October 8
Report: Nearly 1 in 6 Homeowners in Financial
Distress
The slide in home prices has left nearly one in six U.S. homeowners
owing more on a mortgage than the home is worth, raising the possibility
of an increase in defaults, the Wall Street Journal reported
today. About 75.5 million U.S. households own the homes they live in.
After a housing slump that has pushed values down 30 percent in some
areas, roughly 12 million households, or 16 percent, owe more than their
homes are worth, according to Moody's Economy.com. The comparable
figures were roughly 4 percent under water in 2006 and 6 percent last
year, says the firm's chief economist, Mark Zandi, who adds that 'it is
very possible that there will ultimately be more homeowners under water
in this period than any time in our history.' Among people who bought
within the past five years, it's worse: 29 percent are in the red on
their mortgages, according to an estimate by real-estate Web site
Zillow.com.
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Central Banks Coordinate Cut in Rates
In an extraordinary move to help stem some of the current financial
turmoil, the world's central banks today announced coordinated interest
rate cuts as they try to restore confidence in the economy, the New York
Times reported. Included in the move to cut rates were the Federal
Reserve, the Bank of England and the European Central Bank as well as
those in Canada, Sweden and Switzerland. The Fed said in a statement
that it had cut the Fed funds rate due to weakening economic activity by
half a percentage point to 1.5 percent. It also cut the discount rate by
the same amount. In a statement, the Federal Reserve said, “The
committee took this action in light of evidence pointing to a weakening
of economic activity and a reduction in inflationary pressures.”
The Fed vote was unanimous. The coordinated action comes as governments
around the world have been trying to ease the financial turmoil that has
led to bank collapses and billions of dollars in bailouts, as well as
market turmoil that has sent the Dow Jones industrial average down 1,400
points in the last five days.
href='http://www.nytimes.com/2008/10/09/business/09fed.html?_r=1&hp=&adxnnl=1…'>Read
more.
Consumers Trim Their Borrowing
The Federal Reserve reported that consumer borrowing contracted in
August for the first time in more than a decade, according to the
Wall Street Journal. The Federal Reserve yesterday said that
total consumer borrowing contracted at a 3.7 percent seasonally adjusted
annual rate during August to $2.577 trillion. Consumer credit, which
includes most consumer loans except for real estate, had increased 2.4
percent in July. 'Even households with good credit histories are now
facing difficulties obtaining mortgage loans or home-equity lines of
credit,' Fed Chairman Ben Bernanke said. 'Banks are also reducing credit
card limits, and denial rates on automobile loan applications reportedly
are rising. Businesses, too, are confronting diminished access to
credit.'
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more. (Subscription required.)
Report: Lenders Squeeze Companies Amid $112 Billion of
Losses
Standard & Poor's said that lenders stung by at least $112 billion
of losses in the loan market are charging companies higher interest
rates to recoup some of the losses, Bloomberg News reported. Banks and
investors who are losing money on the record $1.7 trillion of
high-yield, high-risk loans made in 2006 and 2007 are charging borrowers
an average of 1.64 percentage points more in interest to amend borrowing
agreements and avoid default, according to Standard & Poor's. That's
the highest since 1997 and almost eight times more than the first half
of last year. Lenders, reeling from an almost 20 percent decline in loan
prices, are punishing borrowers in jeopardy of breaking their loan
agreements as the economy teeters on recession. As many as 135 companies
are in danger of breaching targets set by their banks, S&P
says.
href='http://www.bloomberg.com/apps/news?pid=20601109&sid=aCy.5P904pHw&refer=…'>Read
more.
Fed Will Lend Directly to Corporations
The Federal Reserve said yesterday that it will bypass ailing banks and
lend directly to American corporations for the first time since the
Great Depression, the Wall Street Journal reported today.
The historic and potentially risky move of lending to nonfinancial
corporations, the latest in a string of extraordinary steps taken by the
Fed over the past month, carries the government deeper into the role of
propping up private markets. Companies ranging from AT&T Inc. to
General Electric Co. to United Parcel Service Inc., along with many U.S.
and European financial firms, tap this $1.6 trillion market for
short-term loans to fund their day-to-day operations.
