US inflation rate ‘still relatively contained’: Paulson

US inflation rate ‘still relatively contained’: Paulson

 

(LONDON) Treasury Secretary Henry Paulson said inflation that strips out food and fuel costs in the US remains in check and he praised the job Federal Reserve chairman Ben S Bernanke is doing conducting monetary policy.

 

‘Core inflation is still relatively contained,’ Mr Paulson said in an interview that aired yesterday on the British Broadcasting Corp’s Newsnight programme.

 

‘We’re dealing with some other challenges and excesses in our capital markets, no doubt about that.’

 

The US central bank’s Federal Open Market Committee last week said it expects price gains will ‘moderate’ this year and next, cautioning that ‘uncertainty about the inflation outlook remains high’.

 

In the interview, Mr Paulson aligned himself with Mr Bernanke’s decisions, which include seven reductions since September in the benchmark interest rate to 2 per cent.

 

‘I’ve been very supportive of what I’ve seen the Fed do and Ben Bernanke do since I’ve been working with him and I’m very supportive of his posture,’ Mr Paulson said, declining to say whether rates should be raised.

 

‘You’re not going to get me commenting on that,’ he said. ‘I just have great reverence and respect for the independence of our central banks – your Bank of England and our Fed – and they’ve got tough jobs to do.’

 

Mr Paulson is in London to discuss financial regulation with his UK counterparts. He said in the interview that rising energy and food prices are affecting developing nations such as China and India as well as the industrial world.

 

Inflation ‘is getting the No 1 focus’, Mr Paulson said, citing his recent travels to discuss economic conditions with his counterparts.

 

Mr Paulson visited Moscow, Berlin and Frankfurt earlier this week; he has also been to Mexico, Japan and the Middle East this year.

 

A June 27 Commerce Department report showed lower-than-expected rises in an inflation measure preferred by Federal Reserve policymakers.

 

The central bankers’ preferred gauge of prices, which excludes food and fuel, increased 0.1 per cent in May, compared with a 0.2 per cent median estimate in the Bloomberg survey.

 

The price measure was up 2.1 per cent from May 2007, also less than anticipated. Wages and salaries grew just 0.3 per cent in May, the Commerce Department figures showed.

 

Mr Paulson said that overall, the global economic slowdown has ‘further to go’. He repeated his view that the US economy will improve by year end, even as the housing market correction has not yet run its course.

 

‘I expect us to be growing, with stronger growth by year end,’ Mr Paulson said. ‘In terms of other places in the world, I think they may be in different parts of the cycle.’ – Bloomberg

 

Source: Straits Times

Paulson: US downturn is biggest focus, not inflation

Paulson: US downturn is biggest focus, not inflation

 

LONDON – THE downturn in the United States economy is a greater worry than inflation at the moment, Treasury Secretary Henry Paulson said yesterday.

In a radio interview with the BBC, Mr Paulson, on a visit to London, was asked whether his main focus was growth or prices.

 

‘Particularly in the US, our biggest concern is the downturn,’ he said.

 

‘There is no doubt that high headline inflation numbers as they relate to oil and food prices are a real concern to Americans. But core inflation is relatively contained, and my biggest focus today is the downside risk – housing, oil prices and obviously what is going on in the capital markets.’

 

The US central bank’s Federal Open Market Committee last week said it expects price gains to ‘moderate’ this year and next, cautioning that ‘uncertainty about the inflation outlook remains high’.

 

In the interview, Mr Paulson aligned himself with Federal Reserve chairman Ben Bernanke’s decisions, which include seven cuts since September that have sent the benchmark interest rate to 2 per cent.

 

‘I’ve been very supportive of what I’ve seen the Fed do and Mr Ben Bernanke do since I’ve been working with him, and I’m very supportive of his posture,’ Mr Paulson said, declining to say whether rates should be raised.

 

Mr Paulson, in London to discuss financial regulation with his British counterparts, said that rising energy and food prices are affecting developing nations such as China and India as well as the industrial world.

 

REUTERS, BLOOMBERG NEWS

 

Source: Straits Times

Dow in bear territory

Dow in bear territory

 

NEW YORK – THE Dow Jones Industrial Average on Wednesday entered a bear market for the first time since 2002, with United States companies poised for the worst profit slump in six years.

