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Stocks fall as retail sales show steep drop & Meltdown 101: Will government stake in banks help? & Direct US stake in banks has many precedents
Stocks fall as retail sales show steep drop
By TIM PARADIS, AP Business Writer
11 minutes ago
NEW YORK - Wall Street pulled back again Wednesday after economic data raised the possibility that the country is either in a recession or moving toward one.
The government's report that retail sales plunged in September by 1.2 percent — almost double the 0.7 percent drop analysts had expected — raised the possibility that consumers may not be as willing to reach for their wallets in the coming months as they worry about a shaky economy.
The Commerce Department report is sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading comes as Wall Street is beginning to refocus its attention on the economy following stepped up government efforts to revive the stagnant credit markets.
Investors also digested third-quarter earnings from two banks caught up in the mortgage mess. JPMorgan Chase & Co. reported an 84 percent decline in its third-quarter profit, offering further evidence of how the financial crisis is slamming the economy.
JPMorgan, which bought the assets of failed bank Washington Mutual Inc. late last month as a result of the mortgage bust, said the profit drop reflected losses on bad mortgage investments, leveraged loans and home loans. The quarter's performance beat expectations, however.
Wells Fargo & Co., meanwhile, reported that its third-quarter profit fell 23 percent after it took hits on investments in troubled finance companies and increased its credit reserves. Still, results topped expectations.
In the first hour of trading, the Dow Jones industrial average fell 255.99, or 2.75 percent, to 9,055.00.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 33.85, or 3.39 percent, to 964.16, and the Nasdaq composite index fell 37.29, or 2.10 percent, to 1,741.72.
On Tuesday, for the first time in nine sessions, the Dow didn't finish the day with a triple-digit loss or gain. Instead, after swinging erratically throughout the session, the blue-chip index closed the day down a moderate 76 points following Monday's record 936-point advance.
The stock market is trying to recover from last week's dismal run, which erased about $2.4 trillion in shareholder wealth and brought the Dow to its lowest level since April 2003. The tumble occurred amid a seize-up in lending stemming from a lack of trust among institutions in response to the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc., which had been the nation's largest thrift.
Beyond the stock market, the credit markets have been showing signs of recovery, though they remain strained, and demand for safe assets remains high. The three-month Treasury bill on Wednesday was yielding 0.19 percent, down from 0.30 percent on Tuesday. When yields are low, it shows that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.
In other economic data Wednesday, the Labor Department said the producer price index, which measures inflation pressures before they reach the consumer, fell 0.4 percent in September, driven by lower energy costs. That decline matched analysts' expectations.
Late Tuesday, Intel Corp., the world's largest maker of PC microprocessors, beat analysts' estimates and posted a third-quarter profit increase of 12 percent. Intel rose 27 cents to $16.20.
JPMorgan's results topped forecasts but the problems seen in all types of loans, not just home equity debt but also prime mortgages and credit cards, is worrisome for the banking industry. The stock rose 72 cents to $41.43.
Wells Fargo, whose pending purchase of Wachovia Corp. will leave it among the top ranks of U.S. banking, rose 45 cents to $33.97 after its report.
Light, sweet crude fell $3.07 to $75.56 a barrel on the New York Mercantile Exchange. The dollar fell against other major currencies.
Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 218.2 million shares.
The Russell 2000 index of smaller companies fell 17.24, or 3.11 percent, to 537.41.
In Asian trading, Hong Kong's Hang Seng Index lost nearly 5 percent after rising more than 13 percent the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1 percent after soaring 14 percent in the previous session.
In afternoon trading in Europe, Britain's FTSE 100 fell 3.24 percent, Germany's DAX index fell 2.63 percent, and France's CAC-40 fell 4.67 percent.
___
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Meltdown 101: Will government stake in banks help?
By RACHEL BECK, AP Business Writer
Tue Oct 14, 6:02 PM ET
NEW YORK - Will the government's plan to pump billions of dollars into banks — in exchange for an ownership stake — help resolve the financial crisis?
Think about the potential effect in terms of cash and confidence.
The primary goal of the effort announced Tuesday would be to ease the psychological crisis that has gripped the financial world. There's a positive message that comes from U.S. government throwing its support behind the ailing banking system.
