OTTAWA–Canadian manufacturers say the worsening economy has yet to hit bottom and will get worse in the months to come.
The dour outlook is contained in a survey of 620 companies conducted in February which found more firms expecting to lay off workers as orders for new business drop over the next few months.
The Canadian Manufacturers and Exporters survey shows 60 per cent of firms, particularly smaller companies, experiencing difficulty obtaining loans as a result of the global credit crunch.
The survey finds 56 per cent of respondents saying new orders will likely decrease from now to May.
That’s a significant increase from the 43 per cent who were pessimistic about business conditions in the January survey payday loans with no fax.
As well, 45 per cent say they expect to reduce their workforce, a slight increase from the previous month.
"The findings indicate that we haven’t hit financial rock bottom just yet," said association president Jayson Myers.
"Unfortunately we will see more layoffs and more plant closures making this downturn the worst economic recession since the Great Depression".
Myers said the findings underscore the urgency of federal budget measures to increase credit in Canada and urged Ottawa to move swiftly on the issue.
General Motors Corp posted a nearly $31 billion loss on Thursday for 2008 and said its auditors were likely to cast doubt on its ability its viability as it seeks an expanded federal bailout to stay afloat.
GM, which asked for up to $30 billion of U.S. government aid, posted losses in all of its major units during the fourth quarter and it burned through $6.2 billion of cash. Revenue plunged by more than a third.
The automaker also warned its pension plans for hourly and salaried workers were underfunded by about $12.4 billion as of the end of 2008, raising the risk of an even greater funding gap in the years ahead.
The release of the grim results came on the same day that GM Chief Executive Rick Wagoner and other senior executives were scheduled to meet with members of the task force headed by U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers.
“They are in fact-gathering mode right now, and so we are here in order to respond to their questions,” GM Chief Financial Officer Ray Young told reporters.
“This is not a negotiation session by any means, they are going to continue to gather facts and continue to ask for clarifications in terms of our submissions,” he said.
Shares of GM dropped 8 percent in pre-market trade to $2 online payday advance.35.
GM said it could receive a “going concern” notice from auditors when it files its annual report for 2008 with U.S. securities regulators by the middle of March.
The company, which took $6 billion in charges to shut down North American plants as sales tumbled last year, posted a net loss of $30.9 billion for 2008.
That marks the second-largest loss for the 100-year-old automaker behind only the $38.7 billion loss for 2007. GM has lost $82 billion over the past four years and cut 92,000 jobs over that period.
GM ended December with $14 billion in cash and including the first $4 billion in loans received from the U.S. Treasury. It received another $9.4 billion in aid in the current quarter.
GM’s fourth-quarter net loss widened to $9.6 billion from $722 million.
Excluding $3.7 billion in one-time charges, GM posted a quarterly loss of $9.65 cents per share. Analysts surveyed by Reuters Estimates had forecast a loss per share of $7.40 on that adjusted basis.
Revenue fell to $30.8 billion from $46.8 billion.
‘CONTAGION’ EFFECT
Industrial icon Frank Stronach has taken a pay cut. And it’s a big one.
The hard-driving chair of Magna International Inc., who regularly leads executive compensation for publicly traded companies in Canada, collected at least $30 million (U.S) less last year than in 2007, the company disclosed yesterday.
The cut could be much bigger when his final pay figures for 2008 come out in other Magna filings next month.
But it’s all relative since Stronach, who controls Magna through the magic of multiple voting shares, will still take home more than $10 million (Canadian). The 2008 pay follows annual compensation packages that were some of the largest in Canadian corporate history.
In 2007, Stronach collected a stunning $70.6 million through a combination of consulting fees, the exercising of stock options and base salary. That’s the equivalent of more than $1.35 million a week.
But Magna revealed a big cut in Stronach’s 2008 compensation package deep in its fourth-quarter results, which showed heavy losses for the auto parts manufacturing giant low interest rate personal loans.
The company said it had set aside $10 million (U.S.) for "business development, consulting and other services" for the "chairman of the board" and his affiliates in 2008. That’s a huge drop from the $40 million (or $40.6 million Canadian) that the company had expensed for him for similar services in 2007.
In that year, Stronach also gained a whopping $27.3 million (Canadian) by exercising stock rights, $215,000 in base salary and other fees.
