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A Cautious, Optimistic Mood on Wall Street

September 30, 2008 2:04 PM

ABC News’ Erin Keohane and Sarah Amos report: On a somber Wall Street and at an anxious New York Stock Exchange, there was a bit of relief this morning -- 18 hours after one of the worst market closes in U.S. history -- as the markets began the day up.

For traders walking through the media storm that was the Financial District this morning their mood was slightly nervous. Most of the NYSE floor traders would not talk to the press; some feared losing job security, others were knocking Congress and party politics for not voting on a bailout. And some were even optimistic that the Dow Jones industrial average would open up 200 points.

From the street to the floor the mood was heightened.

"It's a really frightening time. I don't know if I'm going to have a job by next week, you know it's really unfortunate that we're in this situation," said George Metzler on his way to work.

John Focshino tried to be light about the market's situation. "My worries? That I lose my job. I lose all my money. I get thrown out on the street and have nothing to eat," he said trying to chuckle a bit, before adding, "Those are everybody's worries. So, it's a very frightening time for all of us. Um, my job, I don't know where my job is going. I don't know, I don't know where the future lies. And we are very uncertain, these are very scary times."

A "get-it-done" mentality was felt as soon as one walked on the exchange floor, which was already covered with newspaper and magazine scraps as well as disposed napkins. This did not slow traders from whizzing around Barclay's and Bank of America trading posts 10 minutes before the bell sounded officially opening the markets.

With just two minutes before the ringing of the bell, the stock exchange floor shifted into fast forward: Traders buzzed past, conversations grew louder and quicker.

Once the bell was heard, traders turned anxiety into production. Several trading posts were crowded with 10 to 15 traders trying to secure a stock at a low rate. National City Bank generated the largest crowd two minutes after the market opened with approximately 25 traders crowding around.

As a bystander the population of traders on the floor this morning seemed to increase 25 percent from Monday morning. This was not confirmed by the NYSE, although it is understood the number of traders on the floor for the market opening varies and it could lead one to speculate that every trader on the floor this morning wanted to partake in rallying the market.

However frustration and fear still existed on some traders’ faces as they roamed the floor three minutes after the bell. Heads were in their hands just as they were after Monday’s congressional vote. Yet other traders had begun joking; one trader even joked with our media liaison, pestering her for a long-awaited date.

Anna Camara was still reeling this morning from Congress' no vote on the bailout plan. "When I heard the news that the bill was not passed I was in shock. I mean I actually was thinking about putting more money back into the market. Thank God I didn't," Camara said.

Even with the strong open, it is clear from the street to the floor that traders are still cautious, but determined to rally the market and the American public. At this point they will do it without congressional support.

September 30, 2008 | Permalink | User Comments (4) | TrackBack (0)

What is “Mark to Market?”

September 30, 2008 1:16 PM

ABC News’ Daniel Arnall reports: It seems like some of the discussion on Capitol Hill is turning to a change in accounting rules to address the current seizing of the credit markets.

Here’s a look at what people are talking about when they’re addressing “Mark to Market” accounting rules:

* The mark to market rule (also known as "fair value" accounting) went into effect Nov. 15, 2007.

* It’s a requirement created by the Financial Accounting Standards Board (FASB) – which has since 1973 been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports.

* The mark to market rule forces public companies to put a “fair value” on their assets or liabilities each quarter. Meaning, if they hold a security on their books, they have to report the actual market value of that asset instead of the price they’d hope to get at some future time.

* Under the FASB’s definition, fair value is the price “in an orderly transaction between market participants.” And it’s not just any buyer. The rules require the buyer to be “knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information.”

* Because there’s no market at this time for the mortgage-backed assets that many banks and financial institutions have invested in, the institutions are taking massive write-downs on these assets quarter after quarter.

* Bloomberg reports that this year the market to market accounting rule has wiped out more than $100 billion in asset values tied to home mortgages and loans issued to finance acquisitions as those loans have started to fail at historically high rates.

* It’s not just about write-downs. It also allows companies that hold assets that have appreciated in value to realize those gains right away – for example, the oil/gas industry holding massive reserves of oil that have recently appreciated in value.

* A change in the standard wouldn’t change the value of the assets, but would likely slow the write-downs in companies are being forced to take each quarter.

* Critics say changing this rule wouldn’t actually bring participants back to the market or increase buyer interest in mortgage-backed securities; it would simply allow companies that purchased these investments to keep their exposure to the mortgage markets out of public view.

* Newt Gingrich (and the rest of the conservative American Enterprise Institute) is pushing this idea.

September 30, 2008 | Permalink | User Comments (9) | TrackBack (0)

For Whom the Bell Doesn't Toll

September 29, 2008 11:01 AM

ABC News' Alice Gomstyn reports: Was it a bad omen or just a glitch? On the day that the government’s massive financial system rescue plan heads to the House, traders waiting for the New York Stock Exchange to open were greeted by silence –- the iconic opening bell failed to sound.

A spokeswoman for the NYSE said that an “isolated electrical issue” was to blame and that the day’s closing bell should operate as usual.

She said that, to her knowledge, the bell had never previously gone silent.

If she’s right, that would be a mighty long streak.

Trading bell history dates back to the 1870s, according to NYSE. At the time, a Chinese gong was used –- it was replaced with brass bells when the exchange moved to its current home in 1903.

Today, the exchange uses four bells, each 18 inches in diameter, and is also home to one spare. The backup bell was made in the 1980s and, because bells meeting NYSE specifications hadn’t been made in quite some time, the bell’s manufacturer had to bring employees out of retirement to do the job.

-- With reports from ABC News' Dan Arnall.

September 29, 2008 | Permalink | User Comments (34) | TrackBack (0)

The Bailout Plan: No Quick Fix

September 29, 2008 9:36 AM

ABC News' Betsy Stark reports: Assuming Congress comes up with the votes to seal the deal on this enormous rescue plan, we can all breathe a sigh of relief. Right? More like maybe…and not so fast.

