Consumer confidence slumps

NEW YORK (Reuters) -- U.S. consumer confidence fell to a three-month low in February on expectations the recession would grind on throughout this year and the jobless rate will keep rising, a survey showed Friday.

The Reuters/University of Michigan Surveys of Consumers said its final index reading of confidence for February fell to 56.3 from 61.2 in January.

That was marginally higher than the preliminary result of 56.2 announced earlier this month but was the lowest final reading since 55.3 in November 2008.

"Confidence remained unchanged at the same low level recorded at mid-month as consumers found no reason to expect that the recession would end during 2009 and reported record declines in their personal finances and job prospects," the report said.

"Moreover nearly two-thirds of all consumers thought it would be at least five years before the full restoration of favorable economic conditions."

The index's headline number did manage to beat economists' median expectation for a reading of 56.0, which was based on 49 forecasts in a Reuters poll that ranged from 52.0 to 57.0.

Ultimately, sentiment remains severely depressed and is not far from the record low of 51.7 that it hit in May 1980. The University of Michigan confidence index dates back to 1952.

Stocks cut their losses after the report, but mainly due to technical factors after a sharp sell-off in early trade.

Government bonds, when generally benefit from weak economic conditions, cut their gains, but were more closely following stocks than the sentiment report.

"I think it tells you that consumer confidence is still extremely depressed but it was marginally better than expected," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

Reflecting the grim mood, the index measuring consumers' view of the 12-month economic outlook fell to its lowest since 1980, when the economy was struggling through the stagflation period of shrinking economic activity and rising prices.

The 12-month economic outlook index fell to 31 in February from January's 47. The only consolation was that this was not as bad as the preliminary reading of 27, which would have been the lowest ever.

One-year inflation expectations fell to 1.9% from January's 2.2%. That was the lowest in two months but not as weak as the 1.6% recorded in the mid-month report.

However, five-year inflation expectations rose to 3.1% - their highest since August 2008 - from January's 2.9%. 


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Consumer Confidence

GDP slides 6.2% on slower spending

NEW YORK (CNNMoney.com) -- The nation's economic slide during the last three months of 2008 was even sharper than previously estimated, with the broadest gauge of economic activity suffering its worst decline in 26 years, the government reported Thursday.

Gross domestic product, which measures the output of goods and services produced in the United States, fell at an annual rate of 6.2% in the fourth quarter, adjusted for inflation, according to a preliminary report from the Bureau of Economic Analysis.

The decline was worse than the 3.8% drop that the BEA reported in last month's "advance" reading on fourth-quarter GDP. It was the largest drop in GDP since the first quarter of 1982, when the economy suffered a 6.4% decline.

The reading was also much worse than the 5.4% decline economists surveyed Briefing.com had expected.

"Things are just terrible out there," said Gus Faucher, director of macroeconomics at Moody's economy.com.

After a 0.5% decline in the third quarter, a 6.2% contraction reflects how severe the economic downturn was at the end of last year, and highlights concerns about the economy going forward.

GDP is expected to shrink another 5% in the first quarter before recovering in the second half of the year, according to Moody's economy.com.

Among the main drivers of the decline was a 4.3% drop in consumer spending, which makes up two-thirds of the nation's overall economic activity.

As consumers cut back on spending amid rising unemployment, businesses have reduced their inventories to compensate for falling revenues.

Businesses trimmed inventories by nearly $20 billion in the fourth quarter, after cutting $29.6 billion in the previous quarter. In its advance GDP report, the BEA said business inventories grew by $6.2 billion.

The decline in inventories is a positive sign, according to Faucher. "Businesses are burning through inventories more quickly," he said.

"That means that once demand starts to turn around, they'll have to increase production quicker," which could boost GDP going forward, he said.

For the meantime, however, spending on equipment and software fell at a 29% annual rate, reflecting decreased spending by businesses.

A big drop in exports also contributed to the decline, while an increase in government spending helped offset some of those declines.

Exports plummeted at a 23.6% annual rate in the fourth quarter, versus an increase of 0.3% in the previous quarter.

Earlier in 2008, robust demand for U.S. exports helped keep GDP in positive territory. But that demand has evaporated as the global economy continues to deteriorate.

Meanwhile, government expenditures and investments increased at a 6.7% annual rate in the fourth quarter, down from a 13.8% increase in the third quarter.

The BEA will report its final reading on fourth-quarter GDP on March 26. 


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Dollar falls after grim GDP data

NEW YORK (Reuters) -- The dollar edged down against major currencies Friday on poor U.S. economic data, weak equity markets and global banking concerns.

Government data showed the U.S. economy shrank at a 6.2% annual rate in the fourth quarter, a larger-than-expected contraction and worse than the prior reading.

Adding to concerns about the banking system, the U.S. government committed to holding up to 36% of Citigroup's common shares to bolster the fallen financial giant's capital base, and gave most of the bank's board their marching orders.

Earlier in the day, the dollar made gains against euro and the pound, as news of the Citigroup (C, Fortune 500) deal sent bank stocks and the broader equity market lower. That prompted risk-averse investors to buy the dollar, according to Adam Fazio, senior currency strategist at CIBC World Markets in New York.

In afternoon New York trade, the euro rose to 1.2681 from $1.2643andsterling gained to 1.4307 from $1.4175.

Yen strikes back

The yen was the other bright spot for currency investors with the dollar falling to 97.71 from ¥97.84 earlier Friday. The yen hit a three month high against the dollar the previous day at ¥98.70, according to Reuters data.

Traders cited month-end flows for the yen rise even as Japanese industrial output data continued to paint a bleak picture of the economy.

On a monthly basis the dollar is on course for a rise of more than 8.4% on the yen, its biggest monthly gain in percentage terms since 1995.

Japanese industrial production plunged 10.0% in January from the previous month, posting its biggest drop on record and underscoring the somber outlook that has helped drive the yen lower in the past couple of weeks.

Analysts said the data did little to change views that the yen would resume its slide once profit-taking and month-end selling by Japanese exporters, to benefit from the favorable exchange rates, had worked its way through. 


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Mortgage rates inch up

NEW YORK (CNNMoney.com) -- Mortgage rates rose over the past week, as home prices and sales fell and the government issues massive amounts of debt to pay for federal spending.

The average 30-year fixed mortgage rose to 5.41% for the week ended Feb. 25 from 5.34% the week prior, according to Bankrate.com. The average jumbo 30-year fixed rate slipped to 6.87% from 6.92%.

It's likely mortgage rates will remain at their historically low levels, as money is funneled into the perceived safety of Treasurys, driving down interest rates and keeping mortgage rates low, according to Patrick Newport, an economist at IHS Global Insight.

"As long as the economy remains weak, mortgage rates are probably not going to go up very much," Newport said.

The average 15-year fixed rate mortgage was unchanged at 4.93%.

Adjustable-rate mortgages were mixed, with the 1-year ARM increasing to 5.58% from 5.47%; the 5/1 adjustable-rate mortgage rose to 5.4% from 5.37%.

This week, the Treasury is offering a record $94 billion debt over three days, including $22 billion in 7-year notes being auctioned Thursday.

In January, sales of newly constructed homes fell 10%, to the lowest level on record, while the median sales price of new houses sold fell 15% from a year ago, according to a government report.

Bankrate.com's national weekly mortgage survey is conducted each Wednesday from data provided by the top 10 banks and thrifts in the top 10 markets. 


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FDIC partnership sells $1.45B of bank assets

NEW YORK (CNNMoney.com) -- The Federal Deposit Insurance Corporation said Thursday that it had successfully sold $1.45 billion in distressed real estate loans from a failed Nevada bank through a partnership with the private sector.

In two separate transactions, the FDIC sold 20% of a $1.45 billion portfolio to Diversified Business Strategies and Stearns Bank NA. The loans were originally issued by First National Bank of Nevada, which was seized by regulators in July.

The private-public partnership ensures that the government will share in any profits that are generated as loans are worked out, while, at the same time, sharing the risk.

Under the terms of the sale, the FDIC will retain an 80% stake, which will be reduced to 60% once certain certain loan performance standards are met.

Over the last year, the FDIC has sold a total of $3.2 billion of distressed loans in five separate private-public transactions.

William Isaac, who was FDIC chairman from 1981 to 1985, said private-public partnerships are a common way to handle the disposition of troubled assets from a failed bank.

"It gives incentives for private purchasers to come in and to maximize returns," he said. "It also gives the FDIC significant upside potential."

The partnership is based on the Resolution Trust Corporation, which was set up in the 1980s to liquidate assets during the savings and loan crisis.

