Calm before storm of more bankruptcies

September 30, 2009
Bankruptcy professionals have noted a curious calm in the pace of corporate Chapter 11 filings, But don't relax yet, they say. A recent slowdown just marks a calm period before another storm of business collapses.

Things may be getting slightly better in the US economy and, paradoxically, that makes it more likely companies will be pushed into bankruptcy in coming months. For one, the largest US banks posted surprisingly strong profits during the first half of the year. That has made them more willing to foreclose on deadbeat debtors, pushing them into bankruptcy.

It is a marked change from the end of 2008, when lenders were so anxious to keep losses off their books that they extended loan deadlines for struggling companies.

"The calls (for restructuring advice) have slowed up," said Lawrence Adelman, co-founder of restructuring advisory firm AEG Partners. "But it is a lull. Banks have had time to get their reserves in balance and they're in a better position to take a writeoff."

"The commercial real estate market is starting to fall apart now," Adelman added.

In addition, media and auto-related companies are about four times more like to file for bankruptcy in the next year than companies in other industries, according to a study by Audit Integrity, which tracked liquidity, debt levels and other risk measures at more than 2,500 companies.

And most restructuring professionals say retailers, particularly those in the women's apparel and jewelry sector, are at risk of collapse.

"There will be more Chapter 11s, more out-of-court workouts," said Richard Mikels, a partner at law firm Mintz Levin. "The deleveraging that we need so badly, it's starting to happen."

Top restructuring experts, bankruptcy attorneys and distressed investors will address the outlook for struggling companies at the Reuters Restructuring Summit in New York and London next week. The specialists will also address which industries might be next in line and what steps can be taken to shore up weakened firms, as well as attractive investment opportunities.

What's next?

The past 12 months brought the bankruptcies of such American icons as automaker General Motors Corp and outdoor apparel maker Eddie Bauer.

Bankruptcy filings have slowed somewhat. In August, there were just 10 public-company Chapter 11 filings, compared with 20 filings in July, according to bankruptcydata.com. But there are more to come, especially for any industries that are hurt by slower consumer spending.

"A lot of the retailers are truly hanging on by a thread," said Daniel Alpert, a managing director at Westwood Capital LLC, who advises distressed companies on restructuring measures.

New bankruptcies may not be as large or as recognizable but their impact will still ripple through the economy, bringing unemployment and balance-sheet losses.

"More jobs are lost, money is lost, banks and lenders have to take more loss," said Adelman. "People are affected."

...Read more...

UK govt to take aim at bankers' bonuses

September 29, 2009
British Treasury chief Alistair Darling said yesterday that automatic annual bonuses for banking executives will be outlawed in an attempt to curb excessive risk taking in the country's huge financial sector.

The Chancellor of the Exchequer told the governing Labour Party's annual conference that new legislation to scrap the payments will be put to Parliament within weeks.

Leaders of the G20 rich and developing countries agreed last week to limit executive bonuses, but didn't set specific caps. Darling said bankers in Britain will in future be offered bonuses for their performance over several years, rather than over 12 months.

"We won't allow greed and recklessness to ever again endanger the whole global economy and the lives of millions of people," Darling said.

Claw-back provision

He told the rally that new laws would include a claw-back provision and help "end the reckless culture that puts short term profits over long term success".

"It will mean an immediate end to automatic bank bonuses year after year, it will mean an end to immediate payouts for top management," Darling said.

The plans, to be included in a new Business and Financial Services Bill, will be proposed formally in the Queen's Speech in December, the annual announcement of the government's legislative program.

Darling told the rally that Britain's economy has not yet recovered from the financial crisis, but predicted the UK is likely to come out of recession by the end of the year.

"Germany, France and Japan are showing signs of growth. There are many independent forecasters now believing too that the UK is coming out of recession," he said. "I think it is too early to say so with total confidence."

Prime Minister Gordon Brown's Labour Party trails badly in opinion polls ahead of a national election that must be called by next June.

Brown said on Sunday that his party could recover if the economy rallies and the public give him credit for averting a worse financial crisis.

"When the history of this period is written, this country and this party will be proud. Proud that the people who led the way in stopping recession turning into global depression were our government and our Prime Minister Gordon Brown," Darling told delegates.

In recent weeks Brown has acknowledged that the government will need to cut public spending to reduce mounting government debts, but insists his Labour Party would protect key services.

Darling said the main opposition Conservative Party, which is widely tipped to win Britain's next election, would put the country's economic recovery at risk by making fast and sweeping cuts to spending.

...Read more...

World Bank chief says economic crisis remaking global power relations

September 29, 2009
World Bank President Robert B. Zoellick said on Monday that the global economic crisis is contributing to shifts in power relations in the world that will impact currency markets, monetary policy, trade relations and the role of developing countries.

In a speech ahead of the Annual Meetings in Istanbul, Turkey, of the World Bank and International Monetary Fund (IMF), Zoellick said leaders should reshape the multilateral system and forge a "responsible globalization" that would encourage balanced global growth and financial stability, embrace global efforts to counter climate change, and advance opportunity for the poorest.

"The old international economic order was struggling to keep up with change before the crisis," Zoellick told an audience at the Paul H. Nitze School of Advanced International Studies of the Johns Hopkins University, in Washington, D.C.

"Today's upheaval has revealed the stark gaps and compelling needs. It is time we caught up and moved ahead," he said.

In the speech entitled "After the Crisis?" Zoellick said "Peer review of a new Framework for Strong, Sustainable and Balanced Growth agreed at last week's G20 Summit is a good start, but it will require a new level of international cooperation and coordination, including a new willingness to take the findings of global monitoring seriously. Peer review will need to be peer pressure."

It was also important for the G20 to remember those countries not at the table.

"As agreed in Pittsburgh last week, the G20 should become the premier forum for international economic cooperation among the advanced industrialized countries and rising powers," said the World Bank chief. "But it cannot be a stand-alone committee. Nor can it ignore the voices of the over 160 countries left outside."

China's strong response during the economic crisis and rapid recovery had underscored its growing influence as a stabilizing force in today's global economy, he said.

But its leaders face challenges caused by rapid credit growth and the economy's dependence on exports, he added.

The United States had clearly been hit hard by the crisis. Its prospects depend on whether it will address large deficits, recover without inflation, and overhaul its financial system, according to Zoellick .

The United States has a history of recovering from setbacks. "But the United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," Zoellick said, "Looking forward, there will increasingly be other options to the dollar."

The crisis has brought to the attention of lawmakers the significant role played by central banks.

Central banks performed well once the crisis hit but their role in the build-up was less convincing.

"In the United States, it will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority," said Zoellick.

"My reading of recent crisis management is that the Treasury Department needed greater authority to pull together a bevy of different regulators," said the former U.S. Deputy Secretary of State.

"Moreover, the Treasury is an executive department, and therefore Congress and the public can more directly oversee how it uses any added authority," said Zoellick.

Developing countries had already been on the rise before the crisis and their position has been further strengthened because of it. Their growing share of the world economy was a positive development.

"Looking beyond, a more balanced and inclusive growth model for the world would benefit from multiple poles of growth," Zoellick said. "With investments in infrastructure, people, and private businesses, countries in Latin America, Asia, and the broader Middle East could contribute to a 'New Normal' for the world economy."

...Read more...

ough times for wealthy in the Big Apple

September 29, 2009
This year, New York's deep-pocketed rich were required to dig even deeper to help shore up state finances during the worst recession since the 1930s.

They now pay higher taxes on their income and on limousines and yachts, more to enter a horse in a race and more to dabble in real estate. Meanwhile, many are losing millions from the closing of business tax loopholes and those making over $1 million are losing tax deductions others get.

It even costs more to hunt foxes or pheasants and have their taxes prepared.

Now, a half-dozen states in this recession-driven movement are nervously eyeing New York to see if it's wise to demand so much from people rich enough to have a second home in less taxing states, and for whom a change of address can be its own tax break.

Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth. Governor David Paterson, who had always warned targeting the rich could backfire, fears that's just what happened.

Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated.

The concern about millionaire flight has prompted some states, including New York, New Jersey and California, to increase the highest tax rates only temporarily. For New York, it's the second temporary increase for high earners since 2001.

The first one ended as scheduled after three years. But Paterson and economists warn that came as the economy began to grow fast into another boom, something that isn't expected now because Wall Street - which historically provided 20 percent of state revenues - is perhaps permanently downsized.

"People aren't wedded to a geographic place as they once were. It's a different world," said New York Lieutenant Governor Richard Ravitch. He said last year's surcharge on income taxes, set to last three years, won't likely meet expectations.

Missing revenue

So far this year, half of about $1 billion in expected revenue from New York's 100 richest taxpayers is missing. The state budget office says losses suffered in the recession could be largely to blame, and it may still come in next year when filers exhaust their extensions.

Those seeking extensions nevertheless had to pay in April at least as much as they owed in 2008. The six-month extension for the balance ends in October, but given the hard times many filers likely didn't earn much more than a year ago.

State officials say they don't know how much of the missing revenue is because any wealthy New Yorkers simply left.

But at least two high-profile defectors now list official addresses in Florida: Buffalo Sabres hockey team owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and conservative radio talk show host Rush Limbaugh.

Real estate mogul Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes.

Golisano, who created 5,000 jobs from his Rochester payroll processing company, Paychex, bristled when politicians said he was bailing out of New York in the spring.

"If anything, New York state has bailed out on us," he said.

And it's not just the well-known leaving.

