Wednesday, April 22, 2009

US Economic Crisis Bulletin: Freddie Mac's CFO Found Dead; IMF Predicts Global Downturn

Freddie Mac’s Kellermann found dead

By Saskia Scholtes and Simone Baribeau in New York
April 22 2009 13:43

David Kellermann, acting chief financial officer of mortgage giant Freddie Mac, was found dead in the early hours of Wednesday morning in his suburban Virginia home, a Fairfax County police spokeswoman said.

Mr Kellerman’s wife reported an apparent suicide, according to local media accounts, but the police declined to comment on the cause of death, other than to say there was no evidence of foul play.

“It’s an active investigation,” said police officer Sabrina Ruck.

Mr Kellerman had worked for Freddie for more than 16 years, beginning in his mid-twenties as a financial analyst, according to his company profile.

Mr Kellerman took on the roll of acting chief financial officer of Freddie Mac in September 2008, after the government placed the troubled mortgage giant under conservatorship and pushed out then CFO Anthony “Buddy” Piszel. The company is in the process of performing an external search for Piszel’s permanent replacement.

Mr Kellerman’s death adds to recent turmoil in the company’s executive suite after Freddie Mac’s government-appointed chief executive, David Moffett, quit last month because of frustration with Freddie’s regulator over its tight grip on company affairs. His temporary replacement is John A. Koskinen, who had been serving as Freddie Mac’s chairman. No permanent successor has been named.

Mr Kellerman was the companies fourth CFO in less than six years. Freddie’s board pushed out then CFO Vaughn Clarke amid an accounting scandal in 2003, and his replacement, Martin Baumann, resigned in March 2006.

As acting chief financial officer, Mr Kellermann reported directly to the company’s chief executive, according to a profile posted on the company’s Web site. He was responsible for the company’s financial controls, financial reporting, tax, capital oversight, and compliance with federal oversight requirements, and also oversaw the company’s annual budgeting and financial planning processes.

Mr Kellermann previously served as senior vice president, corporate controller and principal accounting officer for Freddie Mac, the profile said.

Copyright The Financial Times Limited 2009

US earnings blunt hopes of recovery

By Alan Rappeport and Simone Baribeau in New York
April 21 2009 17:22

A raft of US companies reported earnings on Tuesday with results that highlight how difficult the first quarter of the year has been for businesses ranging from financials to industrials, amid the worst downturn since the Great Depression.

The banking sector continued to show signs of strain, dimming hopes that an end to the financial turmoil was imminent. Even after changes in accounting rules helped boost earnings at large US banks, including Citigroup and Bank of America, regional banks profits continued to suffer.

“Some of the smaller banks don’t have the scale to withstand the strains in credit markets and global economic pressures,” said Joseph Brusuelas, analyst at Moody’s, speaking generally.

Bank of New York Mellon, the world’s biggest custodian of investor assets, said it was slashing its quarterly dividend as it reported profits fell by 51 per cent in the period and cut its dividend from 24 cents to 9 cents as it tried to bolster its capital base and take a step toward repaying Tarp funds.

But the BoNY results left some analysts concerned about how the bank would fare in the Treasury’s stress test results. “Given that they had the lowest [tangible common equity] ratio of all 19 banks subject to the upcoming stress test, we think it is unlikely that the government will allow them to repay the [Tarp’s Capital Purchase Program funds],” said Mark Fitzgibbon, director of research at Sandler O’Neill and partners.

Net income declined to $322m, or 28 cents a share, from $749m, or 65 cents, in the same period last year. The drop was worse than analysts had expected and came as fees and revenue fell 28 per cent in a volatile quarter for equity markets.

But the bank had some success rebuilding its capital base during the last three months, improving its Tier 1 capital ratio to 13.8 per cent from 13.3 per cent at the end of last year, and boosting its tangible common equity ratio – a measure of financial health – to 4.2 per cent from 3.8 per cent.

