The first jobs to go

NEW YORK (CNNMoney.com) -- With jobless claims and unemployment climbing, employees across the country are holding their breath, hoping to hang on to their positions and paychecks.

But widespread layoffs are all too common in an economic downturn. The economy has already lost over 600,000 jobs this year, and experts agree that there will be many more jobs lost in the months ahead.

When credit freezes up, businesses find it tougher to secure financing needed for daily operations, including payroll. That means that more companies will have to take a careful look at business operations in the current climate - and make some tough decisions.

That will likely involve cutting human capital. But which employees will be the first to go?

"From a job standpoint, we're in a recession. When the economy is in recession the chance of being laid off goes up," says John Challenger, chief executive of global outplacement firm Challenger, Gray & Christmas.

Employees with less time at the company are likely to feel more insecure than those who have many years under their belts. But experts say companies are more likely to target layoffs based on things like individual performance and salary.

In the midst of the current financial crisis, here are a few factors that can determine who gets laid off first:

Job performance: Gone are the days of last hired, first fired, Challenger said. Employers now are more focused on building a better and more efficient team.

When a workforce must be cut, "employers need to keep their best talent," Challenger said. "You want to keep the people that you think are your A-players."

Instead of cutting those that have been at the company for the least amount of time, companies now have sophisticated methods for evaluating performance. Management teams can better pinpoint the employees that are the most productive and do the highest quality of work, Challenger said, and retain those that help the business succeed.

And that doesn't just mean showing up on time and completing each task. In order to avoid a pink slip, "everybody who is employed should remind themselves how important it is to make themselves as valuable as possible," cautioned Bob Eubank, executive director of the Northeast Human Resources Association.

Salary: Productivity alone cannot necessarily keep you safe from the next round of layoffs. Employees at every level of an operation usually fall within a defined salary range, and those at the upper end could also be targeted.

"When companies cut back, they certainly look hard at people at the high end of the salary range," Challenger said.

In an effort to cut costs, highly paid individuals are more at risk simply because they are more expensive. "They really have to justify that they are worth that money," Challenger added.

Business need: Employers will also take a hard look at each division or department, to find areas that can be cut without sacrificing successful business operations. "As [companies] look to cut costs, they look to see where the expensive items are," according to John Dooney, manager of employment and HR strategy for The Society for Human Resource Management.

In tough times, it is not unusual to see companies slashing entire departments if they are not cost effective, or dismantling divisions that are costing more money than they're bringing in.

In many of those cases, all or most employees in the department will get pink slips, regardless of their length of service or loyalty, performance or salary. If possible, some companies will try to redeploy some workers to other areas within the company to maintain employee confidence and retain the top performers.  


More job cuts loom as economy slows
Private sector cuts 33,000 jobs

Manhattan real estate: Pricey but headed for a fall

NEW YORK (CNNMoney.com) -- The crisis on Wall Street hasn't hit the high cost of Manhattan real estate, but the economic slowdown has curbed the number of deals in the Big Apple, according to reports out Friday.

Sales figures from four major New York real estate agencies showed the average price for a Manhattan apartment rose in the third quarter over last year. At the same time, the number of apartments sold in the quarter declined sharply.

"The events of the second half of September in the financial markets and Washington have not shown up in the market data for the quarter, aside from the lower level of sales activity compared to last year's record levels," said Jonathan Miller, president of New York real estate firm Miller Samuel.

The average price of a Manhattan apartment ranged from $1.4 million to $1.48 million in the third quarter of 2008, according to separate reports released Friday by Brown Harris Stevens, the Corcoran Group, Halstead Property and Prudential Douglas Elliman. That represents an increase of anywhere between 8% and 12% over average apartment prices in the third quarter of 2007.

But the rise in third quarter sale prices was skewed by a large number of deals in new luxury buildings, which went into contract as much as a year or two ago, before economic conditions deteriorated, but only closed recently, according to Corcoran Group CEO Pamela Liebman.

"The average sales price is going to trend down," Liebman said. After soaring to unprecedented heights in 2007, "we're going to get back to a more normal range," she added.

Dwindling deals

Already the number of properties sold during the quarter saw a steep decline from the record highs hit in the third quarter of last year.

Corcoran sold fewer than 3,000 properties last quarter, down 45% from the nearly 5,500 properties the agency sold in the third quarter of 2007.

At the same time, the number of properties on the market is increasing. Listing inventory rose 34% during the third quarter, according to Miller's research.