Nancy Bell is moving her Science First manufacturer of scientific products from the Buffalo site her father founded in 1960 to Florida, which aggressively courted her and her two business-partner sons. They are building a new facility there and, with the state's help, had 1,000 applications for 20 jobs.

"It was the higher tax brackets, the so-called millionaire's tax", that forced the move, she said. "We feel we have to look to the future ... I'm leaving wonderful, wonderful friends. It's not our first choice. It's our 100th."

Maryland enacted higher tax rates for wealthier residents in 2008 to boost revenues but income from those taxes is down 6.7 percent so far this year. Officials in Maryland, as in New York, hope much of the revenue is simply delayed because of filers' extensions, however.

"Overall, as in most states, revenues are down at the higher income levels," said Joseph Shapiro, spokesman for the Maryland Comptroller's Office. He said there's no concern yet that the higher tax rates on the wealthy are driving the rich out.

The approach has been tried before.

The conservative-leaning Tax Foundation said that through the early 1990s, several states maintained double-digit income tax rates for the higher earners. Those rates were dropped, however, in the boom of a fast-growing economy.

States also realized that having a higher tax rate than their neighbors would cost them talent, lose jobs and hinder economic growth, the foundation reported in May after Hawaii joined Maryland, New Jersey, California and New York to adopt a "millionaire's tax". New York, for example, has been careful not to raise its highest rates above New Jersey's, according to the foundation.

The trend toward hitting up the rich is re-emerging because states want to avoid spending cuts or assume that revenues will always grow in the long term, the foundation said. The result is a reliance on a volatile tax source that can contribute to more boom-and-bust cycles, even if revenue from the rich rises in the short term before high earners find a way to avoid or limit taxation.

Undermine growth

The foundation said the taxes can undermine growth, and notes even states that increased taxes on high-income earners - New Jersey, Maryland, and California - face shortfalls comparatively worse than others.

In May, the most recent calculation available, Maryland reported that taxes collected from top earners fell by about $100 million. The number of Marylanders with more than $1 million in taxable income who filed by the end of April fell by one-third, to about 2,000.

Often pushed as a "fair tax" measure and backed by public worker unions, pinching the rich could backfire.

"You can say, 'The millionaire is evil,' but they don't just put their money in a coffee can," said Christopher Summers, president of the nonpartisan Maryland Public Policy Institute. "They employ people ... That fact is, you need rich people to keep working hard so they will invest."

...Read more...

U.S. large loans credit quality deteriorates sharply

September 27, 2009
Credit quality declined sharply for loan commitments of 20 million U.S. dollars or more held by multiple federally supervised institutions, a U.S. government report has said.

According to the 32nd annual review of Shared National Credits (SNC) released on Thursday, the credit risk of these large loan commitments was shared among U.S. bank organizations, foreign bank organizations (FBO), and nonbanks such as securitization pools, hedge funds, insurance companies, and pension funds.

Credit quality deteriorated across all entities, the review said. But nonbanks held 47 percent of classified assets in the SNC portfolio, despite making up only 21.2 percent of the SNC portfolio. U.S. bank organizations held 30.2 percent of the classified assets and made up 40.8 percent of the SNC portfolio.

The 2009 review covered 8,955 credits totaling 2.9 trillion dollars extended to approximately 5,900 borrowers.

The review identified significant deterioration in credit quality of leveraged finance credits, with these loans representing more than 40 percent of the dollar volume of total criticized assets.

About 72 percent of the dollar volume of the 50 largest leveraged finance SNCs were criticized, which represents one-third of all criticized assets.

"While we expected a year-over-year increase in problem assets, given the weak economic environment, declining (commercial real estate) values, and previously weak underwriting, we were surprised by the magnitude of the increase," Scott Valentin, an analyst for FBR Capital Markets, was quoted as saying on Friday.

The SNC program was established in 1977 to provide an efficient and consistent review and classification of SNC, which includes any loan or asset extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates to 20 million dollars or more and is shared by three or more unaffiliated supervised institutions.

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G20 shifts more IMF voting power to developing countries

September 27, 2009
The Group of 20 (G20) countries agreed in Pittsburgh yesterday to increase developing countries' voting power at the International Monetary Fund (IMF) by at least five percent, a major move to improve the international organization's legitimacy and effectiveness.

"We are committed to a shift in IMF quota share to dynamic emerging markets and developing countries of at least 5 percent from over-represented countries to under-represented countries using the current quota formula as the basis to work from," said a Leaders' Statement issued after a two-day summit meeting of the world's major economies in Pittsburgh, the US state of Pennsylvania.

"Today we have delivered on our promise to contribute over US$500 billion to a renewed and expanded IMF New Arrangements to Borrow (NAB)," the statement said.

The G20 also committed to protecting the voting share of the poorest in the IMF. On this basis and as part of the IMF's quota review, to be completed by January 2011, the G20 urged to accelerate the work "toward bringing the review to a successful conclusion."

Analysts believe this move will help improve the IMF's credibility, legitimacy and effectiveness as many developing countries have complained that they were underrepresented in the international organization.

The commitment by the G20 to a shift in IMF representation is "a groundbreaking step" to improve the IMF's legitimacy and effectiveness, said IMF Managing Director Dominique Strauss-Kahn.

"I am very encouraged by the outcome of the G20 summit, including the new role given to the IMF," he said, praising the reform as "a decisive move."

The reform was also hailed by many countries. He Yafei, China's vice foreign minister, said earlier yesterday that a shift in voting rights at the IMF was a key success of the Group of 20 summit.

"The most important thing is to send a message, that is to say the governance structure and decision-making procedures of the [international financial institution] should reflect the reality of the world economy today," He said.

"I don't think there's anybody who does not believe this is a necessary shift," said US Treasury Secretary Timothy Geithner, acknowledging that there have been differences with European countries on the shift at the IMF.

The loss in power would come from European nations, whose global economic clout has shrunk over the past two decades.

However, some analysts believe the reform failed to fully redress IMF imbalances as the poorest countries do not have enough voices, while some main emerging countries are still underrepresented in the organization.

"We welcome the G20's recognition that the IMF needs to change. Unfortunately, this updating of the IMF quota share is not real reform, it is tinkering at the edges," said Max Lawson, Oxfam senior policy adviser. "Without change to the IMF voting rules to give poor countries a real say, the IMF will remain the world's rich country club."

"The IMF must deliver on the promise of wider reform if it is to have a chance of being the 'legitimate and effective' institution the G20 envisages," he said.

The IMF will play a critical role in promoting global financial stability and rebalancing growth, said the statement released by the G20 leaders.

"The IMF should continue to strengthen its capacity to help its members cope with financial volatility, reducing the economic disruption from sudden swings in capital flows and the perceived need for excessive reserve accumulation," the statement said.

"As recovery takes hold, we will work together to strengthen the Fund's ability to provide even-handed, candid and independent surveillance of the risks facing the global economy and the international financial system," it added.
Moreover, the IMF will be given more power to monitor member countries' policy frameworks and their collective implications for financial stability and the level and pattern of global growth.

"This historic decision, and emergence of the G20 as a key forum for international economic cooperation, will lay the foundation for a deeper partnership in global economic policy between emerging and developing countries and the advanced economies," said Strauss-Kahn.

...Read more...

Andrew Ang:More efforts needed for stable world financial system

September 26, 2009

Much effort is still required to build a stable international financial system despite signs of economic recovery around the world, a U.S. scholar says.

Global coordination is critical in reforming the current financial system, said Andrew Ang, a professor of finance and economics at Columbia University, in a recent interview ahead of the G20 summit in Pittsburgh.

"The reform needs to be coordinated worldwide, it would be no use if you shut down or prohibit something in one market, because it will spread up somewhere else," Ang said.

Since the financial crisis erupted last year, some countries have called for a new global reserve system to replace the U.S. dollar as the world reserve currency, saying the use of dollar reserves was contributing to the weakness of the global economy.

Ang agreed that the global reserve system needs to be updated, but insisted the U.S. dollar may still dominate the global reserve system for many years.

"Fundamentally, no one asks the U.S. dollar to be a reserve currency, the dollar has value today because investors gave it value," the professor said. "Meanwhile, there is no other option so far to replace the dollar."

"I think what is going to come out of this financial crisis is the role of developing countries, particularly China. China has a little role a few years ago, but will play a bigger role in the future. But the shift from the dollar to other currencies still needs a long time," he added.

Earlier this month, EU leaders issued a joint plea to U.S. President Barack Obama to back their call for rich and developing nations to cap bankers' pay. They said all 27 EU nations are in "total unity" that the world cannot repeat the "scandal" of bonuses for executives and traders that encouraged banks to take huge risks.

The idea is good but it could not solve the problem, said Ang. "I am sure those people (bankers) could say, if you don't get paid in cash, you get paid in perks, if you don't get paid in options, you will get paid somewhere else. So these things are very hard to solve."

Ang also expressed concern that government bailouts during the crisis could lead to moral hazard.

The U.S. government allowed the Lehman Brothers investment bank to close, but bailed out other banks that made similarly bad real-estate deals and engaged in the same legal, yet risky, business practices of derivatives and subprime mortgages.

"If you're a Wall Street player and you know someone will rescue you, you'll just keep doing what you're doing," said Ang.

Ang also suggested that developing countries continue opening up capital markets even after the global financial crisis.

"Building up temporary firewalls is only temporary, and usually they come back and bite you. You prevent something right now, it will become even worse in a few months down the road," said the professor.

"The most effective thing one can do is to try not to put restrictions on the capital flows, but to encourage robust institutions with great transparency, good regulations, good legal systems and structures, and in the long run that matters," added the professor.

