Treasury Secretary Timothy Geithner said to the Senate Banking Committee that he expects the programs to start by early July, Bloomberg reported.

“Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks,” Geithner said in prepared testimony.

The Public-Private Investment Program is a coordinated effort with the Federal Reserve and Federal Deposit Insurance Corp. (FDIC) to help banks sell as much as $1 trillion in distressed mortgages and other assets.

Announced in March, the Public-Private Investment Program will be funded with $75 billion to $100 billion of U.S. Federal Reserve and Federal Deposit Insurance Corp. (FDIC) debt guarantees, as well as the funds remaining in the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).

Geithner is betting this plan will finally establish market values for the toxic debt left over from the U.S. housing bust, and that getting the private market involved will minimize the risk that taxpayers will overpay for assets.

“Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk, and banks are funding themselves more conservatively,” he said.

TALF Expanded, TARP Reserves Revised

Earlier this week, the Federal Reserve announced it would add older real estate to TALF. And Geither reiterated that the Treasury and Fed intend to expand programs to help asset-backed securities markets, such as TALF, Bloomberg reported.

“The Treasury and the Federal Reserve will continue to monitor and enhance the ABS programs to bring in new, more niche asset classes and make sure that the number of eligible borrowers and issuers continues to increase,” Geithner said.

In late March, the Federal Reserve kicked up TALF’s capacity from $200 billion to $1 trillion and began accepting mortgage-related securities as loan collateral.

Geithner also said the Treasury has about $124 billion of the $700 billion Troubled Asset Relief Program (TARP) left, $11 billion less than his previous estimate in March. He also said he expects about $25 billion to be repaid over the next year.

Source: Treasury Selling As Much As $1 Trillion in Bank Assets with Fed and FDIC

Transparency has long been a cornerstone of both democracy and the free market, but Lewis’s testimony that implies the CEO of one of America’s largest financial institutions – an institution that received more than $20 billion in taxpayer money – neglected to alert investors and potential shareholders to the full scope of Merrill’s losses prior to his company’s acquisition. It also implicates two prominent government officials in that decision.

Lewis made the comments in testimony given before New York’s attorney general as part of an investigation into bonus payments at Bank of America. The Journal reviewed a transcript of that testimony, the paper reported today.

The merger, originally valued at $50 billion, was announced on Sept. 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt. Afraid the collapse of Merrill Lynch would cause further deterioration of panic-stricken markets, the government helped facilitate the deal with $25 billion of capital -$15 billion in October and another $10 billion in January – from the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program (TARP).

Shareholders of Merrill Lynch and Bank of America voted to approve the merger on Dec. 5.  Lewis said in his testimony that he first considered backing out of the deal on Dec. 13 when Bank of America Chief Financial Officer Joe Price informed him that projected after-tax losses were “about $12 billion,” the Journal reported.

Merrill Lynch actually lost $15.84 billion in the fourth quarter. BofA posted a fourth-quarter loss of $1.79 billion, but was forced shift more weight to the U.S. taxpayer, as the government agreed to guarantee $118 billion of Bank of America assets, including commercial and real estate holdings and credit default swaps. Bank of America was required to absorb the first $10 billion of losses from its pool of assets.

Nearly 13% of the first $350 billion in TARP funds went to Bank of America.

“As we saw the anticipated loss accelerating, we reevaluated our rights under the deal,” Lewis said in BofA’s fourth-quarter conference call. “The government was under the view that walking away would cause significant concerns and serious systemic harm to the financial markets.”

Lewis elaborated in his testimony, saying that while he was not explicitly instructed to keep quiet about Merrill’s losses but that Paulson and Bernanke suggested his job would be jeopardized if he did.

“I was instructed that ‘We do not want a public disclosure.’” Lewis said.

Lewis went on to describe the conversation he had with Treasury Secretary Paulson in which he expressed his desire to abandon the deal:

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said. “I said, ‘Hank, let’s de-escalate this for a while. Let me talk to our board.’”

When asked by investigators if Paulson was “really asking Bank of America shareholders to take a good part of the hit of the Merrill losses,” Lewis said “Over the short term, yes.”

BofA shares have lost three-quarters of their value since the Merrill Lynch acquisition was announced.

Bank of America shareholders will vote on whether Lewis will keep his position as chairman and CEO at their annual meeting on April 29.

“I’d rather have this than gold.”

That’s what one well-known fund manager recently told Barrons. Why? This special group of investments is set to pay out $4,201 guaranteed cash next month. And they pay out juicy cash sums all year long. But they’re not income trusts, corporate bonds, or foreign bonds. In fact, only Martin Hutchinson is talking about them. Read his full report here…

Source: Bank of America’s Lewis Says Paulson, Bernanke Forced Merrill Takeover

In the face of gloom-and-doom predictions, rapidly rising unemployment, and an imploding economy, the market’s strong rally clearly anticipates a recovery in late 2009.

Is this just a bunch of bull?

While everyone seems focused on the economy hemmoraging red ink from the gash in the real-estate market, the broken bones of consumer demand and the unconscious state of banking and credit markets, only the stock market, and yours truly, seems to realize that the patient is being effectively triaged.

No, I haven’t lost my senses; I’ve simply regained a sense of optimism. I never drank the poisoned Kool-Aid of markets past and am on record calling in February 2008 for investors to not only “sell everything,” but to “short everything, buy short-dated Treasuries and hold cash, not cash equivalents.” And just because I was right then doesn’t mean that I’m right now; however, like back then, the traffic lights are flashing.

This time, however, they’re green, and not bright red.

There’s no doubt in my mind that the economy has farther to fall. Unemployment will hit double digits. Yesterday, the Labor Department announced that 5.6 million Americans are out of work, and that doesn’t count those who’ve given up looking for work. On top of that it was reported that based on fourth-quarter numbers, gross domestic product (GDP) actually shrank at an annualized rate of 6.3%.

So, what are rallying markets telling us?

First of all, the U.S. Treasury Department may not actually have to spend the approximately $13 trillion in rescue programs teed-up to drive the economy. If investor perception that the U.S. Federal Reserve and Treasury plans might actually work, whatever the details end up being, then traders and risk takers will lead the investing crowd by getting in early before the herd follows suit.

That is exactly what we’re seeing now.

