Financial life in a big town

The Philippine central bank refrained from cutting its benchmark interest rate on concern lower borrowing costs would weaken the peso and fan inflation.

Bangko Sentral ng Pilipinas maintained the rate it pays banks for overnight deposits at 6 percent for a second month today, Governor Amando Tetangco told reporters in Manila. The decision was predicted by 7 of 16 economists in a Bloomberg News survey. Nine expected the bank to lower the benchmark.

“Rising readings on core inflation suggest there are still price pressures in the pipeline,'' Tetangco said. “Sources of upside inflation risk remain, including volatility in the foreign-exchange market.''

Bangko Sentral has reduced the amount of deposits it requires banks to hold in reserve, approved a dollar-lending facility and raised the amount banks can borrow from it to boost liquidity, rather than join counterparts in India and China in cutting interest rates to sustain growth amid a global recession. Those measures are adequate for the economy, Tetangco said today.

“The central bank is more concerned about the exchange rate so I think any rate cut may happen in January unless major economies slow further and drastically,'' said Joric Nazario, treasurer at Philippine Veterans Bank in Manila.

Peso Falls

The peso fell 0.2 percent today to a two-year low of 49.999 against the dollar. It's declined 17 percent this year, set for the biggest drop since 2000, shortly before former President Joseph Estrada was ousted from office by a popular revolt in January 2001.

“Reducing policy rates would affect capital flows,'' Deputy Governor Diwa Guinigundo said today cash in 1 hour. Keeping the rate steady “will prevent additional volatility in the foreign- exchange market.''

The peso's drop is eroding the value of local assets and threatening to swell the nation's $33 billion foreign-currency obligations. Foreign investment in stocks and bonds posted a net outflow of $911.5 million in the ten months to October compared to a net inflow of $3.7 billion in the same period a year ago, data from the central bank showed.

Remittances from overseas nationals this quarter will boost the supply of dollars and support the peso, Guinigundo said.

Bangko Sentral had raised interest rates three times since early June to damp inflation that accelerated to a 16-year high in August, before halting last month. Consumer-price gains have slowed to 11.2 percent in October and may fall below 10 percent next month, Tetangco said yesterday.

Flexibility to Review

“If the upside risks start to retreat next month or in 2009, there's a flexibility to review'' the policy stance, Guinigundo said today. Still, possible increases in government wages may be a risk to inflation, he said.

Expansion in the Southeast Asian nation may slow to an eight-year low of 3.5 percent next year while average inflation will likely ease to 6 percent, the International Monetary Fund said last week.

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United Airlines parent UAL Corp (UAUA.O: Quote, Profile, Research, Stock Buzz) posted a quarterly loss due to July’s record-high energy prices and a drop in the value of its fuel hedges as oil later plummeted, but the results were not as bad as Wall Street expected, and the company’s shares rose more than 10 percent.

The loss underscores the troubles UAL and its rivals had last quarter as they grappled with skyrocketing fuel bills that peaked alongside crude oil in July.

The carrier suffered an additional noncash loss of $519 million, however, as its hedges — designed to blunt the impact of rising fuel — lost book value as oil began a rapid descent.

“While oil prices are lower in recent weeks, they continue to be volatile,” UAL Chief Executive Glenn Tilton said in an e-mail to employees.

“That said, the convergence of falling oil prices with our capacity flexibility, strong improvement on costs and competitive revenue put us in a position to make our margin and return United to profitability,” Tilton said faxless online payday advances.

Minus the noncash loss, the carrier’s results easily beat market expectations. UAL shares rose $1.30, or 10.3 percent, to $13.97 in morning Nasdaq trade.

The airline industry has been battered by soaring fuel costs, which peaked alongside crude oil as it notched a record high in July. Oil has fallen about 50 percent since it touched its high.

Nevertheless, airlines are rapidly downsizing to offset fuel bills. UAL, which intends to reduce its domestic capacity by 14 percent in the fourth quarter, is cutting 7,000 jobs from its workforce of 55,000. 

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ROME–Italy’s government held emergency talks with unions and investors yesterday over a plan to save Alitalia, as the bankrupt airline risks having to ground flights for lack of fuel.

The rescue plan would have investors buying profitable assets and investing euro1 billion ($1.4 billion).

But the plan also envisages wage cuts and layoffs opposed by the unions.

The government began mediating when direct talks broke down Friday after the investors failed to win the unions’ crucial support. The investors said, however, that their offer remained on the table.

The labour and transport ministers met yesterday with representatives of flight attendants and pilots, who have been the most critical of the rescue plan.

