EU Ready to Present Stimulus Package

EU Ready to Present Stimulus Package

On Wednesday the European Commission will present a giant stimulus package to meet the looming economic downturn — with an estimated €130 billion in initiatives. But Brussels has neither the money nor the ability to forge an economic program.

By Hans-Jürgen Schlamp in Brussels

The situation is getting serious. Europe’s industries are running out of contracts. Economists predict that next year will bring reduced working hours and layoffs and that times will get bleak. The US Federal Reserve and Treasury Department on Tuesday announced a new package totalling $800 billion to make it easier for small businesses, students and home buyers to borrow money. And in Europe, state economic stabilization policies that fell out of favor long ago have suddenly found many new backers.

On the European Commission, where European President José Manuel Barrosa and 26 other commissioners direct the business of the European Union and where “the market” has been viewed as the best force to steer the economy for a long time, “the state” was supposed to keep its fingers out of everything. Now it’s all different.

The states — or, more precisely, their taxpayers — have just been forced to rescue the global banking system because its leaders proved to be little more than incompetent gamblers. Now more tax revenues are supposed to avert — or cushion — a threatening crisis in the global economy. Taking their places at the head of this phalanx in the fight of “politics against recession” are Barroso and his commissioners. They plan to bring forward an enormous economic program on Wednesday full of prescription for battling the crisis.

“Temporary cuts in value-added (or sales) tax” is one of the proposals that could be “quickly implemented to give a strong fiscal impulse to promote consumption,” reads one of the proposals. Additional caps should also be placed on the value-added taxes for certain labor-intensive services, like those performed by tradesmen, cooks or waiters. The Commission also intends to give tax concessions to especially climate-friendly products and to lower income taxes on low-income earners.

But that’s still not enough. The Commission will also call on EU member states — especially those that are not deep in debt — to use national spending packages to “quickly stimulate demand and to lift consumer confidence.” According to the plan, the European Central Bank (ECB) should lower interest rates even further and the European Investment Bank (EIB) should offer cheap credit for measures meant to conserve energy and for the production of climate-friendly automobiles. In all, Brussels wants a package worth 1 percent of Europe’s economic output — the equivalent of roughly €130 billion.

The problem, though, is that Brussels has neither the money nor the ability to shape a European economic program. Money and ability lie with the member states themselves, and — as usual — they can’t agree on a strategy. Every government does as it sees fit. Brussels’ super crisis-rescue package is not just a package of well-meaning yet unbinding suggestions; it’s also the simple sum of previously announced national measures. Barroso, nevertheless, can distribute research subsidies or infrastructure aid within the EU’s budget faster than previously thought. But he has no other means, and won’t be given any. Elmar Brok, a German member of the European Parliament, has unsurprisingly spoke of “false labeling” in Brussels.

Barroso says the package is based on a “groundwork of coordinated measures by member states, which are tailored to each specific situation.” The head of the EU’s largest economy, Chancellor Angela Merkel, liked the sound of that and proceeded to do just what Germany’s “specific situation” required. Her government has approved injections of capital which over the next two years will total €32 billion. She refuses to do more, and she’s said nothing about a quick reduction in taxes.

French President Nicolas Sarkozy could not talk her out of this strategy on Monday in Paris. The British example doesn’t interest her, either. Prime Minister Gordon Brown’s government wants to lower its value-added tax (or VAT) for 13 months, from 17.5 to 15 percent, starting in December, and demand even lower rates in some instances, such as restaurant bills. To balance these cuts the government wants to raise income tax at very top of the scale, and skim more from sales of alcohol, tobacco and gasoline.

All European governments are currently facing the same task of building crisis packages. Most choose from a menu that includes public works expenditures, tax cuts, monetary handouts, benefits for the poor or for families with children — the kinds of things that can be pushed through quickly. more

German Auto Industry Facing the Abyss

German Auto Industry Facing the Abyss

More than 1.5 million workers in Germany depend on the automobile industry for their jobs. But that industry is now facing one of its worst crises ever. Respected giants BMW and Mercedes are particularly exposed as sales plummet.

By Dietmar Hawranek

It was time for Martin Winterkorn to relax. The exhausted chairman of the VW Group was sitting in a leather seat on the company jet, coming from a conference in Berlin where he warned attendees of the consequences of the financial crisis. It had been a long day. It was 9 p.m. and he was still in the air.

“We have never before seen this kind of a crisis,” Winterkorn, 61, said at the conference. The German auto industry, he told his audience, must prepare itself for a “tough, prolonged dry spell.” It would not be possible to avoid “difficult cuts” and “painful” measures, Winterkorn said.