"During the last banking crisis, when asset values were similarly difficult to ascertain, these types of structures ultimately resulted in superior recoveries relative to the then-depressed market valuations," said James Wigand, deputy director of the FDIC's division of resolutions and receiverships, in a statement.

First National Bank of Nevada was one of 25 banks that failed in 2008 as the downturn in the housing market took a toll on regional banks.

So far this year, a total of 14 banks have failed. At the current rate, nearly 100 institutions - with a combined $50 billion in assets - will collapse by the end of 2009.

Many economists think the number of failed banks will continue to rise as more consumers and businesses default on loans amid one of the longest recessions on record.  


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They're hired! Going to church to get a job

NEW YORK (CNNMoney.com) -- In today's tough economy, many people are praying for a job offer. When Michel Butler headed to church, he ended up with multiple offers.

One year ago, Butler, 42, was a consultant in the home-building industry in Texas with aspirations of building his own spec homes in the Dallas/Fort Worth area. But six months later, he was an unemployed husband and father of three with no job prospects to speak of.

"The market here really hit the skids in late June, early July, and I knew it was time to consider something outside the industry," Butler said.

First, Butler joined a free career workshop at a local church, which was open to the public. They met every Saturday evening and covered everything from networking to resume writing and interview skills.

"I think that church organization was really a feather in my cap," he said. "It helped me focus on my next steps and also gave me refreshers in interviewing and resume writing," he said.

Then, Butler plugged back into some old networks, including college friends and former employers.

One friend introduced Butler to a local business coach who put him in touch with a few hiring managers and by October he had two interviews in two different industries.

Prudential offered him a job as a financial service agent. They would pay for the training but Butler's income would be largely based on commission. Although that wasn't ideal, he accepted right away.

Then came another offer, this time for a marketing position with a six figure salary. "I couldn't pass it up," Butler said, so he quit Prudential shortly after starting and went to work as relationship manager at Spear One in Dallas.

Aside from the bigger salary and better job security, "the best part about my new position is that it is fun," Butler said, which is the last thing he imagined he'd be having after his last career crumbled.

Getting off the couch

Our panel of career coaches agree that Butler was wise to tap into local organizations that could help him brush up on his job search skills and expose him to other job seekers sharing their experiences.

"Church groups are a good way to use existing community connections to expand your network of people," according to Career and Business Consultant Kathy Robinson. But the danger is that "you could be getting 20-year-old resume advice," she warned. "As long as the members are keeping themselves current on job search techniques it's actually a fabulous resource."

He was also smart to dig into his networks, said Ford Myers author of the upcoming book, "Get the Job You Want, Even When No One's Hiring."

"The wrong thing to do is sit at home in your pajamas and apply to jobs online," he said, "it's isolating and depressing."

Reconnecting with college friends, former coworkers and even other unemployed workers in the community can pay off big time. "That's called networking and that's the single most important activity anyone can do when they are in transition," Myers said.

For Butler, those connections led to not one, but two job offers and the experts agree that while not encouraged, quitting one new job to accept a better offer is acceptable in today's market.

"It's every man for himself in this economy," Myers said.

Butler's first responsibility is to himself and his family, according to Gerry Crispin, co-owner of Careerxroads, a consulting firm based in New Jersey.

Even after finding full-time employment, Crispin recommends that workers stay in touch with recruiters and keep up with their other resources. Keeping yourself in the game is essential to getting job offers.

"Are you ever 100% out of the market? Yeah when you're dead," Crispin said, "or retired," he added.

Have you found a job recently? We want to hear from you. Send us an email and attach a photo. Tell us where you got hired and how you landed the job and you could be profiled in an upcoming story on CNNMoney.com.  


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Small biz loan failure rate hits 12%

NEW YORK (CNNMoney.com) -- Bank lending to small businesses has dried up in recent months. One reason credit has grown scarce: They're risky loans. A new analysis of Small Business Administration-backed loans found that the failure rate has hit the double digits, with 11.9% of the SBA's loans last year going into default.

The Coleman Report, which provides lenders with small business data and SBA news, calculated the failure rate by dividing the number of loans liquidated or charged-off last year by the total number of loans made through the SBA's flagship lending programs.

Last year's failure rate is a sharp increase over past years. In 2004, the SBA loan failure rate was 2.4%, but it has increased each year since, rising to 8.4% in 2007, according to Coleman's calculations. The 2008 failure rate of nearly 12% covers the fiscal year that ended on Sept. 30. In that year, the SBA's 7(a) and 504 programs approved 78,324 loans, totaling $18.2 billion.

"The numbers are brutal, but it validates what we already know," said the report's editor and publisher, Robert Coleman. "In towns, we see established businesses going under every day, and [I've heard] bankers say their small business portfolios have become a disaster."

Doing its own calculations based on defaults in December - which falls in the agency's 2009 fiscal year - the SBA came up with a annualized default rate of around 5%, based on the total dollars lent. Calculating defaults based on the number of loans made, the default rate for the 2008 calendar year was around 10%, according to the SBA.

"The real point is, of course, that both rates - number of loans and dollars - have been rising. That increase is a reflection of what's going on in the general economy," said SBA spokesperson Mike Stamler. "It could not be a surprise to anyone that loan defaults rise when the economy turns difficult, and the economy has been getting more and more difficult for some time now."

The SBA's loan programs offer banks insurance on a percentage of qualifying small business loans: If the borrower defaults, the SBA pays the bank back for the portion of the loan it has guaranteed. This approach makes small business loans more enticing to risk-averse lenders. But the number of loans the SBA backed plunged in 2008, thanks to stricter bank lending standards and a frozen secondary market for the loans.

"Lenders are criticized for not getting capital to Main Street, but the problem, as this report shows, is that it's hard to justify getting capital out there when there's a 12% failure rate," Coleman said. "That's why they tightened the credit box."

Congress has picked up on the problem. The stimulus bill passed last week included a provision allowing the SBA to increase its guarantees to 90% of qualifying loans, up from a current maximum of 85%.

But that won't solve the problem of loan failures - it will only transfer the losses from banks to the government. The SBA's loan charge-off rate - the actual cash paid by the agency to honor its guarantees divided by the total dollars disbursed - has increased from 0.4% in 2004 to 1.9% last year, according to The Coleman Report.

"Credit got easier, and there was too much capital for too little demand. So more and more loans went out to those who were going to fail," Coleman said. "But now we have the opposite problem, and the clamp-down has made loans too scarce."

"The magnitude of the credit crunch, a uniquely cruel feature of this particular recession, only makes things worse," said the SBA's Stamler. "This situation won't turn around until we can get capital flowing again to small businesses. That's what the TARP and the TALF and the recovery act are designed to do."

In the meantime, while the government and lenders try to find that steady middle-ground for small business lending initiatives, Coleman suggests the SBA and lenders try to curb the fear they're bound to feel when they see the grim statistics.

"We all want to be good stewards of tax payers' dollars," Coleman said. "Because 50% of the GDP is driven by small businesses, we need to focus on the flip argument: There's an 88% success rate. Just face that we will have losses right now, and that those losses have to be at the government level so that we can protect what we have." 


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Third time's the charm: Commerce head named

WASHINGTON (CNN) -- President Barack Obama named former Washington Gov. Gary Locke as his nominee for commerce secretary Wednesday.

"Gary will be a trusted voice in my Cabinet, a tireless advocate for our economic competitiveness, and an influential ambassador for American industry who will help us do everything we can, especially now, to promote our industry around the world," Obama said at the announcement held near the White House.

Locke, 57, was the country's first Chinese-American governor, elected to lead Washington in 1996 and re-elected in 2000.

Prior to becoming governor, he served five terms in the Washington state House of Representatives and one term as King County executive. He was chairman of the House Appropriations Committee from 1989 to 1994.

A lawyer, Locke is currently in private practice with Davis Wright Tremaine in the national firm's Seattle, Washington, office.

"Working with the professionals at the Department of Commerce, I'm committed to making the department an active and integral partner in advancing (Obama's) economic policies and restoring the American dream to all Americans," Locke said.

Locke is Obama's third choice to be commerce secretary. His second pick, Republican Sen. Judd Gregg of New Hampshire, cited "irresolvable conflicts" with the administration over the economic recovery bill when he withdrew his name from consideration on February 12.

New Mexico Gov. Bill Richardson bowed out on January 5, citing the distraction of a federal investigation into ties to a company that has done business with his state. Democratic officials told CNN the investigation involves a California company that won municipal bond business in New Mexico after contributing money to various Richardson causes.

Richardson denies any wrongdoing.

