or whether they would establish a network of doctors from which members could choose.Nonprofit co-ops aren’t a new idea, and some already exist today. But in order to be truly competitive in a market dominated by United Healthcare and the group of Blue Cross/BlueShield insurers, they need to attract a substantial number of people.Sen. Kent Conrad, D-S.D., who proposed the co-op idea, has said actuaries estimate that co-ops could attract 12 million members — potentially enough to make them competitive. But without any details on the proposal, it’s impossible to independently verify that kind of estimate.Who’s going to pay for this?That’s the 1 trillion question tripping up everyone. Much of the cost would stem from subsidies to help make health coverage more affordable for low- and middle-income families, including the uninsured.The House bill proposes to pay for reform in part by implementing various cost-saving measures in Medicare and Medicaid. It would also impose a surtax on the highest income Americans, affecting up to 1.2% of households. A surtax is a tax on top of a person’s ordinary income tax.The surtax has support among many although not all House Democrats. House Republicans oppose it.The surtax is not expected to get much love in the Senate, where the Senate Finance bipartisan group is seen as the arbiter of what will fly as a pay-for and what won’t. The Senate group is expected to propose a slew of savings in Medicare and Medicaid. On the revenue side, it has been considering a tax on insurers for very expensive health plans — those whose cost well exceeds the average cost of a policy for individuals and for families.Opponents of the insurer tax — including unions — say the tax is likely to be passed on to consumers in the way of higher costs.Another way lawmakers want to alleviate the cost of reform is through “pay or play” mandates on employers to provide coverage or pay a penalty that would help subsidize those who buy insurance. The Senate Finance Committee is not expected to propose an employer mandate but is expected to provide what have been referred to as employer incentives to provide coverage.When would health reform take effect?Not right away. In fact, health reform is going to be a long-term process no matter whose ideas end up dominating the day. Why? Because in essence it’s a restructuring of one of the biggest and most complex parts of the economy.The proposed health insurance exchange in the House bill, for instance, wouldn’t be up and running before 2013, and many of the insurance reform measures wouldn’t be fully in effect until 2018.Plus a number of measures in all the reform proposals will take time – in some cases 5 to 10 years, in some cases longer – the achieve the promises of greater efficiencies, better care and cost savings.- CNN’s Dana Bash, Ted Barrett and Deirdre Walsh contributed to this report.

NEW YORK: Lawmakers are quickly learning that “too big to fail” may be too complex to legislate away.The issue of determining which financial firms are worthy of a government rescue, which first took hold when the credit crisis intensified last fall, has been a subject of persistent — and divisive — debate.Top regulators at the Treasury Department and Federal Reserve were widely criticized after making the difficult decision to let Lehman Brothers file for bankruptcy, while stepping in more than once to bail out insurer AIG (AIG, Fortune 500).The topic has taken center stage in Washington recently as the debate on regulatory reform picks up speed on Capitol Hill.One of the biggest challenges facing lawmakers, experts argue, is determining which companies are so important that their downfall would have disastrous implications for the financial system and entire U.S. economy.In addition to AIG, the government has propped up big banks such as Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) with multiple capital injections. Each bank has received 45 billion from the Treasury Department as part of the Troubled Asset Relief Program, or TARP. Taxpayers now own more than a third of Citi following a conversion of part of the government’s preferred shares into common stock.At the same time, the Obama administration looked the other way when the smaller commercial lender CIT (CIT, Fortune 500) was teetering on the brink earlier this month.But determining who makes the cut shouldn’t be based simply on size, said Peter Wallison, a fellow in financial policy studies at the American Enterprise Institute. He noted that even small, seemingly innocuous firms can pose a risk to the financial system.”The major problem with ‘too big to fail’ is that we don’t really know when an institution is too big to fail,” said Wallison.The notion of creating of a list of systemically important institutions appears to have the backing from the Federal Deposit Insurance Corp. and the White House, but there have already signs of a pushback from Congress.Rep. Barney Frank, D-MA, whose House Financial Services Committee will likely impose a heavy hand on any forthcoming regulatory legislation, warned earlier this week that creating such a list would encourage the very problem that regulators have sought to stamp out.”It would be kind of a license to do well because people would think you couldn’t fail,” he said. Many have cited the implicit government guarantee behind mortgage giants Fannie Mae and Freddie Mac as helping to fuel problems there. Because there was a widely-held belief that regulators wouldn’t allow Fannie and Freddie to collapse, the two firms took on sizeable risks during the housing boom. Fannie and Freddie eventually grew to such mammoth proportions that the government was ultimately forced to seize control of them nearly a year ago to prevent them from completely going under.Mechanics and the marketBut even if lawmakers are able to agree on who is and isn’t too big to fail, there are several other complicated issues for Congress to consider.One nagging question is determining just how to let a failed financial institution go under without causing a major disruption to the financial system. Many blamed the lack of such a mechanism for regulators’ inability to dismantle AIG last fall once they learned just how grave the insurer’s health was.One leading proposal would entail creating a system similar to how the FDIC handles failed banks. In such cases, the agency takes control of a failing institution, often with a buyer already in place for all of its assets.0:00
/9:50Does regulation work?Bipartisan legislation put forth this week by Sen. Bob Corker, R-Tenn. and Mark Warner, D.Va., would effectively allow the FDIC to do the same thing with large, complex financial firms that are organized as bank holding companies.Still, there are questions about whether money should be set aside in the event a systemically important company goes under and how to fund such a reserve.Taking a page from her agency’s own playbook, FDIC Chairman Sheila Bair proposed last week that a fund paid for by large financial companies be created in order to avoid needing more bailout money from the U.S. taxpayer.But this plan would likely meet plenty of resistance from those who would bear the biggest costs, the financial services companies themselves. George Kaufman, a professor of finance and economics at Loyola University Chicago, added that lawmakers would also need to decide whether firms be charged before, or after, a troubled institution goes under. “If you do it [afterwards] then you let the guilty party escape without paying,” Kaufman said.Regardless of how the issue is resolved, it is clear that the government needs to find some way to let major financial firms go under without feeling as if they are putting the economy at risk.”We must find ways to impose greater market discipline on systemically important institutions,” Bair told lawmakers last week. “Unfortunately, the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail.”Talkback: Should the government allow even the largest financial firms to go under or do you think there is such a thing as a bank that is too big to fail? Share your comments below.

