Platinum Lending Solutions

President to Balance Realism and Optimism in Address to Congress

By KAREN TRAVERS and JAKE TAPPER

WASHINGTON, Feb. 24, 2009—

In his first address to a joint session of Congress, President Barack Obama will pledge to not just fix the nation’s economy, but make it stronger than it was before the current crisis.

“[W]hile our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before,” the president will say, according to excerpts released by the White House.

Obama will talk about finding solutions that are already within reach in the American economy and workforce.

“They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth,” the president will say in his televised address.

“Those qualities that have made America the greatest force of progress and prosperity in human history, we still possess in ample measure,” he will say. ”What is required now is for this country to pull together, confront boldly the challenges we face, and take responsibility for our future once more.”

White House officials addressed repeatedly today the balance Obama has to strike between speaking realistically about the economic crisis while not sounding too pessimistic, being mindful of the financial markets and the weariness of the American people.

“The weight of this crisis will not determine the destiny of this nation,” Obama will say, according to excerpts.

White House spokesman Robert Gibbs said on “Good Morning America” today that Obama will offer “a sober assessment about where we are and the challenges that we face.”

Obama will tell Americans that “we have met many big challenges before and he believes that we’re on the right path. And there are better days ahead for this country,” his spokesman said.

The message and tone, according to a senior White House official, will be: “We will get through this economic hardship. … Here are the actions necessary to take to do so.”

Axelrod: Obama’s ‘Chance to Speak to the American People’

In an interview with ABC News’ Charles Gibson, Obama senior adviser David Axelrod said the speech tonight gives the president an opportunity to speak beyond the audience in front of him in the House chamber.

“[F]undamentally, this is a chance to speak to the American people, to be direct and open and blunt about where we are and where we need to go,” Axelrod said. “And I think he wants to take advantage of that opportunity.”

Axelrod said the speech will largely focus on the economy because Americans want to hear from the president about how the White House will address the current challenges and move the country forward.

Obama is also expected to focus on education, health care and energy independence in the context of his overall economic strategy, and address them under the theme of responsibility.

A senior White House official said Obama will talk about those topics in the context of what his administration has accomplished and what has to happen next “to press to the goal line.”  

“He has a set of wins under his belt” coming into this joint session of Congress, the senior White House official said.

Republican Gov. Jindal : Democrats’ Economic Plan ‘Irresponsible’

Louisiana Gov. Bobby Jindal will deliver the Republican response to tonight’s presidential address and he plans to take aim at the Democratic Party for the $787 billion stimulus legislation, which he has strongly opposed.

Jindal, often mentioned as a potential 2012 Republican presidential candidate, will charge that the stimulus legislation will not help the economy grow but will increase the size of government and “saddle future generations with debt.”

“It’s irresponsible. And it’s no way to strengthen our economy, create jobs, or build a prosperous future for our children.” Jindal will say in Baton Rouge, La. “To solve our current problems, Washington must lead. But the way to lead is not to raise taxes and put more money and power in the hands of Washington politicians. The way to lead is by empowering you — the American people. Because we believe that Americans can do anything.”

First Lady Michelle Obama’s Guests

First lady Michelle Obama will be joined in her box at tonight’s address by over two dozen people representing a range of backgrounds, states and political views.

Michelle Obama will sit with two governors, Republican Jim Douglas of Vermont, who supported the president on the stimulus bill, and Democrat Ted Strickland of Ohio, a 2008 battleground state.

Several Washington-area students will also attend the address as guests of the first lady, part of Obama’s pledge to reach out to their new community.

Other guests reflect accomplishments of the month-old Obama administration.

Blake Jones, the co-founder and president of Namaste Solar, met with President Obama last week for a tour of his company’s solar installation in Denver and spoke about how he will benefit from the stimulus plan.

Lilly Ledbetter is the namesake for the first piece of legislation the president signed in office — the Lilly Ledbetter Fair Pay Restoration Act, which makes it an act of discrimination to pay workers unfairly.

By MADLEN READ and TIM PARADIS – 1 hour ago

NEW YORK (AP) — Federal Reserve Chairman Ben Bernanke has given Wall Street a double dose of reassurance. Now it’s President Barack Obama’s turn.