Earnings also suffered at US Bancorp, another large US regional bank. It reported a 50.8 per cent fall in first-quarter profits as it was hurt by higher credit costs, lower fees and more writedowns.

Net income at the Minnesota-based bank fell to $529m, or 24 cents a share, from $1.09bn, or 62 cents. Revenue ticked up by 0.2 per cent to $3.88bn, but a big increase in US Bancorp’s allowance for credit losses disappointed analysts.

“Credit costs continued to rise this quarter; an expected consequence of the weak economy and the primary contributor to the reduction in net income year-over-year,” Richard Davis, US Bancorp’s chief executive, said in a statement.

The disappointing earnings come as Treasury Secretary Tim Geithner told a Congressional oversight panel that evidence the bank bail-out had led to a credit thaw was ”mixed.”

Although banks have been at the centre of the recession, industrial companies such as Caterpillar, the world’s biggest maker of construction equipment, have been hit especially hard as the downturn spread to other parts of the economy.

The Illinois-based company reported its first quarterly loss since 1992 and slashed its outlook for the year. The loss of $112m, or 19 cents a share, was fuelled largely by the costs of massive job cuts imposed during the last few months. In January, Caterpillar cut 20,000 jobs, or 11 per cent of its workforce, as orders plunged.

Caterpillar’s revenue also fell sharply, declining by 22 per cent in the quarter to $9.23bn.

The company, seen as a bellwether for the US industrial sector, took some comfort in the fact that its losses were due to the one-time costs associated with the job cuts. Excluding those, Caterpillar earned $237m, or 39 cents a share.

Cutting its outlook, the company said it expected to earn 50 cents a share on $35bn in sales and revenues this year.

”We will take action to keep Caterpillar lean, while at the same time making strategic product and operational investments to position Caterpillar for long-term success when the economy does recover,” said Jim Owens, chief executive.

Meanwhile, Coca-Cola, the world’s largest soft drinks group, reported that its first-quarter profits were off by 10 per cent during the first quarter compared with the first three months of last year.

Coke’s net income declined to $1.35bn, or 58 cents a share, from $1.5bn, or 64 cents. The company’s results were in line with analysts’ expectations.

“While the global economic environment remains challenging, we are well positioned for long-term growth,” said Muhtar Kent, chief executive. “Our business was built for times like these.”

Coke’s revenue declined by 3 per cent to $7.17bn during the quarter, but sales by volume were up by 2 per cent.

In February Coke said it would raise its 2009 quarterly dividend by 8 per cent, making it the company’s 47th consecutive annual increase.

Copyright The Financial Times Limited 2009

IMF slashes outlook for global economy

By Sarah O’Connor in Washington
April 22 2009 14:00

The global economy will contract sharply this year and recover only sluggishly in 2010, the IMF said on Wednesday, drastically downgrading the predictions it made just three months ago.

The IMF said the economy would contract by 1.3 per cent this year and grow by just 1.9 per cent the year after. It acknowledged this was a “substantial downward revision” of its predictions in January, when it said the global economy would grow by 0.5 per cent this year and spring back to 3 per cent growth in 2010.

“By any measure, this downturn represents by far the deepest global recession since the Great Depression,” the IMF said in its World Economic Outlook. “Even once the crisis is over, there will be a difficult transition period, with output growth appreciably below rates seen in the recent past.”

The IMF blamed the worsening prospects on the intensifying “vicious circle” between the ailing financial sector and the shrinking real economy. Efforts by governments to shore up their economies were “failing to arrest corrosive feedback” between those two problems, the IMF said.

Overall credit to the private sector in advanced economies will decline in 2009 and 2010 as banks continue to reel in lending, it predicted.

Any global recovery depends on more decisive efforts to shore up financial institutions, it added. On Monday, the fund said governments should pump more common equity into banks and other key institutions, even to the point of nationalisation.

Even then, governments must commit to bolstering their wider economies well into 2010.