The immediate goal of this bill was to prevent an economic calamity, which we were told was just days away if Congress did not act swiftly. Assuming the bailout bill is passed, we will soon know whether the immediate crisis has been averted, whether credit markets are thawing and whether banks are lending. We will soon know whether a measure of confidence has returned to the financial system. We can look at where Americans are putting their money. Will they trust more than government-guaranteed treasury bills? We can look at what happens to very short-term interest rates. Will they go up to more normal rates? Both will be important clues.

But we are already seeing today the daunting task that lies ahead.

First there is the reality of putting this bill into action. The Treasury Department will need to hire a team of sophisticated asset managers at government salaries to come up with fair prices for a mass of arcane financial securities invented by MIT doctorates that no one wants to buy. Eligibility guidelines need to be set for helping homeowners avoid foreclosure. A debt insurance product and premium schedule needs to be created for financial institutions participating in the bailout. Newt Gingrich called it all a "monstrosity" on Sunday’s "This Week." Today in The New York Times, William Seidman, the former chairman of the Resolution Trust Corp., said if this works out "without some tremendous snafu…it will be a miracle."

And I direct your attention across the pond today, where the contagion has spread. Today the British nationalized the giant mortgage lender Bradford and Bingley. On Sunday night the Netherlands, Belgium and Luxembourg bailed out the huge Fortis bank to the tune of $16 billion after private buyers walked away from the deal. Sound familiar?

The $700 billion rescue plan is no quick fix for what ails the economy. In the purging of all this bad debt from all these overleveraged Wall Street institutions -- and Main Street consumers -- there will be more bank failures, more homes that fall into foreclosure, more jobs that are lost. This bill -- if we get it -- is emergency first aid. But it is no magic bullet.

September 29, 2008 | Permalink | User Comments (17) | TrackBack (0)

Bought Before It Could Fail? Citi Acquires Wachovia

September 29, 2008 9:04 AM

ABC News' Alice Gomstyn reports: On the heels of JPMorgan’s purchase of Washington Mutual –- the largest bank failure in U.S. history -– a new bank merger has been announced. This time, though, the Federal Deposit Insurance Corporation assures us that a bank failure wasn’t part of the mix.

In a statement to the press this morning, the FDIC announced that Citigroup Inc. will acquire the banking operations of Charlotte, N.C.-based Wachovia.

The FDIC indicated that the Citi deal was good both for the government and Wachovia customers.

“All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC,” according to the press statement.

But it’s not guaranteed that the FDIC will not eventually have to shell out money on the deal.

Citi has agreed to absorb up to $42 billion in losses associated with Wachovia’s loans, but the FDIC, according to the statement, will be on the hook if there are any losses beyond that. In return, the FDIC will receive $12 billion in preferred stock and warrants.

FDIC chairwoman Sheila Bair said the deal was necessary “to maintain confidence in the banking industry given current financial market conditions."

Read the full FDIC statement here.

September 29, 2008 | Permalink | User Comments (30) | TrackBack (0)

Understanding the Financial Crisis and Bailout

September 25, 2008 10:35 AM

ABC News’ Betsy Stark reports: Listening to the MBA president trying to explain the roots of the financial crisis last night, it was easy to imagine why Americans are so reluctant to sign on to this $700 billion bailout. It's not just that they resent having to rescue Wall Street fat cats who have been living the high life while they struggled to fill their gas tanks and send their kids to college, it's that most of them have no idea -- in economic terms -- what this crisis is all about.

Most Americans understand the stock market -- a little. We show them pictures of the trading floor of the New York Stock Exchange and half the population is invested directly or indirectly in stocks. They know, in rough terms, that the value of their nest eggs goes up and down with the Dow.

But it starts to get a little fuzzy after that. The financial literacy problem in this country is well-documented. Many Americans with 401ks couldn't tell you what's in them and, despite the lesson of Enron,that diversification is the first rule of investing. It's safe to say lots of hardworking Lehman Brothers, Bear Stearns and AIG employees probably lost their life savings when those companies became part of the carnage of this crisis.

We've been told and we've been reporting that frozen credit markets are at the heart of this crisis. But even a lot of smart people don't have the foggiest idea what these invisible markets do for the economy, even when they are not frozen. We've offered various metaphors -- "the plumbing of the economy" and "the circulatory system" -- and Fed Chairman Ben Bernanke has tried his best in Congress over the last couple of days to explain what happens when the plumbing and the circulation fail. But it wasn't quite adding up to a $700 billion bailout -- until, perhaps, last night.

Even if ordinary Americans are still not able to connect the dots of how the malfunctioning of markets they can't see or understand has morphed into a crisis of epic proportions, they are getting the message about where this all could lead if Congress doesn't cut a deal: Stocks will tank, nest eggs will crumble, retirement dreams will disappear, lending will halt, people will not be able to buy houses, home prices will fall some more, foreclosures will rise some more, consumers will hunker down, corporate profits will sink, jobs will be lost … and those are consequences everyone can understand.

September 25, 2008 | Permalink | User Comments (75) | TrackBack (0)

Bush Tries to Sell $700 Billion Bailout

September 24, 2008 6:16 PM

ABC News' Charles Herman brings you this pop quiz: Who’s the most powerful man according to Wall Street?

President Bush? He will address the nation directly this evening to try to convince Main Street that his $700 billion bailout plan is not just for Wall Street. In his 32nd prime-time address, he will, according to aides, make clear to the American people that the cost of not acting is greater than acting. Will his speech get taxpayers to support the plan?

Treasury Secretary Henry Paulson? After conducting shuttle diplomacy between the House and Senate, Paulson took time to answer questions from the House Financial Committee. Skeptical lawmakers still have questions about excessive pay, homeowners facing foreclosure, oversight and what exactly taxpayers will get from the bailout. Can Paulson make the case and save Wall Street before Wall Street sends another company into the abyss (Hello Washington Mutual!).

Congress? A lot of angry, doubful, and frustrated members of Congress aren’t sure they like being rushed into approving a $700 billion bailout plan when so many of their constituents are saying, Just Vote No. Can Congress agree to bailout plan and get it to the president’s desk before Wall Street can’t wait any longer?