The talks with unions and investors had started Saturday but ended late at night with no resolution.

Among the sticking points in the talks are new contracts, salary cuts and layoffs that might run to 5,000, out of the airline’s 20,000-strong work force.

Each side has accused the other of being intransigent. But with time running out and the airline edging toward collapse, officials gave some signal of compromise. "There is a different atmosphere. Everybody is aware that there are no alternatives to an agreement," said Giuseppe Caronia of the transport chapter of the UIL national labour confederation cash advance. “There’s a sense of a moderate, cautious optimism.”

Labor Minister Maurizio Sacconi, who summoned all nine Alitalia unions to the meeting, expressed confidence that a deal would be reached.

Italian reports said the investors might offer an additional euro100 million ($140 million) in order to minimize the wage cuts and overcome the unions’ opposition.

However, pilots union representative Fabio Berti said after yesterday’s talks that he saw no substantial improvement. "Right now it is very difficult to be optimistic,” he added. Other union leaders voiced similar concerns.

In a sign of high tensions yesterday, Administrator Augusto Fantozzi was heckled and booed as he walked into the Labor Ministry for the meetings. Some in a crowd of 200 Alitalia workers that had gathered outside the ministry shouted: "Buffoon! Buffoon!" while others threw coins at him.

Workers have been holding protests and demonstrations for days, including at Rome’s Leonardo da Vinci airport, where on one occasion flights had to be cancelled.

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Kohl's Department Stores said Wednesday its same-store sales fell 5.8 percent in August.

Menomonee Falls, Wis.-based Kohl's (NYSE: KSS) said overall sales for the four-week period ending Sept. 1 increased 2.6 percent, to $1.26 billion, compared with $1.22 billion over the similar period in 2007.

For the fiscal year to date, Kohl's said total sales were up 2.6 percent, to $8.6 billion, compared with $8.4 billion in the same period a year earlier. On a comparable store basis, sales for the period decreased 5.6 percent.

Kevin Mansell, Kohl's president and CEO, said some back-to-school business such as footwear and children’s performed well while other areas, such as juniors and young men’s, were more challenging.

“As expected, August was more difficult than our expectations of a 2 to 4 percent comparable sales decrease for the third quarter," Mansell said.

As of Aug faxless payday loans. 30, the company operated 957 stores in 47 states, including Georgia, compared to 834 in 46 states at the same time last year.

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Despite Bill Clinton’s powerful endorsement of Barack Obama Wednesday night, there’s still plenty of resentment inside Team Hillary over the fact that she’s not on the ticket and her strategists aren’t on the campaign. But when it comes to economic policy, the Democrats are jelling into one big happy family.

Obama’s inner sanctum now includes Clinton Treasury Secretaries Lawrence Summers and Robert Rubin, former White House chief economist Laura Tyson, and - most recently - Gene Sperling, former White House adviser and chief economic policy wonk for Hillary Clinton during the primary season.

"Everyone who was with Hillary Clinton is now with us," Jason Furman, Obama’s economic policy director, tells Fortune. "The campaign has deepened and broadened its economic bench in the general election."

That bench also includes poverty expert Jared Bernstein of the Economic Policy Institute; Austan Goolsbee, the University of Chicago economist who has been at Obama’s side since the start of the race; and Georgetown University law professor Daniel Tarullo. Investor Warren Buffett and former Fed Chairman Paul Volcker top off the list of regular advisers. A larger circle also includes CEOs Jamie Dimon of JPMorgan Chase (JPM, Fortune 500), Indra Nooyi of PepsiCo (PEP, Fortune 500), and Eric Schmidt of Google (GOOG, Fortune 500).

Managing this team of large and accomplished egos is the 38-year-old Furman, a child of Greenwich Village (and liberal parents) who was so intellectually precocious he had to trek uptown to Columbia University for math and physics because his high school didn’t offer sufficiently advanced courses. He later obtained his PhD in economics from Harvard. Despite his relative youth, Furman so far seems adept at meshing the two campaign cultures. "These are good friends of mine," he says of the Clinton folks. (He could have substituted "former bosses of mine;" Furman once reported to Sperling, and later to Rubin.) After the primary campaign was over, he notes, "I reached out to them and they reached out to me."

Furman’s job is made easier by the fact that Clinton and Obama ran on virtually identical economic agendas. The biggest difference was that Clinton’s healthcare plan mandated that individuals be covered, and Obama’s didn’t cashadvance.com. Since the primary campaign ended, Obama has borrowed one Clinton idea - a healthcare tax credit for small business.