Acknowledging his trouble in filling the Commerce slot, Obama joked that he is "a big believer in keeping at something until you get it right."

Another Obama nominee - former Sen. Tom Daschle of South Dakota, who was selected to be secretary of health and human services - withdrew on February 3 after controversy erupted over his tax records and questions over his work in a field that some consider lobbying.

CNN's Ed Henry and Suzanne Malveaux contributed to this report.  


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Mass layoffs down in January

NEW YORK (CNNMoney.com) -- There were fewer mass layoffs in January, with the brunt of the job casualties occurring in the South and in temporary-help services, according to the U.S. government.

In January, there were 2,227 mass layoffs, which resulted in 237,902 job cuts, according to the Labor Department. There were 48 fewer mass layoffs compared to December, but the number of unemployment claims associated with them increased by 11,785.

Mass layoffs are those that involve 50 or more job cuts in a single sweep.

Although employers announced more mass layoffs in December than January, the workers were actually let go in January, which is what caused the number of unemployment claims to spike, according to David Wyss, chief economist for Standard & Poor's.

"Initial claims are going to continue being high through January and February. But we'll see another peak around the beginning of summer because by mid year, people will realize the economy isn't recovering, and companies will do another round of layoffs," he said.

The nation could lose 2 million more jobs in 2009 after shedding 2.6 million last year, according to a forecast released by the Conference Board in January.

The total number of mass layoffs has reached 25,712 since the start of the recession in December 2007.

Hard-hit industries

Temporary workers reported the highest number of jobless claims, with 25,467 in January, the highest since 1998.

Workers in school and employee bus transportation filed 12,071 unemployment claims, the most since 2005. Many of the cuts stem from budget-tightening in the school systems, according to Wyss. If cities and school districts receive additional funds from the stimulus, those cutbacks could be lessened, he said.

Vehicle manufacturing was another hard-hit industry as automakers fight for survival. In its report, the Labor Department split this into three industries: automobile, heavy-duty truck, and light truck and utility vehicle. This last category accounted for the third-highest number of unemployment claims - across all industries - with 11,404.

This week, two U.S.-based tech companies announced job cuts that will put 5,000 people out of work.

Spansion (SPSN), based in Sunnyvale, Calif., said on Monday that it will cut 3,000 jobs, or 35% of its total workforce, to save money for restructuring and to position itself for a possible sale.

Micron Technology (MU, Fortune 500), based in Boise, Idaho, said it would cut 2,000 jobs by the end of August, all of them in its home state. Of these cuts, 500 will occur in the next couple of weeks.  


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TARP: $365 million to 23 banks

NEW YORK (CNNMoney.com) -- The Treasury Department offered up details Tuesday for 23 regional banks that received a combined $365 million in the latest round of government bailout funding.

The funds were distributed on Feb. 20 to companies in 16 states through the Troubled Asset Relief Program, a $700 billion bank rescue enacted last October under the Bush administration that was intended to encourage lending.

The Treasury Department received the first half of those funds ($350 billion)immediately in October.

The Obama administration said it was committed to repairing the banking sector in January, when it received the Congressional OK for the remaining $350 billion. Earlier this month, Treasury Secretary Tim Geithner outlined the administration's "Financial Stability Plan," the new name for TARP, and said the government could commit up to $1 trillion to promote consumer and business lending.

So far Treasury has injected a total of $196.4 billion into 442 regional institutions in 48 states and Puerto Rico.

The local banks that received the most money in the current round of funding include First Merchant's Corp. of Indiana at $116 million, BancPlus Corp. of Mississippi at $48 million, and Royal Bancshares of Pennsylvania, which received $30.4 million.

Other payouts ranged from $22 million for Central Community of Texas to $2 million for Lafayette Bancorp in Mississippi. 


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Kerry: Block bailout abuses

WASHINGTON (Reuters) -- A senior Democratic senator said Tuesday he will introduce a bill to end "the extravagant spending practices of U.S. banks" after reports that Northern Trust Corp., which got taxpayer bailout money, last week threw lavish parties around a California golf tournament.

"I'm sick and tired of picking up the newspaper and reading about another idiotic abuse of taxpayer money, while our country is on the brink," Sen. John Kerry, D- Mass., said in a statement released to Reuters.

Kerry plans to introduce legislation targeting banks that received taxpayer assistance under the government's $700 billion Troubled Asset Relief Program (TARP).

Northern Trust (NTRS, Fortune 500) received $1.6 billion under TARP, according to the Kerry statement. A spokesman for the bank did not immediately return telephone calls seeking comment. 


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Housing fix leans on troubled firms

NEW YORK(CNNMoney.com) -- Fannie Mae and Freddie Mac won't be leaving the federal government's nest anytime soon.

President Obama is leaning heavily on the teetering mortgage finance titans to help stabilize the housing market, even as it pumps hundreds of billions of dollars into them to keep them afloat.

As the housing crisis deepens, the question of the companies' long-term future has been set aside.

"The Obama administration has indicated that Fannie and Freddie will continue having a key role in the nation's economy as we go forward," James Lockhart, director of the Federal Housing Finance Agency, which regulates the companies, said in a speech last week. "At this point, our primary focus has to be getting through the present crisis."

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500), which long straddled the line between private companies and government agencies, were taken into conservatorship last September to prevent their collapse. Each were given a lifeline of $100 billion.

Their importance to homebuyers and lenders is clear - they accounted for more than 75% of mortgage originations at the end of last year, injecting much-needed financing into the lending arena. They own or guarantee almost 31 million mortgages worth $5.3 trillion.

Crucial to foreclosure rescue plan

And they are playing an pivotal role in Obama's foreclosure prevention program, which was announced Wednesday.

Under the plan, Fannie and Freddie will provide access to low-cost refinancing to borrowers with little or no equity in their home. The administration expects this will help up to 5 million borrowers avoid foreclosure.

The companies are also contributing more than $20 billion to subsidize struggling borrowers' interest rate reductions as part of Obama's $75 billion loan modification program. This is expected to prevent up to 4 million foreclosures.

The administration, realizing it needs to boost confidence in the struggling companies, has agreed to double its level of support for the firms to $200 billion each, as well as boost the amount of mortgages they can own or guarantee to $900 billion, up from $850 billion.

The additional funding comes at a crucial time for the firms, which are contending with soaring defaults in their own portfolios as the economy weakens. Both are expected to report large losses -- Fannie by next Monday and Freddie by the end of March.

Already Fannie has said it needs up to $16 billion to cover fourth-quarter losses, while Freddie plans to draw down up to $35 billion more, on top of the nearly $14 billion it already received.

The firms may need more than $200 billion each in government funding, especially since they are holding $1.6 trillion in subprime and Alt-A loans, experts say. But all signs indicate that the federal government will be there to back the companies.

"The government wants Fannie and Freddie to help people buy houses," said James Angel, associate professor at the McDonough School of Business at Georgetown University. "They don't want there to be any limit."

Future of Fannie and Freddie

In the near-term, the federal government could continue operating the companies as they are now or it could deepen its commitment. Many experts are arguing for the latter.

If the administration were to fully take over Fannie and Freddie - putting it into receivership and wiping out the remaining shareholders - it would have a lot more flexibility to use them to prop up the housing market, said Thomas Stanton, a lecturer at Johns Hopkins University. Right now, the government has to keep in mind shareholder interests instead of devoting all efforts to the company's role in housing policy.

Federal officials might choose to use Fannie and Freddie to soak up the toxic residential mortgage assets at other financial institutions, creating a so-called "bad bank," Angel said.

At least Obama should come out and say that the government will back the company's debt, many experts say. Right now, that guarantee is implicit, but it's not enough for some investors, who are shifting to other forms of debt that are explicitly backed by the United States.

Such a guarantee could bring down their financing costs by as much as one percentage point, by some estimates, since the debt would be viewed as less risky.

"Using Fannie and Freddie to address the bust would be cheaper and easier if Congress would simply enact an explicit guarantee of their debt, reflecting the de facto reality," Alex Pollock, resident fellow at the American Enterprise Institute, said in a recent speech.

As for the long-term future of the companies, there are many wide-ranging opinions. Any of these changes, however, are likely years away, experts said.

Lockhart outlined several options. The first scenario calls for the firms to be nationalized and merged with either the Federal Housing Administration or Ginnie Mae, a government corporation that guarantees federally insured mortgages. Lockhart opposes this option because it would expose the government to the significant risks posed by insurance programs.

Or the companies could remain as government-sponsored enterprises, possibly with a continued lifeline from Treasury or a sharp reduction of their mortgage portfolios.

