Money world

The U.S. unemployment rate unexpectedly shot up to 6.1 percent in August, the highest in nearly five years, as employers cut payrolls for an eighth straight month and a decline in labor markets accelerated.

The Labor Department said on Friday 84,000 jobs were lost in August, significantly more than the 75,000 that economists surveyed by Reuters had forecast. In addition, July’s job losses were revised up to 60,000 and June’s to 100,000 from a previously reported 51,000 in each month.

Analysts said the bleak hiring data showed a weakening economy that likely will oblige the Federal Reserve to keep interest rates low for an extended period.

“The economy is clearly deteriorating,” said Gary Thayer, senior economist for Wachovia Securities in St. Louis. “We’re also seeing weakness around the globe so there’s less reason for the Fed to focus on inflation and more reason to focus on getting the economy back on its feet.”

Stock indexes futures extended losses but U.S. Treasury debt prices rose as investors bet it meant interest rates will remain in hold. The dollar dipped in value against other major currencies and short-term interest rate futures began to signal that the Fed could cut interest rates by year-end.

Labor department officials said the August jobless rate was the highest since September 2003. Analysts had expected the rate to remain steady at July’s 5.7 percent rate rather than to jump.

“We’re running job losses that are typically seen in the early stages of an economic recession,” said David Resler, chief economist for Nomura Securities in New York, adding, “we’re probably in one.”

There were steep cuts in hiring in nearly every major category of employment. Some 61,000 manufacturing jobs were lost in August, the most for any month since mid 2003, and 8,000 more construction jobs were cut. There were 53,000 jobs eliminated in professional and business services and 4,000 in leisure and hospitality industries. 

Read more

Watching Alan Greenspan in his new incarnation is a strange experience. Greenspan 1.0 served as Federal Reserve Board chairman for an entire generation, being oracular, talking in what we (and now he) called Fedspeak, rarely saying anything on the record outside of carefully choreographed public appearances.

But now we have Greenspan 2.0. He ended his 18-year run as head Fed in 2006, leaving with a rep as perhaps the best central banker in the history of money. Now, amid a worldwide financial meltdown that just won’t go away, Greenspan finds himself yapping in public and defending his record in op-ed pieces - whole new roles.

I always knew that Greenspan was capable of delivering a coherent English sentence, because although I wrote skeptically about him - or maybe because I was skeptical - I got to talk to him on the rare occasions when I felt I needed to do it. I had to agree to let him speak off the record, and found myself dealing with a superb spinmeister. He managed to influence the thinking of even a skeptic like me without having to take responsibility for what he said.

He could be extremely charming. In a briefing with some of us at Newsweek, my former employer, Greenspan went on about the first name he and I share, which his parents spelled with one "l" fewer than mine did. Talk about flattering me! Years later I discovered during a conversation with Allan Hubbard, then director of President Bush’s National Economic Council, that Greenspan had used the same Alan/

Summer job cuts have risen to their highest level in six years.

From May through August, employers nationwide announced they would cut 377,325 jobs, according to employment consultant Challenger, Gray & Christmas Inc.

That's nearly 30 percent more people than during the first four months of 2008. The last time U.S. companies announced this many layoffs was summer 2002 — in the wake of the 2001 recession.

Despite the summer climb, however, work force reduction plans tapered off in August from July, according to the Chicago company. The number of announced job cuts fell to 88,736 in August compared with 103,312 in July, but remained more than 12 percent higher than the same period last year, the report said.

Sourse

Oil was around $109 a barrel on Tuesday after sliding to five-months lows when initial reports showed Hurricane Gustav had spared major U.S. Gulf oil facilities.

U.S. crude was $109.53 a barrel by 10:44 a.m. EDT, down $5.93 from Friday’s close. It touched a session low of $105.46, its lowest since April 2.

A U.S. public holiday on Monday meant the New York Mercantile Exchange did not issue an official settlement price for U.S. crude on Monday.

London Brent crude was down 92 cents at $108.49.