The presidential candidates? McCain wants to postpone Friday’s debate and go to Washington to help resolve the vote on the bailout. Obama thinks the debate should go on saying it's important “now more than ever.” How will their votes impact whether or not the bailout plan is approved?

Warren Buffett? With a $5 billion investment in commercial bank Goldman Sachs, billionaire Buffett’s big cash infusion was a just the reassuring sign the nervous market needed. If the Oracle of Omaha, a world class investor, thinks its time to get into financial stocks, maybe everyone else should too?

So while investors tried to figure out who has the answers and wondered if and when Congress will approve a bailout plan, the Dow closed down just slightly on Wednesday.

The Dow Jones closed down 29 points to close at 10,825.17 (down 0.27%).  The Nasdaq ended the day up 2.35 points to close at 2,155.68 (up 0.11%).  And the S&P closed down 2.35 (0.20%)

September 24, 2008 | Permalink | User Comments (6) | TrackBack (0)

$700 Billion Bailout Creates Massive Headaches

September 24, 2008 9:56 AM

ABC News’ Betsy Stark reports: Did anyone else notice yesterday how many senators were holding their heads in their hands? Maybe it's not surprising that the Treasury Department's request for $700 billion to spend largely as it pleases -- issued with a warning from the Federal Reserve that not granting the request could lead to financial catastrophe -- is enough to give anyone who has to vote on that request a massive headache.

As Montana Senator Jon Tester put it so well at yesterday's hearing: "Why do we have one week to determine $700 billion that has to be appropriated or this country's financial system goes down the pipes?"

The timeline for approving this rescue package does seem absurd, until you remember that in a 24/7 global economy with markets that react emotionally in real-time to rumor as well as fact, the opportunity for considered debate is trumped by the potential for panic-induced devastation. Paulson and Bernanke -- who we are reminded is the nation's pre-eminent student of the causes and consequences of the Great Depression -- seem to be warning us that as scary as it is already, it could get a lot scarier if this $700 billion firewall is not erected.

Which brings us to that number: why $700 billion? Is it really going to cost that much? Is it possible, as some senators were asking yesterday, that it might not be enough? And what is the likelihood, as Chairman Bernanke suggested yesterday, that it will end up costing a lot less?

Keep in mind that what the government is trying to do here is more art than science. They don't really know what it will cost to buy up the bad debt on all those balance sheets but they want to make sure they have enough in their wallet to cover not only the estimated cost but a few ugly surprises. Paulson also argued yesterday that he needs a big number to make a credible statement to global financial markets that the size of the solution is big enough to match the size of the problem. Roughly speaking, the sum of the good money has to be at least equal to the sum of the bad or the markets won't believe in this firewall.

What this $700 billion is not, if it's any comfort to taxpayers, is a check payable immediately from Main Street to Wall Street in the full amount. Paulson and Bernanke call it an investment, not an expenditure, and if it works right, only a portion of that number will actually be spent. If it works right, the legendary investor Warren Buffett said this morning that he thinks taxpayers might even make a profit on this bailout. That may sound a little blue sky in the midst of so many dark clouds but they don't call him the Oracle of Omaha for nothing.

September 24, 2008 | Permalink | User Comments (51) | TrackBack (0)

Should Bailout Extend Beyond Mortgages?

September 23, 2008 8:35 AM

ABC News' Betsy Stark reports: Trivial Pursuit: Economic Meltdown Edition -- What does TARP stand for? If you said: “Troubled Asset Relief Program,” congratulations. Which brings us to our next question: Can you name the troubled assets for relief?

One of the most daunting tasks ahead for Congress as it attempts to pound out the details of this $700 billion bailout is which "troubled assets" should be included in this monumental rescue. It's not every day in the midst of an economic crisis the government comes along with a virtual blank check to pay for whatever the Treasury secretary thinks is necessary to restore health and confidence to the financial system.

There's a reason the government called it TARP and not MARP, which would have made it the Mortgage Asset Relief Program. The government wants the latitude to help other industries that may be entwined in this mess… or maybe it just wants the political maneuvering room it needs to cut a deal, which may mean extending this bailout aid to other over-leveraged industries… or other simply "troubled" industries.

In addition to all those bad mortgage assets threatening the financial system, there are also hundreds of billions of dollars of troubled asset-backed securities that have been sold against auto loans, student loans and credit card loans. Should the holders of these troubled assets be bailed out too? Including them would almost surely swell the price tag of this bailout beyond the already-staggering $700 billion. Is that what's necessary to restore the nation's financial system to good working order?

Are You Happy With the Bailout Ideas? Tell ABC News Your Story

Americans have been bingeing on all kinds of debt for decades. Wall Street bought it, dressed it up as fancy securities, sold it and resold it and guess who has ended up holding the bag? If you said the taxpayer, once again, congratulations.

September 23, 2008 | Permalink | User Comments (197) | TrackBack (0)

Stocks Fall, Oil Makes a Surprise Return

September 22, 2008 4:01 PM

ABC News’ Daniel Arnall and Scott Mayerowitz report: It was another rough day on Wall Street, with the Dow Jones industrial average failing 372.75 points today. The main driver: fear over the government’s plan to spend $700 billion to buy bad mortgage investments from banks.

To make matters worse, it was a wild day for the oil markets. Just when you thought the price of oil and gas was going down a bit, it sneaks up and bites you.

The price of a barrel of oil today shot up $16.37 to close at $120.92. It was the largest single-day jump ever in the price of oil. At one point, oil was up a mind-blowing $25 a barrel.

The previous one-day price jump record of $10.75 was set June 6.

In the last four trading days, crude has made tremendous gains, ending a two-month decline that brought the price -- briefly -- below $100 a barrel. Oil prices are still below the record of $147.27 reached in July, but a little too close for comfort.

There is never one thing that drives up the price of oil, but part of today’s rise came as investors continued to move money away from stocks and into other investments. Commodities -- like gold and oil -- have historically been safe-havens for investors hoping to weather a stormy stock market.

