Friday, May 08, 2009

US Economic Crisis Bulletin: Another 539,000 Job Losses; Banks Lose $600bn; AIG Losses at $4.35bn; Another 'Jobs Program'

MAY 8, 2009, 8:52 A.M. ET

Pace of Job Losses Moderated in April; Jobless Rate at 8.9%

Wall Street Journal

WASHINGTON -- The pace of U.S. job losses tapered off a bit last month, suggesting that while the economy remains mired in a prolonged recession, it may be finally starting to find its footing.

Still, even though the decline was the smallest in six months, a good deal of the improvement came from temporary government hiring in advance of next year's Census.

And another half-million-plus drop in employment and further increase in the unemployment rate to a 25-year high remains a sober reminder that any road to recovery will be bumpy.

Nonfarm payrolls fell 539,000 in April, the U.S. Labor Department said Friday, slightly better than Wall Street expectations for a 610,000 decline, according to a Dow Jones Newswires survey. March was revised to show a steeper payroll drop of 699,000.

The economy has shed 5.7 million jobs since the recession started in December 2007, with almost 2.7 million of those losses occurring in the last four months alone.

"Widespread job losses continued throughout the private sector," said Keith Hall, Commissioner of the Bureau of Labor Statistics. Private-sector employment fell by 611,000 last month, down a bit from the 700,000 average of the past four months, Hall said.

The unemployment rate, which is calculated using a survey of households as opposed to companies, increased 0.4 percentage point to 8.9%, the highest level since September 1983.

Many economists expect that rate to eventually top 10%. Not only does the economy have to stop losing jobs before the jobless rate stabilizes, it actually has to add payrolls at a modest rate just to keep up with new entrants into the labor force.

In testimony to the Congressional Joint Economic Committee Tuesday, Federal Reserve Chairman Ben Bernanke said, "currently we don't think it's going to get to 10%" though even something in the 9% range is still "way too high."

By broader measures, unemployment -- or at least underemployment -- is already well into double digits. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers hit 15.8% last month, up from 15.6% in March and 6.6 percentage points higher than it was one year ago.

Average hourly earnings advanced just $0.01 to $18.51. That was up just 3.2% from one year ago, a sign that inflation isn't a threat.

Should the modest improvement in labor-market conditions continue, as weekly jobless claims figures suggest, then the pace of economy contraction will probably ease somewhat this quarter. After declining over 6%, at annual rates, in each of the last two quarters, gross domestic product is expected to contract at a much slower rate this quarter, setting the stage for a return to growth later this year.

But so far, most of the so-called "green shoots" of recovery that economists and policymakers have latched onto are sentiment-based indicators such as consumer confidence and purchasing manager surveys.

The mix of grim automobile sales for April and ongoing steep job cuts suggest that consumers still face considerable headwinds.

According to Friday's report, hiring last month in goods-producing industries fell by 270,000. Within this group, manufacturing firms cut 149,000 jobs, bringing the total since the recession began to 1.6 million.

Construction employment was down 110,000 last month.

Service-sector employment fell 269,000. Business and professional services companies shed 122,000 jobs, the sixth-straight six-figure loss, and financial-sector payrolls were down another 40,000.

Retail trade cut 46,700 jobs, while leisure and hospitality businesses shed 44,000 as households cut back on nonessential spending. Temporary employment, a leading indicator of future job prospects, fell by more than 62,000 a slight improvement from the previous month's fall.

As has been the case throughout much of the recession, the sole bright spot among private sector industries was health care, which added almost 17,000 new jobs.

The government added 72,000, "mainly due to hiring of temporary workers in preparation for Census 2010," Hall said.

The average workweek was unchanged at 33.2 hours. A separate index of aggregate weekly hours fell 0.6 percentage point to 100.3.

Write to Brian Blackstone at

Fed Sees Up to $599 Billion in Bank Losses

Worst-Case Capital Shortfall of $75 Billion at 10 Banks Is Less Than Many Feared; Some Shares Rise on Hopes Crisis Is Easing

Wall Street Journal

The federal government projected that 19 of the nation's biggest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.

The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues.

The Federal Reserve's worst-case estimates of banks' total losses and capital shortfalls were smaller than some had feared. Optimists interpreted the Fed's findings as evidence that the worst is over for the industry. But questions remain about the stress tests' rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks.

The government's tests measured potential losses on mortgages, commercial loans, securities and other assets held by the stress-tested banks, ranging from giants Bank of America Corp. and Citigroup Inc. to regional institutions such as SunTrust Banks Inc. and Fifth Third Bancorp. The government's "more adverse" scenario includes two-year cumulative losses of 9.1% on total loans, worse than the peak losses of the 1930s.

Treasury Secretary Timothy Geithner said Thursday that he is "reasonably confident" that banks will be able to plug the capital holes through private infusions, alleviating the need for Washington to further enmesh itself in the banking system.

Banks also said they will consider selling businesses or issuing new stock to meet the toughened capital standards.