Bernanke told Congress on Tuesday the recession might end this year, and that regulators aren’t planning to nationalize banks. The news alleviated some of investors’ worries about the economy and the banking industry, and lifted the Dow Jones industrial average and Standard & Poor’s 500 index off their lowest levels since 1997.

And investors are hopeful that Tuesday night, Obama will provide specifics about his plans to stabilize the financial system and further stimulate the economy. Anticipation of his remarks helped drive beaten-down financial shares up sharply.

“There’s growing optimism that Obama can deliver the details that the market is so desperately looking for in his speech,” said Ryan Larson, senior equity trader at Voyageur Asset Management. If it gets those details, Larson added, the market’s upward momentum could continue.

Stocks remain on shaky ground, however. Bernanke may have helped stem the market’s slide Tuesday, but the market also found stability from temporary technical factors: bargain-hunting, the unwinding of short bets, and selling exhaustion after six straight down days for the S&P 500.

And though it appears the government is trying to quash the notion of bank nationalization, the Obama administration still has not demonstrated how exactly it will repair the banking system. The nation’s financial system remains “zombie-like,” said Nick Kalivas, vice president of financial research at the brokerage MF Global.

“We had an up day today, but nothing has really changed on that front,” Kalivas said. “If nothing is articulated on that tonight, we’re moving to the downside again.”

The continued focus on the stability of the financial system comes a day after the government moved closer to dramatically expanding its ownership stakes in the nation’s banks, including Citigroup Inc. The Treasury Department, the Fed and other banking regulators said Monday they could convert the government’s stock in the banks from preferred shares to common shares.

The Dow rose 236.16, or 3.3 percent, to 7,350.94. On Monday, the major indexes tumbled more than 3 percent, including the Dow, which fell 251 points and hit its lowest close since May 7, 1997.

Broader stock indicators also rebounded Tuesday. The S&P 500 index rose 29.81, or 4 percent, to 773.14. On Monday, it logged its lowest finish since April 11, 1997.

The Nasdaq composite index rose 54.11, or 3.9 percent, Tuesday to 1,441.83, while the Russell 2000 index of smaller companies rose 17.90, or 4.5 percent, to 412.48.

Advancing issues outnumbered decliners by about 6 to 1 on the New York Stock Exchange, where consolidated volume came to 7.09 billion shares, compared with Monday’s 6.35 billion.

In his semiannual report to the Senate Banking Committee, Bernanke predicted the economy is likely to keep contracting in the first six months of 2009, but that “there is a reasonable prospect” the recession will end this year.

He warned that a recovery will require getting credit and financial markets to operate normally, and that the government must continue working with ailing banks to bring them back to profitability. To the market’s relief, though, the Fed chief said formally nationalizing the banks “just isn’t necessary.”

Traders were encouraged that the S&P 500 index has so far managed to stayed above its Nov. 21 trading low of 741.02. Investors searching for a recovery look for signs that market can test its lows from the worst of the credit crisis and then bounce higher.

Still, many analysts expect the market to remain volatile for the foreseeable future.

Rich Hughes, co-president of Portfolio Management Consultants in Los Angeles, said the market’s rallies are likely to be based on hope or on rebounds from selloffs. He contends Wall Street still hasn’t seen the wrenching decline that is often needed to scare investors from the market and set the ground for a lasting recovery.

“The underlying fundamentals just aren’t there to support anything that’s sustainable right now,” Hughes said. “We haven’t seen the capitulation that you’d want to see before you’d get thoroughly enthused.”

The market’s slide has been tough on long-term investors. A person who in 1997 put $50,000 in a fund that tracks the S&P 500 would now only have about $46,256.

Bond prices fell Tuesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.80 percent from 2.76 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, was unchanged at 0.29 percent.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude rose $1.52 to $39.96 per barrel on the New York Mercantile Exchange.

Home Depot posted a loss but the nation’s largest home improvement retailer’s results topped expectations when excluding costs for shutting four home-improvement brands. The stock rose $1.96, or 10.5 percent, to $20.67.