"Capital flows can turn within a minute, so one has to be prepared for that," he said. "Volatility is a part of life, and more open your economy is, there is good and bad things about that, one of the things is you expose to many more global influences than closed economies."

...Read more...

G20 agrees to shift more IMF voting power to developing countries

September 26, 2009
THE Group of 20 (G20) countries agreed in Pittsburgh yesterday to increase developing countries' voting power at the International Monetary Fund (IMF) by at least five percent, a major move to improve the international organization's legitimacy and effectiveness.

"We are committed to a shift in IMF quota share to dynamic emerging markets and developing countries of at least 5 percent from over-represented countries to under-represented countries using the current quota formula as the basis to work from," said a Leaders' Statement issued after a two-day summit meeting of the world's major economies in Pittsburgh, the US state of Pennsylvania.

"Today we have delivered on our promise to contribute over US$500 billion to a renewed and expanded IMF New Arrangements to Borrow (NAB)," the statement said.

The G20 also committed to protecting the voting share of the poorest in the IMF. On this basis and as part of the IMF's quota review, to be completed by January 2011, the G20 urged to accelerate the work "toward bringing the review to a successful conclusion."

Analysts believe this move will help improve the IMF's credibility, legitimacy and effectiveness as many developing countries have complained that they were underrepresented in the international organization.

The commitment by the G20 to a shift in IMF representation is "a groundbreaking step" to improve the IMF's legitimacy and effectiveness, said IMF Managing Director Dominique Strauss-Kahn.

"I am very encouraged by the outcome of the G20 summit, including the new role given to the IMF," he said, praising the reform as "a decisive move."

The reform was also hailed by many countries. He Yafei, China's vice foreign minister, said earlier yesterday that a shift in voting rights at the IMF was a key success of the Group of 20 summit.

"The most important thing is to send a message, that is to say the governance structure and decision-making procedures of the [international financial institution] should reflect the reality of the world economy today," He said.

"I don't think there's anybody who does not believe this is a necessary shift," said US Treasury Secretary Timothy Geithner, acknowledging that there have been differences with European countries on the shift at the IMF.

The loss in power would come from European nations, whose global economic clout has shrunk over the past two decades.

However, some analysts believe the reform failed to fully redress IMF imbalances as the poorest countries do not have enough voices, while some main emerging countries are still underrepresented in the organization.

"We welcome the G20's recognition that the IMF needs to change. Unfortunately, this updating of the IMF quota share is not real reform, it is tinkering at the edges," said Max Lawson, Oxfam senior policy adviser. "Without change to the IMF voting rules to give poor countries a real say, the IMF will remain the world's rich country club."

"The IMF must deliver on the promise of wider reform if it is to have a chance of being the 'legitimate and effective' institution the G20 envisages," he said.

The IMF will play a critical role in promoting global financial stability and rebalancing growth, said the statement released by the G20 leaders.

"The IMF should continue to strengthen its capacity to help its members cope with financial volatility, reducing the economic disruption from sudden swings in capital flows and the perceived need for excessive reserve accumulation," the statement said.

"As recovery takes hold, we will work together to strengthen the Fund's ability to provide even-handed, candid and independent surveillance of the risks facing the global economy and the international financial system," it added.

...Read more...

Reports on manufacturing, housing weigh on stocks

September 26, 2009
INVESTOR confidence suffered another blow yesterday as disappointing reports on manufacturing and home sales stirred worries that the economy will struggle to recover.

Stocks fell for a third straight day to post their biggest weekly losses since early July. The reports on durable goods and sales of new homes reminded investors that while the economy might be improving, it might not do so in a straight line.

The Dow Jones industrial average fell 42 points, bringing its three-day loss to 165.

Durable goods orders, a key indicator for the manufacturing industry, fell unexpectedly in August. The Commerce Department said orders for goods expected to last at least three years slid 2.4 percent, after rising 4.8 percent in July. Economists polled by Thomson Reuters had forecast an increase of 0.5 percent.

It was the second drop in three months and the latest sign that any rebound inside the nation's factories is likely to be slow.

Meanwhile, the government also reported that new home sales inched up to 429,000 last month, below analysts' expectations. The tepid improvement followed four months of stronger gains in new home sales that had raised investors' hopes that the troubled housing market was improving.

The market was already starting sour on housing, and had fallen on Thursday following a separate report showing a surprise drop in existing home sales in August. Stocks also fell Wednesday on worries that the Federal Reserve would be too quick to withdraw its financial supports from the economy.

The week's economic reports have hit shares of industrial companies, which have been logging big gains as investors pile into stocks of companies that could see big jumps in profits if the economy improves. The reports ran counter to other data that had boosted hopes for a rebound in manufacturing.

Technology shares fell yesterday after quarterly results from BlackBerry maker Research In Motion Ltd. fell short of expectations. That weighed on Nasdaq composite index, which contains a big pool of tech stocks.

The day's losses - and even those for the week - are still modest considering how far stocks have rocketed since major indicators tumbled to 12-year lows on March 9. The Standard & Poor's 500 index, the basis for many mutual funds, is up 54.4 percent since then. Analysts have been calling for a break in the advance so the economy can catch up with investors' expectations.

"We really have come a long way and the markets are taking a pause to reflect the fact that we were up 60 percent," said Steven Goldman, chief market strategist, Weeden & Co. in Greenwich, Conn. "We still think things should stay relatively orderly in the pullback and we're still likely to see further gains."

Yesterday, the Dow fell 42.25, or 0.4 percent, to 9,665.19. The index hasn't fallen three straight days since the first week of the month. The broader Standard & Poor's 500 index fell 6.40, or 0.6 percent, to 1,044.38, and the Nasdaq fell 16.69, or 0.8 percent, to 2,090.92.

Falling stocks narrowly outpaced those that rose on the New York Stock Exchange, where consolidated volume came to 4.6 billion shares compared with 5.6 billion Thursday.

For the week, the Dow lost 1.6 percent. It was the biggest slide since the week of July 10 and only the third losing week of the last 11. The S&P 500 index slid 2.2 percent for the week, while the Nasdaq fell 2 percent.

The week's economic data marked an improvement from a few months ago but still disappointed the market by coming in well shy of analysts' expectations - a sign that investors might be underestimating how long it will take for the economy to recover. The market will likely need more convincing evidence that the economy is on track before moving higher again.

Next week's heavy calendar of economic reports could help provide more clarity about how the recovery is going. Yesterday, the Labor Department will release its monthly employment figures, one of the most closely watched economic reports. Other figures are expected on consumer confidence, manufacturing, factory orders and home prices.

Burt White, chief investment officer at LPL Financial in Boston, contends investors who are parked in safe investments like government bonds and who are upset that they missed the run in stocks should re-examine their portfolio. He said they might consider gradually shifting some money from ultra-safe debt to riskier but higher-returning areas like high-yield bonds. Then they could look to stocks.

In other trading, bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.32 percent from 3.38 percent late Thursday.

The dollar was mixed against other major currencies, while gold prices fell for a third day.

Oil rose 13 cents to settle at US$66.02 per barrel on the New York Mercantile Exchange as tension mounted over Iran's nuclear ambitions and Federal Reserve Chairman Ben Bernanke said he still supported a federal lending program that could press the dollar.

The Russell 2000 index of smaller companies fell 2.81, or 0.5 percent, to 598.94.

Overseas, Britain's FTSE 100 rose 0.1 percent, Germany's DAX index fell 0.4 percent, and France's CAC-40 lost 0.5 percent. Japan's Nikkei stock average fell 2.6 percent.

...Read more...

Wall Street retreats on unexpected drop in home sales

September 25, 2009
Wall Street erased early gains and fell on Thursday, as sales of existing homes unexpectedly slumped last month and the strong dollar weighed on commodities.

    The National Association of Realtors said existing home sales dropped 2.7 percent in August, the first time in four months. D.R. Horton led declines in homebuilders.

    The negative reading on the housing market overshadowed better-than-forecast jobs data. The U.S. Labor Department said the number of newly-laid-off workers seeking unemployment benefits fell for a third week in a row. The number of people continuing to claim benefits for more than a week also fell, dropping 123,000 to 6.14 million.

    Financials were among worst performers. Bank of America and Citigroup retreated after the Fed said it will shrink emergency programs that auction loans to commercial banks and Treasuries to bond dealers.

    Moreover, producers of raw materials fell 2 percent for the steepest decline among 10 groups and energy shares lost 1.3 percent. Metals fell as the dollar rallied, and crude oil tumbled 4.4 percent to a one-month low on the New York Mercantile Exchange.

    The Dow Jones fell 41.11, or 0.42 percent, to 9,707.44. Broader indexes also went lower. The Standard & Poor's 500 index slipped 10.09, or 0.95 percent, to 1,050.78, and the Nasdaq fell 23.81, or 1.12 percent, to 2,107.61.

...Read more...

US existing-home sales ease following four monthly gains

September 25, 2009
Existing-home sales in August gave back some of their strong gain in July but remain above year-ago levels, the U.S. National Association of Realtors (NAR) said on Thursday.

    Existing-home sales -- including single-family, townhouses, condominiums and co-ops -- declined 2.7 percent to a seasonally adjusted annual rate of 5.10 million units in August from a pace of 5.24 million in July, but remain 3.4 percent above the 4.93 million-unit level in August 2008, the association said.

    In the previous four months, sales had risen a total of 15.2 percent.

    Lawrence Yun, NAR chief economist, said the tax credit is working.

    "Home sales retrenched from a very strong improvement in July but continue to be much higher than before the stimulus," he said.