The exercise of option rights in 2007 proved extremely timely since the company’s stock price tumbled dramatically last year.
The outspoken Stronach, who founded Magna more than 50 years ago, will likely collect his base salary but not exercise any more stock options or collect bonuses for 2008 since the company’s financial performance declined significantly.
Stronach, 76, could not be reached for comment yesterday about the steep drop in his consulting fees.
U.S. financial regulators pledged to inject additional funds into the nation’s major banks to prevent their collapse and will this week begin examinations to determine whether they have enough capital.
Banks that cannot privately raise the additional capital they need after the so-called stress tests will get taxpayer money, regulators said in a statement in Washington. Government funds would be in the form of “mandatory convertible preferred shares” that would be exchanged into common equity “only as needed over time.” Stakes the Treasury has already bought will be eligible to be changed to convertible preferred shares.
While the new injections could leave the government with majority ownership of several lenders, Citigroup Inc., Bank of America Corp. and other banks rallied on speculation shareholders won’t be wiped out. Officials said that the move would be a temporary effort to ensure firms stay in business and keep providing credit to households and businesses.
“The goal here is to incrementally provide as much support as necessary,” up to what could be called “temporary nationalization,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, who is now a lawyer at the Paul, Hastings, Janofsky & Walker law firm in Washington.
Stocks Gain
The Standard & Poor’s 500 Banks Index advanced 2.1 percent to 59.41 at the close in New York, still leaving it down 57 percent since the start of the year. Citigroup gained 10 percent to $2.14 after plunging 44 percent last week on concern it can’t keep going without some form of nationalization that hurts shareholders. Bank of America rose 3.2 percent to $3.91.
“The market is voting and saying ‘this is a good thing, it looks like they’re not going to do anything stupid,’” said Michael Holland, who oversees assets worth $4 billion, including JPMorgan Chase & Co. shares, as chairman and founder of Holland & Co. in New York.
“I need a lot more beef before I think they’re getting it right,” Holland added. The Treasury already has bought more than $280 billion worth of stakes in U.S. financial companies since Congress approved a $700 billion financial-rescue fund in October. That’s failed to stem an exodus of investors from banks on concern credit losses will surge further this year.
‘Temporary’ Buffers
The new government funds are designed to provide a “temporary” buffer for firms against increased losses during the crisis, the Treasury, Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision said.
The mandatory convertible preferred shares will be exchangeable to common equity on a one-to-one basis, a government official said on condition of anonymity.
Officials are open to considering requests to exchange existing government stakes into common equity shares if the bank and its regulator believes it would help it survive, Treasury spokesman Isaac Baker said late yesterday.
“The U.S. government stands firmly behind the banking system during this period of financial strain,” the Treasury and bank regulators said in today’s statement. “The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth.”
Supervisors will start the stress tests on Feb. 25 to assess whether banks have enough capital to withstand “a more challenging economic environment.” The statement didn’t specify the tests that bank examiners will run or say when the results will be known.
FDIC Report
Regulators will announce further details about the tests in two days, an official said. FDIC officials will release a quarterly report Feb. 26 with an updated tally of the number of “problem banks,” put at 171 in the third quarter.
“They don’t want to announce to the world that a third of the banks are undercapitalized and have to be nationalized,” said Sean Egan, managing director of Egan-Jones Ratings Co guaranteed high risk personal loans. in Haverford, Pennsylvania. “So they’re trying to finesse it.”
U.S. business economists in a survey today projected that the country’s recession will be the worst in more than three decades as job losses mount and consumers and companies retrench.
The world’s largest economy will shrink by 1.9 percent this year and a total of 2.8 percent in the current downturn, the most since the 1973-75 slump, according to the median estimate in a poll taken by the National Association for Business Economics. Another 3.2 million Americans will be cut from payrolls in 2009, pushing unemployment to 9 percent by year-end, NABE said.
Nationalization Idea
Sliding bank shares have given momentum to the idea of nationalizing banks in recent weeks. Nouriel Roubini, the economist and professor at New York University’s Stern School of Business, Republican Senator Lindsey Graham of South Carolina and former Federal Reserve Chairman Alan Greenspan have all suggested it as a solution to banks’ woes.