Second, by some estimates, there is more than $9 trillion of cash sitting on the sidelines. I haven’t heard a single market commentator – or so-called expert – illuminate the new market reality, which is that there are far fewer shares available to buyers than anyone realizes.

Since the Tech Wreck of 2000, we haven’t seen any significant issuance of corporate equity. Since late 2007, for instance, the initial public offering (IPO) pipeline flow has been virtually at a standstill.

What hasn’t been at a standstill since 2002 are leveraged buyouts. Low interest rates drove the leveraged buyout (LBO) business, which now goes by the more genteel name of private equity. Giant and once-thriving private equity shops such as KKR & Co. LLP, TPG Capital, Cerberus Capital Management LP, The Blackstone Group LP (BX), The Carlyle Group LP, Bain & Co. Inc., and a host of other multi-billion-dollar buying machines took hundreds of public companies private by purchasing their outstanding stock with leveraged debt.

What will happen to most of these debt-laden “private” companies is another story, but the word “bankruptcy” will be featured prominently in the epitaph-like final chapter of most of their stories. The point, however, is that there are fewer companies and fewer shares for equity buyers to purchase. Add into the equation a share-drop in share prices to levels not seen in decades, and “Presto:” When institutional money and eventually retail buying comes back into the market, those trillions of dollars will be chasing fewer shares at low, low prices. It doesn’t take a Wall Street rocket scientist to figure out that robust demand for cheap assets will fuel a rapid run-up in prices.

As the perception that this dead-cat bounce or bear-market rally has real legs takes hold, more committed buyers will come out of the woodwork, not wanting to miss the opportunity to average down or pick up top-notch household names at bargain-basement prices. [For additional insights on the recent run-up in U.S. stock prices, please click here to check out a news-analysis story that appears elsewhere in today’s issue of Money Morning.]

Increasingly positive market breadth and momentum technicals aside, what’s fueling my optimism is that we’re finally seeing a real effort to constitute meaningful regulatory reforms. Recent statements from President Barack Obama and Treasury Secretary Timothy F. Geithner echo my clarion calls for regulation of derivatives, market-moving hedge funds and run-amok private equity firms. This week, Geithner said he was pushing “not modest repairs at the margin, but new rules of the game.”

In addition to reigning in freewheeling leveraged wrecking machines, I see unequivocal echoes of my calls for a systemic regulator to monitor all players with the potential to single-handedly corrupt the markets, tightened and more universal accounting standards and a systemic watchdog to monitor threats to markets and the general economic health of the country.

Equally encouraging are statements that signal interest in adopting the “Spanish model” of requiring banks to set aside more capital in good times to cushion their equity and support regulatory reserve and capital ratios in bad times. Also, in a wink and a nod to stemming the moral-hazard implication of charging all banks the same Federal Deposit Insurance Corp. (FDIC) deposit insurance premiums, smaller and better run banks may not have to pony up premiums on an equal basis with insanely large and egregious and incompetently run money center universal banks.

The upcoming G20 meeting on April 2 will spotlight whether America will take charge in orchestrating a better international regulatory order by demonstrating its commitment to meaningful wholesale changes in it own feeble domestic regulatory apparatus. Clearly, President Obama had Treasury Secretary Geithner float several trial balloons this week, and clearly in the face of terrible economic data, the markets found a reason for increasing confidence.

It’s just not possible to say enough about what effects appropriate, protective, and dynamic regulations can do for investor confidence in banks, markets and the safety of committed investment capital.

Unfortunately, as far as the economy, unemployment, embattled homeowners, businesses and devastated investors are concerned, the pain may not be over. On the other hand, if the tide of investor perception flows towards the potential for a safer investing climate and roots itself in anticipation of a stampeding bull run, all boats may rise with the tide a lot sooner than the gloom-and-doomers would have us believe.

I’m looking to the future.

Are you?

Source: Stock Markets Move Past Gloom and Doom in Anticipation of the U.S. Economy’s Recovery

The Barack Obama administration yesterday (Monday) unveiled a detailed strategy for attacking that problem. The plan, which fleshes out a very broad strategy sketched out on Feb. 10, relies on a joint effort with private investors to rid banks of up to $1 trillion worth of the toxic assets that are clogging the financial system and blocking an economic recovery.

Labeled as the “Public-Private Investment Program,” the administration’s strategy is designed to finance purchases of devalued real-estate assets.  It will be funded with $75 billion to $100 billion of U.S. Federal Reserve and Federal Deposit Insurance Corp. (FDIC) debt guarantees, as well as the funds remaining in the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).

U.S. Treasury Secretary Timothy F. Geithner is betting this plan will finally establish market values for the toxic debt left over from the U.S. housing bust, and that getting the private market involved will minimize the risk that taxpayers will overpay for assets.

U.S. stocks soared in a sign that investors like the aggressive nature and unique approach of the plan. The Standard & Poor’s 500 Index soared 7.08%, while the blue-chip-laden Dow-Jones Industrial Average advanced 6.84% in trading yesterday. The indices are still down about 10% since Geithner first outlined the Obama administration’s plans on Feb. 10.

This newfound investor confidence follows a week in which the Obama administration endured harsh rebukes for overspending, and for failing to block more than $165 million in bonuses awarded to employees by embattled insurer American International Group Inc. (AIG) – which has received more than $180 billion in taxpayer-provided bailout money.

Lawmakers on Capital Hill reacted last week by passing a bill to tax 90% of the bonuses, with some even calling for Geithner’s resignation.

But the administration stood by Geithner over the weekend and said the plan was the right solution for ridding the banking system of stubborn loans and assets – and involving private-sector investors, but without actually catering to Wall Street.

”This has never been about helping Wall Street or helping a firm that made mistakes,” Christina Romer, head of the Council of Economic Advisers, told The Associated Press. “It’s absolutely about helping a system so that people can get their student loans, and [so] that families can buy their house and buy their cars, and small businesses can get their loans.”

Private Funds Crucial

Government officials contend that they have found the right mix to attract private investors and make inroads on what could be more than $2 trillion in troubled assets on banks’ books.

The administration has stressed that the problems are so serious that the government cannot solve them alone, and Geithner emphasized that market participation is vital.

“For these programs to work investors have to be prepared to take some risk,” he told a pool of reporters.

But it may be some time before it’s clear whether his approach will work because officials still have to select private asset managers, and banks have to decide whether or not they will sell their illiquid investments.