The falling dollar also likely contributed to the day’s big crude spike. Oil is sold world-wide in U.S. dollars. So when the dollar falls against other currencies, foreign buyers of oil can buy more black gold when they spend the same amount of their local currency.

But oil analyst Stephen Schork says he believes something else might be at play: short selling.

Schork says he believes the big jump in June came after a big oil marketing firm had placed a big bet that the price of crude was going to drop. When that didn’t come to fruition, the company had to cover its bet by buying a lot of oil contracts, and quickly. Other market players knew this firm had to buy the contracts, so they effectively said, “We know you need this now, so pay up.”

“I think someone today has obviously gone bust,” Schork said. “This was obviously a short squeeze of epic proportions. Some large or just a cadre of bears stole short this market and they just got a squeeze of a lifetime today.”

Schork says there’s no news about supply and demand that would justify such a big move, so consumers shouldn’t necessarily worry the retail price of gasoline or heating oil will spike too.

September 22, 2008 | Permalink | User Comments (82) | TrackBack (0)

Short Selling and the 'Plus Tick' Rule of Yore

September 19, 2008 1:07 PM

ABC News’ Alice Gomstyn and Zunaira Zaki report: The news of a potential trillion-dollar federal government solution to the credit crisis is the dominant news story of the day, but let’s not sell the other news short.

Pun intended.

The Securities and Exchange Commission announced today that it is temporarily banning the short selling of 799 financial stocks to “to protect the integrity and quality of the securities market and strengthen investor confidence.”

As of now, the ban is scheduled to hold until the end of the day  Thursday, Oct. 2.

Short sellers, who take bets that a share price is going to fail, have come under extra scrutiny lately, with some arguing that they’ve played  a  large part in the breathtaking plunges this year of once-valuable stocks, with now-bankrupt Lehman Brothers being held up as the most recent, prominent example.

SEC chairman Christopher Cox alluded to those concerns in his statement today about the new ban.

“The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” Cox said.

The SEC’s move follows a similar move by regulators in the U.K. and the announcement by New York State Attorney General Andrew Cuomo that he’s launching an investigation of short selling. (For more on the SEC’s earlier actions on short selling, check out this blog post from Thursday.)

Meanwhile, some are defending the practice of short selling.

“There's nothing wrong with short selling,” said Ted Weisberg, the president of the brokerage firm Seaport Securities.“In free markets, you should be able to sell short.”

Weisberg said that the real problem lies in the fact that the SEC eliminated a rule known as the “plus tick” rule last year. That rule prevented traders from ganging up on a stock that was already falling in price and instead, limited potential short sales to stocks that were on an upswing.

Weisberg said that reintroducing the rule is a better long-term solution than simply banning short-selling.

The SEC hasn’t immediately responded to calls for comment on Weisberg’s suggestion. We’ll let you know if that changes.

UPDATE: The SEC responded to an ABC News request for comment by directing us to a statement issued just before the “plus tick” rule change was set in motion. According to the statement, the change was “designed to modernize and simplify short sale regulation and, at the same time, provide greater regulatory consistency by removing restrictions where they no longer appear effective or necessary.”

September 19, 2008 | Permalink | User Comments (20) | TrackBack (0)

A Tough (Short) Sell

September 18, 2008 4:40 PM

ABC News’ Alice Gomstyn reports: If you haven’t been paying attention to short sellers lately, there are two important things you should know:

1. Some are blaming short sellers for driving down the share prices of vulnerable companies, including the now-bankrupt brokerage firm Lehman Brothers.
2. They’re under some serious pressure from the federal government, the British government and now, a state attorney general.

But let’s backtrack for a minute and take a look at what short selling is: Through short selling, investors can profit off bets that a company’s stock is going to fall by borrowing the stock and then selling it. Assuming the stock’s price falls as expected, short sellers then cover their positions by actually buying the stock at the cheaper price. They then pocket the difference between what they sold it for (the higher price) and what they bought it for.

Because short sellers essentially wager that a company is going down the tubes, they’re not exactly the most popular people on Wall Street or Main Street.

Over the summer, spurred by concerns that short sellers were encouraging the decline of mortgage giants Fannie Mae and Freddie Mac and other firms, the Securities and Exchange Commission adopted a ban on “naked” short selling  --  the act of selling a stock that you don't own and haven't borrowed yet    --  on 17 companies. On Wednesday, the SEC announced it was bringing certain limits on short-selling to the wider market.

Today, across the pond, the U.K.’s Financial Services Authority put a temporary ban on short-selling for financial companies.

Now, just this afternoon, New York State Attorney General Andrew Cuomo said he would be investigating whether traders illegally used false information to push down stock prices (and push up their own profits) for companies like Lehman and insurance giant AIG.

Cuomo told reporters: "Short-sellers should know today that I am watching.”

So are we.

--With reports from ABC News’ Lauren Pearl.

September 18, 2008 | Permalink | User Comments (15) | TrackBack (0)

Why Friday May Be a Volatile Day

September 18, 2008 9:41 AM

ABC News’ Bianna Golodryga reports: The headline this morning reads: "Federal Reserve and other central banks announce further measures to address elevated pressures."

A globally coordinated injection of money from central banks from around the world was announced this morning. Most argue that this may not be enough, and that a globally coordinated interest rate cut is needed now.

What's the downside of a global rate cut? A declining U.S. dollar. This worry is offset, however, by the expectation that global currencies would decline in tandem.

As it turns out, no economy is immune from the ripple effect of the credit crisis. And the only way we can get out of it is with a globally coordinated reaction. As the United States goes, so goes the world economy. If an American consumer sneezes, a Chinese factory worker catches a cold.

This all comes at a particularly bad time.

Not only is September historically the worst month of the year for the stock market. But the third Friday of the month -- tomorrow -- is historically the most volatile.

That's because it marks a quadruple witching day. That's when investors unwind their positions in futures and options contracts before the contracts expire.

Confusing to say the least, but what's important to keep in mind is that quadruple witching days are very volatile, with wide stock swings and heavy trading volume. Not something to look forward to, on the heels of recent events.