Fed Chairman Ben S. Bernanke said last week “there’s a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible.” Senate Banking Committee Chairman Christopher Dodd said in a Feb. 20 Bloomberg Television interview that “short-term” government takeovers may be unavoidable.
By converting its preferred shares to common, the government could pad too-thin tangible common equity, or TCE, ratios. TCE strips out intangible assets, goodwill — the premium above net assets paid for acquisitions — and preferred stock, including shares issued to the U.S. Treasury. The ratio measures TCE against tangible assets.
Citigroup Stake
The government holds $52 billion of preferred shares in Citigroup, five times the bank’s market value as of Feb. 20. If the U.S. were to convert all of its holdings into common shares, it would own more than 80 percent of the company.
Charlotte, North Carolina-based Bank of America, which has received $45 billion in TARP funds in exchange for preferred shares and warrants, would be 66 percent owned by the government if its entire stake were converted to common equity, according to data compiled by KBW Inc., a New York-based investment bank.
The figure would be 69 percent at Regions Financial Corp. in Birmingham, Alabama, which has received $3.5 billion from the U.S. It would be 83 percent at Fifth Third Bancorp, the largest Ohio-based lender, which got $3.4 billion.
KBW calculated the government stakes based on a conversion price of 80 percent of the stock’s value as of Feb. 5.
Bank of America, Citigroup and Wells Fargo & Co. in San Francisco are among more than 400 financial institutions that have received cash in exchange for preferred shares under the program.
Current Capital
The regulators today said major U.S. banks are currently meeting their existing capital requirements.
“Major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized,” the regulators said.
Still, analysts and investors anticipate that writedowns will climb. President Barack Obama has also said that some lenders haven’t fully recognized likely losses. The International Monetary Fund estimates that writedowns and credit losses on U.S. mortgage-related assets will reach $2.2 trillion, after a total of about $1.1 trillion so far.
Officials are still “attacking the symptoms of the problem as opposed to the underlying cause,” Egan said. “The base problem in the financial markets right now that has yet to be addressed is the valuation and pricing of structured finance assets.”
Treasury Secretary Timothy Geithner outlined earlier this month a Public-Private Investment Fund designed to address the toxic assets. Officials have yet to specify how the program, which may reach $1 trillion, will work.
Even in the midst of what may become the worst recession in the postwar era, Americans still have the means to enjoy more luxuries than their parents or grandparents did a half-century ago — for now.
Necessities like food and clothing take a much smaller share of household budgets, with plenty left over to pay for bigger homes, second or third cars and higher levels of education than families could afford back then.
That has allowed U.S. families to devote 43 percent of their budgets to housing — including rent, furnishings, utilities and even hotel stays — according to weightings used by the Bureau of Labor Statistics to calculate the consumer price index. The comparable share in 1955, when Dwight D. Eisenhower was president and the rate of inflation was last as low as today, was 33 percent.
Consumer prices were unchanged in January from a year earlier, the first time they haven’t increased on a 12-month basis since 1955, Labor reported yesterday in Washington. Americans today devote 15.8 percent of their budgets to food and beverages, down from 28.6 percent 54 years ago, and spend 3.7 percent on clothing, down from 9.8 percent.
“It shows how much discretionary income has been generated,” said Donald Ratajczak, chief consulting economist at Morgan Keegan & Co. in Atlanta, and a former director of the Economic Forecasting Center at Georgia State University where he won acclaim for his inflation forecasts in the 1990s. “A lot of that has gone into housing and cars as we wanted bigger and bigger homes and more car.”
“Back then you had to spend a quarter of your income to feed your family, and now it’s about a sixth,” he said low rate payday loans.
More Necessities?
As home ownership surged in the postwar period and more Americans achieved higher education levels and better paying jobs, households were able to divert more of their spending to less essential items. Now, with the economy mired in a recession since December 2007, Americans may once again have to allocate more of their spending to necessities, said Ratajczak.
Transportation expenses, including cars, maintenance, fuel and public transport, account for 15.3 percent of household budgets, up from 11.1 percent in 1955, according to Labor’s data.
Education and communications, which didn’t even exist as a separate, major category a half century ago, accounts for 6.3 percent of family budgets today. Those expenditures include tuition and books, as well as spending on information processing, such as computers and telephone services.
Telephone service, which until 1998 was included in housing because of the fixed land lines, was moved to the new education and communications category as more and more people use mobile phones, the Labor Department said.
