bank run blog

The Labor Department reported that jobless claims by recently laid off workers rose last week by 18,000 requests for benefits. The new figure, 366,000 workers seeking benefits, is the highest weekly number of new claims filed since last month and higher than a year ago by about 50,000.

The number of people continuing to draw unemployment benefits stood at 3.1 million for the week ending July 5, which is compared with 2.6 million people last year at this time. The number of jobs lost this year in the US is 438,000, according to government figures.

Bloomberg writes, “Housing-related companies and carmakers are leading the cutbacks in staff as costs of fuel and raw materials have surged and consumer demand has waned,” and reminds readers of the recent announcements of anticipated job cuts at GM and Northwestern Airlines. CNN notes that the Tribune company, Pfizer and American Airlines also announced lay offs this month.

Bloomberg provides this analysis and prediction;

“The biggest U.S. housing recession in a generation, tightening credit and slowing consumer spending are inhibiting economic growth. A softening labor market means consumer spending may retrench, threatening to extend the slump.”

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Bloomberg : U.S. Initial Jobless Claims Rose to 366,000 Last Week
CNN Money : Jobless claims up

A recent study released by the Nielsen Company that tracks consumer habits found that 63 percent of consumers report having to trim expenses because of high gas prices. Todd Hale, senior vice president of Nielsen said;

“While discretionary spending is likely to be a challenge for most low and middle income shoppers, even affluent consumers are looking for ways to make their dollars go further.”

Nielsen reported that 78 percent of consumers are combining shopping trips, 52 percent are eating out less and 35 percent of consumers are buying less expensive brands at the supermarket.

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CNN Money article : Gas prices have consumers cutting back - study
Phoenix Business Journal : Nielsen survey shows 63 percent of consumers cutting spending

In an interview today on Yahoo Finance, economist Nouriel Roubini predicted that independent investment banks will inevitably become extinct. According to Yahoo News, ‘They’re All Toast’: Roubini Says Brokers, Even Goldman, Can’t Stay Independent :

“The broker/dealer business model is ‘inherently unstable’ and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU’s Stern School and chairman of RGE Monitor.

Embattled Lehman Brothers is likely to seek a buyer ‘within months,’ Roubini says. Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.”

Due to continuing problems in the financial sector, Roubini doesn’t see the investment banks being merged into large US commercial institutions :

“With U.S. financial giants like JPMorgan, Citigroup, and Bank of America dealing with internal issues, the most likely buyers are international financial firms or sovereign wealth funds, Roubini says. But unlike in 2007, foreigners are not going to settle for preferred shares, and non-voting rights next time around.”

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The Office of Federal Housing Enterprise Oversight reports that U.S. home prices fell a record 4.8 percent in May since the same time last year. The agency also said that home prices fell 0.3 percent since last month. OFHEO oversees the government-sponsored mortgage-finance companies Fannie Mae and Freddie Mac.

Market Watch points out, “The OFHEO index tracks mortgages data from Fannie Mae and Freddie Mac of sales of the same homes over time. It does not include jumbo loans, or subprime loans, so it may understate the declines in the bubbliest areas of the country, such as California, Florida, Nevada and
Arizona.” Market Watch notes that the more comprehensive Case-Schiller index;

“will be released for May by Standard & Poor’s next week. Through April, home prices were down 15.3% in the past year according to Case-Shiller. It includes subprime and jumbo loans, so it covers more homes than the OFHEO index does.”

There are wide regional disparities in home values that the national averages do not reflect. While the OFHEO reports that prices rose in May in the Middle Atlantic (New York, New Jersey and Pennsylvania) and the East North Central states (Michigan, Wisconsin, Illinois, Indiana and Ohio), the San Diego Union Tribune writes, “DataQuick Information Systems reported yesterday that the statewide median home price was down 31.5 percent last month from June 2007 levels.”

See articles-
Market Watch : U.S. home values fall 4.8% in past year, U.S. says
Associated Press : US home prices fell 4.8 percent in May
San Diego Union Tribune : Statewide home prices fall

Wachovia, the nation’s fourth largest bank, reported a record second quarter loss of almost $9 billion this morning, becoming the only one of the five biggest US banks to “miss Wall Street analysts’ expectations”. Reuters reports :

“Wachovia Corp on Tuesday posted an $8.86 billion second-quarter loss, slashed its dividend and announced 6,350 job cuts after losses tied to mortgages soared.

Its shares fell $1.67, or 12.7 percent, to $11.51 in premarket trading.