And despite the Fed's decision to keep interest rates unchanged on Tuesday, some traders think that, given yesterday's selloff and Friday’s expirations, the Fed could be considering that globally coordinated rate cut with other central banks.

September 18, 2008 | Permalink | User Comments (10) | TrackBack (0)

Want to Buy Lehman? Head to eBay

September 17, 2008 9:00 AM

ABC News' Alice Gomstyn reports: Just because Lehman Brothers has filed for bankruptcy, that doesn’t mean that you can’t still own a little piece of the fading brokerage firm -- and I’m not talking about stocks. Everything from hats to softball jerseys to tote bags to cigar humidors, all emblazoned with the Lehman Brothers name, are now up for auction on -- where else? -- eBay.

So far, a Lehman Brothers logo tie and one of the humidors have fetched some of the highest bids: $102.50 and $203.50, respectively.

A source inside Lehman tells me that he and his co-workers -- none of  whom would cop to posting the items online -- have had a good chuckle about the auctions.

But not everyone is laughing. One of the eBay sellers is peddling a Lehman Brothers “Operating Principles Cube," a block that lists company tenets such as “Demonstrating smart risk management.”

In the product’s description, the seller wrote, “I wish management listened to the same things on this cube! Then my good friends  ...  talented people wouldn't be out of a job.”

September 17, 2008 | Permalink | User Comments (4) | TrackBack (0)

Congress Examines Lehman’s 'Excesses'

September 16, 2008 5:12 PM

ABC News' Scott Mayerowitz reports: Just one day after Lehman Brothers filed for bankruptcy, Congress decided to look into its collapse.

The House Committee on Oversight and Government Reform and its chairman Henry A. Waxman, D-Calif., called Lehman CEO Richard Fuld to testify Sept. 25.

The hearing will “examine the regulatory mistakes and financial excesses that led to the bankruptcy filing. The committee will also explore the impacts of the bankruptcy on financial markets and the United States economy.

Waxman has been active this year looking at Wall Street and excesses. Back in March, his committee looked at how much CEOs of three companies behind the subprime mortgage market make millions of dollars while thousands of Americans lost their homes and investors lost billions of dollars.

September 16, 2008 | Permalink | User Comments (44) | TrackBack (0)

New Wall Street Powerhouses Emerge

September 15, 2008 11:40 AM

ABC News’s Bianna Golodryga reports: With Bear, Lehman and an independent Merrill out of the picture, Morgan Stanley and Goldman Sachs remain the last brokers standing.

Shocking at how quickly this all happened. But not shocking that it actually happened. Over the last decade, brokers have been acting like banks -- and thus became take over targets for larger banks. Bank of America expressed an interest in Merrill this time last year (when Merrill was at $90 a share). I spoke with Bank of America CEO Ken Lewis six or so years ago when he first took over at the bank. Even then, he was stressing a more compact financial services sector.

No doubt this is a big blow to New York and New Jersey economies due to widespread layoffs. But going forward, the banking industry -- while consolidated and much smaller, will most likely be more powerful.

I can't help but notice the similarities to the dot com bubble. There were tens if not hundreds of Internet companies before the bubble burst, leaving only a handful. But the three to five left have a larger market capitalization now than all of the dot com companies at the height of the bubble.

Ken Lewis and Jamie Dimon, of JP Morgan, once viewed as Wall Street’s biggest outsiders, are now the new kings of the street.

The AIG story is much bigger and potentially damaging. This is one that should be watched closely. It will be more difficult for an outside buyer to step in and save the world's largest insurer. And so, while the Government and Fed wouldn't help Lehman out, don't be surprised if they do step in somehow for AIG.

To think: on any other day the big story would be oil which is down dramatically below $100. Inflation is down as well. At least there is some good news for consumers.

September 15, 2008 | Permalink | User Comments (28) | TrackBack (0)

Economic Woes: Will It Ever End?

September 12, 2008 11:46 AM

ABC News Charles Herman reports: With word on the street that Lehman Brothers could be sold off as early as this weekend and with other institutions like Washington Mutual and Merrill Lynch seeing their stock price under assault, it leaves you wondering.

Who is next? When will it end?

While no one can foresee the answer to the first question -- if they could, they’d make a mint in today’s volatile market -- the answer to the second one always comes back to one answer.

The turmoil will start ending after the housing market stabilizes.

But that light at the end of this financial tunnel is still not yet visible.

First off, home prices have to stop dropping so dramatically. As of June, home prices are down 15.4 percent, according to the Case-Shiller Index from Standard & Poor’s.

Next, the number of homes for sale has to decrease. Currently, there are 11.2 months of existing homes for sale or 4.7 million homes with for sale signs in the front yard. That’s just too much. Economists look to six months worth of inventory to promote home price increases.

Then again, even if there are buyers, mortgages have become harder to obtain as banks worry about providing any loan that has the word “mortgage” in it.

Finally, we can’t forget foreclosures. On Friday, we learned that foreclosures shot up 27 percent in August compared with a year ago. There are more than 303,800 homes in some stage of foreclosure, according to RealtyTrac, the largest number of homes in some stage of foreclosure since the group started tracking foreclosures in January 2005.

Taken together, these are all preventing a recovery in the housing market. Economists and other housing analysts now believe we could see the bottom sometime in 2009. Unfortunately, there won’t be a press release announcing it, so all of us will have to read the housing tea leaves to uncover when this will all end.

Until then, expect more bad news from Wall Street and, increasingly, Main Street.

September 12, 2008 | Permalink | User Comments (55) | TrackBack (0)

WaMu's Fighting Words

September 12, 2008 10:14 AM

ABC News' Alice Gomstyn reports: The time has come: WaMu is fighting back.

When I was working on a story Wednesday about analysts questioning whether the housing crisis would sink Washington Mutual, the bank stayed mum. But by Thursday evening, it had issued not one but two statements defending its financial health.

The first was a forecast for the bank’s third-quarter performance. The bank said that it expects to write off less in bad loans this quarter than in the quarter before -- $4.5 billion vs. $5.9 billion.