Other expenses have remained more constant over time. Americans spend 7.6 percent on energy today compared with 6 percent in 1955. Medical care takes up 6.4 percent of family budgets, up from 5.2 percent.
The Association of Corporate Travel Executives says 71 percent of its member companies plan to spend less on travel this year than in 2008.
According to the trade group, that’s a huge and unprecedented shift in corporate travel mangers’ plans from just five months ago.
ACTE’s new survey shows most companies are seeking to spend 10 percent to 20 percent less on travel than they reported in September of 2008.
Using the most conservative figures for estimating the dollar impact of such cuts, ACTE suggests that the 176 member companies responding to the survey will spend about $880 million less on travel this year than they had planned personal no fax payday loan. If the same estimate is applied to the ACTE’s full membership of 2,400 companies, the impact would be more than $2 billion.
The Alexandria, Va.- based Association of Corporate Travel Executives is a not-for-profit group established to provide executive-level global education and peer-to-peer networking opportunities. ACTE serves more than 6,000 executives in 80 countries.
Statistics Canada collects, analyzes and publishes a kaleidoscope of data, from population estimates to processed cheese production.
Economists, the government and industry groups always keep a close eye on reports from the central statistical agency. But aside from a few key releases, it rarely garners major headlines or much public attention.
Until now. Certain Statistics Canada reports have become widely anticipated news events as the economy spirals down. While forecasters bicker over where the economy is going, the federal agency tells us with detached authority where it has been. Predictably, the news isn’t good. Jobs are evaporating, the economy is contracting and crucial export markets are drying up.
But in a country as large as Canada, how is it possible to tally these numbers with any certainty?
Take the latest unemployment figures, which showed Canada lost 129,000 jobs in January, far more than economists had predicted.
That report, released Feb. 6, was the result of a survey taken in mid-January of about 110,000 people, aged 15 and older, living in 54,000 households selected to be representative of the country’s population. The agency dispatched about 1,500 interviewers to question subjects on their employment situation – or, increasingly, their unemployment situation.
Interviewers usually start with telephone calls. But if they don’t get through, they visit households to get the information they need. Resistance is futile: along with the census, the labour force survey is the only other mandatory household survey in Canada.
"The reason for that is that this is a big indicator of what’s going on in the economy," said Danielle Zietsma, an economist with the labour force survey at Statistics Canada.
But not all Canadians are considered to be potential respondents. Aboriginals living on reserves are excluded because of "serious challenges" in interviewing those in remote communities in the short window for collecting data, Statistics Canada said. Full-time members of the military, prison inmates and nursing homes residents are also left out.
The numbers are considered final when they are published, although once a year the agency tweaks monthly seasonally adjusted numbers going back several years based on new adjustment factors. Seasonal adjustment removes normal fluctuations expected in particular months – for example, the influx of university students into the job market every May.
But some months, the change in overall employment may not mean much. Statistics Canada considers a movement of less than 28,000 jobs "little changed." Anything more is deemed statistically significant.
Another closely watched economic report from Statistics Canada is gross domestic product, or GDP, the total value of goods and services produced in Canada instant payday loans completely online.
It is important because a recession is often defined as two consecutive quarters of falling GDP. Most economists think that when the final numbers are in – the last GDP figures Statistics Canada released were from November – they will show the economy shrank in the last quarter of 2008 and continued to contract at least through the first quarter of this year.
Statistics Canada calculates GDP using a range of surveys, including retail sales, wholesale trade, manufacturing, employment payrolls and hours, the labour force survey, quarterly financial statistics and international trade data.
On a monthly basis, the agency tallies up GDP by industry. But it uses three different methods to arrive at quarterly numbers. One measures the income of households, corporations, government and the foreign sector using various measures. Another gauges expenditures. The third method measures what each industry produces by assessing how much "value-added" they put into their production.
"In theory, these three numbers should be equal, but they’re never equal" for statistical reasons, said Bernard Lefrançois, chief of monthly GDP by industry at Statistics Canada. "So we have a big process of reconciliation of the three ways of measuring GDP, and this is how we end up with a final number."
Even then, the figures still aren’t set in stone. "We put out the numbers with the best information we have at the moment we produce them," Lefrançois said. But the agency sometimes revises its GDP statistics to take into account new information. "It takes quite a number of years before they’re really final," he added.