The index slipped to 11,215.51 points on Wednesday from a high of 14,164.53 on Oct 9, causing firms to shed a collective US$1.1 trillion (S$1.5 trillion) in value.

 

The Dow became the second major US index to enter a bear market, crossing the critical threshold of a 20 per cent decline from its peak; the Nasdaq crossed that line in February.

 

‘I think we’re seeing a capitulation of sorts and a sign that the market is really on its knees,’ said Mr Marc Pado, the chief equity market strategist at Cantor Fitzgerald.

 

However, the Dow recovered slightly, up 1 per cent to 11,326.40 after two hours of trading yesterday. Investors snapped up shares of energy companies after oil prices hit a record US$145.85 a barrel.

 

REUTERS

 

Source: Straits Times

Is the sub-prime crisis really over?

Is the sub-prime crisis really over?

 

ONE of the most striking things about the past couple of months is how quickly the phrases ‘sub-prime crisis’ and ‘credit crunch’ have disappeared from mainstream consciousness, both replaced by ‘inflationary worries’ and ‘oil crisis’ as the stock market’s main bogeymen.

 

In its ‘Third Quarter Strategy Outlook’ dated June 27 for instance, BCA Research said the outlook will be greatly influenced by how oil prices behave: ‘The sustained advance in oil is choking off growth in the G-7 universe and could send equities to new lows. A reprieve in the oil crisis is needed for global equities to regain traction but there is no guarantee that such a reprieve will come anytime soon.’

 

As a result, the research outfit recommended going defensive and that ‘portfolio managers should further reduce their equity weightings below benchmark’.

 

There was virtually no discussion as to whether there could be more sub-prime shocks to come or whether the financial system has really recovered from the huge losses caused by a still-collapsing US housing market.

 

Similarly, most other outlook reports and stock market updates have assumed that the Bear Stearns bailout and the Fed’s actions in March/April have been sufficient to ensure that the sub-prime crisis is a thing of the past.

 

Readers would do well to ask themselves this question: how likely is it that a credit bubble that was about six years in the making (when the US Federal Reserve started an aggressive rate cutting campaign after the Internet bubble burst) can be so quickly and gently deflated in the space of two to three months?

 

Although most of the headlines over the past few weeks have focused on oil’s relentless climb and the inflationary-cum-growth implications, it is the complacency surrounding the sub-prime crisis that could well be the main problem equities will face over the next few months.

 

In fact, Wall Street may well be now waking up to this possibility – Bloomberg on Friday reported that it was sharp drops in financial stocks AIG and Merrill Lynch that dragged the S&P 500 to its five-year low and that the reason for the selling was mounting realisation that there are more sub-prime losses to come.

 

Bloomberg also reported that Lehman Brothers analyst Roger Freeman increased his second-quarter loss estimate for Merrill on expectations that sub-prime-related writedowns will be more than twice as big as previously projected.

 

The concerns over oil, inflation and growth are of course justified. BCA’s ‘Emerging Markets Strategy’ dated June 27 said these economies will witness a period of slower growth in the months ahead as inflationary pressures rise.

 

Although a major slump is unlikely, BCA said near-term risks are high and recommended investors ‘stay on the sidelines’.

 

Interestingly, US newspaper Barron’s June 23 issue reports (in the ‘Up & Down Wall St’ column) that fund manager Dewey Kessler from SDK Capital believes that the sub-prime crisis is now moving into its second phase, a phase that will see emerging markets transformed into ‘submerging markets’.

 

The process is said to have only just begun, starting with China, which although it is 50 per cent off its all-time highs, has still a long way to go.

 

Here, investors may derive some consolation from the relative resilience the Straits Times Index displayed last week, largely thanks to strong support for the banks (OCBC and UOB actually rose over the five days while DBS only lost 2 cents).

 

However, it is possible that this support came via window-dressing activities ahead of the end of the first half and if so, the start of the second half could see this support withdrawn.

 

Moreover, US financial stocks are now being sold off as the realisation grows that the sub-prime credit crunch has not yet run its course. If the same realisation and selling spreads to the local banks, the STI will not be able to display the resilience it did last week.

 

All told, it looks like the worst is still not over yet. Forecasts earlier this year that the second half will be better than the first may well have to be revised.