As the hurricane was downgraded to a tropical storm, the market refocused on bearish factors including a softer global economy, weaker demand for oil and a stronger U.S. dollar.

These had already begun to drive down prices, which have dropped about $40 from a peak of $147.27 a barrel on July 11.

Hurricane Gustav, combined with Russia’s conflict with Georgia, which disrupted flows of oil and gas, had halted the slide.

“If it were not for these threats, we would have been testing $100 already,” said Mike Wittner of Societe Generale. 

Read more

The three big credit rating agencies were shaken by a host of new regulations designed to correct shortcomings and curb their influence on investors.

But after the dust settles they most likely will continue to dominate Wall Street.

The biggest threat comes from reforms put forward by the U.S. Securities and Exchange Commission, including one to wean investors and Wall Street off the risk-assessment reports provided by Standard & Poor’s (MHP.N: Quote, Profile, Research, Stock Buzz), Moody’s Investors Service (MCO.N: Quote, Profile, Research, Stock Buzz) and Fitch Ratings (LBCP.PA: Quote, Profile, Research, Stock Buzz).

The three agencies are blamed for failing to spot the pitfalls in the mortgage securities market, contributing to massive losses for global banks and crippled credit markets.

But with SEC Chairman Christopher Cox and European Union Internal Market Commissioner Charlie McCreevy both expected to leave office early next year, analysts wonder if regulators have the time and authority to implement meaningful reforms.

“I don’t think much is going to change. They will keep making money … because some guy in Oklahoma wants a Moody’s or S&P rating,” said Philippe Stephan, former director of product development at Moody’s KMV, a unit that assesses companies’ credit quality.

For decades, S&P, Moody’s and Fitch have dominated the landscape. Wall Street turned to them to rate their products and investors relied on them to determine the quality of companies and securities.

Now, the SEC reforms such as eliminating a requirement that money market funds hold highly rated securities means investors may turn to other avenues to evaluate a security’s credit worthiness. 

Read more

As investors exchange their beach wear for business suits at the end of summer every year, they usually prepare for a rally in technology stocks in the run-up to the December gadget spending spree.

But this year, with high energy and food prices, the housing slump and credit market crisis muting consumer demand, Wall Street is bracing for a subdued performance from the technology industry even during its busiest manufacturing season.

Dell Inc (DELL.O: Quote, Profile, Research, Stock Buzz), the world’s No. 2 maker of personal computers, sounded a warning bell on Thursday when it reported a sharper-than-expected drop in quarterly profit and said cutbacks in U.S. spending were spreading to other countries.

While analysts say the results reflect weaknesses in Dell as much as in the broader industry, even the most bullish forecasts call for only a 10 percent to 15 percent rise in technology stocks this fall — which would barely take the sector back to where it was at the start of 2008.

“The tech rally into the back half of the year will probably be more muted than other years,” said Jim Grossman, an analyst for Thrivent Asset Management, which manages $73.2 billion of investments.

However, if holiday sales outpace the worst expectations, investors would revisit the sector since the shares already reflect deep pessimism, he said.

The S&P Information Technology 45 index has fallen about 13 percent so far this year and the Merrill Lynch Technology 100 index has lost about 14 percent.

Tech stocks in the S&P 500 index are trading at about 16 times estimates of earnings for the next 12 months, compared with almost a multiple of 19 this time last year, according to Thomson Reuters Proprietary Research. 

Read more

The catastrophe looming in the documentary "I.O.U.S.A." isn’t romantic like the doomed young love in "Titanic," but billionaires Warren Buffett and Pete Peterson warn it could break many more hearts.

The disaster they warn of could be bigger than any we’ve ever seen - bigger than an iceberg, bigger even than the current mortgage crisis.

If the U.S. doesn’t do something, and fast, to tame the federal government’s debts - now more than $50 trillion - the two Nebraska natives warn we will saddle coming generations with economic problems that will make this year’s financial turbulence look like a trip to the debt counselor’s office.

Premiering Thursday at 358 theaters nationwide, "I.O.U.S.A." is part of Peterson’s campaign to give the ballooning debt a central role in the presidential campaign.