"Clearly, inventory is moving higher as sales activity has fallen," said Miller, who attributed the slowdown at least in part to the fact that mortgages have become more expensive and harder to get.

And economic turmoil in Europe has crimped the flow of overseas buyers to the city. Miller estimates that foreign buyers made up one-third of all purchases in new developments in New York last year.

While the labor market in New York has remained relatively stable, the fallout from the crisis on Wall Street, and the corresponding rise in unemployment in the financial sector, will probably further undermine the city's real estate market.

"We're going into an uncertain economic period with volume at low levels and a low likelihood of new development," Miller said.

Miller said the direction of the real estate market could hinge on Washington's proposed financial intervention, which is currently being debated in Congress and the outcome of this year's presidential election.

One of the main goals of the bailout plan is to free up the frozen credit markets, which have been a major drag on economic activity - particularly in the housing market.

"The question of housing is almost moot unless you get a handle on where credit is going," Miller said. 


Time to bet on an oil crunch

And now on to the House - again

NEW YORK (CNNMoney.com) -- Now get ready for Bailout Redux - the House vote.

The fate of the Bush administration's planned $700 billion financial system bailout rests in the House, which sparked a huge selloff on Wall Street on Monday with its surprise 228-to-205 rejection of the bill.

Late Wednesday night, the Senate voted 74 to 25 to approve the controversial proposal, but added sweeteners intended to attract House votes. The House - returning Thursday from a two-day recess - is likely to vote on the revised bill Friday.

The core of the Senate bill would give the Treasury Department authority to buy troubled assets from financial institutions. Those assets, mostly mortgage-related, have caused a crisis of confidence in the credit markets.

For the past two weeks, lending between banks and between banks and businesses has gotten considerably more expensive and in the case of small businesses, exceptionally difficult to get. As of midday Thursday, one key measure showed that banks were hoarding cash rather than loaning it. Meanwhile, an indicator showing how willing banks are to lend each other hit an intraday high.

The new legislation also includes a number of provisions aimed at Main Street. House leaders are cautiously optimistic they can win this time.

"We believe we'll have a better chance to pass this bill than the one that failed [Monday]," said a spokesman to the lead House Republican, Rep. John Boehner, R-Ohio.

The main House negotiator on the bailout, Rep. Barney Frank, D-Mass., said that lawmakers have seen "the reality" of the economy's problems. "It's not possible now to scoff at the predictions of doom if we don't do anything," he said.

That reality came home to House members by way of calls from small business owners, who lobbied lawmakers after Monday's vote urging them to pass the bailout on the next go-round, said Brian Gardner, the Washington analyst for investment firm KBW.

House Speaker Nancy Pelosi, D-Calif., said in a press conference Thursday afternoon that House members are reviewing the Senate bill. She said House leaders will not bring the bill to the floor for a vote unless they've got the votes. "I'm optimistic we'll take the bill to the floor," she said.

Pelosi noted that she and other House members like a number of changes the Senate made. While many lawmakers would like to offer further amendments, she said, "I don't think any changes here will do what we need to do now, which is send a message of confidence to the markets that Congress will act."

President Bush, speaking Thursday after a meeting with business executives, urged the House to pass the bill.

"The bill that's before the House ... has got the best chance of providing liquidity, providing credit, providing money so small businesses and medium-sized businesses can function," Bush said.

Here's what's in the bill

Attacking credit crisis: The core is the Treasury's proposal to let financial institutions sell to the government their troubled assets, mostly mortgage-related. And as in the House bill, the Senate would only allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.

Protecting taxpayers: The Senate bill is also similar to the original House bill in that it includes a number of provisions that supporters say would protect taxpayers. One would direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury would be allowed to take ownership stakes in participating companies.

Like the House version, the Senate bill includes a stipulation that the Treasury set up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

Curbing executive pay: The bill would place curbs on executive pay for companies selling assets or buying insurance from Uncle Sam. For example, any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate.

Oversight: The bill would set up two oversight committees.

A Financial Stability Board would include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.

Tax breaks: Added to the bill are three key tax elements designed to attract House Republican votes.

It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels.

The legislation would also continue a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns.

In addition, the bill includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "income tax for the wealthy."

New accounting rules: The bill underlines the Securities and Exchange Commission's power to change accounting rules on how banks and Wall Street firms value securities, and directs the agency to study the issue.

