Financial thoughts

Warren Buffett said Wednesday that the U.S. economy has "no bounce" and will take time to recover, but there is no risk of deflation to push it further into despair.

Speaking on CNBC television, the world’s second-richest person also praised efforts by the Obama administration and Federal Reserve to jump-start economic activity.

He lamented that the slowdown has hurt his insurance and investment company Berkshire Hathaway Inc., which runs close to 80 businesses and in the January-to-March period had its first quarterly loss since 2001.

"We have had no bounce" in the economy, Buffett said on CNBC television in New York. "There are a lot of excesses to be wrung out, and that process is still under way, and it looks to me it will be under way for quite a while."

Asked whether the economy was still in a "shambles," as he had said in February, Buffett said: "I’m afraid that’s true."

U.S. gross domestic product fell at a 5.7% annualized rate in the first quarter.

Government efforts to stimulate business activity remain a work in progress, and President Barack Obama Tuesday again said the nation’s jobless rate will rise above 10%.

"They’re doing things, but they take a while to have an effect," Buffett said. "You can’t produce a baby in one month by getting nine women pregnant."

Yet he added that "I don’t worry about deflation at all," and maintained his long faith in the stock market, saying it is "attractive over the next 10 years" relative to alternatives.

Asked whether Obama should reappoint Ben Bernanke to lead the Federal Reserve when the chairman’s term expires next January, Buffett said: "I don’t see how you could do better pay day loans."

Stocks for the long run

In a separate interview, Buffett told Fox Business Network he expects the United States to maintain its "triple-A" credit rating for decades. Berkshire lost its equivalent rating this year.

Buffett also said he plans to keep his Goldman Sachs Group Inc. (GS, Fortune 500) warrants, which now show a paper profit.

Last September, Goldman agreed to sell Berkshire $5 billion of preferred stock carrying a 10% annual dividend, and warrants to buy $5 billion of common stock at $115 per share.

"We’ll make a lot of money off Goldman," Buffett said.

Goldman earlier this month repaid $10 billion of federal bailout money taken from the Troubled Asset Relief Program.

Buffett spoke just before a scheduled lunch with Zhao Danyang, a Hong Kong-based investor who in an auction last June agreed to pay $2.11 million to dine with the billionaire.

An auction for a similar lunch to benefit the Glide Foundation, a San Francisco nonprofit offering housing, job training, health and child care, and meals for the poor, is being conducted this week on eBay Inc’s (EBAY, Fortune 500) website.

As of 3:30 p.m. ET, the top bid was $135,678. The auction ends Friday.

Berkshire’s Class A (BRK.A) closed up $1,000 to $86,800 on the New York Stock Exchange. 

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Australia’s unexpected economic growth last quarter, driven by government cash handouts and record interest-rate cuts that fueled consumer spending, may mask a bleaker picture.

Gross domestic product rose 0.4 percent from the previous three months, the statistics bureau reported yesterday in Sydney, buoyed by the government doling out A$12 billion ($9.9 billion) to lower-income earners. Prime Minister Kevin Rudd said without the payments, the economy would have shrunk about 0.2 percent.

Not so positive was a measure of corporate investment, which showed outlays on machinery and equipment tumbled by the most since the economy was last in a recession in 1991. Miners BHP Billiton Ltd. and Rio Tinto Group have cut spending, fired workers and closed mines in Australia as the worst global slump since the Great Depression curbs demand for commodities.

“Australia has been lucky so far, but that good fortune appears set to evaporate when examining the underlying data,” said Robert Cunneen, Sydney-based senior economist at AMP Capital Investors, which manages about $95 billion. “There was an ominous warning sign that business investment is in rapid decline.”

Exports tumbled 11.3 percent in April from March, the biggest drop since July 1997, on a decline in shipments of coal, iron ore and wheat, the statistics bureau said today.