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more. (Subscription required.)
FDIC May Let Banks Hold More Fannie, Freddie
Debt
Regulators plan to reduce capital requirements for banks holding Fannie
Mae and Freddie Mac debt and mortgage bonds, potentially freeing up more
money for loans, Bloomberg News reported yesterday. The Federal Deposit
Insurance Corp. (FDIC) yesterday tentatively approved a rule, proposed
by all four federal bank regulators, that eases capital requirements for
federally insured depository institutions that hold large amounts of
Fannie and Freddie corporate debt, subordinated debt, mortgage
guarantees and derivatives. The so-called “risk weighting”
for banks on Fannie and Freddie's credit claims was cut to 10 percent
from 20 percent.
href='http://www.bloomberg.com/apps/news?pid=20601087&sid=aYwGPidQVTUs&refer=…'>Read
more.
Commentary: Did the Ban on Short-Selling Make a
Difference?
Nearly three weeks ago, regulators abruptly banned short sales of
financial stocks to protect companies that had come under siege in the
stock market, but some question the effectiveness of the ban as it
expires tonight, according to a commentary in today's New York
Times. Few experts expect the expiration of the ban itself to spark
another precipitous plunge in the stock market. Financial shares have
plunged 23 percent since the ban was imposed on Sept. 22, suggesting
that the short-sellers might not have played such a big role in the
declines. The Securities and Exchange Commission took additional steps,
which will remain in place, to hem in short-sellers, who typically
borrow shares and sell them, hoping to buy them back later at lower
prices and pocket the difference. The SEC has shortened the length of
time allowed to locate borrowed shares for short-sellers and will
require investors to begin disclosing the stocks they short. Since the
SEC ban went into effect, borrowing shares has become more expensive, in
part because some big pension funds and endowments have stopping lending
stock altogether.
href='http://www.nytimes.com/2008/10/08/business/08short.html?ref=business&pa…'>Read
more.
Report: Pension Plans Down by $2 Trillion in Last 15
Months
The Congressional Budget Office said that pension plans lost over $2
trillion in the past 15 months, a drop of over 10 percent,
CongressDaily reported today. Approximately $1 trillion was
lost between January 2007 and January 2008, the agency said, and the
rest has disappeared in the past nine months. 'Because the majority of
pension assets are held in equities, drops in stock prices have had a
significant adverse effect on pension plans,' CBO Director Orszag told
the House Education and Labor Committee. While many families have yet to
feel the financial crunch, 'that may start to change when households
start to receive their 401(k) balance sheets for the most recent
quarter,' he said. Defined benefit pension plans -- traditional pension
plans where former employees receive a certain set of benefits each
month regardless of market conditions -- will fare better in the short
term than defined contribution plans such as 401(k) plans, Orszag said.
House Education and Labor Chairman George Miller (D-Calif.) said
retirement security 'may be one of the greatest casualties of this
financial crisis.'
AtheroGenics Files for Chapter 11
Drug developer AtheroGenics Inc. said yesterday that it filed for
chapter 11 protection due to its large debts, the Associated Press
reported. Four firms that hold AtheroGenics notes filed a petition for
involuntary bankruptcy on Sept. 15. The company said yesterday it had
accepted the petition because its debts were making it difficult to
develop its drug AGI-1067, which is being tested as a treatment for
diabetes. The company's stock has ranged from 18 cents to $1.91 over the
past year.
href='http://biz.yahoo.com/ap/081007/atherogenics_bankruptcy.html?.v=1'>Read
more.
Ex-Workers Sue Auto Dealer under WARN Act
Employees laid off last month by Chevrolet dealership giant Bill Heard
Enterprises Inc. filed a lawsuit Monday under the Worker Adjustment
Retraining Notification Act, alleging they did not receive adequate
notice before losing their jobs when the company collapsed,
Bankruptcy Law360 reported yesterday. In the suit, filed in
U.S. Bankruptcy Court for the Northern District of Alabama, Northern
Division, plaintiffs are seeking class-action status for roughly 2,000
former employees of the company who were laid off on Sept. 24, when Bill
Heard Enterprises abruptly shut down dealerships and related operations
across much of the country. Shortly after the closures, on Sept. 28,
Bill Heard Enterprises and more than 20 related entities, mostly
dealerships, filed for chapter 11 protection in the Alabama bankruptcy
court. Read
more. (subscription required.)