Target Corp. and Macy’s Inc. said fiscal fourth-quarter earnings fell sharply as shoppers cut back on purchases. Office Depot Inc. posted a loss for the quarter. Target fell 60 cents to $27.83, while Macy’s rose 89 cents, or 12 percent, to $8.29.

Two big drags on the Dow this year — Citigroup and Bank of America Corp. — regained ground Tuesday. Citigroup rose 46 cents, or 22 percent, to $2.60, and BofA rose 82 cents, or 21 percent, to $4.73.

Another bank in the Dow, JPMorgan Chase & Co., rose $1.51, or 7.74 percent, to $21.02 after announcing late Monday it would slash its quarterly dividend to 5 cents from 38 cents in a move to save $5 billion a year.

The only loser in the Dow Tuesday was Microsoft Corp., which dipped 4 cents to $17.17 after it reiterated its belief that the economic crisis will persist at least into the second half of 2009.

Stocks fell in Asia and Europe following Monday’s drop on Wall Street. Japan’s Nikkei stock average fell 1.5 percent, Britain’s FTSE 100 fell 0.78 percent, Germany’s DAX index fell 0.73 percent, and France’s CAC-40 fell 0.73 percent.

By BEN FELLER – 2 hours ago

WASHINGTON (AP) — The White House on Friday dismissed a cable television reporter’s criticism of President Barack Obama’s housing bailout plan as the ranting of an individual who “doesn’t know what he’s talking about.”

In a report on CNBC on Thursday, Rick Santelli animatedly accused the Obama administration of “promoting bad behavior” with its $75 billion lifeline to millions of Americans on the brink of foreclosure.

White House press secretary Robert Gibbs poked fun at Santelli by inviting him to come to the White House to read the details of Obama’s plan. “I’d be happy to buy him a cup of coffee,” Gibbs said. In a nod to Santelli’s caffeinated style, Gibbs then wryly added: “Decaf.”

Santelli took the critique in stride, saying Gibbs had hardly offered tough words.

“I think this is terrific that this has been opened up to national debate,” Santelli said in an MSNBC interview shortly after Gibbs’ daily briefing wrapped up. “I think it’s wonderful he invited to me to the White House. I’m really not big on decaf, though. I think I’d prefer tea.”

The episode underscores how closely the Obama White House, like others before it, monitors how media coverage may be shaping public opinion. In particular, the constant chatter of cable television news shows has at times gotten under the skin of White House aides, and they have made no effort to hide their displeasure.

The goal of Obama’s plan is to help millions of homeowners from being evicted and stabilize the flailing housing market. It aims to help struggling homeowners refinance and provides more money to mortgage giants Fannie Mae and Freddie Mac to encourage them to rework deeply troubled loans.

In his report on CNBC, Santelli said responsible homeowners would end up subsidizing other people’s bad behavior.

From the floor of the Chicago Board of Trade, he turned to traders and said: “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” The traders booed that notion, and Santelli said: “President Obama, are you listening?”

Santelli’s report has become something of an Internet sensation.

Gibbs countered that Obama’s housing plan would help those who have acted responsibly but yet could lose their home.

“Here’s what this plan won’t do,” Gibbs said. “It won’t help somebody trying to flip a house. It won’t bail out an investor looking to make a quick buck. It won’t help speculators that were betting on a risky market. And it is not going to help a lender who knowingly made a bad loan.”

Later, Gibbs acknowledged that “there will be people that made bad decisions that in some ways will get help,” but that they are not the focus. “I also think it’s tremendously important that for people who rant on cable television to be responsible and understand what it is they’re talking about,” he said.

By Elizabeth Stanton

Feb. 20 (Bloomberg) — U.S. stocks fell, capping the worst weekly drop in three months for the Standard & Poor’s 500 Index, as concern bank shareholders will be wiped out by government takeovers snuffed out a late-afternoon recovery.

Citigroup Inc. tumbled as much as 36 percent and the Dow Jones Industrial Average dropped below its lowest close since 1997 before paring losses as White House spokesman Robert Gibbs said the administration wants to maintain a “privately held banking system.” Bank of America Corp. also plunged as much as 36 percent before recouping most of the drop after Chief Executive Officer Kenneth Lewis said the bank can survive “on our own.”