That might be cold comfort to some,  but the bank also said that, despite the expected write-offs, it “continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability.”

WaMu’s second statement, issued about two hours later, disputed the decision by the credit rating agency Moody’s to lower the bank’s investment grading.

The bank called Moody’s move “inconsistent with the company’s current financial condition.”

“The action by Moody’s appears to reflect the current uncertainty in the markets, rather than a thorough evaluation of Washington Mutual’s business, the strength of its national franchise and the steps it is taking to return to profitability,” the bank said.

WaMu, no doubt, is attempting to quell the perception that it's yet another financial firm headed for a meltdown, but it’s unclear how effective its efforts will be. Fred Cannon, an analyst with Keefe, Bruyette & Woods Inc., suggested to The Wall Street Journal that the efforts could backfire.

"By needing to make the statement,” he said, “it underscores a lot of the concerns.”

Stay tuned.

September 12, 2008 | Permalink | User Comments (56) | TrackBack (0)

Mortgage Rates Fall, Saving Homebuyers Thousands

September 11, 2008 11:02 AM

ABC News' Scott Mayerowitz reports: While shareholders might have lost out in the federal government’s bailout plan for Freddie Mac and Fannie Mae, people looking for a new mortgage might have won big.

The rate for a 30-year fixed mortgage this week fell to an average of 5.93 percent, according to Freddie Mac. That’s down from 6.35 percent just last week.

A family with a $200,000 mortgage taken out last week at 6.35 percent would have monthly payments of $1,244.47. At this week’s rates, those monthly payments drop $53.35 to $1,190.12

That $50 might not seem like much, but the interest savings over 30 years is actually pretty substantial: $19,568.30.

Also, keep in mind that last year at this time, the average 30-year mortgage was 6.31 percent. Since that time the Federal Reserve has cut interest rates several times but mortgage rates never followed because banks shaken by bad loans were hesitant when making new ones.

Frank Nothaft, Freddie Mac’s vice president and chief economist, said these new, lower rates “will help to spur home purchases and loan refinancing in coming weeks.”

Given falling home prices and continued foreclosures this might just be the shot in the arm that the housing market needed.

September 11, 2008 | Permalink | User Comments (12) | TrackBack (0)

For Sale to Foreigners: Las Vegas, Houston?

September 11, 2008 10:30 AM

ABC News' Alice Gomstyn reports: Real estate developers in cities outside of New York have a message for foreign investors: Wish you were here!

During an international real estate conference held (ironically) in New York City, a handful of developers lead a session called “Beyond New York City: A Look at Other Top Cities for U.S. Real Estate Investment.”

With the credit crisis leaving so many in the United States tight-fisted, developers – much like U.S. banks – are looking abroad for more investment.

On Wednesday, their basic message was this: Times may be tough but there are still good buys in the United States and they’re not just limited to the Big Apple, long a favorite of foreign investors who in the last year have snapped up the city’s historic Chrysler and Flatiron buildings.

At the session, developers extolled the benefits of cities like Las Vegas and Houston, among others.

Sin City has seen a sharp drop in its recent gaming revenue lately, but the city’s population is still increasing, said Paul Murad, the president of Metroplex Group. Murad also touted the city’s growing furniture and alternative energy industries.

David Goswick, the principal of Houston-based Historic Real Estate, said his city was tops in job creation and has been ranked as one of the best places to live by several publications.

I checked in with Goswick after the session to see whether he really thought Houston had a chance to rival New York in the real estate investment world. Not surprisingly, he stayed upbeat and on message.

“It’s not in the hip status of New York City,” he replied, “but it’s certainly emerging.”

September 11, 2008 | Permalink | User Comments (16) | TrackBack (0)

Big Paydays for Fannie, Freddie CEOs

September 10, 2008 10:22 AM

ABC News’ Betsy Stark reports: It looks as if it's going to be wild day on Wall Street -- and not the good kind of wild.

Never mind that the U.S. government has staunched the bleeding at Fannie Mae and Freddie Mac with an historic takeover of those mortgage giants.  There's a new crisis at hand: What will become of Lehman Brothers, the 157-year-old investment bank?

Lehman says it has the cash to survive its bad bets in the mortgage markets, but in nervous times like these, it takes more than money to make it -- Lehman also needs investors' confidence in its solvency to keep the storied firm alive.

While ordinary Americans continue to watch their home values and stock portfolios shrink in this massive mortgage market meltdown, the CEOs of Fannie and Freddie stand to make a fortune on their way out the door. You'll remember that they were shown the door by Treasury Secretary Hank Paulson over the weekend.

On Daniel Mudd's watch at Fannie, shares of the company's stock fell about 90 percent. On Richard Syron's watch at Freddie, shares of the company's stock fell about 90 percent. So how is it that Syron could receive an exit package of $14.1 million on top of the $17.1 million he's already earned at Freddie? And how is it that Mudd could collect more than $9 million on his way out the door?

Syron and Mudd could become the latest poster boys for Pay Without Performance, joining Robert Nardelli of Home Depot, Hank McKinnell of Pfizer and Phillip Purcell of Morgan Stanely, who have also achieved this dubious distinction. Or this time could be different: Congressional lawmakers (who failed to protect taxpayers with better oversight of Fannie and Freddie) are now calling on Paulson to nix those payouts or at least cut them way back. Syron and Mudd have hired lawyers and public relations reps to help them manage the battle.

And guess what? Under Daniel Mudd's employment contract, the company -- now owned by the U.S. taxpayer -- is supposed to pay his legal bills.

September 10, 2008 | Permalink | User Comments (45) | TrackBack (0)

Pickens on Palin: ‘Looks Good’

September 09, 2008 3:33 PM

ABC News’ Scott Mayerowitz reports: “Looks good.” Those were the two words that billionaire oilman turned wind-power proponent T. Boone Pickens used this morning to describe the Republican party’s vice presidential nominee.

Pickens didn’t say much when asked about Alaska Gov. Sarah Palin, a woman who backs drilling in Alaska's Arctic National Wildlife Refuge.