The information provided by the stress tests will "make it easier for banks to raise new equity from private sources," Mr. Geithner said. Still, he added, "We have a lot of work to repairing the financial system."

Some of the banks told to add capital raced to accomplish that by tapping public markets. On Thursday, Wells Fargo & Co., which the Fed said needed to raise $13.7 billion, laid plans for a $6 billion common-stock offering. Morgan Stanley, facing a $1.8 billion deficit, said it will sell $2 billion of stock and $3 billion of debt that isn't guaranteed by the U.S. government.

If successful, the offerings "should be a meaningful step in restoring a modicum of confidence to the banks," said David A. Havens, a managing director at Hexagon Securities. "It indicates that even the big messy banks are able to attract private capital."

Shares of more than a dozen stress-tested banks rose in after-hours trading as the government's announcement soothed jitters about the industry's immediate capital needs. Bank of America shares climbed 3.6% to $13.99, while Citigroup was up 6.3% to $4.05. Fifth Third jumped 19% to $6.35. SunTrust fell 2.5% to $18.05, and Wells Fargo slipped 0.9% to $24.54.

Nine of the stress-tested banks -- including titans like J.P. Morgan Chase & Co. and Wall Street's Goldman Sachs Group Inc. as well as several regional institutions -- have adequate capital. That finding essentially represents a seal of approval from the Fed.

The others need to raise anywhere from about $600 million for PNC Financial Services Group Inc. to $33.9 billion for Bank of America. In between are several other regional lenders: Fifth Third, which needs to raise $1.1 billion; KeyCorp, $1.8 billion; Regions Financial Corp., $2.5 billion; and SunTrust, $2.2 billion.

Experts warn that the tests could have a serious unintended consequence: Loans could be harder to come by for consumers and businesses. That's because the government's intense focus on thicker capital cushions might prompt banks to hoard cash and further curtail lending, said Jim Eckenrode, banking research executive at TowerGroup, a financial consulting firm. He said banks will have less room to offer consumers low interest rates, while corporate customers may have a tougher time getting financing for commercial real-estate and property development.

That would undercut a key goal of the Obama administration, which has been pushing banks to lend more in order to jump-start the economy.

The test results were vigorously contested by some banks, which argued they were superficial and didn't reflect significant differences in the health of various banks' loan portfolios.

In a news release Thursday, Regions publicly criticized the testing process. The Birmingham, Ala., bank said the Fed's loss assumptions were "unrealistically high." Regions said it "questions whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario," given recent hints that the economy may have hit bottom.

With the tests complete, Washington's effort to clean up the banking system now shifts into a new, potentially messy phase. While most of the banks that need capital are likely to be able to find it, analysts and bankers say a few others are likely to end up being largely owned by the U.S. government due to their inability to raise capital from private investors.

Meanwhile, the tests don't address a sea of problems confronting many midsize and smaller banks.

Federal officials have repeatedly vowed to support the 19 banks, which essentially have been labeled too big to fail. Those reassurances have propelled the companies' shares to their highest levels in months. The White House, Treasury Department and Fed hope that by restoring confidence in the industry, private investors will help troubled banks shore up their finances, eliminating the need for taxpayer-financed rescues.

There are some encouraging signs. In recent weeks, a handful of healthy banks -- ranging from giants like Goldman Sachs to Denver's 34-branch Guaranty Bancorp -- have raised money by selling stock in public offerings. That represents a seismic shift from earlier this year, when many investors refused to touch any bank stocks.

"What we're starting to hear from investors is a view that these companies were oversold and, although things are bad, they're not as bad as was baked into the assumptions," said Brian Sterling, co-head of investment banking at Sandler O'Neill & Partners in New York.

Some Fed-blessed banks are likely to pursue public equity or debt offerings to flex their financial muscles and help pay back the funds that the government invested in them.

Comptroller of the Currency John Dugan, left, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke gathered in Geithner's office at Treasury on Thursday.

State Street Corp. Chairman and Chief Executive Ronald E. Logue said the government's conclusion that the Boston company needs no additional capital puts it "in a position to consider repayment of the TARP preferred stock and warrants under the appropriate circumstances."

State Street, one of the largest managers of index funds, got a $2 billion taxpayer-funded infusion under the Troubled Asset Relief Program, or TARP. On Wednesday, The Wall Street Journal incorrectly reported that State Street had been told to come up with more capital.

Bankers acknowledge that investors' appetites are limited. Investors say not enough private funds are available to fill the big banks' financial holes.

"I think there is some demand in the market to raise a certain amount, but whether you could find $60 billion of capital in the next couple of months is highly unlikely," said Joshua Siegel, managing principal at StoneCastle Partners LLC, a New York firm that invests in banks.

Banks that can't coax private investors have some other options. They can sell assets or business lines, a strategy already under way at Bank of America and Citigroup. They can push investors to swap so-called preferred shares for common stock, padding a measure of capital known as tangible common equity.