Furman runs the Obama economics shop through regular conference calls with advisers - coupled with ad hoc meetings to respond to news events. On July 13, after the plunge in Fannie Mae and Freddie Mac share prices prompted the Federal Reserve and Treasury Department to consider intervention, Furman’s first call was to Summers. A conference call to a broader group followed. Then Furman reported the results to Obama. Within hours, the campaign issued a statement saying any government plan should "maintain a steady flow of capital to the housing market" and should protect taxpayers rather than bail out shareholders.

The politics of economics is hardly new territory for Furman. He was Kerry’s economic policy director in 2004 and worked on the Gore campaign in 2000. Before joining Obama in June, Furman was running the Hamilton Project, a centrist think tank founded by Rubin and former deputy Treasury Secretary Roger C. Altman.

Furman’s own reputation is as a centrist. When Obama tapped him there was a mini-uproar from the left wing of the party over his defense of Wal-Mart (WMT, Fortune 500) and free trade agreements. Furman reminded his critics of his work opposing efforts to privatize Social Security, and the storm settled.

"When Barack hired me," Furman says, "he told me my job was to be an honest broker and incorporate different points of view."

Now that he’s integrated Team Clinton into the campaign, that job is done. If Obama wins, Furman’s toughest (and potentially most influential) task comes when it’s time to advise the president on how to dole out all those prime government jobs - from Treasury Secretary on down. Those Clinton folks are no dummies on the workings of Washington: Being loyal and visible soldiers now means being front and center for the big titles later. 

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Lehman Brothers Holdings Inc is expected to follow in Merrill Lynch & Co Inc’s footsteps and sell a lot of risky assets at a loss. But shedding the assets may create another headache for Lehman — the need to raise large amounts of new capital, including common equity.

Any capital raise would be painful for Lehman and its shareholders, given that the company just raised $6 billion in June and trades at a significant discount to its book value, or the net accounting value of its assets.

But Lehman, the fourth-largest U.S. investment bank, may have little choice as it wrestles with roughly $65 billion in mortgage-related assets, particularly after Merrill Lynch agreed to shed $30.6 billion in toxic assets at a fire-sale price of 22 cents in the dollar, analysts said.

“Lehman’s caught between a rock and a hard place. They’re getting more and more pressure from regulators and investors to add reserves or mark these things down,” said David Hendler, an analyst at independent research firm CreditSights in New York.

“In normal times, they could wait it out, but the market wants it done now,” Hendler added.

The New York Post reported on Friday that Lehman was talking to potential buyers about selling $30 billion in assets payday loans. CNBC television reported Friday that Lehman was in talks with BlackRock Inc to sell mortgage securities and other assets. Both Lehman and BlackRock declined to comment.

Lehman’s chief financial officer told Merrill analyst Guy Moszkowski recently that the investment bank was willing to sell assets at a loss if the deal materially reduced risk, the analyst said in a report.

Lehman had roughly $65 billion in mortgage and real estate-related assets on its balance sheet as of May 31. 

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Washington Mutual reported a $3.3 billion quarterly loss Tuesday — far worse than Wall Street was anticipating — as it set aside more money for bad loans.

The Seattle-based thrift reported a net loss of $6.58 a share, which included a charge related to a $7 billion capital raise the company announced in April.

Excluding the charge, WaMu reported a loss of $3.34 a share. Analysts polled by Thomson Reuters were expecting the nation’s largest savings and loan to report a loss of $1.05 a share on this basis.

Just a year ago, the company reported a profit of $830 million, or 92 cents a share.

Washington Mutual (WM, Fortune 500) shares initially climbed in after-hours trading, before turning lower after the credit rating agency Moody’s put WaMu under review for possible downgrade. WaMu shares finished Tuesday’s regular session more than 6% higher.

When quizzed about the report from Moody’s by an analyst, WaMu management said it didn’t see much impact from the announcement, saying there wasn’t any need to raise debt at this time.

Driving this quarter’s loss was a sharp increase in WaMu’s loan loss reserves, which grew $3.74 billion during the quarter to $8.46 billion.

WaMu warned that the company would need to continue to reserve against loan losses over the next couple years, but said that 2008 would represent the peak of loan loss provisioning.

"I still think there is more to come in the way of provisions because of the increasing rate of non-performing loans in the home loan, home equity, and subprime categories," said Stephanie Hall, a senior analyst with the Scottsdale, Ariz.-based research firm Gradient Analytics. "But they have taken a step in the right direction by increasing the loan loss accrual."