“The big question is what is the incentive for the banks to sell?” Dino Kos, managing director at Portales Partners LLC in New York, and former executive vice president at the New York Fed, told Bloomberg News. “What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?”

The backlash in Congress might mean private firms will be hesitant to take part in Geithner’s public-private partnership, even though government-backed financing will mean the private-sector investors face lower risks and enjoy heightened opportunities for profits.

To encourage private investors to be more supportive, the government will put up most of the money, shouldering more risk than the investors. Other enticements will come in the form of low-interest loans to purchasers, which could include hedge funds, private-equity firms, insurers and pension funds.

“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” the Treasury Department said in a statement. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience.”

Two-Pronged Approach

The plan calls for dividing funding from the Treasury equally between two programs to alleviate distinctly different problems hanging over the banking industry:

• Legacy Loans: Half of the capital will go to purchase a pool of troubled loans stuck on bank balance sheets that have made it difficult for banks to access private markets for new capital and limited their ability to lend. After private fund managers put up the other half, the FDIC will guarantee financing for the investors, up to a maximum of six times the capital provided.
• Legacy Securities: In order to generate prices for securities backed by mortgages that have become highly illiquid, the Treasury will provide up to 80% of the initial capital, with the rest of the investment coming from private funds. The FDIC would then offer financing for up to six times the pooled amount.

The Federal Reserve will also bump the Term Asset-Backed Securities Loan Facility, or TALF, from $200 billion up to $1 trillion and begin accepting mortgage-related securities as loan collateral.

Additionally, the Treasury will approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” and match their money one-for-one to buy securities banks want to unload.

Austan Goolsbee, a member of the White House Council of Economic Advisers, expressed confidence that private investors will step up.

Goolsbee said in an interview with Bloomberg Television that “you will start to see this buying up the assets” shortly after the private asset managers are chosen by May.

“The private sector will compete to be partners with the government,” Goolsbee predicted. “I don’t believe they should expect to be treated the same way as a deadbeat type of institution like AIG or Fannie Mae (FNM).”

Two of the largest U.S. money managers, BlackRock Inc. (BLK) and PIMCO Financial Inc., chimed in and expressed interest in participating.

“This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery,” Bill Gross, PIMCO’s co-chief investment officer, told Reuters.

More May be Needed

Despite yesterday’s near-euphoric jump in stock prices, some analysts said the need for further funding may temper the plan’s actual long-term results. The administration said the program has the capacity to purchase $500 billion – and possibly as much as $1 trillion – in troubled loans, much of which reaches all the way back to the initial declines in what’s become a total collapse of the housing market, as that’s led to a wave of foreclosures that continues to mount.

Mark Zandi, an economist with Moody’s Economy.com, estimated the government would need another $400 billion with the TARP bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG.

Current sentiment in Congress is hostile to another bailout, reflecting taxpayer frustration with Washington, and puts the possibility of further funding in serious doubt.

Source: Will Obama Administration’s Banking Sector Fix-It Plan Finally Break the Toxic-Asset Logjam?

President Obama’s team was hard at work weeks before his Jan. 20 inauguration, crafting an ambitious $825 billion economic stimulus plan, parlaying with the U.S. Treasury Department and Congress to ensure its speedy implementation, and assembling the team the nation’s 44th chief executive felt he needed to get the job done.

The current package, which has been endorsed by House Appropriations Committee, has yet to get overall congressional approval, but ultimately, the plan’s focus on job creation, infrastructure development, increased regulatory oversight, tax relief for businesses and America’s middle class, and aid to states struggling with budget shortfalls will remain intact.

In his inaugural address yesterday (Tuesday), President Obama made it very clear that he understands the scale of the challenge that his White House team faces. To a crowd that was repeatedly chanting “O-BA-MA, O-BA-MA,” the newly sworn-in president detailed the broad-ranging initiatives his administration plans to pursue.

“The state of the economy calls for action, bold and swift, and we will act – not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together,” President Obama told the gathered throng. “We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.”

Will Spending + Tax Cuts = Jobs?

The House bill contains $550 billion in federal spending and $275 billion in tax cuts. In an effort to spur job creation, House Democrats have slated $90 billion for highway, transit, and public works projects. On top of that, the bill allots $102 billion to helping workers find new jobs and retaining employer-provided healthcare.

“High unemployment and rising costs have outpaced Americans paychecks,” a summary of the bill read. “We will help workers train and find jobs and help struggling families make ends meet.”

Specifically, some of the plan’s highlights include:

• $79 billion for states to fund schools and educational programs.
• $18.5 billion for renewable energy and energy efficiency research and improvements.
• $16 billion in college financial aid and higher student loan limits.
• $13 billion in K-12 education spending.
• $6 billion for mass transit improvement and expansion.
• $5 billion for public housing construction and improvement.
• $10.1 billion in water-system improvements.
• $3.8 billion to build new military and veterans’ hospitals.
• $4.5 billion for defense-construction projects.
• $6 billion for federal building construction and repair.
• $4 billion for governments and housing agencies to deal with foreclosed and abandoned homes.

Hard-Hitting Parts of the Plan

Lawrence Summers, the director of the National Economic Council, said earlier this week that he expects the stimulus package will pass within a month. But he, along with many analysts, have been quick to point out that the road to recovery will be long, and the total effect of the stimulus will not be immediately felt.

“These problems weren’t made in a week or a month or a year and they’re not going to be fixed in a week or a month or a year,” Summers said. “There’s almost no question the economy is going to decline for some time to come.”

Less than half of the $30 billion in highway construction funds outlined by the plan would be funneled into the economy over the next four years, according to an analysis by the Congressional Budget Office (CBO). Less than $4 billion in highway construction money would reach the economy by September 2010, The Associated Press reported.

Only $26 billion, or 7%, of the total $274 billion dedicated to infrastructure spending would infiltrate the economy by Sept. 30, the end of the budget year.

However, other features of the plan will have a more immediate impact. The $275 billion in tax cuts the administration has planned for 95% of tax filers, and additional aid for social programs and state governments will take effect much faster.

“Some of the adjustments will take place almost immediately,” Summers explained. “People will see income in their paychecks, state and local governments will get support to prevent layoffs … and there are a ton of shovel-ready projects that are out there that aren’t going to have to be cancelled when this program passes.”