Congress Grills Former AIG Chiefs
Lawmakers portrayed former executives of American International Group
Inc. as running a high-rolling organization that glossed over warnings
about the risks that helped necessitate a government rescue -- and
continued to reward executives even as the big insurer headed toward
financial distress, the Wall Street Journal reported today. The
focus of yesterday's hearing before the House Committee on Oversight and
Government Reform differed in a key respect from the grilling on Monday
of Richard Fuld Jr., chief executive of now-fallen Lehman Brothers
Holdings Inc. That company wasn't bailed out, while AIG received an $85
billion lifeline from the government -- $61 billion of which it has
already tapped. Lawmakers challenged former CEO Martin Sullivan about
why he recommended that the insurer exclude massive unrealized losses
tied to a key unit, AIG Financial Products, when calculating incentive
pay for top executives -- including himself. Sullivan said that the
other executives weren't responsible for the unit's problems. The
committee also released minutes of a meeting of AIG board members that
said AIG's outside auditor had warned Sullivan on Nov. 29 that the giant
insurer 'could have a material weakness' in its risk management. That
was less than a week before Mr. Sullivan told investors in December that
AIG was 'confident in our marks and the reasonableness of our valuation
methods.'
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International
Britain Announces Huge Bank Bailout
Desperate to halt the financial distress swirling through Europe's
markets, Britain announced a three-part multibillion-dollar bailout for
its beleaguered banks today, the New York Times reported today. The most
ambitious action was in London, where the government pledged hundreds of
billions of dollars in credits, guarantees and cash to restore
confidence in the world's second-largest financial center. A statement
from the British Treasury said that at least $350 billion “will be
made available to banks under the special liquidity scheme,”
doubling the size of a credit line from the Bank of England established
as the financial crisis began and designed to unlock frozen lending
between banks. Additionally, the British government pledged $87 billion
in direct support for eight major banks.
href='http://www.nytimes.com/2008/10/09/business/worldbusiness/09britain.html…'>Read
more.
Mexican Paper Giant Files for
Bankruptcy
Facing accrued liabilities of nearly $1.5 billion and rising energy
costs, Corporacion Durango SAB, Mexico's largest paper maker, has filed
for bankruptcy protection simultaneously in the United States and
Mexico, Bankruptcy Law360 reported yesterday. Unable to pay a
$26.5 million interest payment on senior notes due earlier this week,
the company filed for reorganization under the Mexican Business
Reorganization Act on Monday while concurrently filing for chapter 15
protection in the United States, asking the court to designate the
Mexican court as the foreign main proceeding. A Durango representative
attributed its liquidity shortage to rising fuel prices and the overall
increase in prices for raw materials. Court filings indicate that the
company holds approximately $1.5 billion in liabilities, including $509
million of senior notes due in 2017 and intercompany debt of
approximately $1 billion.
href='http://bankruptcy.law360.com/articles/71829'>Read
more. (Subscription required).
Iceland Works to Stave Off National
Bankruptcy
The government of Iceland took extraordinary measures yesterday to stave
off national bankruptcy, as the credit crisis tightened its grip on this
remote island nation in the North Atlantic, the New York Times
reported today. Iceland's banks had propelled years of significant
growth, lending so freely that their assets ballooned to many times the
size of the country's economy. In an effort to avoid financial collapse,
the government yesterday took control of the country's second-largest
bank - its second takeover in two weeks. The government also announced
that it had asked Russia for a loan of 4 billion euros, about $5.5
billion, to try to keep the economy afloat.
href='http://www.nytimes.com/2008/10/08/business/worldbusiness/08icebank.html…'>Read
more.