Thursday, April 16, 2009

US Economic Crisis Deepens: Mall Owners File for Bankruptcy; Unemployment Continues to Rise

General Growth files for Chapter 11

By Alan Rappeport in New York
April 16 2009 11:45

General Growth Properties, the second biggest US shopping mall owner, filed for bankruptcy on Thursday ending months of speculation that the crumbling commercial property market would make its $27bn debt unbearable.

The Chicago-based company owns more than 200 malls in the US, making it one of the largest real estate bankruptcies ever. Speculation grew that General Growth would need to declare bankruptcy late last month after it failed to renegotiate new terms with bondholders for $2.25bn of debt.

Shares of General Growth plunged by 52.38 per cent to $0.50 in pre-market trading on Thursday.

“While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of chapter 11,” Adam Metz, General Growth’s chief executive, said in a statement.

The company, which had pursued acquisitions aggressively during the real estate boom, saw its fortunes begin to fade last year as it had $1.2bn in overdue debt and lenders began to exert pressure.

General Growth has been able to secure $375m for a debtor-in-possession financing facility from Pershing Square Capital Management as it works through the bankruptcy process. It said on Thursday that daily operations would continue as usual at all of its shopping centres and properties.

As it attempts to regain its footing, General Growth said it would explore “strategic alternatives” and search the market for new sources of capital. It plans to extend mortgage maturities and reduce its corporate debt and overall leverage.

In February, General Growth said it had $4.09bn in debt that could be accelerated this year and that if it could not refinance or have an extension it might need to seek legal protection.

General Growth said on Thursday that approximately 158 regional shopping centres that it owns also filed for bankruptcy.

“Any development that upsets the orderly disposition of GGP’s assets holds the potential to undermine the market,” said Sam Chandan, chief economist at Real Estate Economics in New York.

According to Reis, a property research firm, real estate investment trusts that focus on regional malls have sustained a 37 per cent drop in value in the first quarter of this year.

Copyright The Financial Times Limited 2009

New jobless claims fall; March housing starts drop


WASHINGTON – New jobless claims fell more than expected for the second straight week, but the number of Americans continuing to receive unemployment insurance benefits rose above 6 million for the first time.

Analysts expect the labor market to remain weak for the most of this year, as many employers are reluctant to hire until an economic recovery is well under way. And fresh housing data show the slump in that market, a major factor in triggering the recession, is not yet over.

The Labor Department said Thursday that its tally of initial unemployment claims dropped to a seasonally adjusted 610,000 from a revised 663,000 the previous week. That was significantly below analysts' expectations of 655,000 and the lowest level since late January. The four-week average of claims, which smooths out volatility, fell 8,500 to 651,000.

Initial jobless claims reflect the pace of layoffs by companies and are considered a timely, if volatile, measure of the economy. While declining, they remain much higher than a year ago when claims stood at 369,000.

Finding a new job is difficult for those who have been laid off. The total number of people remaining on the jobless benefit rolls rose 172,000, topping 6 million for the first time. That's the highest on records dating from 1967. The figures for continuing claims lag initial claims by one week.

Meanwhile, the Commerce Department said construction of new homes and apartments dropped 10.8 percent last month to a seasonally adjusted annual rate of 510,000 units, the second lowest pace on records that go back 50 years.

The decline was worse than economists expected and February activity also was revised lower. Applications for building permits, considered a good barometer of future activity, also fell in March to an annual rate of 513,000 units, lower than the 550,000 economists expected.

The Labor Department also said an additional 2.1 million people were receiving benefits under an extended unemployment compensation program enacted by Congress last year, as of March 28, the latest data available. That provides an additional 20 to 33 weeks on top of the 26 weeks typically provided by the states.

Employers have cut 5.1 million jobs since the recession began in December 2007, as they try to slash costs while consumers and businesses spend less. The department said earlier this month that companies cut a net total of 663,000 jobs in March, sending the unemployment rate to 8.5 percent, the highest in 25 years.

The Federal Reserve expects the unemployment rate will probably "rise more steeply into early next year before flattening out at a high level over the rest of the year," according to minutes from the central bank's March meeting released earlier this month. Many private economists expect the rate will hit 10 percent by year's end.

Among the states, Michigan saw the largest jump in claims for the week ending April 4, an increase of more than 5,400 due to layoffs in the auto industry. Missouri, Texas, New Jersey and Pennsylvania reported the next largest increases.