One of the first measures to be included in the plan will almost certainly be President Obama’s “Making Work Pay” tax perk, which provides $500 to individual taxpayers and $1,000 to couples. This measure is widely expected to take the form of a credit on payroll taxes.

“If you send people a check for $500, they can put it in the bank,” Clint Stretch, managing principal of tax policy at Deloitte & Touche USA LLP told MarketWatch.com. “If you raise everybody’s paycheck by $10 or $20 a week, they will spend it.”

The House proposal calls for tax credits to be extended to small businesses. The 2008 stimulus bill let small businesses to deduct as much as $250,000 of certain expenses, and the current stimulus package would temporarily extend that measure.

Also, companies could enjoy an extended bonus-depreciation provision, which would allow them to immediately write off one-half of the cost of certain capital expenses and deduct the rest over time.

The Obama administration has also pledged to keep stricter tabs on the $700 billion Troubled Assets Relief Program (TARP). The first $350 billion authorized by Congress has all but vaporized at this point. But there is no way to tell what effect the money has had, as the banks that refused capital infusions are refusing to disclose how they spent it.

“There’s going to be a very different level of rigor in the evaluation of institutions,” Summers said. “The institutions that are healthy and don’t need [the money] to survive are going to be expected to lend.”

Summers said the new administration intends to create a Web site that will detail where the bailout money has gone, as well as details of the banks’ repayment obligations and the expected repayment schedule.

President Obama on Jan. 12 asked Congress for the second half of the bailout funds.  Summers insisted the administration would take a “more proactive approach” to managing the funds, ensuring they are not focused “on the needs of banks, but on the need of the economy for credit.”

David Axelrod, another top advisor to the Obama administration, echoed those claims on ABC television program “This Week,” saying Obama would “have a strong message for the bankers.”

“We want credit flowing again,” he said. “We don’t want them to sit on any money that they get from taxpayers.”

The administration is also expected to clamp down on executive pay for companies in line for bailout funds.

Said Axelrod: “We have to make sure the money doesn’t go to excessive CEO pay and dividends when it should be going to lending.”

Key Cabinet Members

President Obama has already made many of his key appointments – crucial if his new administration is to hit the ground running. Now those nominees must run the gauntlet of U.S. Senate confirmation.
The Senate confirmed six cabinet members yesterday afternoon, but delayed the confirmation of Sen. Hillary R. Clinton as the U.S. secretary of state. Those confirmed, and their new posts, consisted of:

• Steven Chu, energy secretary.
• Tom Vilsack, agriculture secretary.
• Arne Duncan, education secretary.
• Ken Salazar, interior secretary.
• Janet Napolitano, secretary of homeland security.
• Peter Orszag, head of the White House budget office.

Sen. Clinton’s confirmation was held up by the objections of a single Republican senator, John Cornyn, R-Tex., who continues to have concerns over non-Americans who might be making large donations to the charitable foundation run by Clinton’s husband, former U.S. President Bill Clinton, the Canadian Broadcasting Corp. reported late yesterday.

That means there will be a roll call vote today to confirm Clinton as Obama’s foreign envoy, the CBC said. Last week, the U.S. Senate foreign relations committee voted 16-1 to endorse Clinton as the next secretary of state. A Republican senator from Louisiana on the committee cast the only vote against her nomination.

Clinton was President Obama’s chief rival during the Democratic presidential primary.

Among the other nominees who must still be confirmed, the key nominees may well be Mary Schapiro, Barack Obama’s choice to head the U.S. Securities and Exchange Commission, and Timothy Geithner, the president of the New York Federal Reserve who has been tapped to take over as U.S. Treasury secretary, succeeding Henry M. “Hank” Paulson Jr., the architect of much of the Bush administration bailout plan. Money Morning has reported extensively on both nominees.

Schapiro, currently the chief executive of the Financial Industry Regulatory Authority, the securities and brokerage industry’s self-policing organization, has been tapped to head the SEC – just as the embattled agency is being called on to help restore investor confidence shattered by the worst financial crisis since the Great Depression.

Although she’s a seasoned regulator, critics question her toughness: Schapiro nevertheless spent much of last year cracking down on small brokerages and minor players – even as the mortgage storm swirled and Bernie Madoff’s Ponzi scheme went undetected, The Wall Street Journal reported.

Schapiro – regarded as a “strong investor advocate” – told the Senate Banking Committee last Thursday that her tenure would “have a laser-like focus on fraud and investor protection,” Reuters reported. “With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors and break the law.”

Money Morning experts wonder if she’s not being brought in to merge one or more other regulatory agencies with the SEC in order to create a “super-agency” with unified oversight of the U.S. financial-services industry.

On the Geithner matter, Stuart Levey, the Treasury Department’s undersecretary for terrorism and financial intelligence, has agreed to stay on until the Senate confirms a permanent successor, published reports state.

Revelations that Geithner failed to pay $34,000 in taxes while employed by the International Monetary Fund (IMF) several years ago derailed Senate Democrats’ plans for a speedy approval for Geithner. Bipartisan backing was still strong, but the delay in his confirmation hearing always opens up the possibility that opposition could build.

Senate Republicans, who have been mostly deferential to Obama’s nominees, were blocking efforts to fast-track Geithner’s nomination, with at least one Finance Committee member saying the tax questions deserved greater scrutiny.

Obama had hoped for approval by yesterday, but the GOP objections made that impossible, meaning Geithner’s confirmation hearing will be held today.  Two Republicans formally objected to scheduling the hearing this Friday after the panel disclosed that Geithner had failed to pay some taxes he owed between 2001 and 2004.

“Look, is this an embarrassment for him? Yes. He said so himself. But it was an innocent mistake,” Obama said when the tax troubles surfaced a week ago. “My expectation is that Tim Geithner will be confirmed.”

According to recent published reports, several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner, who actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors. Many members of Congress on both sides of the aisle believe he’s the very best candidate for this job – which is going to take someone with superlative skills and qualifications, given that the financial crisis continues to grow in complexity with each passing week.

Source: The Obama Blueprint for Solving the U.S. Financial Crisis

Warren, who heads a congressionally appointed oversight panel, told ABC News there was no evidence the Treasury had used money from the Troubled Assets Relief Program (TARP) to put a floor under the falling U.S. housing market by avoiding preventable foreclosures.
“There’s just no money that’s gone in that direction,” Warren said. “This one’s not even arguable. The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so.”