Source:CNN

NEW YORK: While the Cash for Clunkers program is being hailed as a success, having apparently burned much or all its of its billion dollar budget in a matter of days, some analysts doubt the program will amount to much in the long run.Even with more funding, the resulting boost in auto sales will amount to little more than a temporary reprieve, said Gary Dilts, an auto analyst with J.D. Power and Assoc.”2 billion will buy you another piece of a month,” he said, “it would buoy August into a reasonable month.”It would also be wrong to assume that the program deals would continue at this frenzied pace, said Jeremy Anwyl, chief executive of the auto Web site Edmunds.com. The quick burn rate was more a sign that the program was woefully under-funded than there being huge demand, he said.Even during a normal month, roughly 60,000 to 70,000 Clunker-type vehicles get traded in, he said. Plus, Edmunds.com’s market analysis indicated that roughly 100,000 car shoppers had delayed their purchases until the program officially kicked in.The program was only designed to pay out for 200,000 to 250,000 sales.By the time it began, rumors had already begun circulating on Internet chatrooms that the funds wouldn’t last, he said. “Any time you create a shortage, you get a frenzy,” said Anwyl.Besides all that, he pointed out, the program came at a time of the year when car sales tend to spike. In the late summer months customers are looking for deals during the model year changeover, when dealerships have to sell off last year’s cars.In addition, the program’s official kick-off date happened to come at the end of a month when dealers are pressured to meet monthly sales quotas, pointed out Tom Libby, president of the Society of Automotive Analysts.”There is pressure for reporting sales by the end of the month,” he said. 0:00
/02:56Auto families still believeLibby did think the program had genuinely tapped into pent up demand, however.”It’s going to draw in people that the forecasters didn’t think would be players,” he said.Mike Jackson, chief executive of AutoNation, the country’s largest auto dealership chain, agreed that the program was bringing in customers that wouldn’t have bought otherwise. AutoNation had booked 3,000 Clunker deals, he said, and the average customer had a higher credit than usual.”They’re frugal consumers,” he said, “who have owned their vehicles for a long time, for hundreds of thousands of miles, and they were going to keep these vehicles forever.”While Anwyl agreed that there are many customers out there who are financially capable of buying who have simply kept themselves out the market before now, he still cautioned against expecting too much,”I think that demand will be met more quickly that we think,” he said, “because the industry is misreading these signals.

Source:CNN

WASHINGTON (Reuters) — Government regulators could prohibit incentive-based pay packages at large U.S. financial institutions that encourage “inappropriate risks” under a bill approved Friday by the U.S. House.Heading next to the Senate, where its outlook is uncertain, the bill would also give shareholders in public corporations the right to cast annual, non-binding votes on executive pay, giving them a louder, but largely symbolic “say on pay.”The House Democrats’ bill, part of a broad push to tighten banking and market regulation, would also impose new standards on corporate compensation committees and compensation consultants, requiring them to be independent of managers.Financial institutions with assets of less than 1 billion would be exempted from the regulation on incentive-based pay.