Finally, Lockhart said, the companies could become purely private-sector firms.

Other experts say the companies' functions should be broken up: The securitization business could be turned over to the private sector, and the housing subsidy mission could remain within the government. Many say the current hybrid structure has proven not to work.

Determining the future of Fannie and Freddie won't be an easy task, no matter when it happens.

"This kind of decision has to be made very carefully," Stanton said. "If they can postpone the decision, it wouldn't be surprising that they might." 


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Retail Sales

NEW YORK (CNNMoney.com) -- Retail sales unexpectedly rose in January, after six straight months of declines, according to a government report Thursday that raised skepticism among economists.

The Commerce Department said total retail sales rose 1% last month versus a revised drop of 3% in sales in December. December sales were originally reported to have declined 2.7%.

Economists surveyed by Briefing.com on average had forecast a decrease of 0.8% for January.

Sales excluding autos and auto parts rose 0.9% compared to a revised 3.2% drop in the measure in December. December sales minus auto purchases were originally reported to have declined 3.1%.

Economists had forecast a decrease of 0.4% in the measure for January, according to Briefing.com.

Has retail rebounded?

Retail experts were quick to dismiss the rebound.

"These numbers are a little puzzling to me," said Scott Hoyt, senior director of consumer economics with Moody's Economy.com

"The gains in apparel purchases is a bit of a surprise given the numbers we've seen from retailers," he added.

To his point, many specialty clothing chains reported big declines last month in their January same-store sales, a key measure of retail performance that tracks sales at stores open at least a year.

"It's very difficult to interpret this report because it is only one data point. And the [positive] numbers are incongruous with everything else that we know is hurting retailing," Hoyt said.

Hoyt said he wouldn't put "too much faith" into last month's sales increases unless he sees other data supporting the Commerce Department's report.

Also, he said he wouldn't be surprised if January's sales increases were revised lower next month.

Others had a similar reaction as Hoyt to the government's report.

"I talk to retailers every day. There's no way these numbers could be as positive as they were," said Bob Duffy, senior managing director with global advisory firm FTI Consulting.

Duffy said he looks at retailers' monthly same-store sales numbers "to get a better pulse of what is actually happening in the industry."

"I think was happened last month was retailers were trying to generate additional cash. So a lot of merchandise was on clearance," Duffy said.

"The 50%, 60% discounts were driving some consumers to spend, but this can't go on long term. I am not saying something turned [for retailers] last month," he said.

Even the National Retail Federation (NRF), the industry's largest trade group, tempered expectations that retail sales could be recovering after a brutal 2008.

"While 2009 got off to a surprising start, it's going to be difficult for retailers to maintain this momentum," NRF chief economist Rosalind Wells, said in a statement Thursday.

While seasonal increases "were encouraging for retailers, budget-conscious consumers still spent much less this year compared to last January," the group said.

"We expect the first half of the year to present challenges while giving way to sustained growth in the fourth quarter," said Wells.

But Jeff Feinberg, managing director Alvarez & Marsal, a turnaround and restructuring firm, offered a somewhat different perspective.

"Elements of these [numbers] make perfect sense," Feinberg said.

"First, Wal-Mart and other discounters are clearly benefiting from their new consumer base," said Feinberg, referring to more upper income shoppers trading down to Wal-Mart's low-priced goods.

"While department store sales were sluggish, they were not as sluggish as forecasted. Extreme discounting has enabled [more] people to make purchases," he added.

Also, Feinberg said he's noticed that both commercial banks and auto dealers have been loosening up loans to car buyers over the past month. This he feels has helped lift auto sales in January.

The government report showed sales rose across retail categories, including purchases at 2.6% gain electronics sales, a 1.6% increases in clothing sales and a 1.1% increase in purchases at general merchandise stores.

Elsewhere, food and beverage stores logged a 2,1% gain last month, and purchases at gasoline stations rose 2.6%, auto purchases rose 1.6%.

"It is impossible to square these numbers with the unit auto sales data," Ian Shepherdson, chief U.S. economist with High Frequency Economics, wrote in a report Thursday.

The few weak spots, according to the report, included a 1.3% decline in furniture purchases, a 3.2% decline in sales of building materials and a 0.5% drop in sporting goods and hobby stores.

"The underlying trend in core retail sales is still clearly downwards," Shepherdson said. "There is no reason to expect any recovery soon. The headline relief today is welcome but it is unlikely to last."  


Retail Sales
U.S. home sales rise in December

Obama pledges to cut nation's deficit in half

WASHINGTON (CNN) -- President Barack Obama pledged Monday to cut the nation's $1.3 trillion deficit in half by the end of his first term.

He identified exploding health-care costs as the chief culprit behind rising federal deficits during a bipartisan "fiscal responsibility summit" convened to discuss ways to restore fiscal stability without deepening the recession.

Meeting with the congressional leadership of both parties, as well as a range of business, academic, financial and labor leaders, Obama warned that the country cannot continue its current rate of deficit spending without facing dire economic consequences.

"I refuse to leave our children with a debt they cannot repay," he said in remarks opening the one-day summit at the White House. "We cannot and will not sustain deficits like these without end. ... We cannot simply spend as we please."

The country, Obama argued, is already starting to face the consequences of greater deficit spending, noting that roughly one in 10 taxpayer dollars in 2008 went toward paying $250 billion in interest on the national debt.

The president pledged to take the first step toward fiscal responsibility by, among other things, ending "accounting tricks" such as refusing to include money for expenses such as the Iraq war or natural disasters like Hurricane Katrina in the regular budget.

Such practices, Obama argued, only serve to mask the real size of the deficit.

He also pledged to end no-bid contracts in Iraq, root out waste and abuse in entitlement programs such as Medicare and Medicaid, require every Cabinet member to scrub department budgets "line by line," and reinstate a "pay as you go" rule from the 1990s.

"This is the rule that families across this country follow every single day, and there's no reason their government shouldn't do the same," he said. "You don't pay what you don't have."

But the biggest challenge, he said, would be controlling spiraling health-care costs - "the single most pressing fiscal challenge we face by far."

The projected increase in the deficit is due largely to anticipated growth in Medicare, Medicaid and Social Security, which in turn is driven by rising health-care costs, budget analyst Bob Greenstein noted shortly before Obama spoke.

Greenstein minimized the impact of the $787 billion economic stimulus plan on the budget shortfall, saying that the plan amounts to only one-tenth of 1% of the gross domestic product.

But if health care is not reformed, he warned, the national debt could soar to 300% of the gross domestic product by 2050.

"We are (currently) on the path to the very debt explosion we must avoid," he declared.

"Health care is the key" to getting the nation off an unsustainable fiscal course, added Peter Orszag, head of the Office of Management and Budget.

After Obama's remarks Monday, the fiscal responsibility summit participants separated into small groups to discuss the specific fiscal challenges facing the country, including taxes, health care, Social Security and the budget process.

Obama's address to a joint session of Congress Tuesday night is expected to be dominated by economic and budgetary issues. The president is slated to officially unveil his fiscal year 2010 budget Thursday.

Obama intends to cut the federal deficit in half primarily by spending less on the war in Iraq, raising taxes on those who make more than $250,000 a year and streamlining government, an administration official told CNN Saturday.

The president's budget proposal will project that the estimated $1.3 trillion deficit inherited from the Bush administration will be halved to $533 billion by 2013, or from 9.2% of the gross domestic product to 3%, the official said.

Obama's plans to cut the deficit may be complicated by the continuing economic downturn, which threatens to reduce tax revenues. A group of leading economists is now forecasting a far deeper and more painful recession ahead in the first half of the year, with a solid recovery not taking hold until 2010.

The economy is likely to decline at a 5% rate in the first quarter, even sharper than the 3.8% drop recorded in the fourth quarter of last year, according to a survey of 47 top forecasters from the National Association of Business Economics.

And according to estimates by economists Alan Auerbach of the University of California at Berkeley and William Gale of the Brookings Institution, the deficit - largely because of the recession and the new economic stimulus effort - will average at least $1 trillion per year for the next 10 years, even if the stimulus is limited to two years and the jobs picture improves dramatically. 


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Economists see deeper pain, followed by gain

NEW YORK (CNNMoney.com) -- A survey of leading economists finds them now forecasting a far deeper and more painful recession ahead in the first half of the year, but a modest pickup in the second half of 2009, followed by a solid recovery in 2010.

"The steady drumbeat of weak economic and financial market data have made business economists decidedly more pessimistic on the economic outlook for the next several quarters," said Chris Varvares, the president of the National Association of Business Economics, which conducted the survey of 47 top forecasters in late January and early February.