Boom Ends

Rio Tinto has slashed its global spending by $5 billion to $4 billion this year and BHP shut its $2.2 billion Ravensthorpe nickel mine in Western Australia.

The West Australian state economy, home to a mining boom that helped drive the nation’s expansion over the past decade, contracted 2.3 percent in the first quarter from the previous three months, the first decline since the fourth quarter of 2000, yesterday’s report showed.

“Despite the positive GDP result, the data provide clear evidence that the global recession is hitting the Australian economy,” Treasurer Wayne Swan told reporters in Canberra. “The collapse in business investment” may threaten Australia for some time to come, he said.

Production in the mining industry fell 1.5 percent in the first quarter, manufacturing slipped 3.3 percent and construction dropped 3.3 percent.

As companies pared spending, imports fell 7 percent, the GDP report showed.

‘Long, Hard Slog’

The fall in imports “suggests that domestic demand remained very weak,” said Heather Ridout, chief executive of Australian Industry Group, an organization representing businesses overnight pay day loans. “We still face a long, hard slog to restore our economic health.”

Imports of intermediate goods, which include fuel and raw materials, plunged 10.3 percent in the quarter. Imports of capital goods, including trucks and machinery, slipped 7.1 percent.

“There is no guarantee that GDP won’t fall in future,” Rudd said yesterday. “Regrettably the unemployment rate will go up. The global recession is out there and unfolding. Difficulties and obstacles lie ahead.”

The jobless rate reached 5.7 percent in March, the highest level since 2004, before falling to 5.4 percent in April. The government said in last month’s budget unemployment will climb to 8.5 percent, which would be the worst reading since 1997, as the jobless queue swells to 1 million within two years.

“When the unemployment rate skyrockets to 8 percent by early next year or sooner, it will feel like a recession to many,” said Annette Beacher, a senior strategist at TD Securities Ltd. in Sydney.

Interest Rates

Reserve Bank of Australia Governor Glenn Stevens, who left the benchmark interest rate unchanged at a 49-year low of 3 percent this week, noted that factory usage will keeping falling as “companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards.”

Australia has scope to cut interest rates further if needed, he said on June 2.

Spending by businesses on machinery and equipment tumbled 9.6 percent in the first quarter, the biggest plunge since March 1991, the GDP report showed.

Non-residential construction fell 4.3 percent, the biggest drop since September 2003. Total business investment decreased 6.1 percent, the worst slump since the final quarter of 2000.

To make up for the shortfall in investment, the government last month unveiled a A$22 billion program of spending on roads, rails, ports, hospitals and schools.

“That really kicks in from about mid year,” Swan said yesterday. “It’s in that vital area of direct investment: in shovel-ready projects plus those over the longer term.”

“What the cash payments to consumers have done is filled the gap that was caused when the global economy contracted sharply and demand fell through the floor,” he said. “There is very significant stimulus still to come” from the infrastructure program.

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The U.S Treasury sees a "small percentage" of recovery on the loans it has given to Chrysler LLC in case the automaker liquidates its assets in bankruptcy, a report by the Government Accountability Office (GAO) said on Thursday.

"According to Treasury, in the case of Chrysler, the sale of the assets would result in cash equal to only a small percentage of the value of the loans," the GAO, the investigative arm of Congress, said in the report.

The U.S. Treasury was also unable to obtain senior liens on most Chrysler assets as they were already encumbered, the report said.

The Treasury was only able to obtain senior lien on a portion of the company’s parts inventory called Mopar paperless payday loans.

This is the first time the U.S. government has detailed its estimates of recovery of the loans it has give Chrysler or laid out the rationale behind its decision to accept third lien credit behind banks and Daimler AG and Cerberus Capital Management.

Chrysler has been loaned $4 billion in emergency funds by the U.S. government. The automaker has asked for another $5 billion to operate. 

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It’s official: 2009 marks the 35th anniversary of the individual retirement account. I will now pause for a moment as spontaneous celebrations break out across the land.