Economists say both unemployment and GDP numbers should be treated with some caution.
The labour force survey, for example, "is only as good as the answers that are provided by people who are surveyed," said Derek Holt, vice-president of Scotia Capital Economics. "Some key questions in that survey can critically depend on how people choose to describe their own conditions."
For example, an auto worker who expects to be called back to work might not count herself as unemployed at first, but her answer might change if a temporary plant idling lasts longer than anticipated.
GDP numbers also rely on samples, and can be subject to revisions, Holt noted. "You can get both the sign and the magnitude completely wrong on the first pass. It’s not common, but it’s certainly not unheard of."
The important thing is to focus on trends, rather than month-to-month volatility, he said.
Wall Street bank executives squirmed this week when the U.S. Congress scolded them for spending slices of the $176 billion in bailout money on perks such as private jets.
But the big test of whether Wall Street brass got the message that high living on the corporate tab is now unacceptable is yet to come.
An avalanche of regulatory filings called proxy statements are set to hit mostly in late March and April. Proxies must go to shareholders before annual meetings and must detail 2008 perks lavished on a company’s top five executives.
Banks’ major shareholders including pension funds and insurance companies will comb through the filings to see whether the appetite for perks like jetting on the corporate dime and personal cars and drivers has dropped, compensation experts say.
“They want (to see) that the CEO and executives are sharing some of the pain by reducing fixed compensation, salary and benefits, including the perks,” said Paul Hodgson, senior research associate at research firm The Corporate Library.
Frustration is growing with pricey trimmings on lofty pay.
“The attitude of … major shareholders of Wall Street banks is that if you make that much in total compensation, then you should pay for your car and driver, your travel on corporate jets and the installation of a (home) security system,” Hodgson said payday loan companies.
An eye-catching example was $233,053 for private car and driver benefits for Goldman Sachs chief executive Lloyd Blankfein, he said.
The Goldman chief’s total approved compensation for 2007 was $68.5 million.
RIDING THE RAILS
Farther down the corporate ladder, the rank and file also are seeing cuts in perks.
Goldman Sachs scrapped holiday parties, a spokesman said. And the firm’s New York staff must now wait until 10 p.m., one hour later than before, to take a car service home at the company’s expense.
In Greenwich, Connecticut, RBS discourages staff from taking taxis or car services into Manhattan, a spokesman said. It posts train schedules to promote riding the rails.
At Morgan Stanley a source said employees must get additional authorizations for catered staff meetings.
When companies file their proxy statements ahead of their shareholder meetings, they also will have an opportunity to set a new tone in their “forward-looking statements,” which will also be scrutinized, compensation experts said.
EDMONTON – The slow death of 500 ducks on a toxic oilsands tailings pond in northern Alberta last April has led to federal and provincial charges against Syncrude Canada Ltd.
Images of the dead and dying birds flashed around the world and Prime Minister Stephen Harper remarked at the time that Canada’s international reputation had been harmed.
Syncrude has been charged under the Alberta Environmental Enhancement and Protection Act and the federal Migratory Birds Convention Act.
"It will be a joint prosecution," Alberta Environment Minister Rob Renner told a news conference Monday.
"The federal investigation and the provincial investigation arrived at the same point and that was that charges would be laid."
The provincial charge carries a maximum fine of $500,000 and alleges that Syncrude failed to take action to keep the ducks from landing on the lake-sized tailings pond north of Fort McMurray, Alta.
The charge specifies that "any person who keeps, stores or transports a hazardous substance or pesticide shall do so in a manner that ensures the hazardous substance does not directly or indirectly come in contact with or contaminate any animals."
The federal charge carries a maximum penalty of $300,000 and six months in prison and is for "allegedly depositing or permitting the deposit of a substance harmful to migratory birds in waters or an area frequented by birds."
In an unusual move, the province and the federal government made separate announcements after what was described as a "joint investigation" of the waterfowl deaths.
Syncrude attempted to rescue some of the ducks that landed in the tailings pond, but only a handful were taken out of the water for cleaning and none survived.
Syncrude officials said last April that noise-makers used to scare waterfowl away from the lake-sized tailings pond had not been deployed because of a spring snowstorm.