California had the biggest drop in recipients of more than 4,700, which it said was due to a shorter work week and fewer layoffs in the trade and manufacturing industries. Ohio, Alabama, Florida and Wisconsin had the next largest drops.

More job losses were announced this week. UBS AG, Switzerland's largest bank, said it expects a first-quarter loss of about $1.75 billion and will cut 8,700 jobs worldwide by the end of next year. ArcelorMittal SA, the world's largest steel maker, said it will idle a plant in Indiana and lay off about 400 workers. Credit card company Discover Financial Services said it plans to cut 500 jobs next month, or 4 percent of its work force.

JPMorgan Chase posts better-than-expected profit

By MADLEN READ, AP Business Writer

NEW YORK – JPMorgan Chase said Thursday it earned $2.14 billion for the first quarter, thanks to a boost in trading activity and deposits. The profit was 10 percent lower than last year, but better than expected.

JPMorgan has not posted a quarterly loss since the financial crisis began.

Like other banks, JPMorgan's loans are still seeing defaults increase. Credit costs amounted to $10 billion, JPMorgan said.

But the company is benefiting from a jump in mortgage refinancing and deposits, as well as low interest rates. When a bank can borrow cheaply, it can profit more from lending.

It can also earn more from trading — like Goldman Sachs Group Inc., JPMorgan pulled in record revenue from trading in the fixed-income markets. Fixed-income markets revenue was a record $4.9 billion, and helped push the entire investment bank division's revenue to a record $8.3 billion.

JPMorgan says it earned $2.14 billion in the first quarter, or 40 cents per share, on record revenue of $26.9 billion. That's down from net income of $2.37 billion, or 67 cents per share, a year earlier. But analysts predicted a profit of 32 cents per share, according to Thomson Reuters.

The company's shares were up nearly 2 percent in pre-market trading.

The results came a week after another big bank, Wells Fargo, surprised investors by announcing a record $3 billion quarterly profit.

JPMorgan's earnings serve as the latest sign that while loan losses are surging across all regions and types of debt, low interest rates and an upturn in mortgage lending might help many banks offset those losses.

"It is reasonable to expect additional increases to credit reserves if the economic environment worsens," said CEO Jamie Dimon in a statement. "Yet, we are confident that even a highly adverse economic scenario would not compromise our overall strength and stability — or our ability to enhance our franchises."

JPMorgan said it extended $150 billion in new credit during the first quarter.

JPMorgan's investment bank pulled in a record profit of $1.6 billion. A year ago, before JPMorgan bought the nearly collapsed investment bank Bear Stearns, that division posted a loss.

Dimon said in a conference call, however, that he does not expect the investment bank's results to stay as strong throughout the year.

"It's unreasonable to expect that to continue," he said.

Its retail banking unit earned $474 million, compared with last year's loss of $311 million. That business was helped by another acquisition — the thrift Washington Mutual Inc., which JPMorgan bought last fall. Average total deposits rose 62 percent to $345.8 billion.

The WaMu acquisition also helped drive JPMorgan's commercial banking unit's income up 16 percent to $338 million.

JPMorgan's card division, however, did poorly because of surging defaults. It posted a loss of $547 million, compared with a profit of $609 million last year.

Asset management, Treasury and securities services, and the corporate lending unit also did worse in the first quarter than in the same period last year.

JPMorgan's stock is up 3 percent for the year, but still down 39 percent since its 2007 peak in May of $53.20.

JPMorgan is one of several bailout recipients, including Wells Fargo, Morgan Stanley and Goldman Sachs Group Inc., expressing interest in repaying their government debt soon. JPMorgan got $25 billion from the government late last year to keep the financial system stable and increase lending.

Dimon repeated during the conference call that he hopes to repay the government as soon as possible, and that he is "waiting for guidance from the government."

He said the bank would be able to do just as much lending without the federal funds.

"Folks, it's become a scarlet letter," Dimon said.

Falling housing starts dampen recovery hopes

WASHINGTON (Reuters) – New U.S. housing starts fell in March after a surprise surge the previous month, government data showed on Thursday, dealing a blow to hopes that housing market stability was on the horizon.

The Commerce Department said housing starts fell 10.8 percent to a seasonally adjusted annual rate of 510,000 units, the second lowest on records dating back to 1959, from February's downwardly revised 572,000 units.

House starts in the West region, which has been hit hard by the housing slump, fell 26.3 percent to a record low 73,000 rate.

Analysts polled by Reuters had expected an overall annual rate of 540,000 units for March.