Some observers argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the so-called mark-to-market rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector. (More about the rules.)

Shielding bank deposits: The bill temporarily raises the FDIC insurance cap to $250,000 from $100,000. The bill allows the FDIC to borrow from the Treasury to cover any losses that might occur as a result of the higher insurance limit.

Federal bank regulators, who first floated the idea to Congress late Tuesday, said that bumping up the insurance limits would help improve liquidity at banks across the country. It may also provide a much-needed dose of confidence for consumers who may be worried about the health of their bank. (More about FDIC rules.)

The bill will also temporarily increase the level of federal insurance for credit union savings to $250,000.

Cost: The tax provisions of the bill - the bulk of which come from the addition of tax breaks from other legislation - may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the 1-year extension of AMT relief.

The Congressional Budget Office said it cannot estimate the net budget effects of the troubled asset program because of the many unknowns about that piece of the bill. However, the agency noted in a letter to lawmakers on Wednesday, it expects the program "would entail some net budget cost" but that it would be "substantially smaller than $700 billion."

Overall, the CBO said, "the bill as a whole would increase the budget deficit over the next decade."

- CNNMoney.com staff writer David Goldman contributed to this article. 


Senate passes bailout

Time to bet on an oil crunch

NEW YORK (Fortune) -- Back in May, when oil was at $129 per barrel and rising, billionaire investor Richard Rainwater did something as prescient as it was shocking: He sold off all the energy stocks he owned.

Now he's making another bold move: He's betting on oil again.

A few weeks ago, when the price of oil tested a low near $90 per barrel for the first time in many months, Rainwater decided that he had found the right reentry point. "I reinvested back in the oil business, and it's worked out really well for me," he told me the other day. "I bought Exxon (XOM, Fortune 500) stock under $75. I bought ConocoPhillips (COP, Fortune 500) under $68. I bought Pioneer Natural Resources (PXD) under $50. I bought BP (BP). I bought Statoil. I made a big bet on the sector. I bought a lot of stocks back."

Considering Rainwater's incredible track record investing in the oil patch, that's big news.

Rainwater first made his reputation by greatly multiplying the Texas oil fortune of the Bass brothers of Fort Worth, with big bets on everything from the resurrection of Disney to the boom in cell phones. After going out on his own in 1986, he made bundles for himself in hospitals (by putting together HCA) and real estate (by forming Crescent Real Estate Equities). Then, in 1997, when crude was priced below $20 per barrel, he decided to make a huge bet on oil. He put $100 million into stocks and $200 million into oil futures. The wager netted him billions in profits.

As Time's Justin Fox reported in early June, Rainwater made the decision to close out his oil bet when the average price of gasoline passed $4 a gallon in the U.S. (and after he saw a reader poll on the Motley Fool Web site in which 77% of respondents said they were cutting down on gasoline consumption).

"I missed the very top by a lot," Rainwater told me. "That's okay. I'm always early. I sold after I got my first inclination that we had a problem with the demand side in America. I saw that we had a problem with the demand side and I sold out. But the stocks kept going up. And the price of oil kept going up. It went from $129 to $147 [on July 11]. But then it went from $147 back down to under $100, and that's when I bought back in."

Betting on increasing demand

Indeed, Rainwater is just as convinced as ever that oil prices are going higher in the long term. As he made clear in a Fortune story three years ago ("The Rainwater Prophecy") he believes that the world is facing a future shaped by scarce natural resources. His decision to sell out in May was based on a belief that oil prices had gone too far too fast, not that the bull market for oil - or for that matter, commodities of all kinds - has ended.

"I think we'll have a run on raw materials of all kinds because we've taught people all around the world how to play capitalism," he says, "and all those people want to live like Americans. But when you look at us being [4.5%] of the population and using 25% of the resource base, that can't go on. You can't extrapolate that out around the globe without there being price pressures on the upside. So there are price pressures in food. There are price pressures on raw materials of all kinds, including oil."

So with crude at around $100 and most of the stock market in chaos, he says oil companies look like a pretty good place for your money: "It's much more positive than the rest of the environment."

Given the volatility of the market right now, though, Rainwater is monitoring his new stock holdings closely. "I've already sold some of them," he told me. "Not all of them, but I sold some because they went way back up. I'm just playing cycles here, and the cycles are really powerful and fast moving. I bought ConocoPhillips for $68 and sold it two days later for $78. I don't think you can make that money in that short of a time unless you get lucky. And if I make that much money because I'm lucky, then I want out."

