Wednesday, September 24, 2008

US Economic Crisis Bulletin: Stocks Fluctuate After Buffett-Goldman Deal; Home Prices Fall, etc.

Stocks fluctuate after Buffett-Goldman deal

By TIM PARADIS, AP Business Writer

Financial markets were tense Wednesday, with stocks fluctuating on investor Warren Buffett's decision to invest $5 billion in Goldman Sachs Group Inc. The credit markets showed added strain as investors await news about the government's plan to rescue banks from crippling debt.

Buffett's Berkshire Hathaway Inc. said Tuesday it was investing at least $5 billion in Goldman — a move Wall Street took as sign of support for the independent investment bank model. Besides buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman's common stock.

Goldman Sachs also said it will sell $5 billion worth of common stock to the public; the company and Morgan Stanley earlier this week were granted approval to become bank holding companies, which would help them strengthen their balance sheets.

Though Buffett's move appeared to soothe some investors, it didn't alleviate concerns about the effectivenes of any government bailout and about the health of the broader economy. It could also lead to new questions from lawmakers for Treasury Secretary Henry Paulson, a former co-CEO of Goldman Sachs. He and Federal Reserve Chairman Ben Bernanke are appearing before Congress for a second day Wednesday to brief lawmakers on a $700 billion bailout measure for financial services firms.

Their appearance on Capitol Hill Tuesday unnerved investors, who questioned whether lawmakers were beginning to doubt the necessity and form of the government bailout.

The waiting was clearly wearing on the credit markets, raising concern again about liquidity.

Demand for short-term government Treasuries increased as investors again sought safe places to keep cash. The yield on the 3-month Treasury bill, considered the safest short-term financial asset, was at 0.43 percent early Wednesday, down from 0.79 percent late Tuesday.

Last week, demand spiked so high that the3-month bill's yield briefly dipped into negative territory; investors were so focused on putting their money in safe assets that they have been willing to accept very little or even negative returns.

In other Treasury trading, the yield on the benchmark 10-year Treasury note fell to 3.78 percent from 3.80 percent late Tuesday.

In midmorning trading, the Dow Jones industrial average rose 26.60, or 0.25 percent, to 10,880.77 after moving in and out of positive territory. The Dow is down more than 500 points, or about 4.7 percent, for the week.

Broader stock indicators were mixed. The Standard & Poor's 500 index rose 5.30, or 0.45 percent, to 1,193.52, and the Nasdaq composite index rose 21.22, or 0.99 percent, to 2,174.55.

The dollar, whose struggles earlier this week contributed to extreme volatility in other markets, was mixed, falling against the euro but rising against the Japanese yen. Meanwhile, gold prices rose.

Bernanke offers bleak outlook

Federal Reserve Chairman Ben Bernanke on Wednesday said global financial markets were under "extraordinary stress" and threatening an already weak U.S. economy as he offered his bleakest outlook since a credit crisis set in last year.

"The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth," Bernanke said in comments prepared for delivery to the congressional Joint Economic Committee.

"The downside risks to the outlook thus remain a significant concern," he said. "Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

Bernanke ticked off areas of the economy that are struggling or have been hit by financial turmoil, which in recent weeks felled investment bank Lehman Brothers and forced the government to take over mortgage finance firms Fannie Mae and Freddie Mac and rescue insurer American International Group Inc.

"More recently, economic activity appears to have decelerated broadly," he said, speaking on the second day of testimony aimed at persuading skeptical lawmakers of the need for the government's $700 billion rescue plan.

Labor markets are weak and unemployment is high, he said. Despite an easing of oil and gas prices since the summer, consumer spending is likely to be sluggish in the near term, he added.

In addition, slower growth around the world is likely to blunt demand for U.S. exports, which had been helping buoy the economy.

While news on inflation has been more favorable, Bernanke said, the outlook remains highly uncertain.

Falling oil and commodity prices and the dollar's rebound from lows hit this summer have eased pressures, but it is difficult to predict the course of commodity prices, he said.

"The upside risks to inflation remain a significant concern as well," he added.

(Reporting by Mark Felsenthal; Editing by Chizu Nomiyama)

Price of existing homes sees record fall

Prices of existing homes in the United States suffered a record drop in August while the sales pace slowed and the overstock of homes shrank, the National Association of Realtors said on Wednesday.