"We had (noisemakers) deployed in other areas, but we had not yet reached that specific area and were delayed because of that spring storm," Syncrude spokesman Alain Moore said Monday.
Moore said the company is to appear in Fort McMurray provincial court March 25 to face all charges.
Although he declined to comment directly on the charges until the company is given time to review the specifics, Moore was quick to concede that this incident received global attention.
"We just feel horrible that it happened," he said. "The fact that a large flock of birds drowned on this water at our operations is quite a difficult event for us.
"So there’s a huge resolve in our organization to understand how it occurred and to make the appropriate changes."
Greenpeace activist Mike Hudema describes the maximum fines under this prosecution as "very weak" given the huge profits that the multibillion-dollar oilsands venture has taken in recent years.
"Syncrude earns more than $1 million a day on its operations," he said.
Hudema also said he doubts the charges will do much to repair Canada’s environmental image, especially given the amount of time it took to announce the prosecution.
"I hope that no jurisdiction is fooled into thinking that this signals a new day with regard to environmental enforcement in the province or in Canada when it comes to the tarsands no telecheck payday loans."
The timing of the charges may have something do with U.S. President Barack Obama’s visit to Canada later this month, he added.
Alberta Justice Minister Alison Redford said the decision to lay charges took more than nine months because the Crown wanted to be sure there was a strong likelihood of a conviction.
She refused to discuss specifics of the case, but is already talking about using "creative sentencing" to deal with Syncrude if the prosecution is successful.
"In terms of technology development or perhaps work that might be done in environmental programs," Redford told a news conference.
"But that will be up to the judge to decide."
Renner said Alberta has an obligation to enforce its environmental laws to ensure the public has confidence "in the credibility of our system.
"Clearly, the message is that there needs to be appropriate bird deterrents in place on these kinds of facilities," he said.
Liberal Opposition leader David Swann welcomed the charges.
"It’s important to send a strong message that there is a penalty for failing to do due diligence as an industry," said Swann, who added that Alberta needs to rebuild its international reputation.
"The industry’s reputation has been sorely tarnished," he said.
Alberta’s New Democrats immediately suggested the maximum fines were relatively paltry for a multibillion-dollar oilsands giant.
NDP environment critic Rachel Notley said the fines should be increased 100-fold to ensure they act as a deterrent.
She said, "$500,000 is a slap on the wrist – it’s just not good enough."
Notley accused Alberta’s Progressive Conservative government of putting oilsands profits ahead of environment protection.
Renner said he’s comfortable that Alberta’s environmental laws are "robust enough." He also pointed out that the province’s energy regulator issued a directive last week that will require action plans to deal with all tailings ponds once they are no longer in use.
Notley called this plan "laughable," given that the tailings ponds have been accumulating toxic liquids and sludge for more than 40 years.
Environmental groups including Greenpeace have also been critical of the go-slow approach to cleaning up the tailings ponds, which they say are now so large they can been seen from space.
The Syncrude Project is a joint venture undertaking among Canadian Oil Sands Limited (TSX: COS.UN), ConocoPhillips Oil Sand Partnership II, Imperial Oil Resources (TSX: IMO), Mocal Energy Limited, Murphy Oil Company Ltd., Nexen Oil Sands Partnership (TSX: NXY), and Petro-Canada Oil and Gas (TSX: PCA), as the project owners.
Syncrude is the project operator.
Last month, environmentalists launched a private prosecution against Syncrude after no action had been taken over the dead ducks, suggesting a decision on the charges was overdue.
“This should be prosecuted in a timely manner and the government has not done that," said Barry Robinson, with the Toronto-based group Ecojustice.
Federal Environment Minister Jim Prentice was expected to comment on the charges in Ottawa.
The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of the rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said.
The Treasury may increase its stake in lenders that are judged short of capital, the people said on condition of anonymity. Should extra taxpayer funds result in majority ownership by the government, officials would then decide whether to liquidate the institutions, place them into receivership or retire the companies’ assets over time, they said.
Officials are preparing to deploy billions of dollars more to help recapitalize the banks, after already investing an excess of $200 billion. In a second key feature of the plan, the Federal Reserve will likely expand what is now a $200 billion program to revive consumer loans, according to two people briefed on the talks. Details are still being discussed and could change.