Rainwater may be lucky. But when it comes to oil, his instincts are more than good. 


SEC bans short-selling

The rule that broke the banks

NEW YORK (CNNMoney.com) -- It's easy to understand why the proposal to spend $700 billion in taxpayer money to rescue banks would inspire impassioned debate in Washington.

But in a sign of just how complex and controversial the current credit crisis has become, a move to potentially change accounting rules on how banks and Wall Street firms value the securities they own is almost as heated.

Some argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector.

Roots of the problem

First a bit of background. The one fact everyone agrees on is that the current financial crisis centers on trillions of dollars worth of mortgage loans that were packaged together into financial instruments known as mortgage-backed securities, or MBS. Those securities were purchased by banks and Wall Street firms.

But as home prices started to fall and foreclosures rose, the value of these securities plunged. Today, there is almost no market for the securities.

This is why Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed that the government buy the securities. The hope is that doing so could restart the MBS market at something well above the current fire sale valuations and that the government could hold the securities until the market improves.

Some advocates of the plan argue that taxpayers will be able to eventually make money if the government sells the securities at a higher price down the road. But the more immediate hope is that banks and Wall Street firms, freed from the toxic loans on their balance sheet, will start lending again.

What is fair value?

Still, others contend that it was not real financial losses from these securities that led to the credit crunch as much as it was an arcane accounting rule known as "mark-to-market."

Mark-to-market means that companies have to report what the fair value of their investments were if they sold them at the current time.

In recent years, firms were required by the Securities and Exchange Commission and the Federal Accounting Standards Board to use mark-to-market valuations for all the MBS on their books.

As more subprime borrowers started to default on their loans, that quickly eroded the value of many MBS pools. Major banks and financial firms around the globe have taken writedowns topping $500 billion in the last year, as a result.

For this reason, some have argued that fixing the rule would solve the credit crisis.

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC.

"And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity," he added.

Isaac believes that since the overwhelming majority of loans packaged together in even the weakest MBS pools are not in foreclosure, it is proper to value these securities based on the flow of cash from all the loans instead of a non-existent market value.

A change of course

Tuesday afternoon, the SEC and FASB seemed to change course on the rule, as they published new guidance to firms. The two organizations said when the market for a security disappears, it is now allowable to arrive at a value using "estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

In plain English, banks may not be forced to take huge writedowns on investments that lost all their value. But the guidance is just that: guidance. The SEC and FASB suggested that more concrete rule changes could come later.

While the possible end of mark-to-market might please critics of the rule, it doesn't satisfy everybody.

Some financial experts argue that even though banks and Wall Street firms may be able to make their balance sheets look better if the rule changes, these companies will be less attractive to investors because there isn't as much information about their true financial condition.

"The garbage is on the books and no one wants to admit the original error of purchasing this class of assets," said Barry Ritholtz, CEO of Fusion IQ, a research firm.

Ritholtz said mark-to-market accounting forces banks to honestly disclose what they own and how much those investments are worth. Changing the rule would make it tougher to come up with a bank's real value.

"I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately is no longer an investment. It is pure speculation, with more in common to spinning a roulette wheel," he said.

Too little, too late

Accounting experts also think that determining the value of pools of loans based on expected payments isn't any easier than figuring out their market value after demand has dried up. Rising default and foreclosure rates makes estimates about future value very suspect.

"People talk about 'hold to maturity', 'economic value.' I'm in the business and I don't know what that means," said David Larsen, managing director at financial advisory firm Duff & Phelps.

Larsen said that even with the new guidance from the SEC and FASB, it's not clear if accountants and chief financial officers are going to be able to ignore the sharp drop in market value for MBS pools in the current environment.

"To try to put a genie back in the bottle and go backwards from a transparency point of view makes little sense," said Larsen.

Others argue that the potential benefit to banks and Wall Street firms from a rule change is much less than is widely assumed since much of the writedowns have already occurred.

And it's too late to save the large financial institutions that have collapsed because of exposure to soured mortgages.

"I think mark to market is seen as a panacea, but I don't think it's that simple," said Brian Gardner, the Washington analyst for KBW, an investment firm that focuses on the financial services industry. "I don't think it's as big a deal for a lot of the banks." 


Fed pumps out more dollars

Factory orders sink 4%, near 2-year low

WASHINGTON (AP) -- Orders to U.S. factories plunged by the largest amount in nearly two years in August as the credit strains began to hit manufacturing with full force.