Even after the conference, sitting in the company jet, the head of VW was still preoccupied with the question: “How bad is it really?” Winterkorn has been in the industry for decades, and he has weathered many a crisis. But now he too is baffled. “I don’t know what else is going to happen,” he said.

According to Dieter Zetsche, the CEO of Daimler, there are those in the industry who believe that “up to 100,000 jobs will be lost in the German auto industry in the next 10 years.” Some, says Zetsche, are even suggesting that this is “the worst crisis since World War II.”

The Daimler CEO has already concluded that Mercedes-Benz will produce more than 150,000 fewer cars than planned in 2009. Management is negotiating with labor representatives over the possibility of Mercedes reducing the workweek to 30 hours, with a corresponding wage cut for workers, or introducing part-time work at the company. Daimler may have to cut several thousand jobs. How many? Zetsche, 55, is not even willing to venture a guess.

Sharp Decline in Sales

Norbert Reithofer, the 52-year-old chief executive of BMW, is similarly baffled. He believes the company is “in the biggest crisis in its history.” BMW has already cut more than 8,000 jobs this year. Production in its plants is shut down for several weeks at a time, a step that Volkswagen and Mercedes-Benz have also taken. But this will not be enough to offset the sharp decline in sales. In some markets, auto sales have not dropped by this much since the 1973 oil crisis.

In October, car sales dropped by 32 percent in the United States and close to 15 percent in Europe. Sales are also down in former growth markets India and Brazil, while economic growth in China is weakening.

This crisis is different from the ones before it. Opel is fighting for its survival, because its parent company, General Motors, is on the brink of bankruptcy. Mismanagement at Ford and Chrysler has driven the two companies into similarly dire straits. This was predictable.

But now even VW, Mercedes-Benz and BMW are at risk, companies that were considered the most stabile in their industry. Even executives at Japanese carmaker Toyota are worried. According to Executive Vice President Mitsuo Kinoshita, “the current situation is an emergency, of a magnitude we have never seen before.”

There is reason for this massive, general uncertainty: The auto industry is being assaulted on several fronts.

Sales are declining rapidly worldwide. If there is one thing anxious consumers can postpone, it is the purchase of a car. Economic crises normally affect one major market, which allows large car companies to make up for the difference in other countries. But this time the financial crisis is shaking North America, Asia and Europe at the same time.

Suppliers are likewise threatened. Banks have cut off funding for necessary investments. Some suppliers are already on the verge of bankruptcy. If the biggest manufacturer of rear-view mirrors or door locks fails, carmakers will be forced to stop production, and it will be difficult to quickly find replacements.

Tens of Thousands of Jobs at Risk

Providing consumers with financing is also becoming more difficult. Part of the reason VW, Audi, Mercedes-Benz, BMW and Porsche have enjoyed such phenomenal sales growth in recent years is that they have offered customers attractive leasing and financing packages. Now the carmakers’ lending divisions must pay high interest rates to obtain the necessary funds on the capital markets, if they can borrow at all. As a result, they can no longer attract customers with low-interest car loans. more

Extreme Makeover at Morgan Stanley

Extreme Makeover at Morgan Stanley

Morgan Stanley, one of the grandest names on Wall Street, transformed itself into an old-fashioned bank holding company in a desperate bid to survive the financial crisis.

By LOUISE STORY

Two months ago, Morgan Stanley, one of the grandest names on Wall Street, transformed itself into an old-fashioned bank holding company in a desperate bid to survive the financial crisis.

But now this new Morgan Stanley faces an even bigger challenge: figuring out where to go from here. Goldman Sachs, its perennial rival, is in the midst of a similar metamorphosis, and both firms face a somewhat uncertain future.

Drawing up the roadmap at Morgan Stanley are Walid A. Chammah and James P. Gorman, who are not only co-presidents but also potential rivals to succeed John J. Mack as chief executive.

Mr. Chammah is trying to re-engineer Morgan Stanley’s vaunted investment banking operation for leaner times, which means cutting jobs — lots of them. Since July the firm has announced plans to eliminate 16 percent of its work force.

Mr. Gorman, meantime, is urgently hunting for a bank to buy to build a base of customer deposits that would provide a crucial cushion — and new types of earnings. So far, he has not sealed any deals.

Morgan Stanley has had some good news in the last few days. Its share price rose three days in a row, along with other financial stocks, and Fitch Ratings upgraded its outlook for the bank’s credit rating to stable from negative. The company plans to sell more than $2 billion in new debt that will be backed by a federal program.