The net loss attributable to common stockholders equaled $4.20 per share and compared with a profit of $2.34 billion, or $1.22, a year earlier.

Results included a $6.1 billion write-down of goodwill, and reflected a $4.2 billion increase in reserves for bad loans.

The Charlotte, North Carolina-based bank slashed its quarterly dividend 87 percent to 5 cents per share from 37.5 cents, and has now lowered it 92 percent this year.”

Wachovia has been battered since its unwise acquisition of Golden West Financial Corporation, a subprime and Alt-A mortgage specialist that marketed the ill-fated ‘Pick-A-Payment’ marketing twist. According to the Associated Press :

“Wachovia recently discontinued offering the ‘Pick-A-Payment’ loan option, which allows customers to pay a less-than-full interest payment on all new home loans. The bank also had hired The Goldman Sachs Group Inc. to conduct an analysis of its loan portfolio and advise it on strategic alternatives.

Late Monday, Wachovia announced plans to leave the wholesale mortgage lending business. And beginning Friday, the company will no longer offer mortgages through brokers, joining other lenders making similar moves to exit the troubled sector.”

The article continues, noting that the bank recently turned to a consummate insider in an unsuccessful effort to right the ship :

“Earlier this month, Wachovia named former Treasury Undersecretary and Goldman Sachs Group Inc. executive Robert Steel as chief executive, replacing the ousted Ken Thompson. Within a week of being on the job, the bank’s shares tumbled to a new 17-year low.

In premarket trading Tuesday the stock shed nearly 12 percent to $11.80. That level would mark the stock’s lowest price since roughly June 1991.”

Reuters : Wachovia loses $8.86 billion, slashes jobs

Associated Press : Wachovia has $8.9B loss, cuts 6,350 jobs, dividend

As inflation and unemployment spike upward, the misery index is at its highest point since 1993, The misery index combines the unemployment rate and the rate of inflation to come up with an indicator that suggests how tough times are for the average working American. Bloomberg reported last week;

“The year-over-year inflation rate accelerated to 5 percent, the fastest since May 1991, the Labor Department said. A separate report July 3 showed a 5.5 percent unemployment rate for June. Today’s consumer price index data also showed wages fell 2.4 percent over the last 12 months, after adjusting for inflation…The June unemployment rate held at 5.5 percent after soaring the most in two decades in May from April’s 5 percent”

Bloomberg also predicted, “Surging costs and falling payrolls will cause consumers to slow spending growth to the weakest pace since 1991 by the fourth quarter.”

The misery index was conceived of by economist Arthur Okun who was an economic adviser to President Lyndon Johnson in the 1960’s. The web site www.miseryindex.us writes, “It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people of out of work implies a deterioration in economic performance and a rise in the misery index.”

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Bloomberg : U.S. `Misery Index’ Climbs to 15-Year High on Prices

Wachovia, which is scheduled to report tomorrow, released some news after the closing bell this afternoon. Reuters reports :

“Wachovia Corp, the fourth-largest U.S. bank, on Monday said its main mortgage unit will stop offering home loans through brokers this week, joining a growing number of lenders to curb wholesale lending.

‘We thought it was important to focus on customers who have relationships with the bank, and in geographies where Wachovia has branches,’ spokesman Don Vecchiarello said. ‘Based on that, we’ve decided to discontinue doing business through our wholesale mortgage channel as of July 25.’”

Reuters : Wachovia mortgage unit halting loans via brokers

CNN Money : Earnings Preview: Wachovia 2Q results

At the end of a week when General Motors announced a seismic company wide restructuring that includes both layoffs and plant closings, and the company’s stock price gained 37 percent in a three day period (trading at $12.85 on Friday, up from its close on Monday of $9.38 but still significantly lower over the long term- plunging 62% this year to 50 year lows), the town of Flint, MI celebrated the 100 year anniversary of the GM. The Detroit News reports;

“A parade will be held at 1 p.m. Sunday that will feature 92 vehicles, each meant to represent a year in GM’s history. Three 1908 Buicks will start the parade at City Hall, which ends on Saginaw Street. A 2008 Chevrolet Tahoe hybrid, a Cadillac CTS and a Chevrolet Malibu will bring up the rear of the parade. Also included in the parade are military vehicles and Corvettes, Pontiacs, Oldsmobiles and other GM staples.”