Okay, so maybe the IRA’s birthday isn’t cause for dancing in the streets. Still, 35 years after the passage of the law that gave rise to the IRA, a strong case can be made that these retirement plans are more important than ever to workers whose primary investment accounts have been put through the wringer.

Unfortunately, many people are not taking full advantage of these tax-advantaged accounts. Even though most U.S. households are eligible to contribute to an IRA, only 14% did so in 2007.

Part of the problem: Nearly a third of adults aren’t sure whether they’re eligible, and 40% don’t know you can have an IRA and a 401(k) at the same time, says a recent AARP survey.

The fact is, between traditional, nondeductible, and Roth IRAs, almost anyone can contribute to at least one type of IRA.

Find out which account you qualify for - and how much you can contribute - by going to the IRA calculator at Morningstar.com. There are two great reasons to fund one this year and for the 2008 tax year, which you can still do by April 15.

You can use IRAs to make up for lost ground

At a time when 401(k) balances have been hammered, and upwards of 10% of companies plan to suspend or cut back their matching programs over the next 18 months, stashing bucks in an IRA can be a great way to rejuvenate your nest egg.

This is especially true if you’re already maxing out your 401(k). Granted, the maximum annual contribution is a modest $5,000 a year (which rises with inflation in $500 increments), plus an extra $1,000 if you’re 50 or older. But if you’re an older boomer earning $100,000 a year, and your firm stopped matching contributions, $6,000 will probably more than make up for the missing match fast cash. And as the chart shows, by funding an IRA over time, you can end up with a six-figure addition to your 401(k).

You can use IRAs to hedge your tax exposure

Chances are, the bulk of your retirement savings sits in tax-deferred accounts, where withdrawals are taxed as ordinary income. This means that if tax rates rise - which is plausible, given how the government is throwing around stimulus bucks - you may wind up with less cash for retirement.

But there’s a way to protect yourself: Put some of your stash in a Roth IRA. Besides tax-free withdrawals, a Roth offers other benefits. For instance, you’re never required to withdraw money from a Roth as you are with 401(k)s and regular IRAs, so your money can grow tax-free for as long as you like. Plus, Roth withdrawals don’t count toward determining whether your Social Security benefits are taxable.

If you have a traditional IRA and your modified adjusted gross income doesn’t exceed $100,000, you can convert a portion of your IRA to a Roth. If you earn too much to convert - or to make annual contributions - you can still get money into a Roth: Contribute to a nondeductible IRA (which anyone under 70

EADS posted an 11 percent increase in full-year 2008 sales to around 43 billion euros ($54.36 billion), Financial Times Deutschland reported on Monday, citing an employee newsletter.

The only one of the European aerospace company’s five divisions that failed to post higher revenues was the Airbus Military Aircraft division, which faces steep penalties on delayed delivery of its A400M military transport aircraft.

EADS is due to report annual results on Tuesday.

An EADS spokesman declined to comment on the contents of any staff publication, but said that nothing new had been communicated to staff beyond what Chief Executive Louis Gallois had already said in public.

EADS shares edged up 0.3 percent in Paris by 0812 GMT.

On January 13, Gallois had said that EADS, which owns airplane maker Airbus, generated around 42 billion euros of revenue in 2008, up from 39 billion a year earlier payday loan no faxing.

Gallois told employees that the company would concentrate on preserving its cash holdings in 2009, FT Deutschland said.

Due to the global economic crisis, the company would reach some of its 2020 targets later than planned. It still aimed to double annual sales to 80 billion euros and lower the proportion of sales generated by Airbus to 50 percent from two thirds.

(Reporting by Maria Sheahan in Frankfurt and Tim Hepher in Paris; Editing by David Cowell and Jon Loades-Carter)

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Tennessee’s economy — and the nation’s — is in for a long, hard ride, according to University of Tennessee economists.