"While a few reports offer some glimmer of hope, a meaningful recovery is not expected to take hold until next year," added Varvares, who is also president of the research firm Macroeconomic Advisors.

The forecasts hold little good news for the first half of this year. The economy is expected to decline at a 5% rate in the first quarter, even sharper than the 3.8% drop recorded in the fourth quarter of last year. And the group is forecasting another 1.7% drop in economic activity in the second quarter.

While the economists surveyed are forecasting a 1.6% gain in economic activity the second half of this year, that won't be enough to overcome the first half weakness, which should result in a 0.9% full-year drop in U.S. economic activity when comparing the fourth quarter of this year to a year earlier. That would be the biggest drop on that basis since 1982, and far worse than the year-over-year decline of 0.2% recorded in the fourth quarter of 2008.

As recently as NABE's November survey, the consensus of economists was that there would be 0.7% economic growth during the course of 2009. Last May's survey found the group forecasting a healthy gain of 2.7% during the year.

But the outlook for this year has clearly gotten much worse since the earlier surveys in just about every measure. The economists are forecasting unemployment rising to 9% for the fourth quarter of 2009, up from their previous 7.5% estimate.

They expect job losses for the year coming in roughly the same as the nearly 3 million jobs lost in 2008, which is nearly four times the job losses they were forecasting three months ago.

They also estimate corporate profits will slip 9% this year, while housing starts and auto sales continue to fall to levels not seen in decades. All those forecasts are significantly worse than estimates in the November survey.

The economists are forecasting a healthy recovery in stocks from current levels, estimating the Standard & Poor's 500 will end the year a 975, which would be 26% above current levels and a gain of 8% from where it started the year. But in November the economists had forecast the S&P would end 2009 at 1,200.

Still, the optimism that the economists had back in November has been pushed back, rather than abandoned. They forecast that the economy will see healthy 3.1% growth during the course of 2010, as they expect unemployment to start to ease as employers add 1.3 million jobs during the year, and auto sales and housing starts at least make it back to 2008 levels. Even the five most pessimistic economists surveyed are forecasting economic growth during every quarter of 2010, although those pessimists expect job losses and the unemployment rate to continue throughout all of next year.

The United States is seen as the most likely major economy to emerge from the global recession first, according to the survey. The survey found 34% expect the U.S. back on its feet first, followed by 28% who believe China would be the first to recover and 13% who picked Canada. Less than 4% picked European economies as the most likely to lead the recovery. 


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Obama to Treasury: Start cutting taxes

WASHINGTON (Reuters) -- U.S. President Barack Obama ordered the U.S. Treasury Saturday to implement tax cuts for 95 percent of Americans, fulfilling a campaign pledge he hopes will help jolt the economy out of recession.

The tax cuts are part of a $787 billion economic recovery plan passed by the Democratic-controlled Congress over Republican opposition. The aim is to put more money in the pockets of Americans and stimulate the economy by increasing consumer spending.

"I'm pleased to announce that this morning the Treasury Department began directing employers to reduce the amount of taxes withheld from paychecks, meaning that by April 1st, a typical family will begin taking home at least $65 more every month," Obama said in his weekly radio address.

"Never before in our history has a tax cut taken effect faster or gone to so many hard-working Americans," he said.

With tens of thousands of Americans losing their jobs in the midst of a global economic meltdown, Obama has said fixing the U.S. economy is his top priority. He has acknowledged that his success or failure in that will define his presidency.

Obama campaigned for the White House last year on a pledge to roll back his predecessor George W. Bush's tax cuts on the wealthy few and implement a cut for 95 percent of Americans.

His announcement came a day after one of his top economic advisers, former Federal Reserve Chairman Paul Volcker, said the global economy may be deteriorating even faster than during the Great Depression of the 1930s.

Since being sworn into office on Jan. 20, Obama has sought to reassure Americans that his government is tackling the economic crisis boldly and swiftly -- holding near-daily events to announce measures to stem mortgage foreclosures, prop up failing banks, rescue the ailing auto industry and drive his stimulus package through Congress.

The measures have received a mixed early reaction from gloomy financial markets uncertain whether they will succeed in arresting the downward economic spiral.

The package includes $282 billion in tax cuts -- the Republicans pushed unsuccessfully for more -- and $120 billion for public works projects including highway and rail projects.

"But as important as it was that I was able to sign this plan into law, it is only a first step on the road to economic recovery," Obama said in his address.

"None of this will be easy. The road ahead will be long and full of hazards. But I'm confident that we, as a people, have the strength and wisdom to carry out this strategy and overcome this crisis," he said.

His announcement on the tax cuts capped a week that saw him sign the stimulus package into law and announce new measures to help families facing foreclosure and those struggling to make mortgage payments.

He will step up the pace next week when he holds a summit at the White House Monday to look at how to rein in the country's ballooning deficit and bring government spending under control as the economy starts to recover.

Lawmakers, academics and business leaders have been invited to share their ideas on how to cut the $1 trillion deficit that Obama inherited along with two costly wars in Iraq and Afghanistan.

Obama will follow the summit with a major speech Tuesday to a joint session of Congress in which he will lay out his domestic and foreign policy agenda. Inevitably, the economic crisis will loom large.

After a short breather Wednesday to host a concert honoring Stevie Wonder, Obama Thursday will unveil his proposed budget for the 2010 fiscal year, which will reflect the big increases in public spending as part of the economic recovery plan. 


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As economy falls, more people put money away in savings
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Your share of stimulus tax breaks

NEW YORK (CNNMoney.com) -- Roughly 97% of American households could see tax savings as a result of the American Recovery and Reinvestment Act, according to a new analysis by a nonpartisan research group.

The Tax Policy Center crunched the numbers and concluded that the average savings would be $1,179. But how much a household actually gets depends on income, marital status and whether a filer has children. The savings range from a few hundred dollars to several thousand.

The law, which President Obama signed on Tuesday, contains a range of tax breaks for individuals. Those likely to affect the greatest number of households are the new Making Work Pay credit worth up to $400 ($800 for joint filers); a patch to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax; and expansions of the earned income tax credit and the child tax credit for low-income families.

There are also breaks that address specific situations: a new credit for first-time home buyers, a sales tax deduction for car buyers and a new credit to help pay for college tuition. For people receiving unemployment benefits, the first $2,400 will be tax free.

On Saturday, Obama said the government had already taken action on the broadest of the law's cuts -- the Making Work Pay.

The Treasury Department has told employers to reduce the amount of taxes withheld from paychecks by April 1. Treasury estimates that a typical family will begin taking home about $65 more per month, according to Obama.

"Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans," Obama said in his weekly video and radio address.

In addition, the economic recovery plan contains a host of tax breaks for small businesses.

The Tax Policy Center used a representative sampling of all tax filers and non-filers, including information on their income, their spending and their demographics. And then they applied the various tax provisions for which those in the sample pool qualify.

Some tax-saving scenarios

A single person with no children making between $20,000 and $30,000 would see a 12.5% reduction in his or her tax liability for an annual savings of $453. The same person making between $50,000 and $75,000 would see a 4.6% drop, or $626.

At the upper income ranges, someone with income between $100,000 and $200,000 would see a 2.1% drop, which translates into $706.

With or without kids, a married couple filing jointly making between $50,000 and $75,000 could see a 10.5% drop for a savings of $991. Those making between $75,000 and $100,000 would see their tax liability go down 9.1%, or $1,457.

Couples with very high incomes -- between $200,000 to $500,000 -- could see a 7.5% decline in their tax bill, or $5,645.

Households with children, regardless of the parent's marital status, would see savings on their tax bill averaging 9.7% of their tax liability, or $1,975.

When you'll see savings

The first tax credit filers will enjoy is the Making Work Pay credit, which will show up in increments in people's paychecks starting in April.

In some instances, such as with the first time home buyer's tax credit, the money can be claimed on one's 2008 tax return if the home purchase occurs between Jan. 1 and before Nov. 30 of this year.

But in many cases, a household won't see some of their stimulus savings until they file their 2009 returns, which they can't do until 2010.

Of course what filers' save on their federal taxes under stimulus may be muted by the fact that their cities and states -- facing steep budget shortfalls that will be lessened but not eliminated by stimulus funding -- may end up raising taxes and fees. 


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Stimulus: It's law. Now on to budget

NEW YORK (CNNMoney.com) -- President Obama took two big steps forward this week in his campaign to heal the nation's ailing economy: He enacted a stimulus bill and pulled back the curtain on his plans for helping homeowners.