A live panel discussion after the first showings - tape delayed for moviegoers in the West - will include Buffett, Peterson and other experts. Despite ticket prices much higher than for a feature, at $11.50 to $20, Thursday’s showings had sold out at some theaters by Wednesday, organizers said.

The two prominent investors don’t share a political philosophy: Peterson endorses Republican John McCain for president while Buffett favors Democrat Barack Obama. But they say the nation’s budget and trade deficits aren’t really partisan issues.

"Our situation is a lot worse than advertised, and we need to start making some tough choices if we want our future to be better than our past," former U.S. Comptroller David Walker, one of the movie’s stars, said Wednesday.

Peterson - who co-founded the Blackstone Group LP (BX) private equity firm and served as commerce secretary under President Nixon - is financing the movie and the discussion in Omaha to advance the goals of his foundation, created in February, which Walker runs.

Peterson pledged $1 billion to help raise the alarm about the nation’s budget deficit, the projected shortfalls in Medicare and Social Security funding, the trade deficit and the meager savings rate for most Americans.

Peterson and Walker both talk about the substantial debt burden that could be left for future generations if changes aren’t made.

"We’re mortgaging the future of people who can’t vote and might not even be born yet," Walker said.

The "I.O.U.S.A." filmmakers followed Walker as he toured the country speaking to college groups, newspaper editorial boards and community groups about the nation’s financial problems.

Most of the talks in the movie took place while Walker still ran the Government Accountability Office, an investigative arm of Congress that audits and evaluates the performance of the federal government.

Walker and the movie cite GAO figures that show the U.S. government owed roughly $53 trillion more than it had at the end of the 2007 fiscal year, which is the most recent figure available.

About $11 trillion of that covers the publicly traded government debt, the amount the federal government owes to employee pensions and the cost of environmental cleanup of federal land. The rest of the $53 trillion figure accounts for projected shortfalls in Medicare and Social Security.

The cost of covering those obligations is expected to spiral as more and more baby boomers become eligible for the two programs.

The film also features interviews with prominent businessmen and officials from both major political parties, such as former Federal Reserve chairman Alan Greenspan and Paul Volcker and former U.S. Treasury secretaries Paul O’Neill and Robert Rubin.

Buffett did not respond to a request for an interview for this story, but he has said the United States is essentially selling off chunks of the country to foreign investors to finance the nation’s overconsumption.

"We’ve got a super-subprime crisis brewing - namely, the federal government’s finances," Walker said. "The factors that caused the mortgage-based subprime (crisis) to explode exist for the government’s finances. The difference is it’s 25 times - at least - bigger."

Buffett also has warned for years that the nation’s trade deficit - the difference between how much the country imports and exports - was going to devalue the dollar and create other problems.

"Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here," Buffett said in his annual letter to shareholders earlier this year.

Thursday’s panel discussion will also feature Bill Novelli, AARP’s chief executive, and William Niskanen, chairman of the libertarian-leaning CATO Institute.

With showings in 358 theaters, the movie’s premiere likely will be bigger than its planned 12-city theatrical run, which begins Friday.

The main reason the movie is being distributed in theaters is that its makers think it could contend for an Academy Award, Walker said. More people will likely see the movie after it leaves theaters because the foundation hopes to air it on television early next year, he said.

Clips from the movie and panel discussion will be available online. 

Sourse

The FDIC, six weeks after taking over mortgage lender IndyMac Bank, said Wednesday that it will start systematically modifying some of the bank’s most troubled loans to keep borrowers in their homes.

The Federal Deposit Insurance Corp. said it has started to send out the first of what will be an estimated 25,000 letters to borrowers most seriously delinquent on their loans.

The goal of the modifications: to provide borrowers with affordable payments so they can stay current on their mortgages and remain in their homes, while at the same time minimizing losses to investors in securities backed by the loans.