    "The first-time buyer tax credit is having the intended impact of bringing buyers into the market, allowing them to take advantage of very favorable affordability conditions," he added.

    Yun explained that some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process.

    "But the decline demonstrates we can't take a housing rebound for granted," the economist said.

    "The recent trend shows broad improvement in most of the country, but with an expected rise in foreclosures over the next 12 months we need to maintain a healthy level of ready buyers to absorb the inventory. An extension of the tax credit is critical to preserve incentives for financially qualified buyers to enter the market," Yun said.

    According to NAR figures, total housing inventory at the end of August fell 10.8 percent to 3.62 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. Unsold inventory totals are 16.4 percent lower than a year ago.

    The national average existing-home price for all housing types was 177,700 dollars in August, down 12.5 percent from August 2008.Distressed properties continue to downwardly distort the average price because they generally sell for 15 to 20 percent less than traditional homes.

...Read more...

Wall Street declines as commodities fall

September 24, 2009
Wall Street capped lower Wednesday, as lower oil prices dragged down energy stocks and financials lost ground amid concern the Federal Reserve is nearing the end of its efforts to lift the economy.

Crude tumbled 3.9 percent to below 69 U.S. dollars a barrel on the New York Mercantile Exchange, as crude inventories unexpectedly increased last week and the dollar rose from a one-year low against the euro. Chevron and Exxon Mobil led energy stocks down.

JPMorgan Chase and Citigroup each lost over 2.8 percent, as the Fed signaled it will use fewer tools to boost the economic growth. The Fed, following a two-day policy meeting, left its interest rates unchanged and said the economy has picked up.

Prudential Financial Inc. slid over 5 percent after Morgan Stanley downgraded the U.S. life insurance industry from "attractive" to "in line."

The Dow Jones fell 81.32, or 0.83 percent, to 9,748.55. Broader indexes also went lower. The Standard & Poor's 500 index lost 10.79, or 1.01 percent, to 1,060.87 and the Nasdaq dipped 14.88, or 0.69 percent, to 2,131.42.

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U.S. Fed slows pace of housing aid program amid upbeat

September 24, 2009
The U.S. Federal Reserve on Wednesday decided to slow down the pace of a program designed to aid housing purchases amid signs that the battered housing market is stabilizing.

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of 1.25 trillion U.S. dollars of agency mortgage-backed securities and up to 200 billion dollars of agency debt," the Federal Open Market Committee said in a statement after wrapping up a two-day meeting.

"The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010," it said.

The Federal Reserve announced the program to buy mortgages and debts from Fannie Mae, Freddie Mac and Ginnie Mae last November, shortly after the financial crisis culminated with the collapses of the Lehman Brothers.

The program, designed to prevent a complete breakdown of the housing market, was originally scheduled to end by the end of this year.

Observers believe that the Fed decision to stretch out the goal of purchasing 1.45 trillion in mortgage-backed securities and debts issued by companies like Fannie Mae and Freddie Mac shows that the U.S. central bank is confident the nascent recovery will take hold.

The Federal Reserve has so far bought about 775 billion dollars worth of mortgage-backed securities and debts from the major loan providers for home buyers.

Nurturing the current economic recovery, the Federal Reserve also decided on Wednesday to leave the federal funds rate at 0 to 0.25 percent and indicated that it will leave the benchmark interest rate at exceptional low levels "for an extended period" of time.

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U.S. Fed leaves benchmark interest rate unchanged to foster recovery

September 24, 2009
The U.S. Federal Reserved on Wednesday decided to leave a key interest rate at a record low in an obvious effort to foster a nascent economy recovery.

Wrapping a two-day meeting, the Federal Open Market Committee (FOMC) said in a statement that it will maintain the target range for the federal funds rate at 0 to 0.25 percent, indicating that it will leave the benchmark interest rate at exceptional low levels "for an extended period" of time.

"Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased," FOMC said.

The committee expressed concerns that while household spending seems to be stabilizing, it remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

"Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales," it added.

The committee said that it expects inflation will remain subdued for some time because substantial resource slack is likely continue to dampen cost pressures and longer-term inflation expectations remain stable.

"In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability," FOMC said in the statement.

The Fed on Wednesday also decided to slow down the pace of a program designed to aid housing purchases amid signs that the battered housing market is stabilizing.

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of 1.25 trillion U.S. dollars of agency mortgage-backed securities and up to 200 billion dollars of agency debt," FOMC said.

"The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010," it added.

The Federal Reserve announced the program to buy mortgages and debts from Fannie Mae, Freddie Mac and Ginnie Mae last November, shortly after the financial crisis culminated with the collapses of the Lehman Brothers.

The program, designed to prevent a complete breakdown of the housing market, was originally scheduled to end by the end of this year.

Observers believe that the Fed decision to stretch out the goal of purchasing 1.45 trillion dollars in mortgage-backed securities and debt issued by companies like Fannie Mae and Freddie Mac shows that the U.S. central bank is confident the nascent recovery will take hold.

The Federal Reserve has so far bought about 775 billion dollars worth of mortgage-backed securities and debt from the major loan providers for home buyers.

The stock markets responded to the Fed decision and statement in a very dramatic way. Stocks, which were little changed in early trading on Wednesday, first jumped by around 50 points in the immediate announcement of the Fed decision but quickly turned negative in later trading.

...Read more...

Online banking turns more popular in U.S.

September 23, 2009
More U.S. consumers prefer to do their banking business online, according to results of a national survey released on Monday.

The survey, released by the American Bankers Association (ABA),reveals that 25 percent of bank customers prefer online banking to any other method, while 21 percent visit local branches and 17 percent use ATMs. The use of mobile banking on cell phones is preferred by only 1 percent of consumers, primarily among people aged between 18 and 34.

"This marks a watershed change," said Nessa Feddis, the ABA senior counsel and retail banking expert. "It tells us that for the first time, more consumers prefer the speed and convenience of conducting their banking transactions on the Internet than visiting their local branch."

The ABA represents its bank members, which are primarily banks with less than 125 million dollars in assets. Its members hold 95 percent of U.S. banking industry's 13.3 trillion dollars in assets.

Online banking has become a major platform for many banks, said Sarah Radwanich, senior analyst at Chicago-based comScore, Inc.

Banks are offering higher interest rates, gas points, large cash incentives for each new checking customer and services such as online personal financial management tools as incentives for people to open online accounts.

The results of the latest survey also show that the popularity of online banking is not exclusive to the youngest consumers – it is the preferred banking method for all bank customers under the age of 55.

Convenience has obviously played a major role in expanding the trend in online banking, said Carol Kaplan of the American Bankers Association.

People choose when and where to manage their finances, and they can keep a closer watch on their accounts with anytime online access.

These services are most often free, which can save bank customers money and a trip to the ATM, offering more attractive incentives.

However, a majority of consumers more than 55 years old, or 26 percent, still prefer to visit their local branch. One of the reasons is that security remains a concern for them using online banking services.

According to a separate survey conducted by the Chicago-based comScore, Inc. earlier this year, security management tools, such as free identity-theft services and free credit score monitoring, are high on the list of desired online service for many of these users.

Experts believe that most of the banks will focus on solving these problems in the future to attract more customers doing their business online.

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Adams: G20 Pittsburgh to focus more on long-term global issues

September 23, 2009

The coming Group of 20 (G20) Pittsburgh summit will focus more on long-term global issues, a former U.S. high ranking official said in a recent interview.

Compared with the April London summit, the Pittsburgh summit would pay more attention to ways getting out of this crisis and into some long-term development, instead of crisis responses, said Tims Adams, the former Under Secretary of the U.S. Treasury Department and the current Managing Director of the Lindsey Group.

Adams said the third round of the G20 summit, to be held from September 24 to 25 in Pittsburgh, had a very full agenda.

"Whenever you have 20 people around the table, there are a lot of priorities," Adams said, "I think the first priority is to ensure a worldwide economic recovery and the key countries are on a firm footing, that it is sustainable and we feel comfortable of a recovery, and we stay in the core with the monetary and fiscal stimulus."

"Another priority is thinking about the exit strategy and the coordination fashion," Adams said. "Besides that, there are other issues, such as financial sector reform, bank compensation, capital ratio, leverage ratios, IMF governance, protectionism, climate change, and support to the lowest income countries."

As the U.S. and world economies are in a process of recovery, some experts suggest that the G20 is not necessary any longer. Adams disagreed with that opinion.

He said it was challenging to get 20 different countries to agree on some very complex issues. He also said maybe it was unnecessary to meet three times a year, but it was good to continue discussions at such levels.

He believed the key issue of the meeting was that the developing countries, the emerging markets and the industrialized countries could sit around the same table and share thoughts on a globalized world.

Questioned about recent trade disputes, Adams replied that he hoped the Pittsburgh summit would reaffirm the open trading system, the support to expand free trade and the fight against protectionism.

"It's obvious that late last year we were in tough times globally. Going forward, the G20 and other organizations need to find ways to work together so that we have balanced growth, and we all work and coordinate closely so we can avoid this kind of crisis that we've just experienced."

...Read more...

Regulatory shake-up threatens lenders

September 23, 2009
Global leaders meet this week seeking to deliver the broadest financial regulation overhaul since the 1930s, potentially threatening profits and stock prices of banks from Goldman Sachs Group Inc to Barclays Plc.

US President Barack Obama and his Group of 20 counterparts convene in Pittsburgh on Thursday and Friday to cement a plan to force banks to curb leverage, hold more equity capital and keep a greater pool of assets that can be easily traded. Restraining bankers' pay and narrowing imbalances in trade and savings will also feature on the agenda as officials try to hammer out an accord to prevent a repeat of the worst crisis since the Great Depression and ensure a sustained recovery.