“Looks good,” Pickens said. “A different looking vice president than I’ve ever seen before.”

The comments came as part of a breakfast series sponsored by The Wall Street Journal that I attended this morning.

Pickens told us about energy and reducing America’s dependence on foreign oil. But there was also plenty of politics.

The Journal’s deputy managing editor and online executive editor Alan Murray tried to find out who Pickens is voting for.

The longtime Republican just stuck out his tongue and refused to answer.

“I’m sitting out this deal,” he said.

Four years ago, Pickens gave money to Swift Boat Veterans for Truth, a controversial group that ran an ad attacking the then Democratic nominee John Kerry.

Does he regret any of his support?

“Why would I?"he said.

Murray said that the accuracy of some of the group’s statements has been called into question. Pickens said he stands behind the ads and doesn’t pass judgment on the rest of the group’s actions.

But let’s forget politics for a second. The real reason Pickens was speaking to the group of business executives, analysts and reporters was to talk about energy.

By now you’ve probably seen his Pickens Plan on TV and in the newspaper. It works like this: Build more wind turbines to generate electricity. Then divert the natural gas we now use in power generation to power our cars and trucks. (Coal is by far the largest power source for electricity, but Pickens focuses only on the natural gas.)

With natural gas trucks -- and maybe eventually cars -- on our highways, then we can cut back on oil imports. We have plenty of natural gas within our own borders right now, Pickens said -- about a 150-year supply at current usage rates.

“The only resource we have in America that can replace foreign oil is natural gas,” Pickens said.

I have been following the Pickens Plan since he introduced it. I even visited a Minnesota wind farm to see firsthand how it all works.

Pickens hasn’t suddenly gone green. In fact, to my surprise, he didn’t even give the pretense of doing this for the environment. The motivation: Stop importing billions of dollars in oil from other countries … many which aren’t always friendly to us.

“I’m kind of a light shade of green,” Pickens said, although he does acknowledge global warming these days.

What about money? He is a businessman, now invested in natural gas and wind.
Pickens starts Chapter 9 of his new book with “I believe I was put on this earth to make money and be generous with it.”

But when the money angle was asked today, he said: “I have enough money.  … It’s not about money. This is about America, I promise you.”

Basically, Pickens' stance revolves around entirely ending oil importation.

He said he even backs plug-in electric cars.

“I’m not opposed to anything American. It’s not foreign oil,” Pickens said. He’s not a fan of ethanol, but he won’t oppose it. “It’s an ugly baby, but it’s our baby.”

And don’t go looking for other solutions; Pickens said, as his is the only feasible solution that anybody’s bothered to put out there.

“I have a plan and it’s the only plan,” he said at the conclusion. “If you don’t like my plan, you’re for foreign oil.”

September 9, 2008 | Permalink | User Comments (20) | TrackBack (0)

Jobs: My Death ‘Greatly Exaggerated’

September 09, 2008 2:29 PM

ABC News’ Scott Mayerowitz reports: Steve Jobs is alive! Well, he was never dead, but some news hounds might have noticed his obituary the other day. On Aug. 27, the Bloomberg financial newswire updated its lengthy Jobs obit and, well, somebody by mistake hit the publish button.

So, today, as Jobs outlined Apple's latest lineup of iPods and changes to its iTunes store, he decided to have a little fun.

As he walked onto the San Francisco stage, a large message flashed behind him: "The reports of my death are greatly exaggerated."

Well, at least somebody still reads up on their Mark Twain quotes.

For months, rumors have swirled about the Apple CEO’s health after he appeared in June looking frail at the company’s Worldwide Developers Conference. The official company line: he had a “common bug.” But many didn’t believe it. Jobs, 53, is a survivor of pancreatic cancer, and some wondered if the cancer was back. Apple’s silence didn’t help matters.

Then came Bloomberg’s obit snafu.

Well, unless the computer geek-turned-billionaire CEO has learned to clone himself, it seems pretty clear: Jobs’ death was clearly exaggerated.

September 9, 2008 | Permalink | User Comments (10) | TrackBack (0)

99 Cent Stores Charging More Than a Dollar

September 05, 2008 3:16 PM

ABC News’ Charles Herman reports:  What’s the world coming to?  The 99 Cents Only Store selling items for over a dollar?

That’s the sense we’re getting from the company after it issued a press release saying: “99¢ Only Stores, the oldest single-price point retail chain in the United States, to announce its first change to its price policy since its founding over 25 years ago.”

Translation, next Monday, it might cost more than a dollar to shop at 99 Cents Only Stores. 

Am I missing something here? What happened to the “only” part?  Are they going to add a big giant asterisk to the store signs or take down the “only” part?

The LA Times jumped on this story Friday (by the way, the Times costs only 50 cents in Los Angeles) about the deep discount retailer with 277 stores throughout Arizona, Calif.,  Nevada and Texas.

And while recently released sales figures from other retailers indicate that stores selling the basics like food and gas -– Wal-Mart and Costco -– are doing well, that hasn’t been the story of late at 99 Cents Only Stores.

The company reported in August that sales at stores opened for more than a year -– a common retail measurement –- dropped 0.5 percent compared with the same time a year earlier and that the company lost $1.5 million in its first financial quarter.

The company cited rising food costs, a minimum wage increase and higher gasoline prices for the loss in profit.

But the company also pointed to higher “shrinkage” rates for its losses.  That’s retailer talk for theft, like shoplifting by shoppers or employees. 

It was such a factor that the CEO Eric Schiffer said in the quarterly statement, “We have taken action with certain personnel that we determined were involved in unauthorized removal of our inventory, and we are continuing our investigations. We remain committed to reducing shrinkage for fiscal 2009 and improving our operating efficiencies across the board.”

Translation:  It sounds like some employees thought a five-finger discount was better than paying 99 cents.

So if people are committing “unauthorized removal of inventory” now, what are they going to do when the prices rise even more?

Whatever the reason to raise prices, I guess it’s true that a dollar doesn’t go as far as it used to these days.