The Commerce Department reported that orders for manufactured goods dropped by 4% in August, compared to July. That's a much worse performance than the 2.5% decline that economists had expected. It was the biggest setback since a 4.8% plunge in October 2006.

The weakness was led by big declines in orders for aircraft, down 38.1%, and autos, which fell by 10.6%, the worst performance in nearly six years.

Orders for non-defense capital goods excluding aircraft, considered a good indication of business investment plans, fell by 2.4%, the biggest setback in this category 19 months. It's an indication that businesses are slashing their investment plans in the weak economy, and growing credit strains are making it hard for companies to get loans to expand and modernize.

The Senate on Wednesday approved an administration-backed bill to provide $700 billion to the Treasury Department to buy bad mortgage debt from the financial system as a way to get banks to resume more normal lending operations.

Analysts are concerned that the economy is so stretched, however, that the country is headed for a recession even with the largest government market intervention since the Great Depression.

An earlier report Thursday showed the number of newly laid off workers filing new claims for unemployment benefits rose to 497,000 last week, an increase of 1,000 from the previous week. It was the highest level for jobless claims since just after the Sept. 11 terrorist attacks seven years ago.

The government is scheduled to release figures Friday on unemployment in September. The expectation is they will show layoffs rose by 100,000, the largest increase this year, with the unemployment rate holding at 6.1%.

The report on manufactured goods showed that durable goods, items expected to last three years, dropped by 4.8% in August. Orders for nondurable goods, items such as petroleum products, food and clothing, fell by 3.3%.

The dismal report on orders for August followed a report Wednesday from the Institute for Supply Management showing that manufacturing activity fell to the lowest level since the aftermath of the 2001 terrorist attacks. 


Leading economic indicators tumble

More job cuts loom as economy slows

NEW YORK (CNNMoney.com) -- The number of job cuts announced in September rose as the economy slowed, according to a report released Wednesday.

Positions on the cutting board rose 7.2% to 95,094 from 88,736 the previous month, and were 33% higher than the same month last year, when 71,739 cuts were announced, according to outplacement consultancy Challenger, Gray & Christmas, Inc.

September brought the announced layoff total for the third quarter to 287,142 - the largest number since 2005, according to the report.

The computer industry was the hardest hit, with 25,715 positions on the line after PC maker Hewlett-Packard (HPQ, Fortune 500) announced the largest workforce reduction of the year, the report said.

HP said it would cut 24,600 jobs worldwide as a result of its acquisition of Electronic Data Systems Corp. But since those cuts were a result of the deal and not a consequence of the ailing economy, the report noted, HP's workforce could gain many of those jobs back.

The struggling auto industry came in second place, with plans to drop 14,595 jobs, while the apparel industry came in third place, announcing 8,350 cuts, according to the report.

Surprisingly, planned job cuts were relatively modest in the financial sector, the report said, despite the turmoil that plagued the nation's financial institutions during the month.

Banks wait for bailout

The data showed that finance industry had announced 8,244 job cuts in September, compared with a spike of 27,169 during the same month last year as the credit crunch began to unfold. But they did jump from 2,182 in August.

September saw a major reshaping of the financial landscape as institutions such as Lehman Brothers, Merrill Lynch (MER, Fortune 500), AIG (AIG, Fortune 500), Wachovia (WB, Fortune 500) and Washington Mutual were acquired, bailed out, or went bankrupt.

"While all of these scenarios are being played out, the fate of the workers remains in limbo," John A. Challenger, chief executive of Challenger, Gray & Christmas said in a statement.

Financial institutions are waiting to see if Congress passes the Bush administration's $700 billion rescue plan that would allow the government to buy up tainted assets in order to keep their businesses from failing.

Whether the bailout plan is approved by Congress - and what form it takes - will affect the number of layoffs that may eventually be announced, according to Challenger.

"One of the big questions is: Are there going to be more runs on banks and financial institutions?'" he told CNNMoney.com.

If there is no bailout plan, financial job cuts will likely increase, according to Challenger. On the other hand, if all banks take advantage of the government's offer, the number of layoffs could be limited, since no one institution is singled out.

But if a bailout plan passes and is only embraced by a few institutions, that would emphasize the weakness of those companies, and we might see more job cuts, he added. 


Americans want bailout - worry over cost
Private sector cuts 33,000 jobs