The proposals are part of what the U.S. Treasury calls a “comprehensive” effort to shore up confidence in the financial system after more than $750 billion in credit losses. Officials are also considering ways to deal with the toxic assets clogging banks’ balance sheets, where the debate has moved away from the creation of a so-called bad bank, which some lawmakers have called too costly. Guaranteeing the securities may offer a cheaper option.
Yellen’s Lesson
“A lesson from past experience with banking crises around the globe is that the removal of bad assets from bank balance sheets, along with the injection of new capital, is needed to restore health to the banking system,” San Francisco Fed President Janet Yellen said in a speech in Hawaii yesterday.
The surge in home foreclosures is also likely to be addressed, according to House Financial Services Committee Chairman Barney Frank.
Geithner will present his plan on Feb. 9 in a speech at the Treasury scheduled for 12:30 p.m. in Washington.
“They need to get credit flowing again,” said Kenneth Rogoff, a professor at Harvard University and a former chief economist at the International Monetary Fund. “To do that they need to clear the decks somehow. The financial system is just dead in the water.”
Economy Deteriorates
Efforts to breathe life back into the banking system have taken greater urgency as reports showed the recession — already the worst since 1982 — is deepening. The Labor Department said yesterday that another 598,000 jobs were lost in January, driving the unemployment rate to 7.6 percent, the highest level in 17 years. As more people lose their jobs, more loans have soured and banks have become even more reluctant to lend.
President Barack Obama has warned that some banks have yet to fully reflect losses on their assets, and stress tests may offer the government a way of forcing firms to reckon with the illiquid securities. The tests model what would happen to banks in different scenarios and gauge whether they have enough capital to survive.
Geithner has for years pushed lenders to be more aggressive in assessing the vulnerability to their capital and liquidity of their trading to unexpected crises.
“More rigorous and comprehensive stress testing of large shocks across multiple markets, geographic regions and business lines is vital, particularly for systemically important institutions,” Geithner said in an April 2005 speech, when he was the president of the New York Fed cash advance payday loan.
Geithner Campaign
More recently, in responding to questions from lawmakers after his confirmation hearing last month at the Senate Finance Committee, he called for “more frequent and more focused forward-looking assessments of capital and liquidity adequacy under a range of possible scenarios.”
The S&P 500 Financials Index is down almost 50 percent since the $700 billion Troubled Asset Relief Program was enacted Oct. 3. The first half of the TARP was dedicated to injecting capital into more than 300 financial firms and bailing out automakers.
Officials have for weeks talked about how to overhaul the four-month-old $700 billion financial-rescue program, which Congress has criticized for failing so far to restart lending to consumers and businesses.
One of the main sticking points has been how to value the assets that the government could insure or guarantee — a challenge that helped force former Treasury Secretary Henry Paulson to abandon an earlier effort at doing so last year.
Reviving Credit
Still, addressing the deteriorating investments is critical to repair the financial system and allow lenders to begin extending credit again, economists say.
Yellen, who served as White House Council of Economic Advisers chairman in the Clinton administration, warned that “as long as hard-to-value, troubled assets clog their balance sheets, banks find it difficult to attract private capital and to focus on new lending.”
One way to nurse banks back to health has been to backstop their debt. The FDIC currently has a program that guarantees some kinds of bank debt for as long as three years, and announced on Jan. 16 broad plans to expand the facility to include guarantees up to 10 years.
The agency is evaluating precisely how to expand the insurance. Temporary regulations on that extension have been delayed as Treasury and FDIC officials weigh what debt should be covered.
Fed Program
As part of Geithner’s rescue plan, the Fed may expand a new program to make it easier for consumers and small businesses to get loans.
Under the Term Asset-Backed Securities Lending Facility, announced in November, the central bank will lend up to $200 billion to holders of top-rated debt backed by “newly and recently originated” loans. Those include education, car and credit-card loans, and borrowing guaranteed by the Small Business Administration.
The program, known as the TALF, is being seeded with $20 billion of funds from the TARP to protect against Fed losses. Any additional Treasury funds may help the Fed widen the program. The Fed said yesterday it will announce a start date this month, stepping back from previous plans to begin lending in February.
Hedge funds, private equity funds and mutual funds based and managed in the U.S. are eligible to borrow from the TALF program to invest in the debt, the Fed said in updated terms and guidance on the facility.
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