Yet, the company offered some signs of encouragement as delinquencies in its troubled subprime and home equity portfolios showed "early signs of stabilization" during the quarter, according to the company.

"We believe this portfolio may be starting to burn out," said John McMurray, WaMu’s chief enterprise risk officer during the conference call.

The company also announced that top management, including Killinger, the company’s chief operating officer and finance chief, would not receive bonuses this year in light of the company’s financial performance to date.

Including Tuesday’s results, WaMu has reported three consecutive quarterly losses. Scrambling for cash, the firm has cut its dividend twice, shut down some of its key business units and trimmed its payroll.

Killinger stressed that the company remained well capitalized even as the housing market and the broader economy has deteriorated further since April when it announced a plans to raise $7 billion by selling an equity stake to an investment group led by the private-equity firm TPG online payday loan.

WaMu also said its Tier 1 capital ratio, a measure of a bank’s ability to absorb losses, stood at 8.44% at the end of the quarter. A ratio above 8% is generally considered a good sign for financial institutions.

"We remain confident that we have sufficient capital to successfully manage our way through this challenging period," Killinger said.

Concerns about WaMu’s fate surfaced last week after Lehman Brothers analyst Bruce Harting wrote in a research note he suggested the company would report $26 billion in cumulative losses when the company delivered its quarterly results, and would have to "substantially" raise its loan loss reserves as a result.

Those concerns were compounded by comments from Ladenburg Thalmann analyst Richard Bove, who warned that WaMu is on the edge of the "danger zone."

That spooked WaMu investors, who were already fearing further bank failures following the high-profile collapse of the California-based mortgage lender IndyMac just days earlier.

WaMu issued a statement later that day stressing it was well capitalized with more than $40 billion in excess liquidity.

Shares of WaMu have nearly doubled in the past week after hitting a new 52-week low. But WaMu’s stock, currently hovering around $6, still trades well below its 52-week high of $41 50.

The latest figures from WaMu come just hours after the Charlotte-N.C.-based Wachovia (WB, Fortune 500) booked a nearly $9 billion loss.

WaMu’s results also come at the tail end of what has been a tumultuous round of second-quarter earnings reports for the nation’s banks.

A number of large financial institutions, most notably Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500), reported quarterly figures that, while not good, still managed to beat analysts’ expectations. Bank stocks have rallied sharply in the past few days on the news.  

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If this weekend’s news about Fannie Mae and Freddie Mac and Friday’s IndyMac failure weren’t scary enough, now Wall Street will have to contend with what is likely to be dismal quarterly results from many top financial firms.

Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500) are each expected to report another quarterly loss. Merrill’s results are due out Thursday afternoon while Citigroup will report its results Friday morning.

Analysts expect profits at other big banks, such as Wells Fargo (WFC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), to fall sharply from a year ago. Wells Fargo’s second-quarter results are due out Wednesday morning and JPMorgan Chase will report its numbers Thursday.

The bad news is likely to be repeated next week as well. Profits for Bank of America (BAC, Fortune 500), due out on July 21, are expected to be less than half of what they were just a year ago. And Wachovia (WB, Fortune 500), which will report its results on July 22, warned last week that it expected to lose anywhere between $2.6 billion and $2.8 billion during the second quarter.

"It is difficult in this environment for anybody to be too optimistic," said Tom Kersting, financial services analyst at Edward Jones.

The familiar, yet nagging, problem of credit remains the biggest problem for most banks.

Analysts and portfolio managers that keep close tabs on the banking sector expect most financial institutions to report further deterioration across their mortgage portfolios.

As a result, banks will most likely have to set aside more cash to compensate for bad loans. Washington Mutual (WM, Fortune 500) and Bank of America did that in the first quarter.

There’s also the grim reality of writedowns. Several major financial institutions will once again have to go through the painful process of witting down the value of their assets, particularly those related to mortgage-backed securities, leveraged loan portfolios and bond insurers Ambac and MBIA.

Earlier this month, Oppenheimer & Co. analyst Meredith Whitney warned that she expects Merrill Lynch to take $5.8 billion in writedowns and Citigroup to mark down its balance sheet by $12.2 billion.

Analysts will also be paying particularly close attention to banks’ credit card and auto loan portfolios for any signs of rising delinquencies.

However, financial institutions tend to report an improvement in credit conditions during the second quarter, helped by tax refunds, Citigroup analyst Keith Horowitz pointed out in a note published Friday.