"Foreclosure is often a lengthy, costly and destructive process. Avoiding foreclosure not only strengthens local neighborhoods where foreclosures are already driving down property values, it makes good business sense," FDIC Chairman Sheila Bair said in a statement. "This is a ‘win-win’ program all around."

Equally important, by making delinquent loans current, the FDIC hopes to maximize the value of IndyMac to potential buyers of the bank and its assets. That would be good news for IndyMac customers who had uninsured deposits at the bank when it was taken over. A higher purchase price would also mean fewer costs for the FDIC and its insurance fund.

"By turning troubled loans into performing ones, we enhance their overall value," Bair said in a press call Wednesday afternoon.

Bair, who has pressed lenders for the past year to streamline the way they modify troubled mortgages, inherited $200 billion in loans owned or serviced by IndyMac when the bank was taken over by regulators in July.

She said she hopes this new FDIC program will serve as a model for other loan servicers.

"It’s my hope that it will provide further catalyst to provide more loan modifications for borrowers across the country," Bair said.

The FDIC is defining "affordable" loans as those in which the mortgage payment (including principal, interest, taxes and insurance) does not exceed 38% of a borrower’s income.

That debt-to-income ratio may be achieved in a number of ways, according to the FDIC: by reducing the interest owed on the loan, by stretching out the number of years over which the loan may be paid back or by principal forbearance, which defers payment on a portion of the original principal until the home is sold or the loan is refinanced.

The new interest rate on the modified loans may not exceed the Freddie Mac survey rate for so-called conforming loans, which is currently around 6.5%.

For IndyMac borrowers to qualify for an FDIC modification, they would have to show verification of income - most IndyMac loans are so-called Alt-A loans, which were given to borrowers with good credit but no proof of income. Borrowers would also have to verify that the home at issue is their principal residence. And they would need to sign the letter sent to them by the FDIC and send it back with the first payment due on the modified loan.

The FDIC said borrowers who haven’t received a letter also may call (800) 781-7399 to talk with an IndyMac Federal representative to see if they qualify for the new program.

Bair stressed that the FDIC would work on a case-by-case basis with struggling IndyMac borrowers who don’t qualify for the program to see if an alternative option could help keep them in their home.

One possible alternative is a new Federal Housing Administration (FHA) program passed by Congress in July. That program, slated to start on Oct. 1, would let the FHA insure new 30-year fixed-rate mortgages for at-risk borrowers if their lenders agree to write down loan balances to 90% of the homes’ current appraised value. 

Sourse

Chip maker Vishay Intertechnology says it offered to buy power management chip maker International Rectifier Corp. for $1.6 billion in cash.

Malvern, Pa.-based Vishay Intertechnology Inc (VSH). says the offer would be for $21.22 per share, which is about a 13% premium over International Rectifier’s (IRF) Thursday closing price of $18.82.

International Rectifier is based El Segundo, Calif. 

Sourse

Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) became the latest Wall Street investment bank to offer to reimburse buyers of auction-rate securities, as New York’s attorney general sought settlement talks with it and two other banks.

Morgan Stanley said it would offer to buy back at face value some $4.5 billion in auction-rate securities held by individuals, charities and small to medium-sized businesses and provide liquidity to institutional investors in the securities.

State and federal regulators have been investigating whether brokerages and banks falsely told clients that auction-rate securities — a $330 billion market of long-term debt instruments that pay yields reset through weekly or monthly auctions — were as safe and liquid as cash.

Instead, auction-rate securities have been impossible to sell since late January, when investment banks stopped propping up auctions that were being abandoned by investors.

New York Attorney General Andrew Cuomo, one of the most aggressive regulators pursuing the issue, on Monday told JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley and Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) that it wants to begin settlement talks immediately.

JPMorgan was the third-largest auction-rate municipal bond underwriter since 2000 after Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), according to ThomsonReuters data, while Morgan Stanley was the fourth.

New York, the Securities and Exchange Commission and other states announced settlements last week with Citi and UBS. Combined, the banks agreed to pay $250 million in fines and repurchase about $27 billion of the debt from their clients.

‘CASH-LIKE’ SECURITIES 

Read more