The S&P 500 decreased 1.1 percent to 770.05. The Dow fell 100.28 points, or 1.3 percent, to 7,365.67 after earlier tumbling as much as 216 points. Europe’s benchmarkindex sank to a six- year low, while Japan’s Topix plunged to the lowest since 1984.

“There’s so much uncertainty and a decent chance of the worst case, nationalization, that it’s complete speculation to mess with Citigroup and Bank of America,” said Edwin Walczak, head of U.S. equities at the American unit of Vontobel Holding AG of Switzerland. “The price is telling you that.” Vontobel’s U.S. unit manages $6 billion.

The S&P 500 tumbled 6.9 percent over the past four days and is now just 2.3 percent above its 11-year low of 752.44 on Nov. 20. It is down almost 15 percent in 2009, its worst start to a year. The Dow average lost 6.2 percent in the week, its worst since last October, and closed at its lowest since October 2002.

Citigroup dropped 22 percent to an 18-year low of $1.95 after sinking to as low as $1.61. The bank is not engaged in any unusual discussions with the government, a person familiar with the matter said today.

Lewis ‘Confident’

Bank of America fell 3.6 percent to $3.79, its lowest closing price since 1984, and slumped to as low as $2.53. The bank has enough “capital, liquidity and earnings power to make it through this downturn on our own,” Lewis said in a memo today to employees.

“I am confident we will not need any further assistance in the future,” Lewis said in the memo. Spokesman Scott Silvestri confirmed the memo’s accuracy.

Benchmark indexes slid to their session lows after Senate Banking Committee ChairmanChristopher Dodd told Bloomberg Television that it may be necessary to nationalize some banks for a short time.

‘It May Happen’

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said in an interview with Bloomberg’s “Political Capital with Al Hunt.” “I’m concerned that we may end up having to do that, at least for a short time.”

Gibbs, the White House spokesman, helped spur a late-day rebound after saying President Barack Obama’s administration wants a “privately held banking system” and that reversing the economy’s slide “will take some time.”

JPMorgan Chase & Co., the second-largest U.S. bank, slipped 3.4 percent to $19.90.Meredith Whitney, the financial industry analyst who left Oppenheimer & Co. to start her own firm, said she doesn’t expect the banks she covers to continue paying dividends at their current levels.

“Most of the big banks would be lucky to break even or earn a little bit of money this year,” Whitney told CNBC.

Banks are leading the companies in the S&P 500 to their first cumulative quarterly loss. The 69 financial companies in the index that have reported fourth-quarter results lost a combined $41.6 billion, their third straight quarterly shortfall, according to data compiled by Bloomberg.

Earnings Slump

For the S&P 500 companies as a whole, the 400 that have released fourth-quarter results lost a combined $75.5 billion, according to Bloomberg data. Standard & Poor’s projects a per- share loss of $11.97, the first deficit in quarterly data going back to 1936.

General Electric Co. fell 6.8 percent to $9.38, its lowest close since 1995, and was the biggest drag on the S&P 500. Sanford C. Bernstein & Co. forecast an unprecedented profit drop at the industrial conglomerate’s finance unit. Bernstein analyst Steven Winoker cut his 2009 income estimate to $1.18 a share, below the $1.28 average of 14 analysts in a Bloomberg survey.

Lowe’s Cos. slid 6.6 percent to $15.86. The company reported fourth-quarter earnings per share of 11 cents, a penny below the consensus estimate of 12 cents, and forecast first-quarter earnings per share of 23 cents to 27 cents, also missing analysts’ estimates.

‘Beginning to Nibble’

“The economy’s going to be mired in a mess for quite some time,” Robert Doll, who oversees $280 billion as chief investment officer for global equities at BlackRock Inc., said on Bloomberg Radio. “But with stocks down nearly 50 percent from the high, we think beginning to nibble makes some sense.”

AT&T Inc. rose 1.7 percent to $23.58 and Verizon Communications Inc. added 2.9 percent to $28.81 for the biggest advances in the Dow average. The two largest U.S. phone companies were raised to “buy” from “neutral” at Goldman Sachs Group Inc., which cited the prospect of earnings growth in 2010.

Newmont Mining Corp., the largest U.S. gold producer, advanced 7.2 percent to $43.73 as bullion topped $1,000 an ounce for the first time in almost a year as investors sought haven investments.

Intuit Inc. rose 13 percent to $23.99. The world’s biggest maker of tax-preparation software said 2009 earnings will be at least $1.78 a share, three cents more than the average analyst estimate.

Dow Theory

This week’s closing lows for the Dow industrials and Dow Jones Transportation Average signal more losses to come for stocks, according to Dow Theory, which holds that shipping and travel stocks foreshadow the economy. The transportation gauge closed at five-year lows each of the last four days, led by tumbles in YRC Worldwide Inc. and JetBlue Airways Corp.

General Motors Corp. slid 12 percent to $1.77. Chrysler LLC may be sending a message to President Obama’s autos task force by saying the “best option” for survival is a merger with the largest U.S. automaker. GM abandoned merger talks in November and said it is focused on its own survival.

Century Aluminum Co. plunged 23 percent to $2.22. The second-largest U.S. producer of the metal reported fourth-quarter loss excluding some items of 54 cents a share, wider than the average 39-cent analyst estimate.

Chiquita Brands International Inc. dropped the most in the Russell 2000 Index, slumping 43 percent to $7.27. The seller of bananas and other produce in more than 70 countries posted a fourth-quarter loss from continuing operations of 74 cents a share. That’s more than triple the 20-cent average loss estimate from analysts in a Bloomberg survey.

The cost of living in the U.S. rose in January for the first time in six months as gasoline stopped sliding and retailers tried to push through start-of-year increases even as sales slumped. The consumer price index rose 0.3 percent, as forecast, after dropping 0.8 percent in December, Labor Department figures showed. Excluding food and fuel, the so-called core rate climbed 0.2 percent, more than anticipated, reflecting gains in autos, clothing, and medical care.

To contact the reporter on this story: Elizabeth Stanton in New York atestanton@bloomberg.net.

By Caren Bohan and Lisa Lambert

WASHINGTON, Feb 20 (Reuters) – U.S. President Barack Obama vowed strict oversight on Friday of his $787 billion stimulus plan, pushing back against Republicans who have labeled the centerpiece of his economic agenda fiscally irresponsible.

Obama said he would name a team of managers to ensure that billions of dollars slated for infrastructure projects would be spent wisely.

“The American people are watching. They need this plan to work,” Obama said at a gathering at the White House with dozens of the nation’s mayors.

“And they expect to see the money they worked so hard to earn spent in its intended purpose without waste, inefficiency, or fraud.”

After taking office last month amid a deepening recession, Obama made his top priority the passage of the stimulus plan. He said the measure was crucial to jump-start growth and prevent the unemployment rate from surging into double digits.

The signing this week of the bill — the most expensive in history — marked a big victory for Obama and his Democratic allies in Congress.

But Republicans, most of whom refused to support the stimulus plan, criticized the bill as laden with wasteful spending and said it would do little to revive the economy.

Obama and other Democrats have bristled at Republican attempts to characterize their plans as fiscally irresponsible. They note the federal budget shifted from surplus to huge deficits during Republican President George W. Bush’s administration.

Republicans controlled Congress during much of the Bush administration.

In addition to the infrastructure spending, the bill includes tax cuts and spending to bolster social safety net programs like unemployment insurance.

At the event with the mayors, Obama said the stimulus plan would not only create jobs but put the economy on a sounder footing in the long term through spending on infrastructure such as roads and bridges, mass transit and the expansion of broadband networks.

TARGETING WASTE

He also emphasized his intent to prevent any wasteful uses of the money.

“If a federal agency proposes a project that will waste that money, I will not hesitate to call them out on it, and put a stop to it,” Obama said.

“I want everyone here to be on notice that if a local government does the same, I will call them out on it as well, and use the full power of my office and our administration to stop it,” he added.

After asking for economic help from the federal government for more than a year, mayors of both political parties are among the strongest supporters of Obama’s stimulus package.

Several mayors who attended the event told reporters later they supported Obama’s call for accountability, not only for the federal government but for cities as well.

“We don’t mind getting called out. … We welcome that kind of accountability. We’re going to help get the job done,” said Trenton, New Jersey, Mayor Douglas Palmer.

Obama’s pledge to spend the stimulus money efficiently came before events planned next week in which he and his aides will emphasize their commitment to rein in the budget deficit, which private economists say will likely balloon to about $1.5 trillion this year. That figure includes the $700 billion from the bank rescue plan but not the stimulus plan signed by Obama.

The deficit in the previous fiscal year was a record-high $455 billion.

On Monday, Obama is hosting lawmakers, economists and representatives of business and labor groups at the White House for a “Fiscal Responsibility Summit.”

The White House is expected to unveil its budget proposal on Thursday.

Some fiscal issues will also likely be highlighted in an address Obama will deliver to Congress on Tuesday night.

At the fiscal summit, which will be attended by top Democrats as well as leading Republicans, Obama is expected to underscore his commitment to tackle long-term budget challenges, such as the cost of health and retirement entitlement programs.

“The president felt that we have to start doing this now. For too long, there has been an irresponsibility among people in the Beltway who were unwilling to make the tough choices,” said Kenneth Baer, a spokesman for the White House budget office.

“This will be the beginning of that process,” Baer said. (Additional reporting by Thomas Ferraro; Editing by Peter Cooney)

In a speech prepared for the National Press Club, Bernanke said many nations have fallen into recession; emphasized that he expects inflation to remain “quite low” for some time; and reiterated the Fed’s determination to do “everything possible within the limits of its authority” to repair the battered economy.

Bernanke defended recent, historic Fed actions to bail out troubled institutions like insurance giant American International Group, and to create extraordinary lending programs to backstop the commercial paper, money market mutual fund and mortgage markets.

The central bank’s balance sheet, its ledger of assets and liabilities, has ballooned from $800 billion to about $2 trillion in recent months as it has aggressively intervened in select credit markets.

According to the Fed minutes from their meeting at the end of January released Wednesday, officials lowered their estimates for Gross Domestic Product, the broadest measure of U.S. economic activity, and raised their forecasts for the unemployment rate this year and next from those made in October.

While the economy was expected to improve in the second half of the year, “Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged,” the minutes said.

All Fed policymakers said they expected the unemployment rate would remain elevated through at least the end of 2011, “even absent further economic shocks,” the minutes said.

The policymakers expected the unemployment rate to range between 8.5% and 8.8% at the end of 2009 and to drop to between 8% to 8.3% at the end of 2010. In the long run, the unemployment rate is likely to fall into a sustainable range of 4.8% to 5%. In January, the unemployment rate was 7.6%.

The Fed in October expected the unemployment rate to range between 7.1% and 7.6% at the end of 2009 and between 6.5% and 7.3% at the end of 2010, meaning the policymakers’ forecasts for the jobless rate was marked up by a percentage point or greater for each year.

On GDP, the Fed officials said they expected the economy to contract between 1.3% and 0 .5% in 2009, worse than the October projection, when policymakers said GDP would range between a contraction of 0.2% and an expansion of 1.1% this year. The economy is expected to swing to a positive 2.5% to 3.3% in 2010.

The range represents a central point of consensus among Fed policymakers, tossing out the three highest and three lowest forecasts. “A few” of the Fed policymakers said it would be “more than five to six years” before the economy returned to a healthy pace consistent with sustainable levels of unemployment and inflation.

Some economists have warned that the expansionary Fed policies create the risk of stoking inflation down the line when the economy recovers. Members of Congress have complained that the central bank has not provided adequate information about the risks it is taking on, and the specific assets it has taken as collateral from institutions like former investment bank Bear Stearns and AIG.

“At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time,” Bernanke said in his speech.

Bernanke also said the central bank, starting later Wednesday, would begin issuing longer-term projections for economic growth and inflation. The announcement is one part of an evolving Fed strategy to reassure the markets and consumers that the Fed will not let inflation fall too far at a time when there is growing concern about the possibility of deflation — a widespread, sustained fall in prices that can further harm the economy.

The Fed chairman said that when the economy and credit markets do begin to recover, the central bank will have to “unwind” its lending programs. To a certain extent, the process will happen automatically as financial firms no longer need its services. Other programs, which the Fed is legally allowed to offer only under unusual and exigent circumstances will have to be halted. The Fed may also work with the Treasury Department to offer special financing tools to help whittle down the Fed balance sheet.

But “the principal factor determining the timing and pace of that (unwinding) will be the Federal Reserve’s assessment of the condition of credit markets and the prospects for the economy,” Bernanke said.

The Fed chairman said the central bank’s overall credit risk is “extremely low” with only about 5% of the overall Fed balance sheet, or $100 billion, consisting of assets from Bear Stearns and AIG. He said most of the Fed activities, including currency swaps with other central banks, were safe and did not pose a threat to the Fed. He repeated promises made in recent congrsesional testimony to provide more transparency, including a new website providing more comprehensive information on Fed lending and policies.

“Extraordinary times call for extraordinary measures,” Bernanke said, adding that “The credit risk associated with our nontraditional policies is exceptionally low, and, by carefully monitoring our balance sheet … we will ensure that policy accommodation can be reversed at the appropriate time to avoid risks of future inflation.”

By Ralph Vartabedian

February 18, 2009

The nation’s major banks modestly reduced their overall lending in recent months, even while they were collecting nearly $200 billion in federal bailout funds, the Treasury Department said Tuesday in its first progress report on the banking rescue program.

The survey of 20 major banks left unresolved the question of how well the government banking bailout program is working, though economists and finance experts were generally reassured that lending had held up relatively well in the face of a drastic economic downturn and a near meltdown in the banking industry.

“It is roughly neutral, and that in itself is encouraging,” said James VanHorne, a Stanford University finance expert. “I was concerned about a meltdown.”

In October, Treasury began implementing the $700-billion Troubled Asset Relief Program, buying preferred stock and rights to purchase common stock from hundreds of banks across the nation.

The rushed program was meant to avert a wholesale collapse of the industry by pumping cash into the system with the hope that it would lead to more lending to companies and individuals. So far, about $200 billion has been paid out to banks, with commitments for about $50 billion more.

The lack of transparency in how Treasury handed out the money and the lack of restriction on how banks could use it has fueled suspicion that the program would end up costing the government billions in securities losses.

By one estimate, Treasury paid $70 billion more for the bank securities than their underlying value. But without the program, most experts say, not only would lending have dropped, but the entire banking system would have collapsed.

Even now, the threats to the system remain potent, with an estimated $1 trillion to $2 trillion in bad assets still to be written off. 

“Are we out of the woods? I don’t think so,” VanHorne said.

In their report, Treasury officials said total mortgage and corporate loans were down by 1% each, while credit card balances were up 2%. New commitments for commercial real estate loans dropped 19%. Though the report did not include an average number for all lending, it described the industry as in a “general trend of modestly declining total loan balances.”

Putting the best spin on conditions, it said, “Despite significant headwinds posed by unprecedented financial market crisis and economic turn, banks continued to originate, refinance and renew loans.”

VanHorne, among others, said the report failed to answer the key question of why lending had trended down. On one hand, banks may have pulled back to protect themselves from bad loans in a weak economy, but that is only half the equation. 

“We don’t have good data on the amount of loan demand that exists in this very weak economy,” he said. “We have anecdotal evidence that banks strengthened their credit standards. Whether they have tightened too much is difficult to say.”

As the economy chugged along in the last decade, it ran on constant credit growth. Now it is unclear whether consumers have stopped buying because they can’t get credit or whether credit is dropping because consumers are pulling back. Without much elaboration, the Treasury report suggested that both credit standards and loan demand were affecting the level of lending.

Stuart Gabriel, a finance professor at UCLA’s Anderson School of Management, said he believed loan demand had slid as people bought fewer cars, homes and other goods.

“It is not surprising that loan originations are down,” Gabriel said. “A flat outcome is a decent outcome in today’s perilous economy.”

The report also gave hope that lending was bouncing back in December and January after dropping in October and November, said Darrell Duffie, a finance professor at Stanford University. “There appeared to be an uptick in the last month,” he said.

Duffie said the concern about bank lending and whether TARP was working missed an important part of the larger financial picture. 

Banks provide only a third of the lending that occurs in the economy. The other two-thirds comes from securities markets through bonds, debt obligations and other instruments. So far, those markets are more badly impaired than banking. 

Last week, Treasury Secretary Timothy F. Geithner launched a plan that includes measures to shore up secondary credit markets as well as improve transparency in the TARP program.

“Securitization has to come back,” Duffie said. “It is way too important to the economy not to come back.”

ralph.vartabedian @latimes.com

A deeply troubled sector resumes sinking amid uncertainty about how the government might intervene.

WASHINGTON – President Barack Obama today outlined his administration’s plans to deal with the foreclosure crisis, saying it should help more than 7 million Americans avoid losing their homes.

That could be especially good news in Detroit. RealtyTrac, a company that tracks foreclosures nationally, said metro Detroit remained among the Top 10 for foreclosures last year. The state of Michigan ranked seventh. But that is underscored by the fact that the foreclosure crisis hit southeastern Michigan earlier than in many other places and has been exacerbated by the highest jobless rate in the nation.

The first part of the Obama plan would allow 4 million to 5 million people with loans owned or guaranteed by government-sponsored lenders Fannie Mae and Freddie Mac refinance to a lower-interest mortgage even if the homeowner doesn’t have 20% equity in the home. Fannie and Freddie back most American mortgages. 

Here’s how it would work: In many communities, home values have dropped to the point that, even though an owner is current on mortgage payments, his or her equity in the property may be less than 20% than the cost of their loan. For instance, say you bought a home that when you purchased it was valued at $260,000. At this point, you still owe your mortgage lender about $200,000 on the loan with a rate of 6.5% and you suspect you’ll have trouble keeping up with the payments. 

You could negotiate to a lower interest rate with your lender but if the home’s value has dropped to, say, $220,000, you still owe more than 80% of the value – meaning you have less than 20% equity in the house. And under those rules, Fannie Mae and Freddie Mac typically can’t negotiate a lower interest refinancing for you. 

Obama, however, says he would get those lenders to accept less than 20% equity – meaning you could get a lower interest loan and ostensibly stay in the home. 

A second part of the plan would create what the president is calling a “homeowner stability initiative” that he says could help 3 million to 4 million homeowners who could face foreclosure by pushing lenders to renegotiate mortgages to keep people in their homes. 

Basically, the proposal would use incentives to try to get lenders to negotiate mortgage payments and interest rates down to a point where an at-risk homeowner’s monthly payment was no more than 38% of his or her income and perhaps lower than that. 

(As interest rates on subprime loans have reset, it has touched off increases in mortgage payments that many homeowners can’t afford, creating the spike in foreclosures nationwide.) 

This program would work like this: The government would provide incentives to loan servicing companies that collect mortgage payments to get them to reach out to homeowners who want to stay in their homes. For instance, servicers could get $1,000 for each eligible modification (plus $500 more if they modify a loan before the borrower falls behind) and $1,000 a year – for up to three years – for every borrower who stays current on his or her loan. The holder of the mortgage could get $1,500 as well.

Borrowers, too, could get incentives – up to $1,000 each year for five years as long as he or she stays current on the new loan.

The idea would be to get borrowers, servicers and lenders to agree to bring down the borrower’s interest rate or principal to the point where the mortgage payment is no more than 38% of the borrower’s income. Then, the government would make a dollar-for-dollar match with the lender to bring the rate down to 31% of the borrower’s income. 

The interest rate would be kept in place for at least five years, after which it could be gradually stepped up to the conforming loan rate in place at the time of the modification. 

Any lenders receiving government bailout money from here on out would also be required to take part in the plan. 

Another part of the plan which could touch off a partisan battle in Congress is the president’s backing of rewriting bankruptcy laws to allow judges to change mortgage payments on primary residences if it’s called for. Right now, bankruptcy judges can rewrite the terms on secondary property, but not a primary residence.