 

Source: Business Times

US sub-prime crisis: Two hedge fund execs nabbed

US sub-prime crisis: Two hedge fund execs nabbed 

They are accused of defrauding investors; 400 others charged with mortgage fraud

 

WASHINGTON – THE United States’ housing crisis has produced its first high-profile Wall Street arrests, while the Bush administration made a call to broaden the Federal Reserve’s powers over investment banks.

The government said it had also charged hundreds of people in a mortgage fraud probe.

 

Two former managers of Bear Stearns, itself a recent victim of bad bets on mortgage securities, were arrested and indicted on securities fraud charges in New York in connection with the US$1.4 billion (S$1.9 billion) collapse of two hedge funds.

 

Ralph Cioffi, 52, and Matthew Tannin, 46, each pleaded not guilty. In a scene reminiscent of Enron-era scandals, the men surrendered to officials and were paraded in handcuffs in front of onlookers en route to their arraignment on Thursday.

 

The two were charged with defrauding investors by hiding problems that had led to the disintegration of the two hedge funds last year.

 

That event raised fears about risky US sub-prime mortgages and helped usher in a global credit crunch that governments around the world are still sorting out.

 

With falling home prices and rising foreclosures, the US Justice Department said it had charged more than 400 people in a 31/2-month national probe.

 

Dubbed ‘Operation Malicious Mortgage’, it involved US$1 billion in losses and 144 cases, mostly of lending fraud and foreclosure and bankruptcy scams.

 

The department’s get-tough display came amid rising fears that the housing slump is pushing the US into a recession – an issue playing a prominent role in the presidential race.

 

US Treasury Secretary Henry Paulson on Thursday urged that the Federal Reserve be given broad new powers over investment banks, following actions taken by the US central bank in March that changed its relationship with Wall Street.

 

In March, the Fed helped broker a takeover of Bear Stearns by JPMorgan Chase, and guaranteed a US$29 billion loan to facilitate the deal, out of concern that a Bear Stearns bankruptcy could trigger financial panic.

 

It was the first time since the Great Depression of the 1930s that the Fed, which regulates commercial banks, had stepped in to rescue a non-depository institution. The Fed also set up a special credit line to make emergency loans to major investment banks.

 

In an opinion piece in The Wall Street Journal on Thursday, Securities and Exchange Commission chairman Christopher Cox said decisions must be made on whether and how long to maintain the emergency lending programme, which is scheduled to expire in autumn.

 

But it looked unlikely that Congress would tackle such complex structural issues this year, given the difficulties it was having agreeing on legislation to help home owners.

 

Meanwhile, the White House issued a surprise veto threat against a Senate Bill aimed at preventing hundreds of thousands of foreclosures.

 

Proponents say the Bill could save 400,000 home owners from foreclosure. But the Bush administration objected to a provision that would give state and local governments money to buy and fix foreclosed properties.

 

REUTERS

 

Source: Straits Times

US housing market weakness long-term: survey

US housing market weakness long-term: survey

 

NEW YORK – US consumers expect housing market weakness to linger for longer than they did a few months ago, a survey showed on Friday.

 

The Reuters/University of Michigan Surveys of Consumers Home Prices Report for June also cited a broad gulf between buyers and sellers in the housing market.

 

Economists broadly agree that US house prices peaked sometime in 2006. According to some measures, they have fallen about 16 per cent since then.

 

‘Consumers now anticipate that the weakness in home prices will last much longer than they had anticipated a few months ago,’ wrote Richard Curtin, director of the survey.

 

‘Record numbers of consumers now think there are very attractive prices on homes for sale,’ Mr Curtin said. ‘The problem has been that record numbers of consumers have objected to selling their home at such deeply discounted prices.’

 

Asked about prospects for home prices during the year ahead, 23 per cent of homeowners reported that they anticipated declines, down from 27 per cent in the May survey. In June, 19 per cent said they expected home prices to rise in the next year, unchanged from May’s reading.

 

Asked about the direction of house prices over the next five years, 13 per cent of respondents said they expect prices to fall, while 55 per cent said they expect prices to rise. That was down from a 2007 peak of 70 per cent who said they expected house prices to rise. — REUTERS

 

Source: Business Times

Housing crisis brings Wall St arrests, veto threat

Housing crisis brings Wall St arrests, veto threat

* Former Bear Stearns managers charged over fund losses

* Federal authorities announce crackdown on mortgage fraud

* White House threatens veto of housing rescue

 

 

WASHINGTON – The US housing crisis produced its first high-profile Wall Street arrests on Thursday, while the Bush administration called for broadening the Federal Reserve’s powers over investment banks and said it has charged hundreds of people in a mortgage fraud probe.