At the same time, the new flow of capital is intended to bolster banks willingness to lend again — to each other, to consumers and to businesses. That would thaw out credit markets from their current deep freeze.
Here are some questions and answers about government's stock ownership plans:
Q: How will the plan work?
A: The government plans to use $250 billion of the $700 billion financial rescue package to buy stock in financial institutions.
This would allow any bank to issue preferred stock — the type of shares that get top priority when dividends are paid to stockholders — to the Treasury Department. The government will receive dividends at an annual rate of 5 percent for five years, and 9 percent after that, in exchange for their investment.
In addition, the government will have the right to purchase the banks' common shares — stock that has lower priority when dividends are paid out.
Q: What banks can participate in this program?
A: Nine major banks, including all of the country's largest institutions, will participate initially. Most of those banks didn't need capital from the government, but they were pressured to participate by Treasury Secretary Henry Paulson in an effort to remove any stigma that might be associated with banks getting bailouts.
The first taker was Bank of New York Mellon, which announced Tuesday that it would sell $3 billion in preferred shares to the Treasury.
In total, the program will be available to U.S. banks, savings associations, and certain bank and savings and loan holding companies that are engaged only in financial activities. Those interested must elect to participate before 5 p.m. EDT on Nov. 14, 2008.
Q: The government has tossed the banks other life preservers in recent months. What's the advantage of this one?
A: Through this action, the government is backing the banks and infusing them with the money they need to lend. Those that participate can't hoard the proceeds from the stock sale, but must put it to work through lending or other transactions, Paulson said in announcing the plan on Tuesday.
Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said by putting "real money on the table, then the government loses if the banks lose."
"This guarantees with real teeth that the full faith of the government stands behind these financial institutions," Weinberg said. "This gives a real sense of security that tools are in place and they are being used."
Q: So now taxpayers are becoming shareholders in the nation's banks. What's the upside — or downside?
A: Americans will gain initially if this action helps stabilize financial markets. That would help make loans available, which ultimately can help companies buy inventory and make payroll — and possibly avoid layoffs.
Over the long term, if the markets ultimately recover, the banks are expected to buy the stock back, which might mean a profit for the government.
But there are risks. Given the fragile state of the financial system, there is no guarantee that the government will ever recoup all of its money.
Also, now that the government has committed a lot of the $700 billion rescue plan — $250 billion for the bank shares as well as another $100 billion to purchase distressed mortgage assets — there could be future appeals to Congress for more resources to deal with the financial crisis, said Brian Bethune, chief U.S. financial economist at Global Insight.
That would mean spending more taxpayer dollars — money that could, in theory, translate into higher taxes, cuts in government programs or a bigger budget deficit.
Q: Will this plan help people facing foreclosure?
A: This part of the bailout doesn't really have to do with bad mortgages. However, if the injection of money into the banks makes them more willing to lend, people looking for new mortgages might have more luck getting one.
Direct US stake in banks has many precedents
WASHINGTON - For all the thorny free-market issues raised, the big U.S. intervention in banks does have precedents — from wholesale wartime takeovers of entire industries to the seizing of hundreds of failed savings and loans in the 1980s. Most nationalizations have been temporary, but some endure, like Amtrak.
The government has taken stakes in banks, railways, steel mills, coal mines and foreclosed homes.
President Bush's announcement on Tuesday that the government would directly invest up to $250 billion in the nation's top financial institutions was the latest step in increasingly bold efforts here and abroad to prop up a financial system near collapse.
It was presented as a last-resort intervention. But already this year, the Federal Reserve had taken a $85 billion stake in failing insurer American International Group, which it later upped by $37.8 billion. And it provided a $29 billion loan to help JPMorgan Chase & Co. buy investment bank Bear Stearns. The government took over mortgage giants Fannie Mae and Freddie Mac, pledging up to $200 billion.
During World War I, the government nationalized railroads, telegraph lines and the Smith & Wesson Company. During World War II, it seized railroads, coal mines, Midwest trucking operators and many other companies and even, briefly, retailer Montgomery Ward.
Not all takeover efforts go through.
President Truman tried to nationalize the steel industry in 1952 to avert a strike he claimed would hurt Korean War efforts. But the Supreme Court stopped him, saying he failed to cite any legislative authority.
Others can last and last. One major friendly takeover remains today: the government-owned National Railroad Passenger Corporation, doing business as Amtrak since May 1971.
In 1984, Washington seized the failing Continental Illinois Bank and Trust. It continued to exist, with some 80 percent of its shares owned by the federal government, until 1994, when it was acquired by what is now Bank of America — among the first banks in which the Bush administration will take an ownership stake.
The Resolution Trust Corp. took over more than a thousand failed savings and loan institutions in the late 1980s and early 1990s, including an array of bad loans and foreclosed homes. It took six years and $125 billion in tax dollars to clean up that mess.
The RTC was modeled on the Reconstruction Finance Corp. which made loans and bought stock in distressed banks during the Great Depression.
Administration officials emphasize that the recent bank interventions are temporary and argue that they are in the national interest — even if seemingly at odds with hallowed private-enterprise principles.
"These measures are not intended to take over the free market, but to preserve it," Bush said on Tuesday.
"The federal government will not be running banks," said White House spokesman Tony Fratto.
Peter Morici, a business professor at the University of Maryland, said that may be a shortcoming — not an advantage. "Unless the government gets involved in the management of banks, we have no assurances that they won't get us into this mess again, that they're really going to start lending money to people who need it," Morici said.
The U.S. action follows similar steps by Britain, France and other European nations.
Some critics argued that scrapping free-market principles would only perpetuate inefficiency while striking at the citadels of capitalism.
"I can't agree with socialism. I mean this is just more government," said libertarian-leaning Rep. Ron Paul, R-Texas.
Wariness of a government interference with U.S. companies, especially banks, is deeply ingrained in the nation's culture and history.
Alexander Hamilton, the first treasury secretary, established the nation's first central bank — the Bank of the United States — in 1791 while Philadelphia was still the nation's capital. Hamilton intentionally kept the direct U.S. stake at 20 percent so the government could not exercise majority control.
By TIM PARADIS, AP Business Writer
11 minutes ago
NEW YORK - Wall Street pulled back again Wednesday after economic data raised the possibility that the country is either in a recession or moving toward one.
The government's report that retail sales plunged in September by 1.2 percent — almost double the 0.7 percent drop analysts had expected — raised the possibility that consumers may not be as willing to reach for their wallets in the coming months as they worry about a shaky economy.
The Commerce Department report is sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading comes as Wall Street is beginning to refocus its attention on the economy following stepped up government efforts to revive the stagnant credit markets.
Investors also digested third-quarter earnings from two banks caught up in the mortgage mess. JPMorgan Chase & Co. reported an 84 percent decline in its third-quarter profit, offering further evidence of how the financial crisis is slamming the economy.
JPMorgan, which bought the assets of failed bank Washington Mutual Inc. late last month as a result of the mortgage bust, said the profit drop reflected losses on bad mortgage investments, leveraged loans and home loans. The quarter's performance beat expectations, however.
Wells Fargo & Co., meanwhile, reported that its third-quarter profit fell 23 percent after it took hits on investments in troubled finance companies and increased its credit reserves. Still, results topped expectations.
In the first hour of trading, the Dow Jones industrial average fell 255.99, or 2.75 percent, to 9,055.00.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 33.85, or 3.39 percent, to 964.16, and the Nasdaq composite index fell 37.29, or 2.10 percent, to 1,741.72.
On Tuesday, for the first time in nine sessions, the Dow didn't finish the day with a triple-digit loss or gain. Instead, after swinging erratically throughout the session, the blue-chip index closed the day down a moderate 76 points following Monday's record 936-point advance.
The stock market is trying to recover from last week's dismal run, which erased about $2.4 trillion in shareholder wealth and brought the Dow to its lowest level since April 2003. The tumble occurred amid a seize-up in lending stemming from a lack of trust among institutions in response to the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc., which had been the nation's largest thrift.