During a Thursday conference with investors, Bank of America Chairman and Chief Executive Kenneth Lewis said, "Our game plan is designed to help get the government out of our bank as quickly as possible," and vowed to abandon a loss-sharing agreement with the U.S. on $118 billion in assets.

But bankers and analysts say at least a few lenders are in a vise. Too weak to lure investors, and lacking a large pool of privately held preferred stock, these banks likely will have to turn to Washington for help. Fifth Third and Regions both said in statements Thursday that they hope to raise private funds.

The 19 tested banks, which all have at least $100 billion in assets, accounted for most of the industry's total loans. But the companies represent a sliver of the roughly 8,000 banks nationwide.

Among that vast field, many banks -- from regional institutions to tiny community lenders -- are holding huge portfolios of rapidly souring loans. Unlike their larger rivals, these banks lack the diverse income streams to overcome the brutal operating environment.

Analysts at RBC Capital Markets estimate that 60% of the top 100 U.S. banks that weren't included in the stress tests would need to raise new capital based on the Fed's loss assumptions.

—Jane J. Kim contributed to this article.
Write to David Enrich at, Robin Sidel at and Deborah Solomon at
Printed in The Wall Street Journal, page A1

AIG blames market disruption for loss

By Henny Sender in New York
Financial Times
Published: May 8 2009 00:11

American International Group reported a $4.35bn net loss in the first quarter, reflecting continuing markdowns of the value of credit insurance sold by its financial products unit.

The company blamed “restructuring and market disruption charges and accounting charges related to taxes” for its performance. AIG’s loss, which amounted to $1.98 a share, follows the $62bn loss it took in the last quarter of 2008, the largest quarterly loss in US corporate history, and a loss of $8.9bn for the year-ago period.

AIG Financial Products, AIG’s financial service unit, had an operating loss of $1.1bn. AIGFP recorded a $454m markdown of the value of the remaining $12bn credit insurance it sold on subprime mortgage securities, showing just how damaging the business continues to be. The group continued to wind down the credit insurance it provided to European banks to less than $200bn in nominal exposure and said it did not expect to make payments on those contracts.

But of greater concern to analysts was the weakness of AIG’s core insurance arms. Operating income was down for the general insurance business as net premiums fell 17.5 per cent compared with the year-ago period. Premiums in the life assurance business also declined, leading the firm to increase its dependence on investment income. The firm denied that it had engaged in aggressive pricing.

Much of the discussion on the group’s results concerned AIG’s asset sales and its efforts to generate cash to repay the government for its loans and other support in place since September last year. AIG, once the world’s largest insurance group, is being forced by the government to spin off many of its crown jewels and wind down many of its operations. The company declined to speculate on how much asset sales have raised so far.

Among options is a public offering of a 20 per cent stake in AIU Holdings, which was spun off in April to try to insulate the core insurance unit from the stigma of the AIG brand.

While many financial institutions that have accepted public capital are struggling to maintain a difficult balance between the desires of the government and their private shareholders, AIG, which has received almost $200bn in support from the government has far less leeway to decide its fate.

“We are making good progress and stabilising the business,” said Edward Liddy, chief executive in a call with investors.

Copyright The Financial Times Limited 2009

MAY 8, 2009, 7:22 A.M. ET

Obama to Unveil Plan to Help Unemployed

Associated Press

WASHINGTON -- President Barack Obama will outline steps Friday to help the unemployed pursue education and training, and at the same time keep their unemployment benefits.

Currently, people who are out of work and want to go back to school have to give up their monthly unemployment check. And if they decide to return to school, they often don't qualify for federal grants because eligibility is based upon the previous year's income.

The president was announcing the new measures hours after the government releases its April unemployment report. The national unemployment rate stands at a 25-year high of 8.5%, and many analysts expect it to climb to 8.9%.

Under the measures Mr. Obama was scheduled to outline, according to the White House:

-The Labor Department will encourage states to update rules during economic downturns so that the unemployed can enroll in community colleges and other education or training programs without giving up their benefits. States generally require people who collect unemployment to be actively looking for work, which can make it difficult to sign up for school or job training. Going to school will satisfy the requirement that they be actively seeking new employment.

-The Education Department will encourage colleges to increase financial aid packages for the unemployed. Colleges can consider an unemployed worker's situation and make them eligible for Pell Grants, which help low-income students afford college, and other aid. An unemployed person could get a Pell Grant and use it to pay for education or job training without giving up unemployment benefits. Beginning in July, the maximum Pell Grant will be boosted by $500, to $5,350.

"Our unemployment insurance system should no longer be a safety net, but a stepping-stone to a new future," Mr. Obama said in remarks prepared for delivery Friday. "It should offer folks educational opportunities they wouldn't otherwise have" and give them skills they need to "get ahead when the economy comes back."

Mr. Obama has directed Labor Secretary Hilda Solis and Education Secretary Arne Duncan to implement the changes. Both departments also have launched a new Web site, , to help get the word out to the public.

States also will send letters to every unemployment recipient describing available training opportunities and financial support.

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