 

At the same time, the White House issued a surprise veto threat against a Senate bill aimed at preventing hundreds of thousands of foreclosures. The threat signalled more partisan warfare on Capitol Hill as homeowners struggle.

 

Two former managers for Bear Stearns Cos, itself a recent victim of bad bets on mortgage securities, were arrested and indicted on securities fraud charges in New York in connection with the US$1.4 billion collapse of two hedge funds.

 

Ralph Cioffi, 52, and Matthew Tannin, 46, each pleaded not guilty. In a scene reminiscent of Enron-era scandals, the men surrendered to officials and were paraded in handcuffs in front of onlookers en route to their arraignment on Thursday.

 

The two were charged with defrauding investors by concealing problems that led last year to the disintegration of the two hedge funds. That event raised fears about risky subprime mortgages and helped usher in a global credit crunch that governments around the world are still sorting out.

 

With falling home prices and rising foreclosures, the US Justice Department said it charged more than 400 people in a 3-1/2-month, national probe. Dubbed ‘Operation Malicious Mortgage,’ it involved US$1 billion in losses and 144 cases, mostly of lending fraud and foreclosure and bankruptcy scams.

 

The department’s get-tough display came amid rising fears the housing slump is pushing the economy into recession – an issue playing a prominent role in the presidential race.

 

Both contenders – Illinois Democratic Sen Barack Obama and Arizona Republican Sen John McCain – are making economic recovery central to their campaigns.

 

‘No one can predict when the fiscal chaos in housing will end, but it doesn’t look like we will be done any time soon,’ said David Abromowitz, a senior fellow at the Centre for American Progress, a think tank in Washington.

 

‘Trillions of dollars in lost family home equity … has been wiped out for many families in just a short time. We would expect this to impact lives and put a drag on the economy well past the day when foreclosures slow and prices stop falling.’

 

 

Fed expansion urged

US Treasury Secretary Henry Paulson on Thursday urged broad new powers for the Federal Reserve over investment banks, following actions taken by the US central bank in March that changed its relationship with Wall Street.

 

In March, the Fed helped broker a takeover of Bear Stearns by JPMorgan Chase & Co and guaranteed a US$29 billion loan to facilitate the deal out of concern a Bear Stearns bankruptcy could trigger a financial panic.

 

It was the first time since the Great Depression of the 1930s that the Fed, which regulates commercial banks, had stepped in to rescue a nondepository institution. The Fed also set up a special credit line to make emergency loans to major investment banks in an effort to ease credit market strains.

 

In an opinion piece in The Wall Street Journal on Thursday, Securities and Exchange Commission Chairman Christopher Cox said decisions must be made on whether and how long to maintain the emergency lending program, scheduled to expire this fall.

 

Another SEC official told a congressional panel on Thursday that the investor protection agency and the Fed have nearly completed a formal agreement to oversee investment banks until Congress can set up a permanent system through legislation.

 

 

Congress debates

It looked unlikely that Congress would tackle such complex structural issues this year, given the difficulties it was having agreeing on legislation to help homeowners.

 

The White House issued a surprise veto threat against a Senate bill that would, like a similar bill already passed by the House of Representatives, create a new fund to underwrite up to US$300 billion of failing home loans. It would also offer billions of dollars in emergency housing relief.

 

Proponents say the bill could save 400,000 homeowners from foreclosure. But the Bush administration House objected to a provision that would give state and local governments money to buy and fix foreclosed properties.

 

Congressional leaders were trying to hammer out a final bill and send it to President George W. Bush before lawmakers leave town at the end of next week for the July 4 holiday.

 

Some House Republicans also threatened to stall a final version of the housing bill, demanding more information about preferential mortgage terms given to two Democratic senators by Countrywide Financial Corp.