The government has spent the first half ($350 billion) of the bailout money. U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. set aside the second half to be deployed by the incoming Barack Obama Administration. President-elect Barack Obama said last week that he wants more transparency and stricter guidelines for using the second half of the TARP money.

The congressional investigation is just the latest in a series of revelations demonstrating the misallocation of the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks – including an investment in China – and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.

The Congressional Oversight Panel has now added to that list of criticisms. In a draft of a report released Friday, the panel said the Treasury Department has failed to reveal its strategy for stabilizing the financial system and had done little to track how the money was used.

The draft report cited “significant gaps in Treasury’s monitoring of the use of taxpayer money,” including asking financial institutions to account for what those banks, brokerages and insurance companies have done with the taxpayer money. The report also questioned whether Treasury fulfilled the promises made to Congress when it pushed for lawmakers to approve the rescue funds.

Indeed, the panel said in its report that “for Treasury to take no steps to use any of this money to alleviate the foreclosure crisis raises questions about whether Treasury has complied with Congress’s intent that Treasury develop a plan that seeks to maximize assistance for homeowners.”
According to the report, the TARP panel had asked the Treasury Department to respond to 45 questions, but the department either didn’t – or couldn’t – answer a number of them.

The Treasury Department “set up the system and [it] didn’t put any tracking mechanisms on it. [It] didn’t put any restrictions on the banks,” Warren said during an interview on ABC TV’s “Good Morning America.”

“So the money could be used in lots of different ways. It might be used for lending, which was supposedly the initial purpose,” Warren added. “It might be used to buy other banks, it might be used to buy other assets, it might to buy things overseas. Or it may just be stuffed in vaults and left there.”

A Treasury spokesman declined comment, saying the department had not seen a copy of the report, Reuters said.

According to Reuters, the panel said the Treasury hasn’t used any of TARP’s first $350 billion tranche to help borrowers refinance or deal with mortgages that have a face value that is more than the current market value of their homes.

“Treasury needs to be clear as to what, if anything, it has done, and if it insists on taking credit for private sector efforts, it must explain what ‘help’ means,” the draft report said.

Asked if the Treasury had been given too much discretion in the use of the funds, Warren, a Harvard Law School Professor, told TV interviewers that “Congress may want to take a very hard look at that question.

“Ultimately, (I) don’t have a badge, don’t have a gun,” Warren said. “It’s up to Congress what they’re going to do about making more requirements and how Treasury uses this money.”

The Treasury Department must request congressional approval to access the bailout fund’s second $350 billion. President-elect Barack Obama’s economic team, including U.S. Treasury Secretary Nominee Timothy Geithner, is working on an overhaul of the fund to speed the flow of credit to consumers and the economy.

President-elect Obama’s economic team has been talking with the Bush administration about having Treasury Secretary Paulson ask Congress as early as this week for access to the $350 billion remaining in the bailout fund. If Congress rejected such a request, a presidential veto could still free up the money, unless Congress overrode the veto.

“Let’s lay out very specifically some of the things that we are going to do with the next $350 billion of money,” Obama said on the ABC News program, “This Week.” “And I think that we can regain the confidence of both Congress and the American people that this is not just money that is being given to banks without any strings attached and nobody knows what happens, but rather that it is targeted very specifically at getting credit flowing again to businesses and families.”

Source: Congressional Watchdog Criticizes Treasury for Failing to Track $350 Billion in Bank Bailout Money

This is the sixth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds

“We have not disclosed that to the public. We’re declining to,” Thomas Kelly, a spokesman for JP Morgan Chase & Co. (JPM) told The Associated Press, which surveyed 21 banks that received at least $1 billion in federal bailout money, and asked how that capital was being used. JP Morgan received a $25 billion infusion as part of the U.S. Treasury Department’s $700 billion Troubled Assets Relief Program (TARP).

As an ongoing Money Morning investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyouts deals are being done in markets as far away as China. Meanwhile, credit remains tight here in the U.S. market, a situation that could be alleviated if only the banks made the bailout money available to consumers in the form of loans.

Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended. More recently, The AP has joined the journalistic posse and published several investigative pieces, including one that looked at executive pay at financial institutions that received bailout money.

Some experts – such as investing icon Jim Rogers – say that bailouts in general are bad deals. They’re even worse if they’re funded by taxpayers who don’t know how their money is being spent [A related story on Rogers' views about the U.S. banking-bailout initiative appeared last week in Money Morning. To access that story, please click here].

The bottom line: Banks won’t say how they’re using the bailout money. That refusal – coupled with the almost non-existent disclosure and oversight of the TARP program – means the country may well never find out how hundreds of billions of taxpayer dollars were spent.

Anatomy of a Survey

In its latest investigative offering, The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings? And what’s the plan for the rest?

According to The AP, none of the banks provided specific answers.

For instance, when Kevin Heine, a spokesman for Bank of New York Mellon Corp. (BK) – which received about $3 billion in TARP money – was asked how his institution was using the emergency infusion, he replied by stating that “we have not disclosed that to the public. We’re declining to.”

The words varied, but the basic message was the same from one bank to another. For instance, Barry Koling, a spokesman for SunTrust Banks Inc. (STI), the Atlanta, Ga.-based lender that received $3.5-billion in taxpayer cash, told the wire service that “we’re not providing dollar-in, dollar-out tracking.”

Some banks actually admitted that they simply didn’t know where the money was going.

For instance, a spokesman for the Birmingham-based Regions Financial Corp. (RF) said the company is not tracking how it is spending the $3.5 billion in TARP money that it received.
“We manage our capital in its aggregate,” said Regions spokesman Tim Deighton.

These answers – or lack thereof – highlight both the secrecy surrounding the TARP program, as well as the lack of oversight by Congress. Given that the entire TARP program is worth at least $700 billion – roughly the equivalent of the economy of The Netherlands – those aren’t small issues.

About half of the $700 billion was earmarked for bailouts. But because the U.S. financial crisis was escalating so quickly – and because the Bush administration pushed Congress to approve the TARP plan quickly – Congress attached virtually no strings to the bailout funds. The Treasury Department has been using the money to buy stakes in key U.S. banks, allegedly hoping that the infusion of cash would enable them to heal themselves and start lending again.

As the deepening U.S. credit crisis has shown, that hasn’t happened.

