(From The New York Times)
As Stress Tests Are Revealed, Markets Sense a Turning Point
By Eric Dash and Louise Story
The results of the bank stress tests have been trickling out for days, from Washington and from Wall Street, and the leaks seem to confirm what many bankers feel in their bones: despite all those bailouts, some of the nation’s largest banks still need more money.
But that does not necessarily mean the banks will get that money from the government. The findings, to be released Thursday by the Obama administration, suggest that the rescue money that Congress has already approved will be enough to fill the gaps. If so, the big bailouts for the banks may be over.
All of this assumes that the economy does not take another turn for the worse, which would result in even more losses at the banks — and the need for even more money to prop them up. But hopes that the tests will be a turning point in this financial crisis electrified Wall Street on Wednesday. Financial shares soared, lifting the broader stock market to its highest level in four months. The Dow Jones industrial average rose 101.63, or 1.2 percent, to close at 8,512.28.
How well many of the banks fared in the tests seems to have become something of a open secret on Wall Street, where the results, and mere whispers of them, have been the subject of intense speculation.
After news this week that Bank of America and Citigroup would be required to bolster their finances again, word came Wednesday that regulators had determined that Wells Fargo and GMAC, the deeply troubled financial arm of General Motors, would need to do so as well. But regulators decided that American Express, Capital One, Bank of New York Mellon, Goldman Sachs, JPMorgan Chase and MetLife would not need to take action. The official word is due at 5 p.m. Thursday.
The results so far seem to suggest that the 19 institutions that underwent these exams will need less than $100 billion in additional equity to cope with a deep recession, far less than some investors had feared. The question now is, where will banks get that capital?
Most of them would prefer to raise money privately, either by selling shares to the public or a big investor, or by selling some of their businesses. But if that is not enough, the odds are the government will step in.
The thinking is that some banks will ask the government to convert preferred shares that it bought last year, at the height of the financial crisis, to common stock. As a result, the government would become a significant shareholder in a number of banks besides Citigroup.
But under that assumption, no new taxpayer money would go to the banks. The government would merely exchange one investment, its preferred stock, which is much like a loan, for ordinary common shares. The move amounts to shifting public money from one pot to another to ensure that these big lenders — those deemed too big to fail — have enough common stock to cushion their potential losses.
This would represent a riskier deal for taxpayers. Whether they get out whole would depend on the stock market. And by exchanging its preferred shares for common stock, the government would also forgo dividend payments on its preferred shares.
“What is positive is that there’s a line being drawn,” said Jim Reichbach, a vice chairman of United States financial services at Deloitte. “There’s a number being put on the table.”
To help cover a huge shortfall, Citigroup has announced plans to convert a portion of the government’s $45 billion investment to common stock, which would give the government a stake of as much as 36 percent. Regional lenders like Fifth Third Bank of Ohio or Regions Financial of Alabama could find themselves in a similar boat.
The banks are eager to avoid having the government increase its stake drastically because that would dilute the holdings of the banks’ existing shareholders. Bank of America, for instance, is looking to sell businesses and to cash in investments to help cover a shortfall of nearly $34 billion.
Morgan Stanley plans to meet an expected shortfall of $1 billion to $2 billion by selling assets or stock to private investors, a person briefed on the plan said. Citigroup has also sold several big businesses, reducing its large capital deficit to around $6 billion.
In fact, after so much talk of nationalizing banks, the administration’s stress tests and capital programs seem to be intended to encourage lenders to take steps to minimize government ownership. The Treasury Department plans to offer a special type of preferred stock that banks can convert to full-voting common shares only as needed. To use it, they will first have to try to raise private capital or do similar exchanges with private investors.
What is more, any gains from asset sales, stock sales or larger-than-expected profits over the next two quarters can be used to offset the shortfalls. That might encourage banks to take bolder action, although some have struggled to find buyers for their businesses, or at least ones willing to pay the prices they seek.
Timothy F. Geithner, the Treasury secretary, said Wednesday that the results of the stress tests might be comforting news.
“It will help lift this fog of uncertainty over the financial system, and I think the results will be, on balance, reassuring,” Mr. Geithner said Wednesday on “The Charlie Rose Show.”
Critics say the tests have eroded confidence rather than bolstered it. The tests have occupied banking executives for months and fed the Wall Street rumor mill, adding to the volatility in the markets. Some also ask why the banks were able to negotiate with regulators behind closed doors over the tests and the results.
“The banks are healing themselves, and it could have been done a lot faster if government had gotten out of the way instead of parking the emergency equipment in the middle of the road,” said Gary B. Townsend, a former banking regulator who now runs his own investment firm.
It may come as a surprise to many people that by most standards, all of the banks that underwent these tests are already adequately capitalized. But regulators are focusing on the amount of capital made up of common stock, the first layer to absorb losses on bad loans.