And given this year’s economic stimulus package, that could bode well for banks’ loan portfolios as consumers try to keep from falling behind on payments. Horowitz wrote that there could be a "reprieve from the rapid pace of delinquency."

Analysts say that banks may also see some benefit from the Federal Reserve’s drastic rate-cutting campaign since last September 500 fast cash. Lower interest rates have driven down the short-term borrowing costs for banks. That should boost their net interest margins, or the profits they make from taking in deposits and lending them back out.

During the first quarter, the country’s nearly 8,500 domestic insured depository institutions reported a 9.6% jump in net interest income from a year ago, to nearly $95 billion, according to the Federal Deposit Insurance Corp.’s most recent quarterly banking report.

But what little in the way of good news banks have to report may be overshadowed by some major announcements about raising more capital.

Several banks raised cash earlier this year by selling stakes to private-equity firms and sovereign wealth funds. Analysts think there could be similar announcements during earnings reports….and maybe even some asset sales.

There has been plenty of speculation, for example, that Merrill Lynch will unveil a major capital raising initiative, including plans to sell all, or part, of its stakes in asset manager BlackRock or the media outlet Bloomberg LP.

Facing pressure from regulators to shore up their books by raising capital, other financial institutions could follow suit, said Chris Hagedorn, a portfolio manager at Fifth Third Asset Management, which owns shares of Bank of America, JPMorgan and Wells Fargo among other banks.

"I think it is a distinct possibility depending on how big the writedowns are and how much deterioration companies are seeing in their capital ratios," he said.

Finally, banks face a lot of uncertainty about the fates of Fannie Mae and Freddie Mac.

On the one hand, the proposal from the Treasury Department and the Federal Reserve over the weekend to prop up the two mortgage finance giants should be good news.

The two government-sponsored enterprises provide a crucial source of funding for banks and other lenders by purchasing mortgages they originate.

But at the same time, banks and other financial institutions own more than $1 trillion of the mortgage-backed securities that Fannie and Freddie sell to investors all over the world.

Were Fannie and Freddie to enter into default, banks would then find themselves on the hook for those home loans they first originated and would most likely have to raise billion of dollars in additional capital.

"That would probably put more pressure on many of the banks," said Frank Barkocy, director of research with Mendon Capital Advisors, a firm that invests primarily in financial stocks. "You have to have the capital to backstop those loans." 

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A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law.

The case began like hundreds of others filed since the U.S. housing boom spawned a rise in sales of adjustable rate loans. Susan and Bryan Andrews of Cedarburg, Wisconsin, claimed that lender Chevy Chase Bank FSB (CCX_pc.N: Quote, Profile, Research, Stock Buzz) had hidden the true terms of what they believed was a good deal on a low-interest loan.

In their 2005 lawsuit, the couple said the loan’s interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children’s college tuition.

The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S free credit report and score. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC.N: Quote, Profile, Research, Stock Buzz) mortgages originated under “unfair or deceptive practices.”

‘MASSIVE CLASS SUITS’

The mortgage banking industry already faces pressure from state and federal regulators, who have accused banks of lowering underwriting standards and forcing some borrowers, through fraud, into costly adjustable loans that the banks later bundled and sold as high-interest investment vehicles. 

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The U.S. Federal Reserve began a two-day policy meeting on Tuesday that was expected to end with benchmark interest rates on hold and little evidence the central bank is going to raise borrowing costs soon.

The Fed began its policy-setting meeting at around 2 p.m. EDT as scheduled, an official said. A decision on rates is expected to be announced about 2:15 p.m. EDT on Wednesday.

Fed Chairman Ben Bernanke and his colleagues confront a deepening housing market slump that looks set to be a drag on growth for months to come, and surging oil and commodity prices that threaten to ignite broader inflation.

While inflation risks have edged up and the economy has seemingly steered clear of the risk of a deep recession, policy-makers at the central bank have not fully set aside concerns about economic weakness.

The U.S. central bank lowered the interbank federal funds target rate to 2 percent at its last meeting on April 29-30, and has indicated it hopes rate reductions of 3.25 percentage points since mid-September will suffice to help the economy recover from the housing collapse and credit crunch.

“For now, policy seems well positioned to promote moderate growth and price stability,” Bernanke said on June 3.

Fed officials are in a bind bad credit payday advance. Raising interest rates to quell inflation would put a further brake on an already weak economy, while more rate reductions to buffer against a further stumble in output could add to price pressures.

Recent data highlights that dilemma. U.S. consumer sentiment slid to a 16-year low in June, while house prices continued their downward slide, reports showed on Tuesday. 

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