No Oversight, No Accountability

There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill late last year and implored them to lend the money – instead of hoarding it, spending it on executive bonuses, or for buyouts to get bigger. But there’s no process in place to guide this. And there are no consequences for banks that fail to comply with what U.S. lawmakers are asking.

Even worse: There’s no vehicle that enables taxpayers to find out what banks are doing – at least, not yet.

“It is entirely appropriate for the American people to know how their taxpayer dollars are being spent in private industry,” Elizabeth Warren, the top congressional watchdog overseeing the financial bailout, told The AP. Stating that it takes “a lot of nerve not to give answers.”

Warren said her oversight panel will try to force the banks to say where they’ve spent the money. But she also noted that she was quite surprised to learn that she even has to ask for that information.

“If the appropriate restrictions were put on the money to begin with, if the appropriate transparency was in place, then we wouldn’t be in a position where you’re trying to call every recipient and get the basic information that should already be in public documents,” Warren said.

In fact, the due diligence on the legislation that created TARP was so lax that lawmakers didn’t realize until much later that the bill they passed actually managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers were furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

“Those are legitimate questions that should have been asked on Day One,” said U.S. Rep. Scott Garrett, R-N.J., a financial services committee member who opposed the bailout as it was being pushed through Congress. “Where is the money going to go to? How is it going to be spent? When are we going to get a record on it?”

Buyouts Not Bailouts

Nearly every bank questioned – including Citigroup Inc. (C) and Bank of America Corp. (BAC) – recipients of some of the largest TARP infusions – responded to AP inquiries with generic public relations statements explaining that the money was being used to strengthen balance sheets and to continue making loans to ease the credit crisis.

As a Money Morning story detailed Friday, BofA just finalized its buyout of Merrill Lynch & Co. Inc. (MER), creating the largest U.S. bank – as well as the biggest challenge yet for longtime BofA Chief Executive Officer Kenneth D. Lewis. And Wells Fargo & Co. (WFC) completed its $12.7 billion purchase of Wachovia Corp. (WB) – outbidding Citigroup Inc. (C) and making a massive bet that it accurately quantified the still existing risks in Wachovia’s huge portfolio of mortgage and real estate loans.

Those were just the latest in a long series of buyout deals being funded at least partly by TARP money, the ongoing Money Morning investigation has shown.

In response to The AP survey questions, a few banks detailed company-specific programs, such as a JP Morgan plan to lend $5 billion to nonprofit organizations and healthcare companies over the next year. Marshall & Ilsley Corp. (MI), said the $1.75 billion bailout infusion it received allowed the Wisconsin-based bank to temporarily stop foreclosing on homes, said Senior Vice President Richard Becker.

This “foreclosure moratorium” will run through the end of March, the bank announced in December.

No Real Answers

But no bank provided even the most basic accounting for the federal money. Some even said that the money couldn’t be tracked.

The bailout money “doesn’t have its own bucket,” said Bob Denham, a spokesman for North Carolina-based BB&T Corp. (BBT).

Denham said taxpayer money wasn’t used in BB&T’s recent purchase of a Florida insurance company. When asked how he could make such a statement – after stating that TARP money couldn’t be tracked – said BB&T would have made that deal even without the infusion.

Interestingly, a spokesman for BB&T told the Charleston (W.V.) Daily Mail newspaper just before Christmas that the bank doesn’t like the federal government’s $700 billion financial rescue plan – and actually didn’t want to participate – but took the $3.1 billion because competitors are participating and because the Treasury Department urged it to.

According to the newspaper, BB&T – the largest bank in West Virginia – has been asked how it justifies participating in the federal government’s Troubled Asset Relief Program, or TARP, in light of BB&T Chairman John A. Allison IV’s promotion of the late author Ayn Rand’s philosophy of free market capitalism.

The reticence banks displayed when it came to discussing their use of TARP money bordered on the absurd. Most banks wouldn’t even say why they were keeping the details secret.
“We’re not sharing any other details. We’re just not at this time,” Wendy Walker, a spokeswoman for Dallas-based Comerica Inc. (CMA), which received $2.25-billion from the government, told The AP.

One didn’t even want to say they wouldn’t say, the wire service reported.

Heine, the New York Mellon spokesman who said he wouldn’t share spending specifics, added: “I just would prefer if you wouldn’t say that we’re not going to discuss those details.”
Morgan Stanley (MS) offered to discuss the matter with reporters on condition of anonymity. When The AP refused, Morgan Stanley spokeswoman Carissa Ramirez sent the wire service an e-mail saying: “We are going to decline to comment on your story.”

Lawmakers say they want to tighten restrictions on the second half of the TARP money, the yet-to-be-released block worth $350 billion. U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the federal department is trying to build up its monitoring of bank spending.

“What we’ve been doing here is moving, I think, with lightning speed to put necessary programs in place, to develop them, implement them, and then we need to monitor them while we’re doing this,” Paulson said at a recent forum in New York. “So we’re building this organization as we’re going.”

But that may all be too late, says Garrett, the New Jersey Republican congressman. Indeed, it’s entirely possible that U.S. taxpayers will never get a clear answer on where hundreds of billions of dollars went.

Source: U.S. Banks Refuse to Detail How They’re Spending Federal Bailout Money

Editors Note: This is the fifth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds.

Such concerns may be warranted in the short-term. But in the long run, deflation won’t be the challenge we face.

Thanks to an overly aggressive central bank, and more than $1.5 trillion in U.S. Treasury Department bailout programs – as well as other factors related to the ongoing global financial crisis – inflation will be the problem that ultimately bedevils us.

As long as oil and commodity prices drop, the PPI and CPI indices, which include oil and commodity prices, also will fall. Such a decline, however, does not constitute deflation; it is simply a one-time price adjustment. This is particularly true if most of the commodity-price declines are simply a reversal of excessive increases that had occurred over the previous year. That’s essentially what we’ve been seeing here.

However, the deflation believers currently have an additional argument: With output in the United States plunging, and the stock market down around 50% from its October 2007 peak, there are very few pressures pushing prices upward. For instance:

• Manufacturers, facing sudden sales declines, cut prices in an attempt to clear inventories or engage in foreign sales drives, intensifying price competition in all markets.
• Nobody is pushing for wage increases – folks are all too pleased to keep their jobs, and their employers know this.
• So while the U.S. economy is declining sharply, prices will not increase significantly and may even decline.