The milestones came on another difficult week in the economy. Investors continued to bail on stocks. The Dow Jones industrial average took another beating this week and is trading 48% below its record high in October 2007.

Despite the barrage of grim news and the growing ranks of the unemployed, most Americans still approve of Obama's performance, according to a CNN/Opinion Research Corp. poll released Friday.

The poll found that 67% of those surveyed approve of the way Obama is handling his job as president. That's a clear majority, but down slightly from 76% about a week ago.

While 60% of those polled expressed support for the $787 economic stimulus bill, which was signed into law Tuesday, 53% indicated that they don't think it will yield significant economic improvement and 67% said it won't help them personally.

Clearly, Americans have their doubts. But the stimulus plan attracted the attention of a key demographic: the nation's mayors.

One of the main goals of the stimulus plan is to provide cash-strapped city and state governments with much needed funds for "shovel-ready" infrastructure projects. Obama cautioned mayors on Friday to spend the money wisely.

The stimulus plan raised hackles overseas for certain Buy American provisions. Obama traveled to Canada this week to discuss trade in his first international trip as president.

Looking ahead, Obama will address Congress on Tuesday and on Thursday will outline his priorities for the nation's 2010 budget.

Among the topics expected to come up: tax policy changes, programs the administration wants to expand or eliminate, and the long-term funding challenges facing Medicare and Social Security.

On Monday, Obama and members of his administration are set to hold a Fiscal Responsibility Summit with lawmakers, academics and advocacy groups. He'll also meet with the nation's governors to talk stimulus.

100-day scorecard:Week 5

CNNMoney.com will continue to track Obama's first 100 days in office and keep score of the government's unprecedented efforts to fix the ailing economy. (Last week's article is available here.)

Fighting foreclosure: Obama traveled to Arizona Wednesday to unveil the details of a $75 billion foreclosure prevention plan designed to aid millions of distressed homeowners and jolt the housing market out of its stupor.

The multi-pronged plan calls for modifying loans for borrowers both at risk or already in default and for allowing those with little or no home equity to refinance into more affordable loans through interest-rate reductions.

While Obama's plan also calls for servicers to voluntarily modify loans, it provides some major incentives for them to do so.

In addition to such inducements, Obama said the administration was working with Congress to amend bankruptcy laws to allow judges to modify mortgages, a move that is very unpopular with the financial industry.

Enacting stimulus: On Tuesday, Obama signed the $787 billion American Recovery and Reinvestment Act into law.

Among the act's key initiatives: creating or saving 3.5 million jobs by improving physical infrastructure, investing in energy projects and providing tax relief to individuals and businesses.

First and foremost, the package is aimed at limiting the fallout from the recession.

"Today does not mark the end of our economic troubles," Obama said before signing the bill in Denver. "But it does mark the beginning of the end."

Still, stocks plummeted Tuesday, falling nearly 4%, as investors worried that the stimulus bill won't be enough to counter the economic malaise.

Saving the automakers: Obama appointed a task force to oversee the restructuring of the auto industry as General Motors (GM, Fortune 500) and Chrysler LLC. asked for another $21.6 billion in federal loans to stave off bankruptcy.

The task force will be lead by Treasury Secretary Tim Geithner and Larry Summers, director of the National Economic Council. It brings together various government agencies as well as nationally recognized restructuring expert Ron Bloom.

GM and Chrysler presented Congress with restructuring plans Tuesday detailing the companies' efforts to become economically viable. The plans included another 50,000 job cuts worldwide by the end of the year.

Have you found a job recently? We want to hear from you. Send us an email and attach a photo . Tell us where you got hired and how you landed the job and you could be profiled in an upcoming story on CNNMoney.com.  


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Bank 'stress tests' to start soon

WASHINGTON (Reuters) -- U.S. financial regulators will soon launch a series of "stress tests" to determine which of the largest U.S. banks should get bigger capital cushions in the event of a deeper recession, a person familiar with Obama administration plans said Saturday.

The person, speaking on condition of anonymity, said if institutions are found to need additional capital, financial authorities will provide them with an "extra cushion of support."

Banks are expected to receive additional information about the tests in the coming week from regulators.

The largest U.S. banks are "well capitalized" for current conditions, the source said, but the Obama administration wants to ensure that they can withstand a more severe economic climate and can play an important role in maintaining the flow of credit.

Initial plans for the stress tests were announced Feb. 10 as part of Treasury Secretary Timothy Geithner's bank stabilization plan, but the source Saturday for the first time linked the tests to additional government support for large banks. This person did not specify what form any extra capital cushion may take.

Little is known about the form of the stress tests, but the person described them as "consistent, forward looking and conservative."

The Obama administration on Friday tried to ease market fears that the government was poised to nationalize some large banks that are continuing to struggle with losses and a lack of confidence, notably Citigroup and Bank of America.

Bank shares fell sharply, with Citigroup's (C, Fortune 500) plunging 22 percent to below the $2 price of a typical automated teller machine (ATM) fee and Bank of America (BAC, Fortune 500) trading around the $4 level.

White House spokesman Robert Gibbs said Friday that "this administration continues to strongly believe that a privately held banking system is the correct way to go." 


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Get ready for a wave of bank failures

NEW YORK (CNNMoney.com) -- If it's Friday, there must be a bank failing somewhere across the country.

For six consecutive weeks, industry regulators have seized control of a bank after the market closed on Friday, bringing the total number of failed banks so far this year to 14.

To put that into perspective, 25 banks failed in 2008, suggesting that the rate of failures is quickening as the economic crisis deepens.

"We'll have a banner year [of failures] this year," said Stuart Greenbaum, retired dean and professor emeritus at the Olin Business School at Washington University in St. Louis.

At the current rate, nearly 100 institutions -- with a combined $50 billion in assets -- will collapse by year's end.

The latest is Oregon's Silver Falls Bank, which was closed by U.S. regulators Friday.

With more consumers and businesses likely to default on loans as the recession drags on, some industry observers think the pace of bank failures could accelerate further.

Gerard Cassidy, managing director of bank equity research at RBC Capital Markets, upped his expectations for bank failures earlier this month, warning that he anticipates 1000 institutions could fail over the next three to five years.

"The sooner the bank regulators can shut down the troubled banks, the faster the industry will get back on its feet, in our view," he wrote.

A different era

Still, the current crop of bank failures hardly comes close to what happened during the savings & loan crisis two decades ago.

More than 1,900 financial institutions went under during 1987-1991, peaking with the failure of 534 banks in 1989.

And many experts are quick to draw distinctions between the two eras.

During the last crisis, many savings and loans were coping with an inability to adapt to higher interest rates, while many banks were significantly undercapitalized to deal with losses.

"That is not our problem here," noted Ann Graham, a professor of law at Texas Tech who spent part of her career as a litigator for the FDIC and Texas' Department of Banking during the 1980s.

Instead, she said the main problem now is that banks have been stuck with assets in their loan and investment portfolios that have quickly soured.

It's also worth remembering that when banks fail, they don't close down for good. The Federal Deposit Insurance Corp. guarantees deposits up to $250,000 in single accounts. Also, the FDIC often is able to find a willing buyer for the failed bank immediately, which means little, if any, disruption for the failed bank's customers.

Still, regulators face a crisis of significantly larger proportions today that promises to keep the nation's banking industry strained for some time.

Even though the overwhelming majority of the banks that have gone under since the beginning of 2008 are smaller community banks, there have been two notable big bank failures.

Last year, the California-based mortgage lender IndyMac failed. That was followed by the collapse of savings and loan Washington Mutual, the largest bank failure in history. The FDIC seized WaMu and immediately sold its banking operations to JPMorgan Chase (JPM, Fortune 500).

Several experts fear the potential for another large bank failure. While the U.S. government has repeatedly said it will not allow major institutions to fail, namely Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), some embattled regional banking giants may be too far gone to save.

"Conceivably, we'll see some larger names fail as we go forward," said Frank Barkocy, director of research with Mendon Capital Advisors, a money management firm that invests primarily in financial stocks.

Bracing for tough times

Regulators have indicated they are gearing up for tougher times. In addition to requesting an increase in its borrowing authority from the Treasury, the FDIC has maintained that it expects its deposit insurance fund to suffer $40 billion in losses through 2013. Last summer's collapse of IndyMac wiped out $8.9 billion from the fund.

Fearful of drawing down the fund any further, banking authorities may attempt to broker more assisted acquisitions like JPMorgan Chase's purchase of Washington Mutual, where the purchaser acquires the deposits and a portion of the failed bank's bad assets.