Source:CNN

NEW YORK: The House on Friday passed a bill to allocate another 2 billion to the Cash for Clunkers program.The move came after reports on Thursday had raised concerns that the program was out of money.The bill which diverts 2 billion from a U.S. Department of Energy program loan guarantee program, passed 316-109. The bill will face tough opposition in the Senate which is not expected to vote before Monday.”I’m pleased about the progress made in the House today about the cash for clunkers program,” said President Obama, in a speech immediately following the vote.The fate of the 1 billion trade-in program was thrown into question Thursday over concerns that it may have already burned through its funds less than a week after it was officially launched.It was unclear how much longer car buyers would be able to trade in clunkers after reports surfaced on Thursday night that the program would be suspended.Obama, in his Friday speech, presented the program as a success: “I’m happy to report that it has already succeeded beyond our expectations. It’s working so well that there are legitimate concerns that the original funds might already be exhausted.”One of the Clunker program’s main champions in Congress, Sen. Debbie Stabenow, D-Mich., said the incentive has provided an important boost to the economy and resulted in 200,000 car sales.”I am delighted to hear dealers say that all of their salespeople are busy and they are selling more cars in a day than they had been selling in a month,” Stabenow said.Cash for Clunkers, which Congress passed in June, was set to end on Nov. 1 or whenever its 1 billion budget was depleted. An earlier version of the Clunkers proposal called for appropriating 4 billion.On Friday morning, the government’s official CARS.gov Web site, set up to provide dealers and consumers with information about the plan, still showed 780 million remaining in the coffers.But many dealers say they are still waiting to proceed.Under the plan as enacted, vehicles purchased after July 1 will be eligible for refund vouchers worth 3,500 to 4,500 on traded-in gas guzzlers. The trade-in vehicle has to get combined city and highway fuel economy ratings of 18 miles per gallon or less.The program aims at helping the struggling auto industry by taking inefficient cars off the road and spurring new sales.Domestic auto sales have been hit hard by the recession and credit crunch and helped propel the bankruptcies and government bailouts of General Motors and Chrysler. In June, the seasonally adjusted annual sales rate fell to 9.7 million, a pace well below recent years.

Source:CNN

(breakingviews.com) — Huge government deficits have many people worried. But why are they harmful? One popular answer to that question is that issuing floods of debt to finance them creates a mortgage on a nation’s future. But it’s not as burdensome — or as simple — as that analogy suggests.If nations worked like individual families, the frightening argument would hold. Suppose the old parents take out a mortgage. They will have more money to spend now, but the mortgage payments mean the children will have less when they inherit the house.But government borrowing doesn’t actually shift money through time. It moves funds now from one group to another and promises different movements later.Start with the present. A government has three ways to get the money it spends. First, there’s printing money. That can easily lead to an inflationary mess. Second, there are taxes. That’s money that the government confiscates, quite legally, from the nation’s available financial resources.Finally, there is borrowing. Like taxation, this involves the government collecting money from the nation’s available financial resources. Unlike taxes, the contributions aren’t compulsory and they are compensated with future interest payments and eventual repayment.The money a population has available to spend today is reduced equally whether its members make tax payments or buy bonds of the same value (and a government has the same amount to spend in each case, too). The government may believe that selling bonds is better for the economy than raising taxes — because deficits are supposed to stimulate more economic activity than balanced budgets — but the basic financial equation is identical.Fast forward a few years. Any government that borrowed in the past will need to raise a bit more money than it would if the books had been balanced, because it has to make interest and principal payments on past debts.Suppose the heavily indebted government chooses to raise the additional funds through taxes. Those are the payments on the supposed national mortgage. But tax revenues don’t get sent backwards in time, so they don’t change the situation today.The future debt-payment taxes do, of course, take money out of the economy when they are levied. But that money, in theory at least, flows right back into the economy as holders of government debt reinvest the interest and principal payments they receive. There is really no mortgage at all: just present transfers to the government to finance deficit spending and future transfers from the government to pay interest on and redeem those bonds, in turn financing spending by bondholders.Even though there is no mortgage, there are still at least two problems.First, the U.S. and U.K. governments, in particular, sell much of their debt to foreigners. For a globally minded economist, that doesn’t change the picture. But anyone thinking in national terms is right to see something like a mortgage. Locals get to consume now, thanks to foreign-financed deficits. But foreigners will get to consume more later, as those deficits come due. Governments issuing swathes of debt can head this problem off to some extent by trying to sell more of their bonds to patriotic locals.Second, higher borrowing now does mean governments, as opposed to their citizens as a group, will eventually have to cut spending or collect more taxes. That can disproportionately affect the poorest layers of society.But the additional burden doesn’t have to be huge. The National Institute of Economic and Social Research, a British group, expects the U.K. will need an additional 25 billion of annual tax revenues four years hence to meet additional interest expense from the crisis period. That’s about 1.8% of GDP, less than half the 4% of GDP the government added to its tax take — raising its share from 38% to 42% — between 1997 and 2008.Even if some of the incremental taxes leave the country to pay foreign lenders, the debt adjustments to taxes wouldn’t create a big problem in a well run country. Many countries, including the U.S. and the U.K., have paid down much higher debt burdens, generally incurred during wars.Assuming a disciplined government, when repayment time comes around some combination of economic growth, controlled inflation and perhaps some government surpluses gradually reduce the share of GDP dedicated to interest payments. In the meantime, clever tax policy can ensure that the rich, who typically own bonds, don’t profit too much at the expense of the poor, who typically don’t and therefore lose when the government has to pay lenders.But perhaps a country governed well enough to achieve those things would not allow gigantic foreign-financed credit booms and busts in the first place. Or try to test what the future effects of massive government borrowing really are.–The above comment reflects the personal view of Edward Hadas, editor at Breakingviews.com

Source:CNN