“While governments have acted to provide substantial stimulus in 2009, it is now apparent that the effort will need to be at least sustained, if not increased, in 2010, and countries with fiscal room should stand ready to introduce new stimulus measures as needed to support the recovery,” the report said.

As well as fiscal easing, the IMF said the central banks of developed economies should continue to ease monetary policy where possible to head off the risk of deflation. Prices in the US fell in the year to March, marking the first annual decline since 1955, and retail prices in the UK dropped last month for the first time since 1960.

The IMF said core inflation, which strips out energy and food prices, had remained in the 1 to 2 per cent range but warned: “Sustained excess capacity together with sharp falls in house and equity prices threaten continued declines in consumer prices that could eventually lead to entrenched expectations of price deflation.”

As a counterpoint to the gloom, Olivier Blanchard, economic counsellor and director of the IMF’s research department, said: “There is light at the end of this tunnel,” but stressed that the state of the financial system would determine “when the balance will tip.”

Copyright The Financial Times Limited 2009

Wall Street set to slip on financial fears

By Kiran Stacey in New York
April 22 2009 14:06

Fears over future write-downs at financial companies were set to push US equities lower ahead of the open on Wednesday.

Bad debts and real estate write-downs wiped out trading gains at Morgan Stanley, which led the company to a worse loss than analysts had predicted. Its shares lost 7.9 per cent to $22.70 before the bell.

This exacerbated fears about continuing write-downs in the financial sector after Capital One triggered a slump in the shares of fellow credit-card lenders when it reported heavier losses than expected and put aside more money for future bad debts. It raised its guidance for the amount of money it would lose from defaulted payments, saying there was “significant uncertainty” over the outlook. Its shares lost 9.2 per cent to $13.67, while American Express dropped 4.2 per cent to $18.75 and Discover fell 5.8 per cent to $7.75.

Wells Fargo was unable to spark a rally in spite of almost doubling its revenues to $21bn as more homeowners paid to refinance their mortgages that helped profits top estimates at $0.56 per share. But its shares slipped before the market opened, with much of the good news having been factored into the share price after the bank ignited a surge on Wall Street earlier in the month when it said it would make record profits for this quarter. The stock fell 3.6 per cent to $18.14.

Financials received a boost from figures figures showing that mortgage refinancing, which has been the bedrock of better than expected earnings for several major banks, took mortgage applications up 5.3 per cent for last week, but this was not enough to reverse early losses in futures.

Less than an hour before the open, futures for the benchmark S&P 500 index fell 10.7 points to 837, while those for the Dow Jones Industrial Average dropped 76 points to 7,847 and those for the Nasdaq Composite index, gave up 11 points to 1,317. The Dow and Nasdaq were up on a fair value basis, which takes into account interest rates, dividends and time to expiration on the contract.

The Nasdaq was bolstered by Yahoo!, the internet search engine, which said it would cut 5 per cent of its worldwide staff after reporting earnings in line with expectations. Revenues fell, but were little worse than predicted and the company’s shares gained 2.9 per cent to $14.80.

Industrial stocks gave limited support to the Dow. Boeing rose despite making less profit than analysts had predicted as the company kept its full year earnings above analysts’ estimates, despite cutting them to $4.70 to $5 a share. The stock gained 4.3 per cent to $38.21.

Ingersoll-Rand, which makes refrigeration equipment, announced a narrower loss than expected, with cost-cutting exercises beginning to take hold. Its shares also rose 6.2 per cent to $17.76 .

But Freeport McMoRan, the copper maker, proved a drag on the industrial sector after reporting tumbling revenues and profits on weak demand and low metals prices. It missed Wall Street’s predictions and its shares fell 2.8 per cent to $39.61 before the open.

Telecoms received a boost after AT&T‘s earnings were considerably ahead of estimates with revenues bolstered by customers transferring data over wireless services, especially on Apple’s iPhone. That boosted the company’s shares 2.6 per cent to $25.93. Apple, which was due to report after the close, gained 0.5 per cent to $122.40 in pre-market trade.