"The [FDIC's] incentive is not to have a bank failure at all," said Jack Murphy, a long-time partner at the law firm Cleary Gottlieb Steen & Hamilton, who previously served as general counsel for the agency. "If it is possible to have a private market solution, that is ideal."

Next week, regulators are expected to provide a better glimpse of the health of the banking sector, when the FDIC presents its quarterly banking profile for the fourth quarter of 2008.

One highlight of the report will be the agency's so-called "problem bank" list. That number is expected to climb from 171, where it stood at the end of the third quarter.

Some have charged that the list is hardly reliable, given that only a fraction of the banks that are included ever actually reach the point of collapse.

Nevertheless, a big jump in the number of banks on the problem list could serve as an indicator that there will many more Friday failures to come this year. 


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Spend! Cut! Obama's budget dilemma

NEW YORK (CNNMoney.com) -- If you're looking for Peter Orszag, you might check between a rock and a hard place.

As director of the White House Office of Management and Budget, Orszag is charged with a seemingly impossible task: Figure out how to rein in the more than $3.5 trillion federal budget as the country tries to spend its way out of a fiscal mess.

The country will get a glimpse of Orszag's handiwork next week when President Obama presents Congress with an outline of his fiscal year 2010 budget request.

That outline will be the first formal indication of the president's policy priorities going forward -- what tax policy changes he favors, what programs he wants to expand or eliminate, and how he wants to handle the long-term funding shortfalls for Medicare and Social Security. The White House is expected to submit its full budget request in March.

Orszag, who used to run the Congressional Budget Office, is the man Obama promised would "scrub" the budget to save money and set the country on a more fiscally sustainable course.

There's just one problem, however. Politically and practically, Orszag's task is a little like trying to scale an ice-coated cliff with flip-flops. And that's true even in good times.

"It's not as easy as it sounds. Every president tries to [scrub the budget]. But there's not much low-hanging fruit," said Charles Konigsberg, a former assistant director at OMB in the Clinton administration and now chief budget counsel at the Concord Coalition, a deficit watchdog group.

Here's what Konigsberg means: Roughly two-thirds of the federal budget -- about $2 trillion in 2008 -- is considered mandatory spending. That's money that Uncle Sam has committed to pay out in entitlement programs such as Social Security and Medicare, in interest owed on the national debt, and on other programs for which budget authority is written in stone.

The other third -- about $1 trillion -- is considered discretionary spending. That's money Congress decides on annually through appropriations bills. But even here lawmakers don't have as much flexibility as the word "discretionary" implies. Usually more than half is spent on security efforts such as defense.

Defense funding is driven in part by the geopolitical situation, but there are also increases baked into the cake. For instance, Konigsberg said, defense spending will go up for the next few years because in 2007 Congress agreed to a permanent build-up in military strength over five years. Plus, health care costs to cover military personnel will go up just as they do for everyone else.

And that's the budget picture in a good year. But 2008 and 2009 have been anything but. Add to the mandatory and discretionary mix the $2.1 trillion-and-counting that has been committed to rescue the banks and credit markets, the auto industry, the housing market and financially strained Americans and businesses.

In fact, largely because of the recession and the federal rescue efforts, the deficit will average at least $1 trillion per year for the next 10 years, even if stimulus is limited to two years and the jobs picture improves dramatically, according to estimates by economists Alan Auerbach of the University of California in Berkeley and William Gale of the Brookings Institution.

Deficit: Future shock

Another fiscal fly in the ointment: coming to grips with the fact that the long-term deficit is bigger than it appears to be.

There are a lot of ways the true cost of tax relief may be masked. For instance, every year lawmakers pass a "patch" to protect the middle class from having to pay the Alternative Minimum Tax. There's bipartisan support for repealing the tax, but budget projections always assume there won't be any patch and that the AMT will bring in more and more revenue as the years go on. That makes the long-term deficit seem smaller than it will be.

To repeal the AMT outright would cost an estimated $1 trillion.

White House spokesman Robert Gibbs on Friday promised that the outline of the president's budget request will bring "some honesty in budgeting to give people a fuller picture of what's going on ... [F]or many years we've used tricks and gimmicks to mask the size of our irresponsibility."

Many economists have said the deficit picture could be much worse if the government didn't do anything. But even so, the reality today is that Orszag and the White House are seriously constrained in what they can do to achieve Obama's policy aims while not worsening the financial outlook.

"There's never been a year like this before when there's so much happening at once. It's the most complicated fiscal mess," Konigsberg said.

Obama has said repeatedly he gets it, and he wants to fix it.

"While we need to do everything in the short-term to get our economy moving again, we must recognize that having inherited a trillion-dollar deficit, we need to begin restoring fiscal discipline and taming our exploding deficits over the long-term," the president said before signing the economic recovery package into law.

At the same time, he's also expressed a desire to do a number of very costly things -- such as making permanent the new Making Work Pay tax credit -- and reforming health care to the tune of $1.6 trillion over 10 years.

Of course, what Obama wants may not be what he gets.

"Congress never blindly accepts the president's budget request," Konigsberg said. 


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Fannie, Freddie to fund part of $75B foreclosure fix

NEW YORK (CNNMoney.com) -- The White House is using only $50 billion from the $700 billion financial industry bailout package to fund the foreclosure prevention program, a senior administration official clarified Friday.

Fannie Mae and Freddie Mac will contribute more than $20 billion to the $75 billion loan modification program, which was unveiled Wednesday. The funds will be used mainly to subsidize interest rates so troubled borrowers' monthly payments can be lowered to affordable levels.

The government took over the troubled mortgage finance companies in September and is increasingly utilizing them to bail out the housing industry. The companies, however, are on shaky financial ground themselves and are expected to report billions in losses in the next week or two. To stabilize them, the foreclosure prevention program calls for doubling their lines of credit with the federal government to $200 billion each.

The federal Department of Housing and Urban Development will contribute the remaining money, which will be used for credit counseling programs for those deeply in debt.

Details of the plan haven't changed. In addition to subsidizing interest rates, the government will use the funds to provide incentives to loan servicers, mortgage investors and borrowers to spur loan modifications.

By drawing on Fannie (FNM, Fortune 500), Freddie (FRE, Fortune 500) and HUD, the administration is conserving the remaining $350 billion of the coveted financial bailout funding Congress approved in October. Obama needs the money to provide additional capital to banks, stimulate consumer and business lending and create a public-private investment fund to purchase toxic assets from banks.

Using other federal funds to support the loan modification is a good way to keep the bailout money focused on the financial industry, especially since Congress doesn't seem inclined to add to the bailout package, said Lyle Gramley, a former Federal Reserve governor. Ultimately, however, the federal government is the one shelling out the dough.

"It's all coming from taxpayers pockets one way or the other," Gramley said. 


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Consumer prices edge higher

NEW YORK (CNNMoney.com) -- Consumer prices rose last month for the first time since July, the government said Friday, but the year-over-year inflation rate was at the lowest level in more than a half-century.

The Consumer Price Index, the key measure of prices at the retail level, was up 0.3% in January, in line with the consensus forecast of economists surveyed by Briefing.com. But the index was unchanged from January 2008 levels, the first time that reading has not shown a year-over-year increase since August 1955, when prices were falling on an annual basis.

Consumer prices fell 0.8% in December.

On an annual basis, the so-called core CPI, which strips out volatile food and energy prices, was up 1.7%, the lowest increase in nearly 5 years. Core prices rose 0.2% in January, a bit more than the 0.1% rise forecast by economists.

Even though there wasn't a 12-month decline in CPI, it fell at an 8.4% compounded annual rate over the last three months, even with the modest rise in January. And the core CPI rose at a compounded annual rate of only 0.9% over that period, which is below the range of 1% to 2% annual rise in that closely watched reading that is widely believed to be optimal for economic growth.

With inflation in check, there has been growing concern by some economists that the economy could be hurt by deflation, or the widespread drop in prices. James Bullard, president of the Federal Reserve Bank of St. Louis, said in a speech Tuesday that deflation is the greatest risk facing the economy this year.

Lower prices are one way businesses respond to the lack of demand for their products in a slowdown. But if companies can't make a profit selling their products at the lower price, they'll respond by cutting production and laying off more people.

More job losses can cut even further into demand. But even if consumers have jobs and money, they're likely to hold off on purchases if they come to believe that prices will head even lower. All of which adds up to even more weakness in the economy.

The January increase in overall consumer inflation was due largely to a 1.7% rise in overall energy prices, which included a 6% boost in the cost of gasoline.

On a year-over-year basis, energy prices were down 20%, driven by a 40% drop in gasoline.

