Wednesday, October 15, 2008

US Economic Crisis Bulletin: Stocks Slide on Recession Fears; Banks Receive Federal Funds; Fed Chair Says Recovery Will Be Slow; Death of "Free Market Capitalism"

Stocks slide on recession fears

By Chris Giles and Javier Blas in London and Krishna Guha in Washington
October 15 2008 19:21

Growing evidence that the worldwide bank rescue plans have come too late to avert a deep global recession drove down stock markets in Europe and the US on Wednesday.

Investor fears came as bad economic data were released across the world and emerging economies appeared more vulnerable than thought to the world slowdown.

In the US, retail sales dropped 1.2 per cent in September, the sharpest fall for three years, leaving them 1 per cent lower than a year earlier, signalling that consumers were cowed from spending by the string of financial sector collapses throughout the month.

Ben Bernanke, Federal Reserve chairman, confirmed investors fears, warning that even if bank rescue plans succeeded in stabilising financial markets “broader economic recovery will not happen right away”.

In the UK, the unemployment rate leapt half a percentage point to 5.7 per cent in the three months to August compared with the previous quarter, its biggest rise since 1991. Many forecasters expect the rate to rise to above 7 per cent in the coming year as companies stop hoarding labour as their financial positions ­deteriorate.

Sluggish world growth was also revealed across the world by numerous indicators of falling demand for commodities. The Reuters-Jefferies CRB index, a global benchmark for commodity prices, on Wednesday fell to a fresh 22-month low of 289.34, down almost 40 per cent from July’s record high. Oil prices dropped below $75 a barrel for the first time since September 2007.

Opec, the oil countries’ cartel, warned of “dramatically worsening conditions” and a “negative impact on the real economy”, while Rio Tinto, one of the world’s largest mining companies, said Chinese demand for commodities was weakening.

With Iceland, Hungary, Ukraine and Serbia either seeking funds from the International Monetary Fund or talking to the IMF about their prospects, the vulnerabilities of many emerging economies to the financial crisis was clear.

In Europe, the FTSE Eurofirst 300 index dropped 6.5 per cent, giving up more than half its rise earlier this week and pushing shares back down to their levels at the end of last Thursday. In London, the FTSE 100 index tumbled 7.2 per cent to 4,079.6, less than 300 points above its low last Friday.

US shares also fell throughout morning trading. In the early afternoon, the S&P 500 index was down 4.4 per cent at 954.47.

Economists expect interest rates to fall rapidly across Europe in response to the worsening economic outlook and in the US Mr Bernanke’s comments are likely to fuel expectations that the Fed will cut interest rates further from 1.5 per cent to 1 per cent, possibly at its policy meeting later this month.

Copyright The Financial Times Limited 2008

Three big US banks unveil $2.6bn in profits

By Francesco Guerrera, Greg Farrell, Saskia Scholtes and Deborah Brewster in New York
October 15 2008 19:40

Three of the nine big banks due to receive capital injections from the US government reported total third-quarter profits of more than $2.6bn on Wednesday, highlighting the different needs of companies receiving assistance under the rescue plan.

Wells Fargo and JPMorgan Chase, which are to receive $25bn each in government funds, said they earned $1.64bn and $527m, respectively, during the period, while State Street, which is to receive $2bn in federal money, put its net profit at $477m.

Jamie Dimon, JPMorgan chief executive, said his bank did not need the capital injection and acknowledged that the Treasury plan might benefit weaker competitors more. But he said JPMorgan did not want to stand in the way of an initiative that benefited the banking system as a whole.

“The plan may well have asymmetrical benefits . . . but what is good for the system is good for JPMorgan,” he said. “The Treasury plan and all of the things they have done recently, is very powerful stuff that will eventually help to unclog the system.”

Mr Dimon said money markets and other frozen parts of the financial system could start to thaw, adding: “You will see some easing in certain critical areas in the next couple of weeks.”

JPMorgan’s profits were down 84 per cent from $3.4bn in the same quarter of last year. Earnings at Wells fell 24 per cent, but rose 33 per cent at State Street.

Michael Cavanagh, JPMorgan’s chief financial officer, warned that future earnings would remain under pressure due to the deteriorating financial health of US consumers and “recessionary conditions”.

“Times ahead are going to be tough,” he said.

Howard Atkins, Wells chief financial officer, said his bank intended to raise $20bn in equity from private sources to finance its pending acquisition of Wachovia.

Under the government’s $250bn capital-injection plan, about half the money will go to nine banks seen as central to the financial system. In addition to JPMorgan, Wells and State Street, they are Bank of America, Merrill Lynch (now being acquired by BofA), Citigroup, Goldman Sachs, Morgan Stanley and Bank of New York Mellon.

Experts say it was important for big banks to join at once to avoid potential “stigma” problems for companies receiving government funds.