The celebration takes place in the home city of GM, William Durant founded General Motors in Flint in 1908, where the company has scaled back it operations. GM closed its huge Buick manufacturing plant in the late 1990’s. The Detroit News notes;

“The sprawling 235-acre site was meant to be GM’s answer to Toyota’s Toyota City in Japan. A sign that welcomed people to Flint, calling it Buick City, has since been removed.”

GM announced on Tuesday that it will cut more than 20 percent of its workforce in the U.S. and Canada, and that it has suspended paying dividends on common stock, asset sales and capital market activities. GM Chairman and CEO Rick Wagoner said, “We need to take some very tough actions to ensure our survival and success.”

Analysts say that GM made a fatal miscalculation when it bet that Americans would always want bigger cars and trucks. Rising fuel prices have hurt GM. Total sales of GM products are off 16 percent this year compared with an industry average of about ten percent. Truck sales fell by 21 percent in the first half of 2008. Sales of the gas guzzling Hummer have plunged 40 percent.

The corporate transformation at GM will mean shifting from the manufacture of larger vehicles and shuttering plants where trucks are built. CNN Money qoutes GM vice president of global product development who said, “Our stated goal is to become the fuel economy leader in every sector in which we participate.” The Vancouver Sun reports;

“In June, GM announced it would close its Oshawa, Ont., truck plant in late 2009. The decision came just two weeks after signing a collective agreement with the Canadian Auto Workers union, in which it said it would keep the plant –employing 2,600 unionized workers — open until at least 2011.”

The Sun wrote that the Canadian Council for Automotive Human Resources reported that “20,000 jobs have been wiped out in Canada’s auto sector since its employment peak in 2000. A further decline of the same amount is likely by 2014″

Here is a segment of a video presentation that Wagoner gave to GM employees where he describes the company wide restructuring plan;



In an interview with the Flint Journal earlier this week, prior to his announcement of worker layoffs and manufacturing cut-backs at the company, Wagoner acknowledged all of the problems that the company faces but seemed to hold out hope that GM could expand its facilities again in Flint;

“Right now, tough economic conditions and high energy costs are affecting the entire auto industry and creating a lot of uncertainty on the part of consumers. Given all these uncertainties, I really can’t speculate on the future of specific products or facilities. But, rest assured, we have every intention of ensuring that Flint has every opportunity to play an important role in GM’s future.”

See stories-
Detroit News : Flint celebrates GM’s 100th anniversary
Flint Journal : GM’s Rick Wagoner has hopeful words for Flint in reflecting on company’s 100th
Vancouver Sun : GM to cut 20% of salaried jobs
CNN : GM to cut jobs, suspend dividend
Reuters : GM sheds bankruptcy risk - now comes the hard part
Detroit Free Press : GM stock climbs for a 3rd day Market signals trust in restructuring plan

Evidence that the economic malaise has become widespread continues to accumulate. With consumer spending confined strictly to necessities, and energy and supply costs rising, more businesses are closing their doors. Yesterday McClatchy reported :

“Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.”

The investigation identified 15,471 bankruptcies in the second quarter, a fraction, according to the report, of total commercial closures :

“Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

The vast majority of these failed companies are among the nation’s 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.”

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An earlier article on the same subject from the International Herald Tribune featured anecdotal evidence of the causes of bankruptcy and the range of effected industries :

“Rising fuel prices and weaker demand were reasons for last month’s Chapter 11 filing in U.S. Bankruptcy Court in Delaware by JHT Holdings, the biggest U.S. transporter of large trucks from manufacturing plants to dealers. Retrenching consumers hurt Whitehall Jewelers, a 373-store jewelry retailer that will liquidate after seeking refuge last month, also in Delaware.

Soaring costs can affect companies even with wealthy owners like the Kenosha, Wisconsin-based JHT, which was acquired in January 2006 by institutional investors including affiliates of Goldman, Sachs, D.B. Zwirn Special Opportunities Fund, Spectrum Investment Partners, and Stonehouse Investment.”

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Reuters reports that the International Monetary Fund has reasserted its estimate that the total cost from “losses on U.S. assets from the subprime crisis and its wider fallout” will be approximately $1 trillion dollars. Reuters quotes the director of the IMF capital markets division, Jaime Caruana, who said;

“Basically, we think this is a reasonable figure and we are not revising the figure every day.”

Caruana also said that European governments may find it difficult to raise capital for development due to the effects of the “credit crisis” for some time to come.

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Reuters : IMF sticks by $1 trillion U.S. subprime fallout