By limiting the scope of banks to invest and trade, governments may check this year's 22 percent gain in the Standard & Poor's 500 Financial Index. That may be a price they're willing to pay to prevent a repeat of the risk-taking that sparked the collapse of Lehman Brothers Holdings Inc a year ago, a worldwide recession and taxpayer-funded bank rescues.

"Regulation will make banks less profitable by increasing the cost of doing business," said Andrew Clare, a professor at Cass Business School in London and a former Bank of England official. "If banks are going to benefit from taxpayer largesse then they need to act in a way that doesn't hurt taxpayers or the economy."

The summit, which will also be attended by UK Prime Minister Gordon Brown, French President Nicolas Sarkozy and Chinese President Hu Jintao, will also debate how to drive the economic recovery, avoid protectionism, improve accountancy and revamp governance of the International Monetary Fund. The officials will also try to devise a framework to generate a more balanced world economy through greater US savings, European investment and Chinese domestic-demand.

Leaders travel to the Steel City amid voter disquiet after governments used public money to bail out banks only to see many of them quickly return to profit and resume setting aside billions for bonuses. Seventy-three percent of UK voters polled this month by YouGov wanted a tax imposed on all bonuses over 10,000 pounds. A Gallup poll in June showed that 59 percent of Americans wanted action to curb executive pay.

Capital levels

Under consideration: forcing banks to augment their capital buffers to better account for risk, retain more earnings and satisfy a leverage ratio, which measures equity as a proportion of total holdings. They may also consider a proposal to tie pay to capital levels from Financial Stability Board Chairman Mario Draghi.

"There has been a culture that rewards short-term thinking, that used leverage to take exorbitant risks that were unsustainable for the system as a whole," Obama said in a Sept 14 interview. "That's the culture I think that we've got to reverse."

The crackdown could lower profitability by a third at Goldman, Barclays and Deutsche Bank AG's investment bank, JPMorgan Chase & Co. analysts led by Kian Abouhossein said in a Sept 9 report.

Deutsche Bank's return on equity will probably tumble the most among the world's largest investment banks, falling to 6.7 percent in 2011 from 10 percent today, the analysts said. Goldman's return on equity will decline by 4.4 percentage points and Barclays' by 4.3 points.

"The amendments to capital requirements will clearly affect the activities of banks in their trading books and securitizations," said Alessandra Mongiardino, a London-based analyst at Moody's Investors Service.

Spokespeople for Goldman, Deutsche Bank and Barclays declined to comment.

Investors may suffer if financial companies have to issue more equity, said Charles Goodhart, a former Bank of England official and now a professor at the London School of Economics.

"Banks will have to raise more capital by issuing more equity so existing stocks will generally go down," Goodhart said. The IMF estimated in April that US and European banks would need $875 billion in extra capital.

To be sure, Goldman has demonstrated that higher capital and lower leverage don't always mean reduced profits.

The company, which set aside a record $11.4 billion for compensation and benefits in the first half, cut its ratio of assets-to-common equity to 16 times in the second quarter from 26 times a year earlier. Goldman still set a new Wall Street profit record this year, making $3.4 billion on $13.8 billion of revenue in the three months that ended in June.

...Read more...

Wall Street retreats from recent rally

September 22, 2009
Wall Street pared early losses and traded mixed Monday, as markets around the globe paused from a recent rally.

Commodities like oil and gold retreated, as the dollar touched higher. The Crude dipped below 70 dollars a barrel on the New York Mercantile Exchange, which weighed on energy stocks.

Fertilizer shares also led the market lower, after Potash Corp., the largest fertilizer maker by capacity, cut its full-year profit forecast amid a slump in demand.

On economic news, the Conference Board said its index of leading economic indicators rose 0.6 percent in August. The reading, which is meant to project economic activity in the next three to six months, slightly trailed estimates.

Meanwhile, investors also took the potential threat of inflation into consideration. They are waiting to see what The Federal Reserve will say this week during its two-day meeting, which begins Tuesday.

The Dow Jones fell 34.31 to 9,785.89. Broader indexes went mixed. The Standard & Poor's 500 index lost 3.81 to 1,064.49 and the Nasdaq added 3.82 to 2,136.68.

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US on the brink of M&A bonanza

September 23, 2009
Never before have US companies piled up cash faster compared with interest costs than they are now, setting the stage for a surge in mergers and acquisitions.

As the economy emerges from the worst recession in 70 years, cash flow may rise from the $1.5 trillion reported by the Commerce Department for the year ended in June, according to data compiled by Credit Suisse Group AG and Bloomberg.

The amount reached a record in the past 12 months amid the biggest wave of firings since World War II and central bank interest rates near zero percent.

Cash relative to share prices will climb to the highest in at least two decades next year compared with yields on corporate bonds, the data show. The previous high in 2005 preceded the two busiest years ever for takeovers.

"You'll see a steady return to growth in the M&A market," said Michael Boublik, the chairman of mergers and acquisitions for the Americas at New York-based Morgan Stanley.

"Investors are wanting and demanding that companies start thinking about M&A to fuel growth, so therefore deals are being well accepted."

Takeover bids by companies from Walt Disney Co to Kraft Foods Inc signal increasing confidence among executives that may extend the 58 percent rally in the Standard & Poor's 500 Index from a 12-year low on March 9. A record amount of mergers helped send the benchmark gauge to its October 2007 high.

Selling bonds

US companies posted annualized cash flow of more than $1.5 trillion in each of the last three quarters, the most on record, Commerce Department data starting in 1947 show.

With expenses shrinking, the money makes US corporations more attractive to buyers who plan to sell bonds to pay for takeovers, Credit Suisse strategists led by London-based Andrew Garthwaite wrote in a report on Sept 11. Pay to non-government workers has fallen for three straight quarters, dropping 6.6 percent to $5 trillion in the April-to-June period from a year earlier, Commerce Department data show.

Yields on corporate bonds are 0.8 percentage point more than the estimated free-cash-flow yield, or income left over after capital expenses, divided by stock-market value, for US companies in MSCI indexes, data compiled by Zurich-based Credit Suisse and Bloomberg show.

Mergers climbed at least 13 percent in the four years from 1990 until the credit crisis when the gap between rates on corporate bonds and free cash flow was less than 2 percentage points.

Biggest years

Rising cash levels in 2005 preceded the two biggest years in US deals, Bloomberg data show. Takeovers jumped 32 percent in 2006 to $1.74 trillion and 13 percent in 2007 to $1.97 trillion, the data show.

"People are going to realize how resilient cash flows have been in a bad recession," said Russell Napier, Edinburgh-based strategist at CLSA. "Buyers usually have to finance some kind of debt and cash flow is king. We are not going back to the silly days where anyone could raise billion-dollar deals but we are going to see M&A. For businesses with strong balance sheets, this is a great time to buy."

The cash levels also provide a margin of safety for companies should the highest unemployment rate in 26 years and lower consumer spending drag the economy back into a recession, said Richard Weiss, who oversees about $50 billion as chief investment officer at City National Bank in Beverly Hills, California.

US consumer credit plunged by a record $21.6 billion in July, according to a Federal Reserve report released this month, as banks restricted lending and job losses made Americans reluctant to borrow.

Futures on the S&P 500 lost 0.2 percent to 1,059.10 as of 12:36 am in New York. The measure has rallied in the past two weeks to close at 1,068.30 on Sept 18.

Companies in the gauge have hoarded cash to weather a two- year slump in earnings, the longest since the Great Depression. Share buybacks by US corporations fell to the lowest level in the second quarter since at least 1998, New York-based S&P said last week, as the recession reduced earnings.

Profits for companies in the index will probably fall 22 percent in the current quarter before growing 62 percent in the final three months of the year, according to the average estimate of analysts surveyed by Bloomberg.

"Making acquisitions now makes more sense than it would have done six months ago," said Bo Nordberg, a merger analyst at GFI in London. "But a big caveat is if this rally is not a fundamentally driven rally and we see a pullback, then CEOs don't want to be seen as having offered too high a price."

Executives will have to rely less on cutting costs to make acquisitions work. The US unemployment rate climbed to 9.7 percent last month, bringing the number of Americans thrown out of work since the recession began in December 2007 to 6.9 million, the most in any post-World War II contraction, data compiled by Bloomberg show.

From the start of the decade until the onset of the contraction, the jobless rate averaged 5 percent.

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Wavering on fiscal policy may rock investor faith

September 22, 2009
With world stocks already having recouped two-thirds of their 2008 losses, any wavering of policymakers' commitment to a super-loose fiscal and monetary policy framework could rock investor faith in the rally.

This week's Group of 20 summit in Pittsburgh, the Federal Reserve meeting and the minutes of the Bank of England's latest policy meeting are the risk events to watch out for, especially as the G20 pledge earlier this month to keep emergency economic support in place triggered the latest leg of the rally.

The benchmark MSCI world equity index hit a fresh 11-month high this week, bringing its gains since January to more than 27 percent, belying fears that risky assets are in imminent danger of a major correction.

However, too-loose monetary policy when the economy is recovering - some G7 countries have already returned to growth - could stir inflation.

"Investors are happy to embrace risk as cash and bond yields are very low. Some of them have entered on the assumption that interest rates are going to stay very low," said Peter Lucas, investment strategist at RBC Wealth Management.

"If that view is challenged, some of that money will exit the market," Lucas said.