Copyright The Financial Times Limited 2008

Bernanke warns of slow recovery

By James Politi and Krishna Guha in Washington
October 15 2008 14:29

Even if the US government’s rescue plan succeeds in stabilising the financial markets, it will not produce a rapid turnaround in the economy, Ben Bernanke, Federal Reserve chairman, warned on Wednesday.

His comments came as new figures showed retail sales last month experienced their sharpest drop since 2005, and an index of manufacturing activity in New York plummeted.

“Broader economic recovery will not happen right away,” Mr Bernanke said. The economy “had been decelerating even before the recent intensification of the crisis” in the markets.

Housing “continues to be a primary source of weakness”, said the Fed chairman, while the US had also seen “marked slowdowns in consumer spending, business investment and the labour market”. Credit markets would “take some time to unfreeze”.

Mr Bernanke warned that the slowdown in growth outside the US meant “our export sales, which have been a source of strength, very probably will slow as well”.

The only consolations were that lower oil and other commodity prices would free up some purchasing power, while measures of expected inflation had fallen.

Mr Bernanke’s comments will do nothing to discourage expectations of rate cuts, possibly later this month.

The Fed appears to be resigned to a very difficult next two or three quarters, which are likely to involve a classic recession in the US.

Mr Bernanke said the “trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning”.

He repeated his argument that by intervening to support banks before most were on the brink of bankruptcy the authorities had minimised the ultimate cost.

Mr Bernanke said taxpayers might even turn a profit on their investments in bank shares and assets.

“I am not suggesting the way forward will be easy, but I strongly believe that we now have the tools we need to respond with the necessary force to these challenges.”

Earlier figures showed US retail sales fell by 1.2 per cent in September, far worse than the 0.7 per cent monthly drop expected .

“Unfortunately, the slide in retail sales were broad-based, so no mitigating circumstances here,” said Alan Ruskin of RBS Greenwich Capital. “We are slipping into regular definitions of recession rapidly.”

The decline was driven by near-4 per cent drops in sales of cars and car parts. Even excluding the ailing auto industry, retail sales fell by 0.6 per cent – still worse than expected. Clothing and furniture purchases were down 2.3 per cent, while electronics and appliance sales were down 1.5 per cent. Food and beverage stores fell 0.5 per cent.

The disappointing figures increased expectations of a contraction in consumer spending in the third quarter, which was averted in the previous recession early this decade. Global Insight economists are expecting real consumer spending to decline by 3.5 per cent, its worst since the second quarter of 1980.

Other economic indicators also signal a dramatic deterioration in the US economy. The Fed’s survey of manufacturing in New York dropped sharply from -7.4 to -24.6, the lowest since the measure was created in 2001.

Copyright The Financial Times Limited 2008

Undertakers deliver last rites for US capitalism

By Krishna Guha in Washington
October 14 2008 21:59

The Cash Room of the US Treasury, with its marbled walls, faux columns and giant chandeliers, was an oddly appropriate place to bury free market capitalism.

For a few minutes all was still, apart from the buzz of the camera crews lined up to film the funeral. The podium stood empty, flanked with two giant flags. Behind it an open door revealed six more flags, as if an abundance of stars and stripes would reassure a troubled nation that the partial nationalisation of America’s banking system was indeed a truly patriotic act.

Above the door a silver seal depicted the US Treasury’s crest: scales, a chevron and a key, with the date 1789. This crest had long proclaimed the genius of the US private financial sector. But now America’s banks had been weighed in the balance and found wanting: government intervention was the only key to unlock a global financial crisis. In strode the undertakers: all in black save the blue-suited undertaker-in-chief, who marched to the podium to deliver such a ringing hymn to the American spirit that the audience wondered for a second why it was there.

“America is a strong nation. We are a confident and optimistic people,” declared Hank Paulson, Treasury secretary.

“Our confidence is born out of our long history of meeting every challenge we face.” But then reality reared its ugly head. “There is a lack of confidence in our financial system . . . it poses an enormous threat to our economy. Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other.”

So was America confident or terrified? Apparently it was confident that it could stop being terrified but only if the government came to the rescue.

Deputy undertaker Ben Bernanke, Federal Reserve chairman, stared grimly into space; Sheila Bair, head of the Federal Deposit Insurance Corporation, nodded occasionally. Tim Geithner, president of the New York Fed, stood with both hands in his pockets, looking concerned.

Mr Bernanke’s turn came next, promising to do whatever it took to save the nation from disaster while letting slip that even yesterday’s giant intervention might not be enough. Then up strode Ms Bair, her head barely visible above the podium Mr Paulson had towered over, to detail the “extraordinary steps” the government was taking to save its banks.

Saving the economy would require “a sustained and co-ordinated effort by government authorities”. People may have lost faith in the private sector but not the power of federal authorities to rescue them. “Above all else, there must be no doubt in our government.”

A loss of faith in the private sector but no doubt in government? In America? Ronald Reagan must be turning in his grave.

Copyright The Financial Times Limited 2008

No comments: