By Erik Holm
Bloomberg News
Thursday, June 26, 2008; D03
American Express, the biggest U.S. credit card company by purchases and cash advances, said customers are falling further behind on their debt, signaling that the economy is worsening.
"Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations," chief executive Kenneth Chenault said in a statement yesterday announcing that the company would receive as much as $1.8 billion in a settlement with competitor MasterCard.
American Express and rivals Capital One Financial and Discover Financial Services have fallen more than 30 percent in the past 12 months in New York trading as consumers absorb the housing slump, rising unemployment and higher food and fuel bills. New York-based American Express adopted a "cautious view" for the year in January after cardholder spending slowed and overdue payments rose in December.
"If you look at the employment situation, clearly that's deteriorated, and consumer confidence is down as well," said Sanjay Sakhrani, an analyst with KBW in New York who has a "market perform" rating on the stock. "Both play a key role in the credit card industry."
The legal accord is "an overhang that's eliminated," Sakhrani said. "The amount of the settlement is not ideal, but it's a manageable amount." MasterCard will pay as much as $1.8 billion in quarterly payments over three years to settle the complaint that it blocked banks from issuing American Express cards.
American Express sued competitors MasterCard and Visa in November 2004 after the U.S. Supreme Court ruled that they violated antitrust laws by preventing member banks from offering rival cards. Citigroup and Bank of America, the two biggest U.S. banks, later agreed to offer American Express services.
Visa settled in November for $2.25 billion.
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Time is running out for Tracy Mosely. A single mother of five, Mosely is on the brink of homelessness after the house she's rented for a year fell into foreclosure and was sold at auction. Mosely, a part-time restaurant hostess, came up with $500 for a security deposit on another place. But she says all the landlords she's contacted want $1,000 or more. She doesn't have it. Lying on her bed in Florissant, Mo., flipping through the newspaper, seeking a place to move her family, Mosely says she's not sure if she has weeks or days before she'll be evicted. She may wind up, she says, in a homeless shelter. "My blood pressure is sky-high," she says. "We'll be on the streets. I'm just lost about what to do. We were settled here, this was home, and the kids are looking at me like, 'Mom, please.' I told them I'm doing my best." Mosely is one of the faces of a national real estate crisis whose most grievous victims are increasingly facing the ultimate fate: homelessness. With more families on the cusp of having nowhere to live, thousands of both former homeowners and renters are winding up in shelters or turning to charities for food or other aid to get by. Nearly 61% of local and state homeless coalitions say they've seen a rise in homelessness since the foreclosure crisis began in 2007, according to a study released in April by the National Coalition for the Homeless. According to the study, which let respondents offer multiple replies when asked where they're headed once their property is foreclosed on, 76% of displaced homeowners and renters are moving in with relatives and friends. About 54% are moving to emergency shelters. About 40% are already on the streets. Those facing homelessness include the working poor, who were among those hardest hit by the collapse in subprime mortgages. But others are middle-class families who scarcely expected to find themselves unable to afford their homes. "Shelters are full, and it's getting worse," says Michael Stoops of the National Coalition for the Homeless in Washington. "There are more homeless homeowners, people who first try to downsize, then wind up living with family and friends or in vehicles. At the shelters, there's almost no room at the inn. It's first come, first serve." Six cities reported a rise in the number of homeless people who used emergency shelter and transitional housing programs in the past year, and 10 cities reported an increase in households with children seeking help, according to a 2007 survey done in part by the U.S. Conference of Mayors. The report cites several reasons for the increase, with the rise in foreclosures at the top of the list. Many cities that have seen an increase in homelessness — among them Detroit, Portland, Ore., and Salt Lake City — have also suffered sharp jumps in foreclosures. The Salvation Army, which provides transitional emergency and shelter housing, is reporting a surge in demand for homeless services. For the first time in memory, it's seeing the trend in such middle-class enclaves as Olathe, Kan., and Englewood, Colo. In Kansas City, the Salvation Army has opened shelters in middle-class communities that are serving more families and middle-income wage earners. In Anchorage, a shelter has expanded from six rooms to 16. "Typically, if families lose their homes, unless they have relatives, they're scrambling," says Maj. George Hood, national community relations secretary for the Salvation Army. "We're really seeing an uptick in homelessness right now. You have to rescue some from sleeping in vehicles. "They're embarrassed and don't want to ask for help. They've found themselves in situations they never expected, and you're also finding families and people with established homes out there on the street." Foreclosure figures rising The intensity of the foreclosure crisis helps explain why. For the first quarter of this year, the rate of new foreclosures hit 0.99%, the highest since record-keeping began in 1979, the Mortgage Bankers Association reported. About 2.47% of all mortgages were in some stage of foreclosure during those three months, another record. And more than 2 million foreclosures were reported in 2007, according to the National Coalition for the Homeless. For some who've lost homes to foreclosure, charitable groups are a desperate alternative to living on the streets. Take Judy Johnson, 46, of Sacramento, who works 10-hour days as a hair stylist. Johnson and her husband, Gregory, 52, had been living for eight years in a two-story, 3,000-square-foot home when he lost his job as a supervisor in waste management. He also developed diabetes, fell into a coma and was hospitalized for a short time. He is now recovered. Judy, a mother of four, tried to support her family and make the mortgage bills on her single income because Gregory was unemployed. "We became paycheck-to-paycheck," she says. Ultimately, the family fell behind on their payments. In December, the home was sold at auction, and the family had to move out. They had no savings left, Judy says, and no family or friends who could take them in. And they couldn't afford the security deposits of $2,000 or so that landlords were requesting. "We were thinking we would have to separate the family; we had nowhere to go, nobody to help us," she says. "We were basically homeless. We were on the verge." The tension caused Judy to overeat, and for her and her husband to fall into frequent arguments. But just days before they were to leave, the Salvation Army told them it could provide her with a security deposit on an apartment. Some charitable groups will provide financial help, such as a rental deposit and money for groceries. The Salvation Army will provide assistance to people who meet certain qualifications. Clients meet with a case worker and provide information such as proof of residency, Social Security numbers of each person in the household, proof of income, statements of alimony and/or child support and lease agreements. A background check is often conducted, too. "I was just sitting on the couch, and I was just sitting there lost, thinking, 'I have to figure out how to get all this stuff out,' and we had no place to go," Judy says. "I never thought I'd be facing homelessness. Some days, I couldn't focus on my job. The tension was so high in the house." Now, they're in an apartment with three bedrooms, two bathrooms and a balcony to barbecue on. Judy says that after facing homelessness, she realizes that in today's wobbly real estate market, the same fate can befall almost anyone, even a middle-class two-earner family, as her own had been. Gregory is still looking for a job. Rising prices a contributing factor In addition to foreclosures, other factors are driving families to the edge of homelessness: mounting utility bills, the surge in gas prices and the rise in unemployment, which jumped from 5% to 5.5% in May, the government reported. Often, those factors make it harder for families to afford their mortgages — especially for those who bought homes with adjustable-rate mortgages that have reset to higher rates. Foreclosures have been spreading to prime loans, the kind made to those with good credit. About 2.3% of prime loans were 60 days or more past due in April, the highest level in at least a decade, according to data issued by First American CoreLogic LoanPerformance. That's up from about 1.4% a year ago. "There are people coming home from work, and their houses are boarded up," says Jean Beil, senior vice president for programs and services at Catholic Charities USA in Alexandria, Va. "They're working poor, middle class. Many were surprised when mortgages increased, and they couldn't pay it." Homeless coalition and advocacy groups have called for steps to help ease the problem. Proposals include state laws requiring home foreclosures to be entered into courthouse records within 30 days of a foreclosure sale, which would help renters determine the status of properties. Another idea would require homeowners to provide potential tenants with information about a home, such as whether it's under foreclosure. In addition, groups such as the National Coalition for the Homeless want all federally insured mortgages to protect tenants in case of foreclosure by allowing them to maintain their lease until it expires. In many cases, tenants who live in properties that are foreclosed upon may have little time before being forced to move out. They may also lose any security deposits they had put down. Some advocacy groups also favor more federal oversight of the financial services industry. States have jurisdiction over non-bank mortgage lenders; the National Coalition for the Homeless argues that this system creates inconsistent regulatory standards. Homelessness affecting schools In the meantime, the effects of foreclosures and homelessness are seeping into public school systems that are now serving more children without permanent addresses. An estimated 2 million children will be directly affected by the subprime mortgage crisis as their families lose their homes to foreclosures, according to First Focus, a bipartisan children's advocacy group that issued the report. The April 2008 report indicates that foreclosures often result in disruptions to a child's education. Losing one's home and having nowhere to go can also leave former homeowners emotionally wounded, seized by a sense of failure and shame. Others struggle to hold onto their pride and a fierce desire to avoid the help of charities or government services. Sandra Wright, 37, and her three children and three grandchildren have lived in a rental home for about a year in Gary, Ind. The home has been foreclosed on, and she has until Friday to move out. Wright, a housekeeper at a hotel, was worried that she'd wind up in a homeless shelter. But she's hopeful of finding another rental in time because the lender on the home is offering her $1,000 if she leaves the house by Friday. "I was worried I'll wind up in a shelter," Wright says. "They could come and put everything out on the streets. I've been praying a lot. All you can do is pray."
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WHERE ARE PEOPLE STAYING AFTER LOSING THEIR HOMES? | 
By Stewart Bailey and Dale Crofts
June 26 (Bloomberg) -- The global credit crisis will slow construction and U.S. economic growth for at least 18 more months, Nucor Corp. Chief Executive Officer Dan DiMicco said.
``We haven't seen the worst impact on the economy yet,'' the CEO of the largest U.S. steel producer said yesterday in an interview in New York. ``The impact of the tighter credit controls is just starting to affect folks.''
The credit crisis, sparked by U.S. mortgage defaults, caused almost $400 billion in writedowns at the world's largest banks and securities firms in the past year. Standard & Poor's and Moody's Investors Service have tightened credit-rating measures, making it more difficult for companies to borrow money, DiMicco said.
While the crisis originated in the U.S., it's a worldwide phenomenon that will last through 2009 at least, DiMicco said.
``After that, who knows?'' DiMicco said. ``There are two camps: one saying we're in a recession, the other saying we're getting close to a recession. You don't hear anyone saying we're heading toward a recovery.''
The Federal Reserve said yesterday that ``tight credit conditions'' will curb economic growth in the next few quarters. American Express Co. CEO Kenneth Chenault said credit indicators have deteriorated beyond the company's expectations.
Nucor, based in Charlotte, North Carolina, fell 86 cents, or 1.1 percent, to $75.80 at 10:11 a.m. in New York Stock Exchange composite trading. The shares gained 30 percent this year through yesterday.
Tightened Credit
S&P has downgraded 345 companies this year as of June 24, the majority in the U.S., Sudeep Kesh, an associate in S&P global fixed income research, said in a telephone interview from New York.
Nucor has already felt the credit crunch, even with an A1 rating from Moody's and an A+ from S&P, in both cases the fifth- highest rating. Credit-rating companies threatened to withdraw Nucor's investment-grade status earlier this year if the company borrowed all of the $3 billion it wanted to finance expansion and acquisitions, DiMicco said.
The prospect of a downgrade, which would have cost Nucor ``hundreds of millions of dollars,'' was enough to force it to borrow only $1 billion and to sell new shares for the first time in its history to raise the remainder, DiMicco said.
Turmoil in credit markets has meant that ``even credit- worthy borrowers like Nucor are having to jump through greater hoops,'' said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois. ``The concept of Nucor being anything other than investment grade seems strange.''
Operating Costs
Tighter credit controls will raise operating costs for property developers and government agencies building bridges, roads, railways and industrial properties, DiMicco said. That is compounded by higher costs for steel and key raw materials such as iron ore and coal, he said.
Nucor produces 22 million tons of flat- and long-steel products a year from mills in states including Louisiana, Ohio and Texas.
``How are the states going to handle the highway work, and where is the federal government going to do anything about the infrastructure?'' DiMicco said. ``You need to be able to borrow more to do the same thing as before.''
To contact the reporters on this story: Stewart Bailey in New York at sbailey7@bloomberg.net; Dale Crofts in Chicago at dcrofts@bloomberg.net.
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Buffett vs. Bernanke: The inflation showdownThe billionaire investor says inflation is 'exploding,' but the Fed believes commodity price shocks should subside.NEW YORK (Fortune) -- Even Warren Buffett is wrong some of the time. Federal Reserve chairman Ben Bernanke is hoping this is one of them. Buffett, the billionaire investor behind Berkshire Hathaway (BRKA, Fortune 500), fingered "exploding" inflation Wednesday as the biggest risk to the economy. "I think inflation is really picking up," Buffett said on CNBC. "It's huge right now, whether it's steel or oil," he continued. "We see it everywhere." Indeed, the prices of gasoline and milk have shot past $4 a gallon, and Dow Chemical (DOW, Fortune 500) has announced twice in the past month that it's raising prices to offset soaring commodity costs. Yet Bernanke's Fed signaled Wednesday that, after nine months of interest rate cuts and expansive lending to the financial sector, it isn't eager to reverse course and push rates higher to try to tamp down rising prices. Why? Because the Fed remains skeptical that high commodity prices will ripple through the economy, leading to broad price hikes and big wage increases. "The committee expects inflation to moderate later this year and next year," the Federal Open Market Committee said in holding the fed funds rate steady at 2%, though it did note that "uncertainty" remains high and suggested inflation concerns could rise. Depends on what you mean by 'inflation' In part, the Fed's decision turns on a distinction economists make between inflation and "relative-price changes." The former is a general loss of purchasing power that's caused, or at least exacerbated by, overly lax monetary policy (such as keeping interest rates too low for too long). The latter are price hikes driven primarily by fundamental shifts in supply and demand. If demand for commodities is spiking because of strong worldwide growth, the thinking goes, prices should rise accordingly, until consumers react by reducing consumption - a process that isn't apt to be influenced by interest rate changes. The Fed is betting that rising prices won't feed through to higher general inflation expectations unless workers start demanding raises and companies start raising prices. But wages haven't been rising sharply, and declining unionization means workers have less bargaining power than they did during the inflationary 1970s, economists say. And while some processors of commodities, like Dow, are charging more, their customers in turn have generally been unable to pass along those costs to consumers. So even as some members of the Fed's policymaking body, such as Dallas Fed President Richard Fisher, warn of the need to take quick action against inflation - Fisher dissented for the third straight meeting in Wednesday's vote, this time advocating a rate increase - committee members' inflation forecast for 2010 has risen only slightly since October, despite surging oil prices. "Oil prices have ratcheted up over the past nine years and the dollar has depreciated for more than six years. Nevertheless, as long as a central bank is not creating an excessive amount of money, these relative price pressures ought to be transitory," Sandra Pianalto, president of the Federal Reserve Bank of Cleveland and a voting member this year of the Federal Open Market Committee, explained in a speech last month. "As consumers spend more money for higher-priced petroleum and agricultural goods," she continued, "they eventually have less money to spend on other goods and services. Other relative prices must then fall." Wait and see To be sure, there are other factors at work in the Fed's move to the sidelines. Bernanke & Co. wants to measure the stimulative effect of the rate cuts it's already made. The rate cuts of the past nine months - the Fed has slashed its overnight bank lending rate by 3.25 percentage points since September - will take time to impact the economy. If possible, the Fed wants to wait before making another move on rates. And while fears of a marketwide meltdown seem to have eased, a weak housing market, rising unemployment and increasing loan losses at banks mean the risk of a sharp economic pullback remains substantial. "In an environment of dislocated funding markets, a rate cut would not produce a recovery but a rate hike could trigger a recession," writes Tullett Prebon economist Lena Komileva. Indeed, while inflation is the buzzword right now, the surge in fuel costs is hurting growth in some key industries. Airlines such as United Airlines, a unit of UAL (UAUA, Fortune 500), and Continental (CAL, Fortune 500) have set plans to eliminate thousands of jobs in response to soaring fuel costs. Automakers Ford (F, Fortune 500) and General Motors (GM, Fortune 500) have slashed their production schedules as well, as consumers stopped buying the fuel-guzzling sport utility vehicles that were once a huge source of profits for Detroit. The loss of high-paying pilot and autoworker jobs will only add to existing weak wage and job trends. None of this makes the recent price shocks easier to bear, of course. But for policymakers, if not for media darlings such as Buffett, the distinction is an important one. "While sometimes devastating," Pianalto said in her speech last month in Paris, "these global relative-price pressures are not the same thing as inflation." |
Delinquencies Rise at Fannie Mae, Freddie Mac
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Thursday, June 26, 2008; Page D01
In a sign of continuing trouble in the housing market, mortgage delinquency rates doubled over a 12-month period at Fannie Mae and Freddie Mac, the two industry giants reported yesterday.
In April, 1.22 percent of the conventional home loans that Fannie Mae guarantees were past due by at least three months or were in foreclosure. That was up from 1.15 percent in March and about twice the rate recorded in April 2007.
Freddie Mac said its delinquency rate was 0.81 percent in April, up from 0.77 percent in March. The rate was 0.4 in April of last year.
Neither company's figures fully captured the problems borrowers have had making payments, because they excluded loans for which payment terms had been relaxed.
Chartered by the government to keep mortgage money flowing, Fannie Mae and Freddie Mac package mortgages into securities for sale to investors, guaranteeing that they will pay the investors if the borrowers default. The companies also invest in mortgages and securities backed by mortgages.
The collapse of the housing bubble has left them the dominant players in housing finance. Together, they bought the equivalent of 68 percent of the single-family mortgages that originated during the first three months of this year, according to the Office of Federal Housing Enterprise Oversight.
After years of hand-wringing about the risks that Fannie Mae and Freddie Mac's rapid growth might pose to the financial system, the government has loosened restraints on the companies in the stated hope that they will help prop up the housing market.
The monthly reports the companies issued yesterday showed that Freddie Mac has made much more use of its increased purchasing power than Fannie Mae has.
Freddie Mac increased its mortgage-related holdings in May at an annualized growth rate of 53.4 percent, to a total of $770.4 billion, its highest ever. Fannie Mae increased its holdings at an annualized rate of 15 percent, to $736.9 billion.
"Freddie has put its newly freed capital to work," while by comparison Fannie Mae has held back, analyst Jim Vogel of FTN Financial said.
Fannie Mae's report showed that it has substantial purchases in the pipeline.
The purchases have the potential to boost profits or reduce red ink at a time when the companies have been reporting heavy losses. But Freddie appears to have nearly tapped out its buying capacity until it raises more capital, Vogel said.
Both companies expanded their holdings largely by buying their own securities. Such purchases represented $20.2 billion of the $32.8 billion growth in Freddie Mac's investment portfolio in May and $8 billion of the $8.5 billion increase in Fannie Mae's portfolio.
In Freddie Mac's case, those purchases have produced a high concentration of risk, raising questions about the company's financial safety and soundness, analysts at the research firm Federal Financial Analytics said. Freddie Mac securities made up more than half of its mortgage portfolio in May; Fannie Mae securities made up just over a third of its portfolio.
"[W]e're pretty sure that any bank holding as much of its own obligations as Freddie would need to have a great deal more [reserves] in place to handle the resulting liquidity risk," the research firm said in a report yesterday titled "Doubling Down."
A Freddie Mac spokesman said the company is fulfilling its mission.
"The numbers tell that Freddie Mac is continuing to provide critically needed liquidity and stability to the housing finance system during this time of crisis," Freddie Mac spokesman Michael Cosgrove said.
"We're managing our portfolio in a safe and sound manner . . . and taking advantage of purchasing opportunities that make sense," Fannie Mae spokeswoman Janis Smith said.
By Josh P. Hamilton and Erik Holm
June 25 (Bloomberg) -- Billionaire investor Warren Buffett says he's concerned about ``stagflation,'' or slowing in the U.S. economy while inflation accelerates.
``We're right in the middle of it right now,'' said Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., in an interview on Bloomberg Television today. ``I think the `flation' part will heat up and I think the `stag' part will get worse.''
Buffett, the world's richest person, runs a company with a $72 billion stock portfolio and businesses ranging from candy to corporate jet leasing and insurance. He's said the U.S. housing slump has been a drag on Berkshire's earnings, adding today he's unsure when the economy will recover.
``It's not going to be tomorrow, it's not going to be next month, and may not even be next year,'' said Buffett, 77.
The U.S. economy will expand 1.4 percent in 2008, the weakest performance since 2001, according to a survey by Bloomberg. The Federal Reserve today left its benchmark interest rate at 2 percent, saying ``uncertainty about the inflation outlook remains high.'' Consumer prices rose 4.2 percent in the 12 months ended in May, the fastest pace since January.
Buffett, whose Berkshire is the second-largest shareholder of Anheuser-Busch Cos., declined to comment on InBev NV's $46.3 billion bid for the St. Louis-based brewer. He disavowed comments in the media attributed to him about whether he favors the offer.
Mistaken Identity
``I've been reported to be in St. Louis, I've been reported to be at dinner with August Busch IV,'' Buffett said referring to the chief executive officer of the brewer. ``There must be some guy in St. Louis that looks a lot like me, because I have not been in St. Louis since this started.''
Federal regulators may not need to step in to help Lehman Brothers Holdings Inc., the securities firm that lost about 62 percent of its market value this year, Buffett said.
``The fact that they intervened on Bear Stearns prevents them from needing to intervene on other large investment banks,'' Buffett said. ``The very act of the fire engine showing up when there was a fire means that other fires won't break out in this particular case.''
The second-largest underwriter of mortgage debt last year, Bear Stearns Cos. sold itself after an exodus of clients and lenders threatened to plunge the company into bankruptcy. New York-based JPMorgan Chase & Co. agreed in March to buy Bear Stearns with backing from the Fed.
Buffett also praised Barack Obama, the Democratic senator from Illinois running for president against Republican John McCain, an Arizona senator.
Charity Lunch
``He will have more concern for the people who don't get the lucky breaks in life like I've gotten,'' said Buffett, ranked the richest man by Forbes magazine.
Buffett spoke before a scheduled lunch with two money managers who paid $650,100 last year for the privilege. The money goes to San Francisco's Glide Foundation, which provides food, medical care and other services to the poor.
The foundation ``takes people who have hit bottom, and brings them back,'' said Buffett.
The ninth-annual auction for lunch with Buffett began June 22 on EBay Inc. and runs through June 27. The high bid so far is $77,100.
To contact the reporters on this story: Josh P. Hamilton in New York at jphamilton@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net