He noted that positive economic surprises could actually spark a sell-off in stocks and other risky assets if they cause speculation of tighter monetary policy and lead to a rise in bond yields.

"How close are we for positive growth surprises to lead to correction? US two-year yields are bottoming out and it could be quite imminent," he added.

Two-year US Treasury yields are hovering around 0.94 percent, having occasionally dipped below 0.9 percent in recent weeks.

The Fed has pledged to buy up to $1.45 trillion of mortgage-backed securities and debt issued by government sponsored Fannie Mae and Freddie Mac by end-2009.

Richmond Fed president Jeffrey Lacker, who is a voting member of the policy committee, said earlier last week it probably made sense to taper the asset purchase program down rather than end it in December.

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US Fed plans pay rules for lenders

September 21, 2009
THE United States Federal Reserve plans new rules on bank pay to curb the type of excessive risk-taking that sparked the global financial crisis and triggered international demands for action.

Public outrage at the stratospheric compensation of some bankers has boiled up to the level of the Group of 20 nations, whose leaders meet this week in Pittsburgh.

The United States, under pressure to act on pay at the G20 from France and Germany, has already said it aims to curb the excessive risk-taking at the root of the crisis.

A Fed source said on Friday that guidelines would be proposed in the next few weeks and would apply to any employee able to take risks that could imperil an institution, not just the executives who have been the main target of popular ire.

The rules will be aimed at all firms the Fed regulates and be enforceable under its existing powers, said the source, who requested anonymity. The Fed oversees more than 5,000 bank holding companies and over 800 smaller state-chartered banks.

Massive losses inflicted by risky subprime mortgage bets destroyed some of the oldest names in US finance and intensified a recession that has cost millions of jobs.

The Financial Stability Board, which answers to the G20, has said that poorly capitalized banks should not be allowed to pay large bonuses.

Industry officials said many financial firms had already reined in pay practices and warned a heavy-handed approach could be harmful.

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Wall Street trades higher as companies upgraded

September 20, 2009
Wall Street traded higher Friday, as analysts upgraded companies from Procter & Gamble to homebuilders.

No major economic reports were on Friday's economic calendar. Investors attached attention to corporate news.

Shares of Procter & Gamble climbed more than 3 percent as Citigroup raised the stock to "buy" from "hold." Chevron was raised to "outperform" from "neutral" at Credit Suisse Group AG while San Disk added more than 5 percent, after the Bank of America upgraded the biggest maker of flash-memory cards from "underperform" to "buy."

Moreover, J.P. Morgan lifted view on home-builders sector to positive from negative, saying the housing market has made it through the worst of the correction. Toll Brothers and KB Home climbed on the upgrade.

As stock prices swang, trading volumes were greater than average because futures and options on indexes and stocks were due to expire.

The Dow Jones industrial average rose 36.28 points, or 0.37 percent, to 9,820.20. The Standard & Poor's 500 index gained 2.81 points, or 0.26 percent, to 1,068.30. The Nasdaq composite index advanced 6.11 points, or 0.29 percent, to 2,132.86. 　

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Regulators eye greater transparency

September 20, 2009
UNITED States regulators on Thursday proposed rules designed to stem conflicts of interest and provide more transparency for credit rating companies. They also proposed banning "flash orders," which give some traders a split-second edge in buying or selling stocks.

The changes, which were opened to public comment for 60 days, could eventually be adopted by the agency, possibly with revisions.

The credit rating industry was widely faulted for its role in the subprime mortgage debacle and the financial crisis. The five members of the Securities and Exchange Commission voted at a public meeting to propose rules that could reshape an industry dominated by three firms: Standard & Poor's, Moody's Investors Service and Fitch Ratings. Their practices would be opened wider to public view and subject to some restraints.

Regulators say they also hope to spur more competition in the rating industry, with possible new entrants -- as well as the other seven existing agencies -- challenging the dominant firms. One of the SEC's proposals is intended to bar companies from "shopping" for favorable ratings of their securities, by requiring companies to disclose whether they had received preliminary ratings from other agencies.

Meanwhile, flash orders have become a hot-button issue in recent weeks amid questions about transparency and fairness on Wall Street. A flash order refers to certain members of exchanges -- often large institutions -- buying and selling information about ongoing stock trades milliseconds before that information is made public.

Nasdaq OMX Group Inc, which operates the Nasdaq Stock Market, and the BATS exchange have voluntarily stopped using flash orders, which made up an estimated 3 percent of stock trading. The New York Stock Exchange has never used them.

The rating agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money.

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Nearly one third U.S. states report double digit unemployment rates in August

September 20, 2009
Fourteen U.S. states and Washington D.C., reported unemployment rates of 10 percent or above in August, said the Labor Department Friday.

The department reported that 42 among the 50 states lost jobs last month, up from 29 in July and 27 states saw their unemployment rates increase in August.

Michigan's unemployment rate rose to 15.2 percent, the highest in the nation. When its jobless rate topped 15 percent in June it was the first time any state surpassed that mark since 1984. 42,900 jobs disappeared in the state in August, including 25,000 in manufacturing, as the state continued to suffer along with its struggling auto industry.

Nevada has the second-highest rate at 13.2 percent, followed by Rhode Island at 12.8 percent and California and Oregon at 12.2 percent each.

It is widely believed that the U.S. economy is pulling out of the worst recession since the 1930s. However, high level of unemployment has become the major concern.

Federal Reserve Chairman Ben Bernanke said earlier this week that the recovery isn't likely to be rapid enough to reduce unemployment for some time.

The jobless rate nationwide is expected to peak above 10 percent next year, from its current 9.7 percent.

The United States lost 216,000 jobs in August, the Labor Department said earlier this month, down from 276,000 in July.

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Can we predict the next crisis?

September 19, 2009
A year after the implosion of Lehman Brothers sent world markets into turmoil, the question of where the next global shock will come from - and whether it can be predicted and prepared for - has never been so urgent.

What makes the issue particularly difficult is that many of the events catastrophic enough to cause a major crisis - known as "fat tail risks" or as "Black Swans" by trader and author Nassim Nicholas Taleb - come from outside the realm of finance.

To be able to forecast what the next global shock will be, we need to be able to make predictions about geopolitics, war, terrorism, extreme weather events, earthquakes and pandemics.

In their book this year on fat tail risks, Ian Bremmer and Preston Keat of political risk consultancy Eurasia Group noted that they pose fundamental problems for accurate prediction.

Fat tails, they wrote, "represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose simply to ignore it. Until it happens".

A growing body of theory and evidence suggests that making accurate forecasts about rare catastrophic events is inherently impossible. But it also suggests a practical solution to mitigate the dangers - detailed scenario-planning by imaginative analysts who do not cling too tightly to mathematical models of reality.

Key problems

Whatever analysts attempt to forecast - the economy, the weather, the progress of epidemics, geopolitical change - the key problems are the same.

Systematic forecasting requires a model that approximates reality. But is this feasible?

Many models assume simple linear relationships between variables, but there are plenty of reasons to believe that in the real world, variables often react in a complex, volatile and non-linear way, particularly where extreme events are concerned.

Models also rely on the future resembling the past. But Taleb argues that by their very nature, "Black swan" events lie outside of normal experience and up-end traditional assumptions.

An even more fundamental spanner in the machinery of many models is that they need to find a way to capture the behavior of a particularly volatile and unpredictable element - us.

Economists and political scientists have long worked on the assumption that people largely behave in a rational way that can be modeled and predicted. That assumption has been left in tatters by the global meltdown of the last couple of years.

Globalization has meant forecasts now need to take into account hugely complex human interactions among millions or billions of people. And forecasting everything from war to weather has been further complicated by the fact that humans increasingly affect the environment around us in profound ways.

Empirical evidence on the accuracy of political forecasting is - to say the least - not very encouraging.

In the most ambitious attempt to analyze the effectiveness of political forecasters, psychologist Philip Tetlock polled 284 political and economic experts for multiple predictions over a 20-year period, for a total of 82,631 forecasts. The overall result was that expert opinion did no better than pure chance.

"When I have staged competitions, many forecasters fail to outperform the proverbial dart-throwing chimpanzee," he wrote in a review last month.

Doomed?

So where does this leave investors and businesses? Should we just accept we are helpless in the face of unquantifiable risks that we cannot foresee - what Bremmer and Keat call the "We are all doomed" approach to risk management?

Not necessarily. Many analysts say scenario planning and risk mapping provides at least a partial solution. While we may never be able to predict extreme events with any certainty, investors and executives can prepare for the future by analyzing worst-case scenarios and considering how they would deal with them.

"Scenario analysis is a particularly useful means of understanding uncertainty and fat tails," said Bremmer and Keat. "The main objective is to inspire creative problem solving and to spur managers to think about unthinkable outcomes."

Some companies have put scenario planning at the heart of their decision-making - Royal Dutch Shell is regarded as a leader in the field. And with its annual Global Risks outlook, the World Economic Forum tries to identify key risks and assess their likelihood, so investors and businesses can prepare.

Risk planners need to be open-minded and flexible.

Tetlock's study divided forecasters into two types - "hedgehogs" who doggedly base their forecasts on a single overarching theory of the world, and "foxes" who are eclectic and adapt when proven wrong. The foxes did much better in getting things right.

Scenarios must also always be adapted in the face of new information. In an influential paper on political risk forecasting, analyst Jeffrey Simon argued that it is crucial for investors and businesses to continually monitor news, and to update their scenarios and risk maps accordingly.

None of this means that all risks can be prepared for - there are always dangers lurking that we are not even aware of, what former US Defense Secretary Donald Rumsfeld famously called "unknown unknowns".