The pace of existing home sales decreased 2.2 percent to a 4.91 million unit annual pace while the median national home price declined 9.5 percent to $203,100.

Economists polled by Reuters were expecting home resales to fall to a 4.93 million-unit pace from the July rate of 5.02 million units. The dollar extended losses against the euro after the data.

The realty trade group said in a report that as many as 2 in 5 home sales are by borrowers who have seen their property lose value or are facing foreclosure.

"The big question now is whether lending is so tight that sales are being hurt," said Gary Thayer, senior economist at Wachovia Securities in St. Louis, Missouri. "If we can work through the current lending difficulty, sales are likely to improve later this year."

The inventory of existing homes for sale fell 7.0 percent to 4.26 million from the record-high overstock reported in July.

(Reporting by Patrick Rucker, additional reporting by Ellen Freilich in New York; Editing by Chizu Nomiyama)

FBI investigating companies at heart of meltdown

By LARA JAKES JORDAN, Associated Press Writer
Wed Sep 24, 8:00 AM ET

The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation over the past year.

Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment Tuesday evening. A Lehman spokesman did not have an immediate comment.

Just last week, FBI Director Robert Mueller put the number of large financial firms under investigation at 24. He did not name any of the companies under investigation but said the FBI also was looking at whether any of them have misrepresented their assets.

Over the past year as the housing market cratered, the FBI has opened a wide-ranging probe of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors. Mueller has previously said the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments.

The investigations revealed Tuesday come as lawmakers began considering whether to approve emergency legislation that would give the government broad power to buy up devalued assets from troubled financial firms.

The bailout proposed by the Bush administration is aimed at helping unlock credit and stabilize badly shaken markets in the United States and around the globe.

In the past two weeks, the government has taken over Fannie Mae and Freddie Mac, the country's two biggest mortgage companies, with a bailout plan that could require the Treasury Department to put up as much as $100 billion for each of them over time if needed to keep them afloat as mortgage losses mount.

Last week, the Federal Reserve provided an emergency $85 billion loan to AIG, which teetered on the brink of bankruptcy. Lehman Brothers was forced to file for bankruptcy after attempts to engineer a private rescue fell apart. All the companies were laid low from bad bets on complex mortgage-related securities.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies. This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up despite the fact that the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system.

Additionally, the FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud. Countrywide Financial Corp., formerly the nation's largest mortgage lender and now owned by Bank of America Corp., is also under scrutiny.

Freddie Mac paid McCain aide's firm

By PETE YOST, Associated Press Writer
Wed Sep 24, 3:50 AM ET

Almost up until the time it was taken over by the government in the nation's financial crisis, one of two housing giants paid $15,000 a month to the lobbying firm of John McCain's campaign manager, a person familiar with the financial arrangement says.

The money from Freddie Mac to the firm of Rick Davis is on top of more than $30,000 a month that went directly to Davis for five years starting in 2000.

The $30,000 a month came from both Freddie Mac and Fannie Mae, the other housing entity now under the government's control because of the nation's financial crisis.

All the payments were first reported by The New York Times, which posted an article Tuesday night revealing the $15,000 a month to the firm of Davis Manafort. The newspaper quoted two people with direct knowledge of the arrangement.

In response to the latest disclosure, the McCain campaign issued a statement saying that Davis left the firm and stopped taking salary from the firm in 2006.

A person familiar with the contract says the $15,000 a month in payments to Davis' firm started around the end of 2005 and continued until the past month or so. The person spoke on condition of anonymity.

The connection between Davis and the housing giants that figure centrally in the global financial crunch emerged after the McCain campaign unleashed a sharp attack on Democratic rival Barack Obama.

McCain has tied Obama to Fannie and Freddie's troubles and has called on Jim Johnson and Franklin Raines — both Obama supporters and former Fannie Mae executives — to return large golden parachute payments they received from the corporations after leaving.

McCain's campaign released a new television ad that says Raines is among those advising Obama on housing policy.

Obama's campaign released a statement from Raines, who says he is not an Obama adviser.

Robert McCarson, a former spokesman for Fannie Mae, criticized the McCain campaign's attack on Obama, given the five years of payments to Davis.

"It's either idiocy or hubris" on the McCain campaign's part, McCarson, a Democrat, said in an interview.

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