The government is betting that if banks have a bigger buffer of equity, private investors will be confident enough in the banks’ health to pour money in. That should encourage the banks to start lending again.
“This is sending a message that the banks need more capital, but their losses are manageable and the system itself is solvent,” said Kevin Fitzsimmons, an analyst at Sandler O’Neill. “Whether it sticks is something else.”
(From Reuters)
Obama seeks budget savings as huge deficits loom
By Richard Cowan and Jeff Mason
WASHINGTON — President Barack Obama, facing criticism over huge budget deficits, will propose on Thursday shaving $17 billion from a 2010 budget that will still hover around $3.5 trillion, administration officials said.
About half of the proposed cuts would come from the defense budget, and a total of 121 programs in areas including education would be trimmed or scrapped, one official told a conference call with reporters.
Even with the spending reductions, the White House's own estimates suggest the deficit will be $1.17 trillion next year. Congressional analysts believe the gap could be $1.4 trillion.
Obama officials said the administration would look for further cuts in the 2010 fiscal year, which starts on October 1.
"This is an important first step but it's not the end of the process," the official told reporters on Wednesday. "We will continue to look for additional savings."
Obama, who has vowed to cut the country's ballooning deficit in half by 2013, was widely panned last month when he challenged agencies to find $100 million in savings. Critics pointed out that was about equal to what the government spends in 13 minutes.
Congress has already passed a $3.4 trillion budget blueprint that will guide tax policy and government spending for the upcoming fiscal year. It embraces many of Obama's top priorities.
But the budget details the White House will release on Thursday, which build on a bare-bones outline the new president submitted to Congress on February 26, could have an impact on those individual spending bills that will wind their way through Congress in coming months.
FOCUS ON CUTS
Asked by Reuters whether the budget document would contain other major new policy initiatives, another official said the $17 billion was "pretty much the news."
The first official said an early childhood education program known as "Even Start" and a long-range radio navigation system that has been made obsolete by GPS technology were on the chopping block.
"We're trying to cut back on the things that don't work, invest more in the things that do," the official told the conference call.
Other examples of cuts included halting payments to states for abandoned mines that have already been cleaned up, saving $142 million, and cutting a Department of Education attache position in Paris, saving more than $600,000.
The official said many of the defense cuts had been announced already by Defense Secretary Robert Gates.
Obama will ask for $1.25 billion from Congress to settle claims by black farmers that they were denied help by the Agriculture Department due to racism, the White House said.
Congressional Republicans, who are a minority in the House of Representatives and Senate, gave tepid praise for the new round of proposed funding reductions.
"While we appreciate the newfound attention to saving taxpayer dollars from this administration, we respectfully suggest that we should do far more," House Republican leader John Boehner said in a statement.
A Boehner spokesman said House Republicans would offer their own set of savings.
During his eight years in office that ended in January, Republican President George W. Bush presided over a huge run-up in federal spending, with record budget deficits and ballooning debt that reversed a few years of budget surpluses. Congressional Republicans signed off on Bush's budgets when they controlled Congress, until 2007.
The White House has already revealed that Obama will include in the 2010 budget a $63 billion, six-year health initiative to help people in the world's poorest countries, largely bolstering existing programs.
Obama's budget was widely seen as sketching out an ambitious agenda that includes healthcare reform, big increases in education spending and a controversial environmental initiative to reduce emissions of carbon dioxide and other greenhouse gases associated with global warming.
(Additional reporting by Caren Bohan, Jeremy Pelofsky and Charles Abbott; Editing by Peter Cooney)
Lawmaker makes push for legal online gambling
By Kevin Freking, Associated Press Writer
WASHINGTON — It's time to regulate gambling on the Internet rather than outlaw it, says Rep. Barney Frank, the chairman of the House Financial Services Committee.
The Massachusetts Democrat introduced a bill Wednesday that is sure to please poker and blackjack players as well as those who like to wager on keno, roulette and other games of chance. But the opposition is formidable and includes conservative groups that view gambling as exploiting the vulnerable, particularly the poor.
Frank's bill would require Internet gambling providers to be licensed by the Treasury Department and regulated to protect children and to ensure the games are fair, the bill states. The department would review criminal and credit histories as well as financial statements as part of the application process.
No similar bill has been proposed in the Senate, and Senate Majority Leader Harry Reid, D-Nev., has said that he opposes Internet gambling, dimming prospects for Frank's legislation.
Opponents of online gambling approved what amounts to a ban in 2006 as part of an unrelated port security bill. Under that legislation, financial institutions were prohibited from accepting payments from credit cards, checks or electronic fund transfers to settle online wagers.
The Bush administration moved in its final weeks to finish regulations enforcing the prohibition, and those regulations are set to go into effect Dec. 1. Frank also introduced a second bill Wednesday to delay compliance with the regulations for an additional year.