But even most skeptics on forecasting argue that by analytical thinking about what storms may come, we may just be better prepared to deal with them when they hit us.

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US jobless figure not to peak until 2011: Krugman

September 19, 2009
Unemployment in the United States will peak only in early 2011 because of a slow and painful recovery from the global economic crisis, Nobel Prize-winning economist Paul Krugman said.

He said the global economy seems to be stabilizing at a level that is "unacceptably poor" and added it is possible that the recession will be a double-dip one.

"(US) unemployment will peak in early 2011 ... certainly staying very high and possibly rising all next year," Krugman told a business meeting in Slovenia.

His forecast was based on data from previous economic crises in the United States.

The US unemployment rate jumped to a 26-year high of 9.7 percent in August, according to US Labor Department data.

Krugman, who received a Nobel Prize for economics in 2008, said that the acute phase of the global crisis had passed but the recovery is likely to feel like a "continuing recession".

He said that recoveries have been weak from past crises in the United States and other regions as job sectors continued to get worse long after the crises have bottomed out, adding the global job market will continue to get worse "well into 2011".

Double dip

"We might have a double dip, that's a real possibility now for the world as a whole," said Krugman.

The effects of stimulus programs will start to fade early next year and recovery will be slow due to the global nature of the crisis, he pointed out.

The Princeton professor and New York Times columnist said most economies should have more aggressive stimulus programs than seen so far and added rising budget deficits had saved the world from a replay of the Great Depression of the 1930s.

"What we should be doing is a lot more support for economies. Yes, deficits are a concern but so is a world economy which is probably operating 7 or 8 percent below capacity," Krugman said.

He also said governments should help people retain jobs, essential income, social services and healthcare.

One way to overcome the crisis might be to boost global investment in green technology and "get serious" about climate change as that could help sustain demand, he added.

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Oil edges lower as equities decline

September 18, 2009
Oil prices dropped slightly on Thursday as equities fell after a three-day rally.

Light, sweet crude for October delivery ended 4 cents lower to settle at 72.47 U.S. dollars a barrel on the New York Mercantile Exchange.

Oil prices seesawed as investors struggled to gauge how robust the economic recovery would be. Viewed as a leading indicator, U.S. stocks fell after touching a fresh 2009 high, spurring concerns about the outlook of the economy and also dragging crude prices to negative territory.

Oil's losses was tempered by the news that household wealth in the United States increased by 2 trillion dollars in the second quarter, which was regarded as a good sign toward the recovery of consumer spending.

In London, Brent Crude for November delivery slipped 12 cents to settle at 71.55 dollars a barrel on the ICE Futures exchange.

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Feature: U.S. middle class trapped in the middle one year after crisis

September 18, 2009
"We can't really go to the mall. If we go to the mall we do window-shopping," Jin Fan Harvilla, a typical middle-class woman in the United States, complained with dismay, saying that the financial crisis brought unprecedented fiscal challenges to families like hers.

Jin, who is from Beijing, China, has been settled down in Virginia for nearly a decade. She and her husband Tom Harvilla live in South Riding, a suburban community in Virginia 45 minutes west of Washington, DC.

In this well maintained, typical middle class neighborhood, there is a golf course, a community swimming pool, and a shopping plaza that caters to most daily household needs.

Jin and Tom live in a 4,500 square foot three-bedroom single house with their two young children and two dogs. When the couple goes to work, the children and the dogs are left to the care of Jin's mother.

In their neighbors' eyes, this is a perfectly happy family. However, the financial storm originated on Wall Street in New York shook the household to its foundations.

First, Jin lost her job as a financial analyst at Bearing Point Inc. when the large management and technology consulting firm filed for Chapter 11 bankruptcy in February, 2009. The news shocked Jin who never thought a company with over 3 billion U.S. dollars in revenue and more than 15,000 employees worldwide could fold up overnight.

"It's a global company, a big company. It should stand strong. But we didn't do very well in the crisis," said Jin, who is in her early 30s.

Jin was notified of her layoff by the company when she had just completed the maternity leave after the birth of her second child.

At a time when family spending had to increase with one more mouth to feed, the second blow hit the family: the value of their house plummeted during a recession.

The Harvillas bought their home at the peak of the residential real estate boom in 2005. One year after the financial crisis, not only the gain in home value over the last four years was wiped out, the value dropped so much that the couple would lose more money if they refinance.

"This housing price that we are in is probably the one that was hit the most," said Tom. "Because it's probably the most common price point...for a family, people in their 30s and 40s and have young kids."

According to realtors' advertisements, single-family house value in this community, which used to range from 500,000 to over 1 million dollars, dropped between 10 and 20 percent on average.

America's middle class saw a large portion of their wealth evaporated along with the stock market crash of 2008.

Gary Burtless, senior economist at Brookings Institute, said American households' wealth has collectively fallen about 12 trillion dollars in the last 18 months.

The sense of financial loss then became a "very big dread" on households spending which in turn hinders economic recovery, said Burtless.

"It will be an obstacle to recovery. There is no doubt about it," he said, noting that Americans were reluctant to spend.

"When savings rate rise by 5 percent, that represents about 3 percent weakening as a share of output for demand for products produced in the U.S. and products produced in the rest of the world," he added.

The sharp change in consumer behavior is clearly noticeable in the Harvilla household. Jin, who used to spend 600 dollars a month on new clothes and accessories, now tries to avoid going to shopping malls.

The couple began to budget their spending more carefully, using a spreadsheet to categorize their monthly expenses and putting most purchases on credit cards to better track where their money goes.

After paying home mortgage, bills for their three cars and other necessary goods and services, they make sure to contribute to the two children's college fund and put whatever is left in a bank account for emergencies.

According to a research by McKinsey Global Institute, for every percentage point increase in American households' savings rate, spending decreases by more than 100 billion dollars. The post-crisis reality is that export-leaning countries in the global trade system can no longer rely solely on American consumers to boost their economies.

Tough times enabled Tom to better appreciate Jin's more traditionally and conservatively Chinese style of spending and managing personal finance.

"She has been a tremendous positive influence that way," said Tom. "The mentality is very different that she brings than what I have that's more typical here, which is yes, overload with debt."

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Dollar mixed against major currencies

September 18, 2009
The U.S. dollar fell against the euro but rose against the pound on Thursday amid mixed economic data from the U.S. and the U.K..

U.S. housing starts rose 1.5 percent to an annualized rate of 598,000 units in August, the Commerce Department reported. It was the highest level in nearly nine months, but slightly lower than expected. New building permits rose 2.7 percent in August, also missing expectations.

Single family starts, the most important indicator of production in the housing sector, were down 3 percent. Analysts said the drop of single family starts in August is likely to prove a temporary pause on a generally stronger trajectory.

Initial claims for unemployment insurance benefits fell by 12,000 to 545,000 last week, the U.S. Labor Department said. Analysts have expected an increase of 13,000. The four-week average of initial claims fell slightly, while continuing claims edged up.

The dollar fell against the euro as the reports reduced safe-haven demand for the U.S. currency. But it rose against the pound after weaker-than-expected U.K. retail sales data cast doubt on the strength of the recovery in British consumer spending. Some analysts speculated that the Bank of England may expand its quantitative easing program to stimulate the economy, bringing fresh downward pressure to the pound.

The euro bought 1.4749 dollars in late New York trading compared with 1.4723 dollars it bought late Wednesday. The pound fell to 1.6448 dollars from 1.6493 dollars.

The dollar fell to 1.0645 Canadian dollars from 1.0664 Canadian dollars, and fell to 1.0281 Swiss francs from 1.0312 Swiss francs. It rose to 91.15 Japanese yen from 90.90 Japanese yen.

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Buffett: US economy on the brink of upturn

September 18, 2009
The US economy has not begun to climb out of the worst recession since the Great Depression, but the "terror" that followed last year's near-collapse of the financial system is gone, due in part to government intervention, Warren Buffett said.

Buffett maintained a positive outlook on the government's much criticized Troubled Asset Relief Program (TARP) for banks, saying it may ultimately turn a profit for the government.

"At the moment we don't see (the economy) getting better or worse, but that's better than you could say six months ago," said the billionaire known as The Sage of Omaha for his long history of successful investments. "The terror of last year is gone and that's thanks in part to the government."

Buffett spoke to Reuters in a brief interview at the Fortune Most Powerful Women conference in Carlsbad, California.

"The economy has not turned up but it will turn up ... I just don't know when," Buffett said. "It could be tomorrow," he added.

He said the Obama administration was "making progress with TARP and may end up making a profit. It certainly won't be a disaster."

Some of the largest US banks will remain in the government's financial bailout program for months, as officials do not expect to grant the next wave of exit approvals until near the end of the year, according to a source familiar with the matter.

Ten banks received approvals in June to repay $68 billion in federal bailout funds, but there have been few clues about when the other large banks would be allowed to exit the program.

Banks such as Citigroup Inc and Bank of America Corp have been chafing under the government's reins and want out of the program, which delivered capital infusions to banks along with limits on pay, share repurchases and dividends.

"The banks want to get out of TARP ... they will all get out of TARP," Buffett said, adding that the time frame for exiting the program "is not a crucial factor."

In an interview aired on CNBC late on Tuesday, Buffett said he was contacted about providing financial assistance for Lehman Bros in the days before its failure a year ago, but never received documentation that he had asked to be faxed to him.

On Sept 15, 2008, Lehman filed for bankruptcy protection, and a day later American International Group Inc, which had been the world's largest insurer, received a massive US bailout that has since swelled to as much as $180 billion.