 

‘Given the questions around Countrywide, preferential loans need to be investigated,’ House Republican leader John Boehner told reporters. ‘To think that we’re going to move a housing bill with these questions looming I think is irresponsible.’ — REUTERS

 

Source: Business Times

Sub-prime legend John Paulson: It’s not over yet

Sub-prime legend John Paulson: It’s not over yet

 

He says write-downs could hit $1.8 trillion, surpassing IMF’s $1.3 trillion forecast

 

LONDON – MR JOHN Paulson, the founder of the world’s top hedge fund company Paulson & Co, said global write-downs and losses from the credit crisis may reach US$1.3 trillion (S$1.8 trillion), exceeding the International Monetary Fund’s (IMF’s) US$945 billion (S$ 1.3 trillion) estimate.

 

‘We’re only about a third of the way through the write-downs, ‘ Mr Paulson, 52, told the Gaim International hedge fund conference in Monaco on Wednesday.

 

‘There are a lot of problems out there and it will continue to be felt through the year. We don’t see any signs of stabilising. ‘

 

Mr Paulson is the hedge fund manager who made almost £2 billion (S$5.4 billion) from correctly calling the implosion of United States sub-prime mortgages last year.

 

His Paulson Partners fund has risen 18 per cent a year since it started in 1994, and his main sub- prime-debt fund rose 591 per cent last year.

 

Banks and securities firms worldwide have posted more than US$395 billion in losses and write-downs since the US sub-prime crisis started last year.

 

In the last few weeks, various figures including Wall Street chief executives and former US Federal Reserve chairman Alan Greenspan have said that the worst of the credit crisis may be over.

 

Mr Paulson said the second half of this year will be worse than the first for the US as the economic slowdown spills over into next year.

 

Signs of stress are ‘accelerating’ in the housing market, and he is betting on falling securities prices.

 

‘I don’t consider myself a bull or a bear,’ he told the audience at the Grimaldi Forum in Monaco.

 

‘I’m a realist.’

 

Mr Bob Janjuah, a Royal Bank of Scotland strategist in London, agreed that stock and credit markets still face the worst in a slump that started almost eight months ago.

 

He added: ‘Mid-July through to October is likely to be the most bearish period we will experience in the bear market that began in the fourth quarter of last year.’

 

Mr Paulson said that Ambac Financial Group, the world’s second-biggest bond insurer, is ‘the most leveraged, troubled company out there’.

 

It is at risk of being downgraded to non-investment grade, he added.

 

Ambac shares have lost 92 per cent of their value this year after losses on US sub-prime mortgage securities caused the company to lose its AAA credit rating at Fitch Ratings.

 

Mr Paulson’s outlook is consistent with the view of hedge funds meeting in Monaco this week.

 

More than 80 per cent of the 1,300 fund managers, investors and service providers gathered there said that they expect the credit crisis to continue, according to a Gaim survey.

 

About 23 per cent said they believe the situation ‘will deteriorate significantly’ .

 

Mr Bill Browder, the founder of Hermitage Capital Management, said that securities firms have a ‘vested interest’ in claiming an early end to the crunch.

 

‘If we’re in the seventh or eighth inning, this is a 100-inning game,’ he said.

 

Source: Straits Times

Housing slump really hits home for ex-Citi chief

Housing slump really hits home for ex-Citi chief

 

NEW YORK – FORMER Citigroup chief executive Charles Prince lost his job because of the housing slump. Now he is having a hard time selling his home.

 

His five-bedroom, Tudor-style house in Greenwich, Connecticut, has been on the market for six months. He has cut the price by US$300,000 (S$410,850) to US$5.85 million, according to the property listing.

 

‘There is no firewall around these sorts of communities that insulates them from what is going on in the housing market,’ said Professor Nicolas Retsinas at Harvard University’s Joint Centre for Housing Studies.

 

Mr Prince and his real estate broker did not reply to telephone or e-mailed messages requesting comment.

 

He listed his home in January, two months after he left Citigroup. It posted US$5.9 billion in mortgage-related write-downs and losses in the third quarter.

 

The number of Americans in danger of losing their homes to foreclosure rose to the highest in at least three decades during the first quarter, the Mortgage Bankers Association said.

 

Source: Straits Times

US Senate leaders agree on housing rescue fund bill

US Senate leaders agree on housing rescue fund bill

New mortgage insurance fund will underwrite US$300b of failing loans

 

(WASHINGTON) US Senate leaders have agreed to a bipartisan bill to establish a US$300 billion rescue fund for troubled mortgages and a new regulator for Fannie Mae and Freddie Mac, lawmakers said on Tuesday.