But the decline in energy prices was not the only thing keeping inflation in check. Overall weak demand for goods and services due to rising job losses and tight credit kept prices low for a wider range of products. Products such as clothing, hotels, video and audio entertainment, and cars and trucks were all cheaper than they were in January 2008. 


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Obama: Stimulus will not be squandered

WASHINGTON (CNN) -- President Barack Obama met Friday with 85 mayors from across the country to discuss the implementation of city-related funding from the $787 billion stimulus package.

"You shouldn't have to succeed despite Washington; you should be succeeding with a hand from Washington, and that's what you're getting now," Obama said at a White House reception.

"This plan does more to lay a new foundation for our cities' growth and opportunity than anything Washington has done in generations."

The economic stimulus package sets aside billions of dollars for highway construction, transit improvements, school modernization and community development block grants. Obama promised that the money would not be squandered or lost to graft and corruption.

"What is required in return is unprecedented responsibility and accountability on all our parts," he said.

"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," he added.

But, he noted, "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."

The mayors have put together a "Ready to Go" report that details 18,750 local infrastructure projects in 779 cities that can be started as soon as the new funding is received.

The projects, which represent an investment of $150 billion, would generate 1.6 million jobs in 2009 and 2010, according to the report. They range from creating bridge guardrails in Bessemer, Alabama, to renovating elementary schools in Norfolk, Virginia.

Obama was joined at the meeting by Vice President Joe Biden, Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, Transportation Secretary Ray LaHood, Energy Secretary Steven Chu and Education Secretary Arne Duncan.

The recession is severely straining cities' ability to meet their financial needs, according to a recent report from the National League of Cities. 84% of cities are reporting fiscal difficulties, the highest percentage since the group starting doing surveys in 1985.

The fiscal outlook for urban areas is expected to remain tough in 2009. The report found that 92% of the cities surveyed expected to have trouble meeting their needs this year.

To cope, cities are implementing hiring freezes and layoffs, delaying capital expenditures and instituting service cuts.

Sixty-nine percent of cities have instituted hiring freezes or layoffs, while 42% are delaying or canceling infrastructure projects.

Another 22% have instituted across-the-board spending cuts.

Cities are seeing their tax revenues decline as property values drop, shopping slows and unemployment rises. On top of that, nearly one in two city finance officers report difficulties in gaining access to credit and/or bond financing.

City finances tend to lag the overall economy by 12 to 24 months, the league said. The weakening economic conditions will be felt by cities through 2009 and likely through most of 2010, the league said. 


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Job losses may be worst in 50 years

CHICAGO (Reuters) -- Job losses in the current U.S. recession are likely to be the worst in 50 years, but fiscal stimulus will provide some relief, according to an economist at the San Francisco Federal Reserve Bank.

As of January 2009, employment had fallen by 2.6% from the December 2007 business-cycle peak, still less than the roughly 3% decline seen during the 1981-82 recession, research adviser Sylvain Leduc wrote in the bank's latest FedViews newsletter.

By the end of the recession, "employment should have decreased by roughly 4% from December 2007. We have to go back to the 1957-58 recession to see a larger percentage drop in employment," Leduc said.

The bleak assessment came as the U.S. Labor Department showed initial jobless claims at 627,000 for the week ended Feb 14. Continued claims for the week ended Feb. 7 were a record 4.9 million.

Leduc forecast that U.S. real GDP would turn positive in the second half of 2009 on the back of Obama administration's $787 billion economic stimulus.

"The fiscal stimulus package has a sizable impact on our growth forecast, particularly in 2009. Moreover, we forecast that the unemployment rate would climb to nearly 10%, absent the fiscal initiative," he said.

Real GDP for 2009 will likely be minus 1%, according to the bank's forecasting staff. Without the stimulus program 2009, GDP was forecast to fall 2.2%.

The fourth-quarter 2009 jobless rate was pegged at 8.9%, falling to 8.5% by the fourth quarter of 2010. Without fiscal stimulus, the rate in both instances was forecast at 9.6%.

Leduc said the inflation rate should stabilize "at a very low level" after plunging in the fourth quarter of 2008.

The San Francisco Fed's forecasters expect the core personal consumption expenditures index, a measure of inflation, to rise slightly from the 0.5% annual rate hit in the fourth quarter, and remain at about 0.75% throughout 2009.

Several Fed officials recently have noted that even if outright deflation does not occur, very low inflation will push up "real" interest rates at the worst possible time for the struggling economy. 


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Stopping stimulus waste

NEW YORK (CNNMoney.com) -- So they've done it. Lawmakers passed a nearly $800 billion stimulus plan - roughly the equivalent of an entire year's of discretionary government spending - in just over a month.

Now who's going to make sure all that money isn't wasted?

When signing the bill Tuesday, President Obama made big promises.

"It's a plan that will be implemented with an unprecedented level of transparency and accountability," Obama told a crowd in Denver. "With a recovery package of this size comes a responsibility to assure every taxpayer that we are being careful with the money they worked so hard to earn."

It's hard to say just how effective the oversight provisions in the stimulus will be, since the money has yet to be distributed. The oversight mechanisms have already drawn some partisan fire. While nearly everyone acknowledges there will be some waste, others are maintaining a cautious if skeptical approach as they wait to see how the spending unfolds.

How it's tracked

Online: Perhaps the most novel idea put forth by the White House is a Web site that's supposed to show where all the money is being spent.

The White House, again leveraging an online savvy that helped get them elected, created http://www.recovery.gov/ - a site where anyone can go and supposedly see exactly who is getting what.

The site currently contains an overview of the stimulus plan, a chart breaking down where the money is going in broad terms and a handy timeline tracking stimulus milestones and alerting users to upcoming announcements, among other things.

The site promises that "within days after the signing of the legislation, Federal agencies will start distributing funds and you will be able to see which states, Congressional districts, and even Federal contractors are receiving them. As soon as we are able to, we'll display that information visually, through maps, charts and graphics."

It goes on to say that "You'll be able to send in comments, thoughts, ideas, questions and any responses you have to what you find."

Just how detailed the site will be is still unclear. It seems likely that you'll be able to bore down to specific projects in your neighborhood, but the White House did not return calls seeking comment.

More money for oversight: The stimulus plan also increases the budget for the Office of Inspector General in the various federal departments responsible for distributing stimulus money.

Each department has an Office of Inspector General charged with investigating and auditing various federal programs.

The bill allocates an additional $253 million for these offices to do their work, according to a spokesperson for Sen. Claire McCaskill, D-Mo., who fought to secure the increased funding.

Oversight board: The administration is also creating a special board to oversee stimulus spending.

The board is supposed to be headed by the Deputy Director for Management of the Office of Management and Budget and include various Inspector Generals, although no appointments have been announced yet.

It is slated to get $84 million in funding, has the power to subpoena and is charged with issuing periodic reports on the stimulus spending.

Projects would presumably be canceled or criminal charges pursued if the board uncovered wrongdoing.

Whistle-blower protections: The bill also extends protection for private workers who report fraud or corruption to authorities.

Current law gives protections - which basically attempt to ensure the whistle-blower doesn't loose their job - to federal employees and certain private employees, like those in the defense sector.

The bill expands those protections to any worker at a company receiving stimulus money.

Government audits: In addition to audits by the federal departments, the Government Accountability Office - which audits federal programs for abuse and fraud - is charged with various oversight tasks in the stimulus bill.

A spokesman for the GAO couldn't say exactly what those tasks are or how many they are expected to perform, as the agency is still reviewing the bill.

Will it work?

Republicans in Congress, who generally wanted a much smaller stimulus package (if any at all), criticized the oversight provisions for giving too much power to the president.

Mike Steel, a spokesman for House Minority Leader John Boehner, R-Ohio, called the Web site "a great way of displaying whatever information is put into it."

Steel said Congress had very little oversight capacity now that the bill has become law.

"We can't rely solely on the administration to self-police," he said.

But others dismissed the idea that Congress would actually do anything even if it was given the tools for the job.

"Generally, Congress had no record of ever actually doing anything with the oversight reports they get," said Brian Riedl, a federal budget analyst at the conservative Heritage Foundation.

Riedl said they'll likely be lots of waste in the bill and recommended making all contract awards subject to competitive bidding.

Audits, he said, were ineffective because they are done after the fact.

But others said audits are an effective tool for deterring waste.

"The knowledge that somebody could be checking will increase accountability," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a non-partisan watchdog group.

MacGuineas said there's bound to be waste, but also acknowledged the difficult balancing act between passing a robust bill with lots of oversight protections and passing a bill quickly - a requirement most economists say is essential if stimulus is to actually help the economy.

"We're striving for as good as we can get," she said.  


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