But even this will not turn into deflation, unless the recession is exceptionally prolonged. Currently, output and employment are dropping very sharply, as is the stock market. This cannot continue for more than a few months – the latest being perhaps late spring of the New Year. As output declines, forces pushing it towards recovery will become stronger and equilibrium will appear.
Provided world trade remains open healthy – and doesn’t plunge by 60%, as it did during the horrid stretch from 1929 to 1932 – we will avoid a second Great Depression, so the bottom in output cannot be all that far down, and will be reached relatively quickly.

Since inflation was running at more than 5.0% when output began its steep descent, it is unlikely to have turned significantly negative by the time the economy reaches bottom. After all, the so-called “core” PPI rose at a rapid clip of 0.4% (equivalent to 5.0% per annum) even in October, while the Cleveland Fed’s “median” CPI, which smoothes out fluctuations, rose by 0.1% in October and 3.2% over the past year.

Once the bottom has been reached, the excess liquidity that has been created over the last few months through the various bailouts – such the Treasury Department’s $700 billion Troubled Assets Relief Program (TARP), which is fueling bank takeovers, and not expansionary lending, and the follow-on $800 billion credit-market stimulus unveiled late last month – will combine with the huge federal budget deficit to spur inflation. By that time, discounting will have become much less prevalent, as the most aggressive discounters will have gone out of business and inventory excesses will have been worked off. Costs will have increased, since many producers will be operating well below capacity.  And the excess money supply will push up inflation.

This time, there will be no surges of foreign competition restraining price increases – Chinese producers are currently suffering high inflation in both wages and prices, so their sales prices are increasing fast.

To estimate the inflation rate we might see, you can look at money supply growth over the past year. The St. Louis Fed’s M2 money stock, the broadest money supply growth now reported by the U.S. Federal Reserve, has increased by 10% over the past year, while the St. Louis Fed’s Money of Zero Maturity (MZM), the nearest we can get to the old M3, has increased by 7.4%.

Both those rates are far higher than the increase in nominal Gross Domestic Product (GDP). In fact, money supply has been increasing about 65% faster than GDP since 1995, which is when former U.S. Federal Reserve Chairman Alan Greenspan began to overly relax monetary policy. In the most recent two months, MZM has risen only modestly, at a 3.1% annual rate, but M2 has risen much more rapidly, at a 20.6% annual rate. (The difference between the two figures reflects quirks produced by the various bankruptcies and bailouts – for example Washington Mutual Inc. (OTC: WAMUQ), nominally a “thrift,” has been taken over by Bank of America Corp, (BAC), a bank).

In any case, it seems likely that inflation in the 7%-10% range lies in our future once output stabilizes. The deflationists here have a huge problem: Their view of falling prices is in incompatible with swiftly rising money supply, so only a sharp fallback in money supply, which we are not seeing, would make deflation plausible.

The Fed has been blamed so widely for not expanding money supply fast enough during the Great Depression, that it is showing every sign of making the opposite error now.

If inflation does return with renewed force, we need to invest accordingly. One way of doing so would to use Treasury Inflation Protected Securities (TIPS). TIPS yields have recently risen, as investors have focused on deflation. Indeed the 10-year TIPS currently yields 3.11%, only 0.08% lower than the 10-year conventional Treasury, so the market is saying inflation will average 0.08% over the next 10 years. That’s nonsense, and such a mis-pricing makes TIPS an attractive investment, even though conventional Treasuries are vulnerable.

Another investment that benefits from inflation is gold, which has declined in price, albeit less than oil, and is currently selling around $770 per ounce. If inflation is expected to take off, gold prices will rise sharply, and a gold price of $1,500 per ounce is by no means out of the question. The most efficient way to buy gold is through the SPDR Gold Shares ETF (GLD).

Source: Why Fed Policies and Treasury Department Bailouts Will Lead to Inflation Rather Than Deflation

The situation is dire. GM is burning through cash at a pace that could mean bankruptcy, and all three players are struggling with high costs, weak vehicle sales, frozen credit lines and dwindling cash reserves calling into question whether they can survive much longer without government help. The answer, of course, is that they probably can’t.

But it’s here that the debate turns political, the Detroit Free Press reports. Congressional Democrats are pushing for some form of auto-sector bailout – even an extension of the deal U.S. banks received as part of the $700 billion rescue plan crafted by the U.S. Treasury Department. But Republican lawmakers claim their Democratic counterparts are “pandering” to their own voter base, which includes widespread support of American unions.

Expect the debate to become heated and emotional as some lawmakers and other policymakers spotlight the massive job losses that a failure of one – or all three – of the carmakers would cause. And there would be massive ramifications beyond the Big Three themselves. As Money Morning has reported, the three automakers – all told – employ more than 200,000 Americans, and support millions of additional indirect workers employed by suppliers and dealerships.

The collapse of the automakers could ultimately cost the economy more than 2 million jobs. And the pain that would cause doesn’t even factor in the additional estimated 1 million Americans who rely on the U.S. auto companies for pension and healthcare benefits – chiefly retired autoworkers and their families.

Reaching a bailout agreement probably would require automakers and their supporters depends on the automakers and their supporters convincing skittish lawmakers that such a deal is critical for the health of the overall economy and that the U.S. government won’t be throwing good money after bad, the Free Press reported.

GM spokesman Tony Cervone even tried to spin it that way: “It’s a loan, it’s a bridge loan,” he said. “The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan.”

Second, Freddie Mac (FRE), seized by the government two months ago, asked the Treasury for $13.8 billion, after a record quarterly loss caused its net worth to fall below zero. More on this momentarily.

And third, the struggles also continue abroad. Foundering Asian economies came away from a weekend Group of 20 meeting in Washington on the worldwide financial crisis with the promise they’d have expanded access to financing programs from such sources as the International Monetary Fund (IMF).

Exporters throughout Asia that depend on credit to pay for raw materials and to finance shipments say business has plunged as access to needed credit has dried up, the International Herald Tribune reports. Access to IMF loans could help governments in South Korea, India, Indonesia and other economies where investor anxiety about a possible scarcity of foreign currency has driven down exchange rates, said Citigroup Inc. (C) economist Yiping Huang.