AT&T’s rival Qualcomm was scheduled to announce earnings after the bell, and its shares slipped slightly in advance, falling 0.3 per cent to $40.15.

McDonald’s slipped slightly in spite of rising sales and profits roughly in line with analysts’ predictions. Its shares lost 0.1 per cent to $55.60 before the bell.

There was some unexpectedly good news for Ford after Goldman Sachs said the struggling car maker would not need government assistance and might benefit from a probable bankruptcy by rival General Motors. The bank added Ford to its “conviction buy” list from “neutral”, helping to send its shares up 7.4 per cent to $4.08.

European stocks were slightly off ahead of the open on Wall Street, with the FTSE Eurofirst 300 index was slipping 0.1 per cent to 786.74 points. Asian equity markets closed mainly down, led by a 2.7 per cent fall in the Hang Seng index to 14,878.45 points.

Bond yields were relatively unchanged. The yield on the two-year Treasury note was flat at 0.932 per cent while that on the 10-year Treasury note fell 1 basis point to 2.891 per cent.

The dollar was up against major currencies early in New York, gaining 1 per cent against the pound to $1.45.

Gold was trading $0.49 higher at $888.09 per troy ounce.

Oil prices were up early in New York. US crude prices were $2.09 higher at $48.60 a barrel.

Copyright The Financial Times Limited 2009

Geithner sparks banks rally

By Tom Braithwaite in Washington and Francesco Guerrera in New York
April 21 2009 22:06

Tim Geithner gave testimony on Monday to a congressional oversight panel as members of Code Pink, a women’s anti-war group, staged a protest

Tim Geithner, US Treasury secretary, on Tuesday sparked a rally in financial stocks after he said the “vast majority” of the nation’s banks are well-capitalised and damped investor fears that the government will wipe out their holdings.

However, Mr Geithner conceded the massive effort by the US authorities to rescue the banking system from the crisis was showing only “mixed” signs of success.

Appearing before a congressional oversight panel, Mr Geithner said it was hard to know how the financial markets would have operated without such programmes .

Interbank lending, corporate issuance and credit spreads were showing some signs of a thaw in credit, he said, but he added: “To date, frankly, the evidence is mixed.”

Shares in the financial sector – which suffered big losses on Monday – rallied in New York on Tuesday after Mr Geithner said in his testimony that the “vast majority” of banks had sufficient capital.

“There was a reversal in the market after Geithner made his comments,” said Richard Bove, analyst at Rochdale Securities.

The KBW index of bank stocks closed 7.9 per cent higher after a steep fall on Monday, which was partly caused by false rumours about the results of the government’s bank stress tests.

Mr Geithner indicated that the conversion of the government’s preferred equity stakes to common equity – a move that would dilute the holdings of existing shareholders – could prove part of the solution for weaker banks.

Jeb Hensarling, a Republican representative and member of the panel, said he worried that such a move would convert “Uncle Sam into a control shareholder of many of our largest financial ­institutions”.

“That risk worries me, too,” said Mr Geithner. He said he was concerned at the “potential damage you do to franchise value and expectations across the financial system if you have this expectation of creeping long-term government involvement, government ownership”.

Mr Geithner said the Federal Reserve needed to conclude the stress tests before deciding which banks needed more capital. Some institutions would be likely to raise capital privately, while others could need additional government support.

Separately, a senior Federal Reserve official said that insolvent US financial companies should be allowed to fail, no matter how big they were.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, told Congress’s joint economic committee that the design of the $700bn bank bail-out last year had slowed down recovery.

“The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accep­ted the idea that some firms are just ‘too big to fail’. I do not,” Mr Hoenig said.

“Yes, these institutions are systemically important, but we all know that in a market system insolvent firms must be allowed to fail regardless of their size, market position or the complexity of operations,” he said.

Additional reporting  by  Sarah O’Connor  in  Washington

Copyright The Financial Times Limited 2009

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