For AIG, he considered both a reinsurance transaction, and the purchase of a large property-casualty business. "I looked hard," he said, and quickly concluded the $25 billion price tag for the insurance business was more than he wished to pay.

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Consumer prices rise in US

September 17, 2009
CONSUMER prices in the United States rose slightly in August due to higher gas prices, another sign the weak economy is keeping inflation in check.

While prices are up slightly over the 12 months ending in August, they are well within the US Federal Reserve's comfort zone. That means the central bank faces little pressure to raise its benchmark interest rate, a step it takes to ward off high inflation. The Fed has reduced the interest rate it charges banks for overnight loans to a record low of nearly zero in an effort to revive the economy.

The US Labor Department said yesterday that the Consumer Price Index rose 0.4 percent in August, after a flat reading in July. Wall Street economists expected a 0.3 percent increase, according to a survey by Thomson Reuters.

Excluding volatile food and energy prices, the core price index rose 0.1 percent, matching expectations.

Prices fell 1.5 percent in the past year, the department said, as gas prices dropped sharply from record levels last summer.

The core CPI rose 1.4 percent in the 12 months ending in August, the smallest increase in more than five years.

A 1.3 percent drop in the price of cars last month, the steepest fall in nearly 37 years, held back the core index. Discounts stemming from the government's Cash for Clunkers program - which provided rebates of up to US$4,500 to consumers who traded in older cars for newer, more fuel-efficient models - caused the decline.

Gasoline prices rose 9.1 percent in August on a seasonally adjusted basis and accounted for 80 percent of the rise in the consumer price index. Still, gas prices are 30 percent below last year's record levels.

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Big business rethinks tactics in Obama battle

September 17, 2009
Recognizing that many people see them as villains, the financial industry and big business groups working to stop key elements of President Barack Obama's financial overhaul are taking a new tack.

They're focusing on how the president's proposals to rein in Wall Street titans could ensnare virtually any business, including the mom-and-pop operations that most Americans deal with every day.

It's a tried-and-true strategy in Washington, akin to using the most sympathetic figures in a debate as human shields. Don't shoot at us, the argument seems to go, or you'll hit the people you really care about.

Creating a new agency to protect consumers from harmful financial products and practices wouldn't just affect financial firms, but "even your local florist or hardware store", says a radio ad released Monday by the US Chamber of Commerce, which recently launched a website to kill the proposed office.

It's just one tactic the industry is using to fight Obama's financial overhaul proposals, but it helps explain why the effort promised by the president and top Democrats has faded into the background. Obama sought to revive his regulatory proposals in a speech on Monday on Wall Street.

The initiative has been overtaken by politically difficult debates over healthcare and climate change on Capitol Hill, complicated by turf battles among the maze of agencies that would be affected, and - perhaps most significantly - fought relentlessly by a determined financial services lobby with a major assist from big business groups.

They say they share Obama's desire to protect consumers and revamp an outdated financial system whose vulnerabilities were laid painfully bare by last year's meltdown, but argue that many of the Democrats' ideas for doing so would lead to over-regulation, additional costs for consumers and a stifling of legitimate business practices.

"The administration and Congress are trying to go after Wall Street, but what's actually happening is they're creating rules that are hurting Main Street," said Thomas Quaadman at the Chamber's Center for Capital Markets. "If we're talking about a financial crisis that needs to be addressed, we don't disagree with that, but when you start talking about additional industries that have nothing to do with the financial services industry, why do they need to be part of that additional regulation?"

The approach extends to other elements of Obama's agenda. An effort to write new rules to govern the little-regulated and mind-bogglingly complex transactions that helped spur last year's meltdown has run into opposition from industries far outside the financial sector - from food companies to airlines - that routinely use so-called derivatives in their businesses.

That's made it more difficult for lawmakers to deal with what many once believed would be a slam-dunk part of the financial overhaul.

And when Obama tried to tackle the tricky question of how to give federal regulators better tools to police companies that extend consumers credit, it ran afoul of such unlikely players as Target Corp and Harley-Davidson Inc.

"The last thing you want to do is to pass major reform and then have the law of unintended consequences. When different players all weigh in, that has an impact on members of Congress," said Scott Talbott, a lobbyist at the Financial Services Roundtable.

Talbott said his industry has worked hard to rebuild and help push reforms following last year's debacle. But while companies back better consumer safeguards, he said, they oppose creating the new consumer agency.

The president sought to shift the initiative to the forefront with his speech, in which he scolded financial players for opposing tighter regulations. But while proponents of tightening financial rules are still hopeful legislation can pass by year's end, the effort faces long odds.

It's taken nine months for Barney Frank, the House Financial Services Committee chairman, to get to a drafting session for the first piece of the financial overhaul: the measure creating the consumer agency, due to be considered by his panel next month.

Chris Dodd, the Senate Banking Committee chairman, is working on one catchall financial overhaul bill, but it's a much heavier lift in that chamber, where moderate Democrats join Republicans in taking a more business-friendly approach that is wary of government intervention.

Big banks and securities firms have spent nearly $90 million lobbying Congress so far this year, according to public disclosures filed on Capitol Hill and compiled by the watchdog Center for Responsive Politics - and that doesn't count the substantial amounts that individual corporations have shelled out.

The Chamber of Commerce has spent more than $26 million so far this year lobbying on issues, including the financial overhaul.

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U.S. businesses inventories drop for 12th straight month in July

September 16, 2009
Inventories held by U.S. businesses on shelves and back-lots fell for the 12th straight month in July, the longest stretch in seven years, the Commerce Department reported Tuesday.

U.S. business inventories declined by 1 percent in July, slightly larger than the 0.9 percent drop economists expected. Compared with a year ago, the July inventories dropped 11.8 percent.

According to data released by the department, the July weakness in inventories was led by a decrease of 2.1 percent in stockpiles held by wholesalers. Meanwhile, manufacturers' inventories declined 1.2 percent in July.

The drop in inventories and a slight rise in business sales pushed the inventory-to-sales-ratio, a figure to measure how long it would take to deplete stocks at the current sales pace, down to 1.36 from 1.38 in June.

Usually, falling inventories are seen as a sign of lack of confidence in future demand or as a result of an unexpected increase in sales. Analysts look at the inventories-to-sales ratio to determine how to interpret the data.

The longest stretch in seven years of declines in business inventories came as companies struggled to cope with the prolonged recession, which started in December 2007.

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Wall Street doesn't feel guilty one year after financial crisis

September 17, 2009
The Hamptons in New York State, on the eastern tip of Long Island, has long been the summer playground for Wall Street executives.

Only a 90-minute drive from Manhattan, this small piece of heaven on earth along the Atlantic coastline is dotted with multi-million dollar summer homes for some of Wall Street's best known names.

This summer, one year after Lehman Brother's collapse, even people in the Hamptons can tell times have changed for some of the wealthiest seasonal residents of their villages.

Real estate is the most important business in the Hamptons. In Southampton, a village of a little over 6.3 square miles, the real estate value of properties exceeds 10 billion dollars, according to Mark Epley, mayor of the Village of Southampton.

But this business is "kind of dried up" this summer, the mayor told Xinhua. Revenue from the real estate sector is down by 33 percent compared to the same time last year. Realtor offices on or near Main Street are mostly empty. Few property pictures are displayed in the windows.

"People are holding on to their money," said Dan Rattiner, who has watched the Hamptons up close for more than 50 years and is the founder and owner of the local publication, Dan's Papers.

Reporting in the tight-knit communities of the Hamptons and being a member of the now famous Atlantic Golf Club, where Bernard Madoff was also a member, Rattiner knows people who have lost all they had to Madoff.

"There is one wealthy man I know who is helping out a friend who doesn't have any money, who lost everything," Rattiner said.

But despite what happened on Wall Street in the fall of 2008, which caused tremendous upheaval in the U.S. and global financial system, and which cost, as in the Madoff case, many people's life savings, Rattiner says Wall Street people vacationing in the Hamptons don't feel any resentment of guilt. "Because they didn't do it collectively. They played by the rules that were enforced," Rattiner said.

Rattiner blamed the Reagan era tax cut policy and an over-dependence on the wealthy's goodwill to protect the public's interest for the collapse.

"The wealthy got this tremendous advantage and were expected to trickle it down to everybody else," Rattiner said. "There was much too much dependence on that."

Skip Ralph, commercial real estate owner in Southampton and New York, said the problem was that Wall Street took their clients' money and gambled it with too much risk. "Many lost a lot of money with regard to the way they managed it, the leverage, the risks they took. But others were more conservative."

He said many smaller banks in the United States were not as heavily affected by the meltdown as the big banks because they took more conservative investment strategies.

Having managed a private business all his life, Ralph sees inherent injustice as one of the major ills in the U.S. financial system, where the bottom line of a company is the only measure for performance and greed is encouraged.

"Freedom is good, but you have to have freedom that's fair. We have a lot of unfairness in this country," said Ralph. "We are free, but we have institutionalized injustice."

In the second quarter of 2009, in which investment firm Morgan Stanley lost 1.3 billion dollars in the value of funds it managed, the company announced it would pay 5.9 billion dollars in bonuses to its staff, about 70 percent of the revenue for the quarter. The bonus to revenue ratio was higher than the average of 48 percent for the past decade.

Ralph has doubts if U.S. President Barack Obama's comprehensive overhaul of financial regulations, which include restrictions on executive pay and bonuses, would succeed in an industry entrenched in its own play book for decades.

"It may take generations because if you are born and raised a certain way, you don't want to change," he said.

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