Leaders of the world’s top industrialized nations also pledged to give developing countries a bigger role in global financial bodies — a move long sought by China’s leadership. And while Beijing welcomed the step, China’s leaders gave no indication whether the country might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve fund.

Target Corp. (TGT), Home Depot Inc. (HD), and AnnTaylor Stores Corp. (ANN) (among others) report earnings, though poor results are already forgone conclusions.  A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy.  (Just a few months ago, such releases were feared…How quickly things can change.)

Market Matters

Looks like the Feds could use a mulligan (do-over).  When the $700 billion bailout plan was first announced, one of its primary goals was to resurrect the balance sheets of ailing banks by buying underwater assets.  Additionally, direct government investments were supposed to encourage bank-lending activity that would help thaw out the frozen credit markets.

Well, just a few weeks after its creation, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. announced that the government will not buy troubled assets (that no one seems to know how to value), meaning the plan will instead focus on enhancing consumer lending.  Meanwhile, as a Money Morning investigative report demonstrated, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending in a way that would stimulate economic growth.  Non-banks also have been recipients of the government’s generosity, as insurance giant American International Group Inc. (AIG) received $40 billion in new capital from this package, under the terms of its newly structured bailout. All told the deal’s worth more than $150 billion.

American Express Co. (AXP) applied for (and received) approval to become a commercial bank in order to tap into the government resources.  While certain tweaks should have been expected to ensure that the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence. President-elect Barack Obama is asking a Congressional lame-duck session to approve $25 billion to $50 billion in rescue aid for Detroit’s crumbling auto industry. He also wants to appoint a czar or board to oversee the auto industry’s rescue and reconstruction, both Money Morning and Bloomberg News reported.

With foreclosures soaring by a full 25% in October from last year’s level, Fannie Mae (FNM) and Freddie Mac (FRE) [now literally part of “the government” – somewhat ironic given that it was the pressure from foreign-government bondholders that forced the federal government to put the two mortgage giants into conservatorship, a Money Morning investigative story demonstrated] announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principal.

Freddie, the mortgage-finance giant that had a negative net worth of $13.7 billion at the end of the third quarter, asked the Treasury Department for $13.8 billion and says it expects to receive the money by Nov. 29. The net loss widened to $25.3 billion after the company wrote down tax assets and providing for bad mortgages and securities, Bloomberg News reported Friday.

As the government tries to avert a financial-market collapse spurred by the worst housing slump since the Great Depression, Freddie’s demand adds to the government’s growing burden as it tries to avert a collapse in financial markets, Bloomberg said. The U.S. pledged $100 billion each to Freddie and larger rival Fannie Mae when it placed them into conservatorship in September. Fannie said this week it may need more money at the end of the year.

“You could very well get losses north of $100 billion on both of these companies,” Paul Miller, an analyst at FBR Capital Markets (FBR) in Arlington, Va.

Freddie Chief Executive Officer David M. Moffett, 56, named in September when the government seized control of the company, increased write-downs for bad mortgages and securities and took a charge against most of Freddie’s so-called deferred tax credits. Fannie CEO Herbert M. Allison Jr., 65, took similar steps earlier this week, causing the Washington-based company to record a $29 billion loss.

Like Fannie and Freddie, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers by streamlining and modifying its loans.  Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25%, or up to 60,000 jobs. And rumors have its chairman among those to be given his walking papers (A Reuters report Saturday stated that Citi would cut 10% of its 352,000-person work force).  Not to be outdone, Morgan Stanley (MS) will be cutting close to 10% of its institutional securities and asset management units.  In non-financial news, Sun Microsystems Inc. (JAVA) plans to reduce its workforce more than 5,000 jobs; Intel Corp. (INTC) and Best Buy Co. Inc. (BBY) offered pessimistic outlooks; Circuit City Stores Inc. (CC) filed for bankruptcy protection (just in time for the holidays), and retailers J.C. Penney Co. Inc. (JCP) and Macy’s Inc. (M) issued weak earnings reports.

In fact, after posting a $44 million loss for the third quarter, Macy’s may be looking to consolidate down to two divisions from its current four, Womens Wear Daily reported Friday. Sources told the trade journal that plans were calling for Macy’s Florida in Miami and Macy’s Central in Atlanta into the New York-based Macy’s East and San Francisco-based Macy’s West division, the industry trade journal reported.

Wal-Mart Stores Inc. (WMT) fared better than many competitors, the company also warned of a challenging quarter ahead.

Early last week, as was reported in this column a week ago today (Monday), China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets.  Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan.  Three days of intense selling meant $1 trillion of lost shareholder wealth.  With the Dow Jones Industrial Average plunging below the 8,000 level, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session).  Oil prices fell below $60 a barrel to a 20-month low; gasoline pushed closer to a national average of $2 a gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75.  At least, that’s good news for those “gloom-and-doom” retailers.   (Maybe they should tap into the bailout fund as well?)

Economic Matters

How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended.  Remember, last summer, most U.S. Federal Reserve watchers also expected the next rate move to be higher as Federal Reserve Chairman Ben S. Bernanke and friends seemed more concerned about threats of inflation (with oil at a record of $145 a barrel) than any domestic (or global) recession.  Fast-forward to the present, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).

By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter.  (No shortage of contradictory predictions from “experts” these days.)  These same economists overwhelmingly believe that President Obama should reappoint Bernanke as the central bank chairman in 2010.  Late in the week, Bernanke stated that the world’s central bankers have pledged to work together to resolve the global financial crisis and even opened the door to another rate cut (below the current 1.0% target level for the benchmark Federal Funds rate).  U.S. President George W. Bush welcomed world leaders to the G20 economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).

[Editor’s Note: For Money Morning’s take on the U.S. economy, U.S. stock market and such other key 2009 topics as the state of economies in China, Latin America and Japan, and the outlooks for the prices of gold, oil and food, check out our “Money Morning Outlook 2009” series, which is just under way. We’ll also be looking at sovereign wealth funds, retail sales, alternative energy, IPOs, mergers and acquisitions, and more.]

A light week in the economic calendar brought little stress relief to investors (not to mention retailers).  Friday’s retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record.  While U.S. auto lots have been transformed into veritable ghost towns these days, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else.

However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months.  Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cash-flow positions (without suffering foreclosure).

Weekly Economic Calendar

Source:U.S. Automakers, Freddie Mac and Foreign Exporters Next in Line for Bailout Handouts