 

The legislation was expected to be considered by the full Senate within days, with lawmakers keen to deliver a final bill to President George W Bush by July 4.

 

Barney Frank, chairman of the House of Representatives Financial Services Committee, in an interview with Reuters called the Senate bill ‘good progress’. But the Massachusetts Democrat said, ‘It’s not yet where we should be . . . To the extent that people say the House will just accept the Senate bill, that’s not appropriate.’

 

The House has already passed a housing bill, which differs from the Senate’s in a few respects. A final bill to be sent to Mr Bush would have to be a House-Senate compromise.

 

Mr Frank said it was still possible Congress could deliver a final measure to the White House by July 4. ‘The table is now set for serious House-Senate discussions about this,’ he said.

 

The Senate legislation agreed to by Banking Committee chairman Christopher Dodd, a Connecticut Democrat, and Alabama Senator Richard Shelby, the committee’s top Republican, represents the boldest step yet from Congress to try to stem the hundreds of thousands of foreclosures sweeping across the country amid the bursting of the real estate bubble.

 

‘We’re going to move to this. It’s important that we do it as soon as we can,’ said Senate Majority Leader Harry Reid.

 

The Senate bill would create a new mortgage insurance fund under the Federal Housing Administration (FHA) to underwrite up to US$300 billion of failing loans, although analysts expect it would cover a much smaller share of homeowner debt.

 

It would create a new regulator for home finance providers Fannie Mae and Freddie Mac, and set some new business practices for the two government-sponsored enterprises.

 

Language endorsed by the Senate leadership would increase the size of loans that Fannie Mae and Freddie Mac could buy by more than US$200,000, pushing the cap to US$625,000 in some costly housing markets, sources familiar with the bill said.

 

The bill would let Fannie Mae and Freddie Mac hold those larger loans in their investment portfolios, and set the higher loan size for mortgages financed by the FHA, sources said.

 

Disclosures given to prospective mortgage borrowers would be improved under the Senate bill, while a national licensing system would be set up for mortgage brokers.

 

In a measure that Republicans have criticised, federal grants would be issued to local governments or other housing groups for buying and renovating foreclosed properties.

 

Both the Senate plan and legislation passed by the House would open the mortgage insurance fund only to lenders that agreed to erase a large share of the original loan amount.

 

Tax measures included in the bill would include a tax credit for the purchase of a home; an increased cap on the issuance of mortgage revenue bonds; and reforms to encourage more investment in low-income housing development.

 

The House bill backed by Mr Frank differs by making the FHA refinancing fund last longer, by setting higher loan limits for FHA, Fannie Mae and Freddie Mac and on some tax provisions.

 

As lawmakers tried to push the housing package forward, Mr Dodd was forced to spend part of Tuesday answering questions from reporters about his personal mortgage finances.

 

At a news conference, Mr Dodd said he did not think he was getting a special deal when told in 2003 that he had been placed in a VIP programme while refinancing two home mortgages with Countrywide Financial Corp. The senator said he thought the VIP status was a ‘courtesy’ extended by the mortgage lender to him and his wife because they had been doing business with Countrywide since 1999.

 

‘At no point did anyone ever suggest to me that we were going to get some deal out of Countrywide,’ Mr Dodd said.

 

Conde Nast’s Portfolio.com website last week reported Mr Dodd was placed in a VIP programme that could save US$75,000 over the life of the loans he obtained from Countrywide.

 

Mr Dodd said, ‘To the best of my knowledge . . . the rates that we received were not some cut-rate deals at all, but were rather standard rates that you negotiate.’

 

Countrywide, the largest US mortgage lender, has been the subject of numerous lawsuits and regulatory probes into its lending practices. The company, which has agreed to be acquired by Bank of America, has suffered steep losses related to risky sub-prime mortgages.

 

The senator also said he was not acquainted with Angelo Mozilo, the high-flying founder of Countrywide who is under a federal regulatory probe into his stock sales.

 

‘I don’t know the man,’ Mr Dodd said. ‘I may have met him at a reception or something . . . I’ve never talked to him about my mortgages and I never would.’ – Reuters

 

Source: Business Times