Beyond the stock market, the credit markets have been showing signs of recovery, though they remain strained, and demand for safe assets remains high. The three-month Treasury bill on Wednesday was yielding 0.19 percent, down from 0.30 percent on Tuesday. When yields are low, it shows that demand is so high that investors are willing to earn meager returns as long as their principal is preserved.
In other economic data Wednesday, the Labor Department said the producer price index, which measures inflation pressures before they reach the consumer, fell 0.4 percent in September, driven by lower energy costs. That decline matched analysts' expectations.
Late Tuesday, Intel Corp., the world's largest maker of PC microprocessors, beat analysts' estimates and posted a third-quarter profit increase of 12 percent. Intel rose 27 cents to $16.20.
JPMorgan's results topped forecasts but the problems seen in all types of loans, not just home equity debt but also prime mortgages and credit cards, is worrisome for the banking industry. The stock rose 72 cents to $41.43.
Wells Fargo, whose pending purchase of Wachovia Corp. will leave it among the top ranks of U.S. banking, rose 45 cents to $33.97 after its report.
Light, sweet crude fell $3.07 to $75.56 a barrel on the New York Mercantile Exchange. The dollar fell against other major currencies.
Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 218.2 million shares.
The Russell 2000 index of smaller companies fell 17.24, or 3.11 percent, to 537.41.
In Asian trading, Hong Kong's Hang Seng Index lost nearly 5 percent after rising more than 13 percent the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan's Nikkei 225 index, however, ended up 1.1 percent after soaring 14 percent in the previous session.
In afternoon trading in Europe, Britain's FTSE 100 fell 3.24 percent, Germany's DAX index fell 2.63 percent, and France's CAC-40 fell 4.67 percent.
___
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Meltdown 101: Will government stake in banks help?
By RACHEL BECK, AP Business Writer
Tue Oct 14, 6:02 PM ET
NEW YORK - Will the government's plan to pump billions of dollars into banks — in exchange for an ownership stake — help resolve the financial crisis?
Think about the potential effect in terms of cash and confidence.
The primary goal of the effort announced Tuesday would be to ease the psychological crisis that has gripped the financial world. There's a positive message that comes from U.S. government throwing its support behind the ailing banking system.
At the same time, the new flow of capital is intended to bolster banks willingness to lend again — to each other, to consumers and to businesses. That would thaw out credit markets from their current deep freeze.
Here are some questions and answers about government's stock ownership plans:
Q: How will the plan work?
A: The government plans to use $250 billion of the $700 billion financial rescue package to buy stock in financial institutions.
This would allow any bank to issue preferred stock — the type of shares that get top priority when dividends are paid to stockholders — to the Treasury Department. The government will receive dividends at an annual rate of 5 percent for five years, and 9 percent after that, in exchange for their investment.
In addition, the government will have the right to purchase the banks' common shares — stock that has lower priority when dividends are paid out.
Q: What banks can participate in this program?
A: Nine major banks, including all of the country's largest institutions, will participate initially. Most of those banks didn't need capital from the government, but they were pressured to participate by Treasury Secretary Henry Paulson in an effort to remove any stigma that might be associated with banks getting bailouts.
The first taker was Bank of New York Mellon, which announced Tuesday that it would sell $3 billion in preferred shares to the Treasury.
In total, the program will be available to U.S. banks, savings associations, and certain bank and savings and loan holding companies that are engaged only in financial activities. Those interested must elect to participate before 5 p.m. EDT on Nov. 14, 2008.
Q: The government has tossed the banks other life preservers in recent months. What's the advantage of this one?
A: Through this action, the government is backing the banks and infusing them with the money they need to lend. Those that participate can't hoard the proceeds from the stock sale, but must put it to work through lending or other transactions, Paulson said in announcing the plan on Tuesday.
Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said by putting "real money on the table, then the government loses if the banks lose."
"This guarantees with real teeth that the full faith of the government stands behind these financial institutions," Weinberg said. "This gives a real sense of security that tools are in place and they are being used."
Q: So now taxpayers are becoming shareholders in the nation's banks. What's the upside — or downside?
A: Americans will gain initially if this action helps stabilize financial markets. That would help make loans available, which ultimately can help companies buy inventory and make payroll — and possibly avoid layoffs.