The annual report to Gov. Phil Bredesen comes from UT’s Center for Business and Economic Research. It says the state’s future is tied to the national economy, but it doesn’t see a bottom yet.

Things could swing either way, the report says, depending on the effects of the federal economic stimulus plan and whether banks will start extending credit again to consumers and businesses.

“If more financial institutions go under, the financial crisis could become more severe as the remaining banks try to fortify their balance sheets by holding reserves rather than lending,” the report states cash loans. “This would reduce both consumption and investment further than already anticipated, which would lead to larger job losses and higher unemployment.”

The report emphasizes education as a key to higher rates of employment and income. Since Tennessee spends less on average than other states, that doesn’t bode well for Tennessee, the economists say.

The state’s unemployment rate was 7.9 percent in December, compared with 7.2 percent across the country.

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new york — Stocks rose Wednesday, extending a global rally, as President Barack Obama prepared to set up a so-called bad bank to absorb toxic investments, and Yahoo Inc. and Germany’s SAP AG reported better-than-estimated earnings.

Citigroup Inc. and Bank of America Corp. surged more than 13 percent after a White House official said Obama’s team may announce the outlines of its plan next week. Deutsche Bank AG and Barclays Plc added at least 18 percent in Europe. Yahoo and SAP, the largest maker of business-management software, climbed more than 5.2 percent. The Standard & Poor’s 500 index gained for a fourth straight day, its longest streak since November.

"The impact of the bad bank idea is positive for equities in that it moves us in the direction of finding a solution to the cloud of bad assets that continues to weigh on proper valuations," said Alan Gayle, senior investment strategist at Ridgeworth Capital Management, which oversees $70 billion in Richmond, Va. "It’s giving nervous markets a lift."

The S&P 500 added 3.4 percent to 874.09, with financial companies posting 19 of the top 20 gains. The Dow Jones industrial average climbed 200.72 points, or 2.5 percent, to 8,375.45.

Citigroup added 66 cents, or 19 percent, to $4.21, while Bank of America, the largest U.S. lender by assets, jumped 89 cents to $7.39. JPMorgan Chase & Co. climbed 10 percent to $27.66. Fifth Third Bancorp and State Street Corp. jumped more than 31 percent.

Financial companies in the S&P 500 rallied 13 percent collectively, with 79 of 81 companies advancing make payday loan.

The "bad bank" initiative may allow the government to rewrite some of the mortgages that underpin banks’ toxic debt, in the hope of stemming a crisis that has stripped more than 1.3 million Americans of their homes. "You’re getting a big relief rally in the financials, and that’s lifting the whole market," said Michael Binger, Minneapolis-based fund manager at Thrivent Asset Management, which oversees about $70 billion. "If the bad assets can be taken out, banks will feel more comfortable in where their capital ratios will be. And if that’s the case, they’ll be more ready to lend and the credit market freeze will thaw."

Wells Fargo & Co., the second-biggest U.S. home lender, rallied 31 percent to $21.19. The bank maintained its dividend and said it doesn’t need more federal aid as it reported its first quarterly loss since 2001 following its takeover of Wachovia Corp.

Yahoo, owner of the second-most-popular U.S. search engine, added 7.9 percent to $12.24.

Sun Microsystems Inc. added 22 percent to $4.86. The world’s fourth-largest maker of server computers reported sales and earnings that topped analysts’ estimates after cutting jobs to cope with the recession.

Life insurers advanced after state insurance commissioners endorsed industry proposals to loosen capital requirements, paving the way for a potential vote on Jan. 29 to change reserving rules. MetLife Inc., the biggest U.S. life insurer, jumped 20 percent to $33.27.

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A consortium of private equity and hedge fund firms, including J.C. Flowers & Co, is close to a deal to buy the assets of failed mortgage lender IndyMac, a source familiar with the matter said on Sunday.

The prospective buyers also include Dune Capital Management, a private investment firm run by former Goldman Sachs executives, and hedge fund Paulson & Co, the source said.