Rep. Shelley Berkely, D-Nev., whose district includes Las Vegas, voiced support for Frank's bill. She previously sponsored legislation that would require a study of online gambling.
"What we have now is an unworkable law passed by those opposed to all gaming, whether it's done by adults in Las Vegas or on the Internet," Berkely said. "So there is no question we must act to correct the problems caused by this failed crusade to ban Internet gaming."
Former New York Republican Sen. Alfonse D'Amato chairs the Poker Players Alliance, which says it will spend $3 million lobbying in this session of Congress to try to overturn the Internet gambling ban.
Among those in the other corner is the National Football League, which says gambling threatens the integrity of its games and has made preserving the Internet ban a priority. Frank's bill contains a provision that tries to address those concerns by continuing a general prohibition on sport gambling.
At least half the $16 billion Internet gambling industry, which is largely hosted on overseas sites, is estimated to be fueled by U.S. bettors.
Chrysler won't repay bailout money
An administration official confirms that a $4 billion bridge loan and $3.2 billion in bankruptcy financing won't be paid back by Chrysler following bankruptcy.
By Chris Isidore
NEW YORK (CNNMoney.com) -- Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing.
This revelation was buried within Chrysler's bankruptcy filings last week and confirmed by the Obama administration Tuesday. The filings included a list of business assumptions from one of the company's key financial advisors in the bankruptcy case.
Some of the main assumptions listed by Robert Manzo of Capstone Advisory Group were that the Treasury would forgive a $4 billion bridge loan given to Chrysler in the closing days of the Bush administration, a $300 million fee on that loan, and the $3.2 billion in financing approved last week by the Obama administration to fund Chrysler's operations during bankruptcy.
An Obama administration official confirmed Tuesday that Chrysler won't be repaying the loans, though a portion of the bridge loan may be recovered by Treasury from the assets of Chrysler Financial, the former credit arm of the automaker which is essentially going out of business as part of the reorganization.
"The reality now is that the face value [of the $4 billion bridge loan] will be written off in the bankruptcy process," said the official, who added that the 8% equity stake that Treasury will be receiving as part of the company's reorganization is meant to compensate taxpayers for the lost money.
"While we do not expect a recovery of these funds, we are comfortable that in the totality of the arrangement, the Treasury and the American taxpayer are being fairly compensated," said the official.
The company filed for bankruptcy Thursday as part of a deal with the federal government, unions, some lenders and Italian automaker Fiat to keep the company from being shut down.
The Canadian government also agreed to kick in about $900 million in bankruptcy financing. According to the filings, Chrysler's advisor assumes that this loan will be forgiven as well.
The Obama administration official said that other money being made available to Chrysler, such as the $4.7 billion that will go to the company as it exits bankruptcy, will be a loan that the government expects to be paid back. In addition, that loan will be secured by company assets, unlike the previous loans to Chrysler.
According to the filing, the company's financial advisor also foresees the need for an additional $1.5 billion loan from the Treasury Department by June 30, 2010.
Lori McTavish, a spokeswoman for Chrysler, said some of the assumptions made by the company have changed since its bankruptcy filing on April 30. But she could not say specifically if the company still hoped for the additional federal loan in 2010.
"The content of the document needs to speak for itself. We are simply not in a position to comment," she said.
Bob Corker, R-Tenn., who took the lead among Senate Republicans in challenging the auto bailout last December, said he was disappointed but not surprised that Chrysler would not be paying back the money.
"I've known for sometime that with the capital structure of the company and the situation it was in, we would not be paid back," he said. "There were several secured lenders ahead of us, and they're not getting most of their money."
Major banks and hedge funds that loaned Chrysler $6.9 billion were offered only $2.25 billion to settle those loans by Treasury. While major banks accepted the offer, hedge funds rejected it, forcing the company into bankruptcy.
Typically lenders who loan bankrupt companies funds to operate during reorganization go to the front of the line on getting the money they are owed repaid. But Corker said Chrysler's dire financial situation left it no chance to even pay back the bankruptcy financing.
He said the fact that Chrysler isn't paying what is owed should be a warning that the $15.4 billion loaned to General Motors by Treasury since December, as well as any bankruptcy financing it might need, is also at risk.
"Certainly there are red flags," he said.
Freelancers bringing home the bacon
By Farnoosh Torabi
Wallet Pop Blog
No more discounted dental or a 401k match. No more access to an office vending machine selling Coke for 50 cents. And bye-bye color copier.
Those were the days working full-time at Thestreet.com. Since getting laid off in March it's been hard to say goodbye to those lovey-dovey corporate perks.
But don't feel sorry for me. As a new member of the freelance economy I am actually working more now and even (don't hate me for saying this) turning down some projects.
I've gone from unemployed to self-employed. I'm happy. And I'm not alone.