Over the long term, if the markets ultimately recover, the banks are expected to buy the stock back, which might mean a profit for the government.
But there are risks. Given the fragile state of the financial system, there is no guarantee that the government will ever recoup all of its money.
Also, now that the government has committed a lot of the $700 billion rescue plan — $250 billion for the bank shares as well as another $100 billion to purchase distressed mortgage assets — there could be future appeals to Congress for more resources to deal with the financial crisis, said Brian Bethune, chief U.S. financial economist at Global Insight.
That would mean spending more taxpayer dollars — money that could, in theory, translate into higher taxes, cuts in government programs or a bigger budget deficit.
Q: Will this plan help people facing foreclosure?
A: This part of the bailout doesn't really have to do with bad mortgages. However, if the injection of money into the banks makes them more willing to lend, people looking for new mortgages might have more luck getting one.
Direct US stake in banks has many precedents
WASHINGTON - For all the thorny free-market issues raised, the big U.S. intervention in banks does have precedents — from wholesale wartime takeovers of entire industries to the seizing of hundreds of failed savings and loans in the 1980s. Most nationalizations have been temporary, but some endure, like Amtrak.
The government has taken stakes in banks, railways, steel mills, coal mines and foreclosed homes.
President Bush's announcement on Tuesday that the government would directly invest up to $250 billion in the nation's top financial institutions was the latest step in increasingly bold efforts here and abroad to prop up a financial system near collapse.
It was presented as a last-resort intervention. But already this year, the Federal Reserve had taken a $85 billion stake in failing insurer American International Group, which it later upped by $37.8 billion. And it provided a $29 billion loan to help JPMorgan Chase & Co. buy investment bank Bear Stearns. The government took over mortgage giants Fannie Mae and Freddie Mac, pledging up to $200 billion.
During World War I, the government nationalized railroads, telegraph lines and the Smith & Wesson Company. During World War II, it seized railroads, coal mines, Midwest trucking operators and many other companies and even, briefly, retailer Montgomery Ward.
Not all takeover efforts go through.
President Truman tried to nationalize the steel industry in 1952 to avert a strike he claimed would hurt Korean War efforts. But the Supreme Court stopped him, saying he failed to cite any legislative authority.
Others can last and last. One major friendly takeover remains today: the government-owned National Railroad Passenger Corporation, doing business as Amtrak since May 1971.
In 1984, Washington seized the failing Continental Illinois Bank and Trust. It continued to exist, with some 80 percent of its shares owned by the federal government, until 1994, when it was acquired by what is now Bank of America — among the first banks in which the Bush administration will take an ownership stake.
The Resolution Trust Corp. took over more than a thousand failed savings and loan institutions in the late 1980s and early 1990s, including an array of bad loans and foreclosed homes. It took six years and $125 billion in tax dollars to clean up that mess.
The RTC was modeled on the Reconstruction Finance Corp. which made loans and bought stock in distressed banks during the Great Depression.
Administration officials emphasize that the recent bank interventions are temporary and argue that they are in the national interest — even if seemingly at odds with hallowed private-enterprise principles.
"These measures are not intended to take over the free market, but to preserve it," Bush said on Tuesday.
"The federal government will not be running banks," said White House spokesman Tony Fratto.
Peter Morici, a business professor at the University of Maryland, said that may be a shortcoming — not an advantage. "Unless the government gets involved in the management of banks, we have no assurances that they won't get us into this mess again, that they're really going to start lending money to people who need it," Morici said.
The U.S. action follows similar steps by Britain, France and other European nations.
Some critics argued that scrapping free-market principles would only perpetuate inefficiency while striking at the citadels of capitalism.
"I can't agree with socialism. I mean this is just more government," said libertarian-leaning Rep. Ron Paul, R-Texas.
Wariness of a government interference with U.S. companies, especially banks, is deeply ingrained in the nation's culture and history.
Alexander Hamilton, the first treasury secretary, established the nation's first central bank — the Bank of the United States — in 1791 while Philadelphia was still the nation's capital. Hamilton intentionally kept the direct U.S. stake at 20 percent so the government could not exercise majority control.
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