"It's disappointing. Half a million in starts is real low. Things are hitting the floor. I think it will turnaround over the next few months," said Kurt Karl, chief U.S. economist at Swiss Re in New York.

S&P 500 equity index futures added to gains after data while U.S. Treasury debt prices pared losses. The dollar was little changed versus yen.

The fall in groundbreaking activity follow recent data that had shown some signs that the 16-month-old recession was moderating somewhat. Housing is at the center of the downturn, which is on track next month to become the longest since the Great Depression.

Collapsing house prices, coupled with rising unemployment, are forcing consumers to scale back on discretionary spending.

New building permits, which give a sense of future home construction, dropped 9 percent to a record low 513,000 units, from 564,000 units in February, the Commerce Department said. That was well below analysts' estimates of 550,000.

Building completions rose 3.5 percent to 824,000 units.

A National Association of Home Builders survey on Wednesday showed U.S. home builder sentiment jumped to a five-year high in April.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Thursday, April 16, 2009
13:09 Mecca time, 10:09 GMT

US consumer prices continue slump

Millions have lost their jobs as the US recession deepens

The cost of goods and services purchased by the average US household has fallen 0.4 per cent over the past 12 months, the worst decline since 1955, as the recession continues to push prices down.

The labour department said on Wednesday that consumer prices were also down by 0.1 per cent in March compared to the previous month.

In another blow to the US economy, US industrial production fell by 1.5 per cent in March, the fifth consecutive month, according to government data released on Wednesday.

The US is struggling with an ongoing recession that has seen stock values plummet and unemployment surge.

Peter Kenny of Knight Equity Markets said: "The numbers speak to an economy that is in deep recession, but we're no longer in the shock mode of staggering numbers that speak to a serious slide lower in terms of macroeconomic activity, coupled with the threat of inflation."

Deflation fears

The March drop in industrial output was much steeper than the 0.9 per cent decline expected by most analysts, according to the figures released by the Federal Reserve, the US central bank.

Production at US factories, mines and refineries dropped to its lowest level since December 1998 and was nearly 13 per cent below 2008 levels.

Producer prices fell by 3.5 per cent in March compared to the same period a year earlier, the largest decline since 1950, according to the government data.

It has also raised fears of deflation, where prices fall over a sustained period.

This can lead to consumers holding off on purchases in the hope of even lower prices, pushing the economy into further decline.

Source: Agencies

Germany warns on ‘crisis after crisis’

By Bertrand Benoit in Berlin
April 12 2009 22:57

The world could face high inflation and a “crisis after the crisis” when the global economy recovers, Peer Steinbrück, German finance minister, has warned.

The comments, in a weekend interview, are the latest sign of concern from Germany at the extra-loose monetary policies conducted by central banks around the world and the ever-larger fiscal stimuli being unveiled by governments.

“I am concerned that the countermeasures we are seeing around the world, financed by enormous amounts of debts, could be paving the road to the next crisis,” Mr Steinbrück told Bild, a tabloid daily.

“So much money is being pumped into the market that capital markets could easily become overwhelmed, resulting in a global period of inflation in the recovery.”

Mr Steinbrück’s warning comes after Angela Merkel, chancellor, told the Financial Times last month that pumping too much money into reviving global growth would create an unstable recovery.

German officials fear the liquidity being injected into financial markets could prove difficult to reabsorb, creating long-term inflationary pressure and, possibly, new asset price bubbles.

“We do not have a short-term inflation problem,” Mr Steinbrück said. “But in the medium term we must start thinking about how to pull the billions we are pumping into our economies out of the system again. This will be a special challenge for the central banks, including for the European Central Bank.”

Because of its strong reliance on exports, the German economy has been one of the worst affected in Europe by the global economic downturn. It is set to shrink by 4.5-7 per cent this year and statistics published last week showed Germany had its lowest inflation in 11 years.

Peter Bofinger, one of the five top academics who advise the government on economic policy and, like Mr Steinbrück, a member of the Social Democratic party, said that Berlin’s concerns about inflation were unwarranted. “Germany faces no risk of inflation for the foreseeable future. On the contrary, I see a clear danger of deflation,” he told the website.

Rising unemployment in the coming months would put wages under pressure, said Prof Bofinger, creating a potential downward spiral in wages and prices.

Asked about how to fight the crisis, Mr Steinbrück conceded that there were “no intelligent alternatives” to higher public investments programmes.

Unlike in the US, he said, there were no signs yet the German economy had turned the corner. “We are not through yet. Nobody can say if the worst is behind us.”

Copyright The Financial Times Limited 2009

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