Sarah A. Needleman's great piece in the Wall Street Journal today about "Negotiating The Freelance Economy" captures the big picture. She describes the fast rise in freelance opportunities in the recession, since it's cheaper to employ part-time or contract workers without health and retirement benefits.
In fact, one freelance worker is so busy with projects she has the luxury of "doing just the fun stuff" with no immediate goal to return to the full-time workforce. She works in web-optimization, but as the article explains, it's not just web and software wizards and graphic artists who are making out well. Everyone from accountants to lawyers, sales reps and journalists are joining the new freelance economy. Jobs posted at work-for-hire sites like Elance.com and Odesk.com are surging compared to the same time last year.
Don't get me wrong; freelancing is not a perfect world. I had to get over some insecurities and annoyances, like "How should I afford health care? COBRA, individual policy or Freelancers' Union?" "How much time can I spend working at Starbucks before they start charging me rent?" and "What to put on my new business cards?"
Some parting advice for the full-timers out there who think they could never enter the freelance economy, that it's too scary: Start making some income for yourself on the side. Ease into the freelance world by taking on a part-time, once-in-a-while gig that you enjoy. That's how I did it. I've always freelanced articles and worked on side projects throughout my full-time working career.
Do you speak a second language or have an A in statistics? Tutor. Have a passion for writing? Freelance some articles locally. Love to garden? Offer to landscape this summer on the weekends. Catering, web design, direct-sales, you name it. A lot can be done in the evenings and on weekends. You never know what your side job might lead to. At the least, it may be something to fall back on part-time if you lose your full-time post this year.
And at this rate, with so many freelance openings, you'll likely make enough to pay up for teeth cleanings and color copies.
Obama Hails Allies’ Anti-Terror Efforts
President Expresses Regret Over US Airstrikes That Killed Afghans
AOL NEWS
WASHINGTON (May 6) - President Barack Obama is applauding Pakistan and Afghanistan for their commitment to helping the U.S. fight terrorists holed up in their territory, but he also is cautioning that the path to success is slow and unsure.
“The road ahead will be difficult,” Obama said Wednesday after a series of meetings with Afghan President Hamid Karzai and Pakistani President Asif Ali Zardari that yielded few announced new commitments. “There will be more violence, and there will be setbacks.”
Obama added, “The United States has made a lasting commitment to defeat al-Qaida, but also to support the democratically elected sovereign governments of both Pakistan and Afghanistan. That commitment will not waver, and that support will be sustained.”
Obama’s national security adviser, Gen. Jim Jones, told reporters later that Obama was clear in his support for Zardari, who has come under heavy U.S. criticism for doing too little to combat a Taliban insurgency. Secretary of State Hillary Rodham Clinton, for example, told Congress last week that Pakistan was “abdicating” to the Taliban extremists.
“The president pledged to do whatever we could, to do what we can as quickly as possible to help the Pakistani government, and said this type of aid would not just be restricted to military,” Jones said. “Miracles will not happen, so this won’t happen quickly. But with a common focus, we can make strides hopefully in the near future.”
Wednesday’s meetings, which began at the State Department and then moved to the White House, had the added complication of reports that U.S. airstrikes on Sunday had killed dozens of civilians in western Afghanistan. The top U.S. commander in Afghanistan suggested that the Taliban might be to blame, but Obama and Clinton felt compelled to respond sympathetically.
Obama expressed U.S. regret, promising to “make every effort” to avoid further tragedies as allied forces press the fight against a rising Taliban insurgency.
General Motors tops expectations with a $6 billion loss in the first quarter
By Mark Fightmaster
AOL NEWS
The earnings news isn't great for General Motors (NYSE: GM) this morning, but the company did manage to lose less money than expected. The struggling American automaker announced that it lost $6 billion during the quarter and spent $10.2 billion more cash than it received. Excluding items, GM lost $9.78 per share -- far greater than a year ago when the firm lost 67 cents per share.
Despite results being far worse than a year ago, GM managed to top expectations of a loss of $11.39 per share. GM's quarterly revenue dropped 47% to $22.4 billion from $42.4 billion a year ago.
The automaker noted that the latest results show its continued global economic pressures along with low auto industry volumes worldwide. Industry sales slumped 21% in the first quarter, which led to reduced volume and revenue across the board.
While a smaller-than-expected loss is nice, a loss is a loss, and a nearly $10-per-share loss is huge. Furthermore, GM continues to stare down the barrel of a June 1 government deadline to either complete restructuring or go into bankruptcy protection.
The picture definitely isn't pretty for GM, but it is possible that the company can come up with an acceptable plan. Although, it seems that the government may have already made up its mind about GM's fate. Nevertheless, the company must shift gears and begin to offer consumers what they want, not what the company wants to make. Unfortunately, this isn't the business model GM has followed in the past, and it sure is hard to teach an old dog new tricks.