September 5, 2008 | Permalink | User Comments (37) | TrackBack (0)

Cindy McCain's $313,000 Outfit

September 05, 2008 2:13 PM

ABC News' Bianna Golodryga reports: Most fashion experts will tell you that Cindy McCain looked like a million bucks during this week's Republican National Convention. In reality, it was more like $313,000.

We've been reminded time and time again that the potential first lady is also heiress to a beer distribution fortune valued at as much as $100 million.

According to Vanity Fair magazine, one ensemble worn last week by McCain was valued at over $300,000. That's nearly $100,000 more than the median price of a U.S. home today.

The article describes what McCain and first lady Laura Bush wore Sept. 1, the first day of the Republican convention. Both women, who are fans of designer-to-the-stars Oscar de la Renta, wore suits from his label, priced between $2,500 and $3,000. But when it comes to jewelry, McCain far outshone Bush, wearing four-strand pearl necklaces valued at $11,000 to $25,000 and a stunning pair of three-carat diamond earnings with an appraised value of $280,000.

The article focuses on the lavish and expensive style McCain openly exhibits time and time again during public appearances, and compares it to that of Michelle Obama's. You'll recall that the McCain team has labeled Barack Obama as an arugula-eating elitist. Following that assertion, team Obama picked up on the fact that Senator McCain did not know how many homes he owns (We later found out it was 8). The article questions whether Cindy McCain's expensive taste and lifestyle comes off as hypocritical, and if it damages the Republican's claim that they are more in touch with average Americans.

In a June interview with Vogue magazine, McCain said that she preferred suits made by the German designer Escada, which run around $3,000. She went on to say that if she became first lady, she would consider switching to American designer Carolina Herrera, whose suits go for roughly the same price.

At the same time, Obama also won rave reviews for the blue dress she wore the night of her speech during the Democratic convention. but unlike McCain's designer frock, Obama's was designed by a lesser known designer Obama has long been a fan of. Maria Pinto, a former Geoffrey Beene assistant was been a favorite of Michelle Obama's for a long time, and has designed many of the suits she's worn along the campaign trail. One dress worn during a stump in June was valued at around $900. (A hefty price most working class women would not be able to afford either.)

But despite attracting tabloid fodder, how relevant is the issue? Does the American voter really care about how much money first ladies spend on their wardrobes. Looking back through history, and reviewing former and hopeful first ladies, the answer is: not really.

First off, expensive taste has applied to both parties. The most famous first lady that comes to mind is Jackie Kennedy. American men wanted to be with her, while women, wanted to BE her -- talk like her, travel like her, decorate like her, and yes… DRESS like Jackie O.

She transformed the White House from the drab Eisenhower style, to the classiest residence in the world. She introduced the world to Camelot and its expensive closet, which included frocks from some of the world's most elite designers: Oleg Cassini, Herbert de Givenchy, Christian Dior and Pierre Cardin. We later found out that her lavish spending, while drawing the awe and admiration of millions, also drew the ire of her husband, who repeatedly warned her that her privileged lifestyle could alienate her from her adoring public.

And Jackie wasn’t the only one. Nancy Reagan also had a penchant for expensive clothes and jewelry. Her inaugural gown was valued at $25,000.

And how about Teresa Heinz Kerry, whose estimated net worth is five times that of Cindy McCain's? She is constantly seen in designer suits, is said to be a slave to cashmere, and has her own private plane.

Vanity Fair picks up on McCain's three-carat diamond earrings, but when it comes to diamond studs, Nancy Pelosi doesn't hide her Tahitian pearl necklaces or diamond earrings when speaking about Americans losing their jobs in a weak economy.

Let's face it, whether we like it or not, most presidential hopefuls, their wives, and even high-ranking politicians, can afford things that the average American cannot. And that notion seems to have been accepted by the general public. In fact, there seems to be more criticism and attention drawn to women with a questionable sense of fashion (think Barbara Bush, Hillary Clinton), than those with an expensive one.

As popular women's apparel line Alice + Olivia owner and designer Stacey Bendet told me, "I think the first lady should look first class. I love fabulous earrings...I don't want to stare at a first lady in a frumpy suit. She represents our country and should be a style inspiration."

Selling that point to the general public (and media) may be a little more difficult however, when the nation faces its highest unemployment rate in five years.

September 5, 2008 | Permalink | User Comments (410) | TrackBack (0)

Darth Vader of Economic News?

September 05, 2008 12:57 PM

ABC News' Charles Herman reports: Unemployment surged in August, a record number of homeowners were late making their monthly payments or were in foreclosure at the end of June, and Thursday, the stock market dropped nearly 345 points. 

It’s enough to make a business reporter a little pessimistic about the state of our economy.  It’s definitely made me a little less popular with my co-workers whenever I speak at our morning editorial meetings.  One colleague hummed the theme for Darth Vader when I passed his desk.

Or as Jay Brinkmann, the newly appointed chief economist at the Mortgage Bankers Association succinctly put it, “This is an interesting period of time to be named to this position, and I assure you I am looking forward to a time when it is less interesting, but today is not one of these times.”  My sentiments exactly.

Joking aside, the economic situation in the country continues to look grim, and people are suffering.  This morning we learned that businesses laid off more people in August,  and for the year, more than 600,000 jobs have been lost.  The unemployment rate now stands at 6.1  percent, the highest rate since 2003.

Less then two hours later, the mortgage association reported that a record 9.2 percent  of homeowners were either late making a payment or were in foreclosure.

Just like politics, all housing is local and the biggest losers were once again, California and Florida.  According to the trade group, those two states accounted for 39 percent  of all foreclosure proceedings that were started in the second quarter of the year.

Along with Nevada and Arizona, California and Florida really were the epicenter of the housing boom, thanks to a combination of soaring home prices, risky loans, real estate speculators, bad underwriting by lenders.  They had it all.  And the downturn in those states has really driven the national figures.

Two items of note:  First, the trade group expects that prime adjustable rate mortgages  --  loans to people with good credit who put money down  --  will increasingly dominate homes entering into foreclosure.  Before, people with risky loans or bad credit wer