The consortium would buy the bank and its 33 branches, IndyMac’s reverse-mortgage unit and a $176 billion loan-servicing portfolio, the source said.

The presence of private equity and hedge fund firms comes after the FDIC said last month it was expanding the pool of qualified bidders to include those institutions that do not currently have a bank charter, although they must have conditional approval for a charter from the responsible agency.

The Federal Deposit Insurance Corp and IndyMac as well as the buyers in the consortium could not be immediately reached.

Last week IndyMac spokesman Evan Wagner said a deal was expected before the end of the year. The deadline for final bids for IndyMac’s assets was December 15.

FDIC estimates IndyMac’s failure cost the agency $8.9 billion. Barclays Capital and Deutsche Bank are advising the FDIC on the sale.

The mortgage specialist’s IndyMac Bank unit was taken over by regulators after it failed on July 11 in one of the largest bank failures in U payday cash loan.S. history. At the time, it had $32 billion in assets and $19 billion in deposits.

IndyMac Bancorp Inc (IDMCQ.PK), the holding company, filed for Chapter 7 protection soon after with the U.S. bankruptcy Court in Los Angeles, indicating it plans to liquidate.

Founded in 1985 by Angelo Mozilo and David Loeb, who also founded Countrywide Financial Corp, IndyMac once specialized in "Alt-A" home loans, which often didn’t require borrowers to fully document income or assets.

It collapsed after defaults mounted and as tight capital markets caused losses on mortgages it couldn’t sell.

The seizure came after panicked customers withdrew more than $1.3 billion of deposits over 11 business days. The withdrawals followed comments in late June by U.S. Sen. Charles Schumer questioning IndyMac’s survival.

Have you filed for first-time unemployment benefits in the past month? Or have you accepted a significant pay cut — 20%, 30% — in order to start working again? If so, e-mail realstories@cnnmoney.com and you could be included in an upcoming article.  

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GRAND BLANC, Mich. (AP) – The financing arm of General Motors Corp. has until midnight Friday to clear a final hurdle in its quest to become a bank holding company, even though it already received the Federal Reserve’s stamp of approval earlier this week.

GMAC Financial Services LLC must complete a complicated debt-for-equity exchange by 11:59 p.m. EST. The effort to raise $30 billion in equity from bondholders was helped along late Wednesday by the Fed’s decision making the ailing auto and home loan provider eligible to access part of the government’s $700 billion bank rescue fund.

GMAC wouldn’t say Friday how close the company was to completing the exchange. Yet both actions — completion of the debt exchange and the Fed’s acceptance of GMAC as a bank holding company — were tied to each other.

The Federal Reserve apparently needed to see that the bondholders were willing to inject more capital into GMAC, a critical requirement to get bank holding status. GMAC bondholders needed reassurance that the Fed would approve GMAC’s application to qualify for federal aid.

"The success builds upon itself. The Fed vote sends a strong signal to the remaining bondholders to help them reach a deal," said Scott Talbott, a financial services lobbyist in Washington, D.C.

Shares of GM surged on Friday, the first day of trading since the Fed’s announcement late Wednesday. Shares rose 41 cents, or nearly 13 percent, to $3.66.

The Fed’s action Wednesday came as GMAC was still struggling to get bondholders to convert 75 percent of their debt into equity of the company. Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM’s own chances for survival. The Fed cited "emergency conditions" in justifying its decision.

GMAC’s goal is to reach $30 billion in capital, the majority of which would come from the exchange of debt. Another part of the equity requirement included a demand from the Fed that $2 billion of the total come from new equity. So far, GMAC has received a commitment of $750 million from its parents GM and Cerberus Capital Management. It’s unclear whether that funding would come from the bridge loans the U.S. Treasury granted GM and Chrysler LLC — which is owned by Cerberus– earlier this month.

GMAC spokeswoman Gina Poria said she couldn’t speculate on the precise "tipping point" that prompted the Fed to act on GMAC’s application earlier than generally expected.

"We’ve kept the Fed and other regulators apprised of the bond exchange," she said Friday. "We still need to complete that bond exchange. It needs to be settled by the end of the year payday loans."

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Becoming a bank holding company would qualify GMAC to access the government’s bank rescue funds, and support GMAC loans to car buyers and GM dealerships.

GMAC has not said publicly how much it was requesting from the $700 billion bank bailout fund. CreditSights analyst Richard Hoffman estimated in a research note Friday that GMAC "could have applied for up to about $6.3 billion."

Sources close to the negotiations with bondholders said earlier this week that talks with GMAC were not going well, with creditors wanting more for their debt investments.

But Talbott said that any stubbornness among bondholders might have softened in recent weeks given the stakes.

"Anytime you ask investors to change their expectations and get less than anticipated, it causes strife," Talbott said. "But as the weeks wore on it became clear that without change the choice was getting very little in bankruptcy or accepting the changes in order to ensure the strength of GMAC to get the bulk of their investment back."

GMAC, which is 49-percent owned by GM, provides auto financing to GM customers and dealerships.

The Fed order says GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. GM’s remaining equity interest in GMAC will be transferred to an independent government-accepted trustee who must dispose of the equity held in the trust within three years of the trust’s creation.

Cerberus, which led an investment group that bought a 51-percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of the lender’s total equity.

The Fed’s move to provide government aid to one of the nation’s biggest suppliers of auto loans was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept ballooning, the program expanded to include insurers, credit card companies, and the automakers themselves. Just last week, President George W. Bush ordered an emergency bailout of the industry, offering $17.4 billion in rescue loans, and citing imminent danger to the national economy.

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Although Wachovia Corp. has been mentioned as one of the more troubled big U.S. banks, at least some analysts believe it is not at risk and is unlikely to suffer the same fate of Washington Mutual Inc. They also believe that Wachovia will be able to survive on its own, without merging with another big financial institution.

Still, shares of the Charlotte, N.C.-based bank plunged Friday as investors, the day after WaMu’s failure, shifted their focus to other financial institutions that also suffer under the weight of mounting losses tied to toxic assets.

Shares plummeted $4.90, or 35.8%, to $8.80 in afternoon trading. Shares are down 64% this year.

On Thursday, the troubled Seattle-based Washington Mutual collapsed under mounting losses tied to bad mortgage bets. The Federal Deposit Insurance Corp. was forced to seize and sell its banking assets to JPMorgan Chase & Co. (JPM, Fortune 500) for $1.9 billion in an emergency sale. WaMu, the nation’s largest thrift, became the nation’s largest-ever bank failure.

"Wachovia is obviously trading down in sympathy," said Kevin Fitzsimmons, an analyst at Sandler O’Neill & Partners, in a telephone interview. "Investors are looking for who else out there has a large exposure to mortgage assets that potentially could be written down to a significant degree."

Wachovia’s (WB, Fortune 500) current problems stem largely from its acquisition of mortgage lender Golden West Financial Corp faxless payday loan. in 2006 for roughly $25 billion at the height of the nation’s housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West’s specialty, which let borrowers skip some payments.

"The fundamentals at Wachovia right now are not real strong, there is no question about that," said Joe Keetle, senior wealth manager at Dawson Wealth Management, who previously spent 25 years at Wachovia. "But the reaction today has more to do with WaMu going under and waiting for Congress to pass a bill. It’s more emotional reaction today."

Essentially, the feeling on Wall Street is that Wachovia is hurting, but it’s not in the same dire straights as WaMu had been before it was seized by the FDIC. The company has been mentioned as a possible merger partner for Morgan Stanley.

The bank may need to raise additional capital or speed up its turnaround plans in some way to soothe investors in the short term, analysts said.

A Wachovia representative was not immediately available for comment. 

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