Still, neither the co-presidents nor Mr. Mack, 64, have fully persuaded investors that Morgan Stanley can recapture its past glory — or past profits. Morgan’s stock is worth only a fraction of what it was a year ago and the company’s next quarterly results, due in mid-December, do not look promising.more

Detroit: Wait until after next year

Detroit: Wait until after next year

Congress wants the Big Three to produce a plan for profitability before it will approve a bailout. This could be within reach…but not until 2010.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) — A profitable U.S. auto industry just around the corner? Given the crisis hitting the industry, it sounds about as realistic as flying cars.

Congressional leaders are demanding to see details by Dec. 2 about how U.S. automakers will start making money again before they’ll agree to even have a vote on the $25 billion federal loan package the industry is seeking.

Many critics of the bailout suggest that automakers have shown no indication of how they’ll return to profitability. Some argue the Big Three U.S. automakers are doomed to fail even if they get loans from the government.

But General Motors, Ford Motor and Chrysler have already made sizable cuts in production and staffing throughout the year. Additional cuts will come in the next few months, and some as soon as later this week.

While it’s tough to offer guarantees of profitability with so much uncertainty about the economy, if the automakers get the federal help they are asking for, the Big Three could be back in the black as soon as 2010.

With that in mind, here’s what GM, Ford and Chrysler are likely to point out in their business plan to Congress.
Lower employment costs

GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler have been downsizing for years and have all continued to make even deeper cuts this year which will save them billions of dollars.

GM plans to cut more than 7,000 salaried and contract employees this year as it aims to trim nonunion labor costs by 30%, or about $2 billion annually.

Those departures did not begin until this quarter and most of the remaining employees should leave by the end of the year. So some of the savings won’t take effect until next year. And the cost of the severance and retirement packages is causing steeper losses in this year.

Ford and Chrysler plan similar size cuts in their non-union staff. Chrysler plans to identify by Wednesday 5,000 salaried and contract staff who will leave the company, about 25% of that remaining workforce.more

Fannie Mae names Johnson chief financial officer

Fannie Mae names Johnson chief financial officer

Fannie Mae names former Hartford Financial Chief Financial Officer David Johnson as CFO

NEW YORK (Associated Press) – Fannie Mae said Tuesday it named David Johnson to serve as the mortgage giant’s chief financial officer and executive vice president, beginning immediately.

Johnson joins the company from Hartford Financial Services Group, where he served as chief financial officer and executive vice president.

His predecessor at Fannie Mae, Stephen Swad, left the company in August and was temporarily replaced by David C. Hisey, formerly Fannie’s senior vice president and controller.

Hisey will stay on in his role as executive vice president and deputy chief financial officer. Hisey joined Fannie Mae in January 2005 as senior vice president and controller.

Incoming CFO Johnson has previously held the post at Cendant Corp. and also worked in the investment banking unit at Merrill Lynch. more

AIG chief slashes salary to $1

AIG chief slashes salary to $1

Top executives agreed to a series of pay restrictions, including canceling bonuses, as the troubled insurer struggles to stay afloat.

By Kenneth Musante, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) — AIG Chief Executive Edward Liddy agreed to slash his annual salary to $1 as part of a series of voluntary pay restrictions by top executives tied to a massive $150 billion government bailout.

AIG (AIG, Fortune 500) will also forgo bonuses this year and eliminate pay increases through 2009 for the firm’s top executives.

Liddy will get paid $1 per year for 2008 and 2009, with his compensation consisting entirely of equity payments. While he will not receive bonuses during those years, he will be eligible in 2010 for “extraordinary performance.” He will also be ineligible for severance payments.

“This action by the senior management team demonstrates not only that we understand our obligation to taxpayers and shareholders, but also that we are committed to the future success of this organization,” said Liddy in a statement.

In addition to Liddy, Paula Reynolds, whom AIG hired as chief restructuring officer in October, will receive no salary or bonuses in 2008. From 2009 onward, any compensation above her base pay will be tied to the progress of AIG’s restructuring.

“It is only fair that top executives, who benefit the most when firms do well, should also bear the burden of the difficult economic consequences their firms now face,” said New York state Attorney General Andrew Cuomo in response to a letter from Liddy informing him of the pay cuts.

Cuomo had voiced concern about AIG’s expenditures in October after it was reported that the company had spent $440,000 on a weekend meeting at a resort. Subsequently, AIG immediately cancelled 160 events, worth an estimated $8 million.

Government help: AIG has been in full-blown cost-cutting mode since October, as it has been receiving billions in government loans. more

Home prices in record decline

Home prices in record decline

A Case-Shiller survey shows a 16.6% annual decline in the summer months as the housing picture continues to deteriorate.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) — The home price plunge stayed on a record pace this summer, according to a widely watched gauge of national real-estate markets released Tuesday.

The S&P Case-Shiller Home Price national index recorded a 16.6% decline in the third quarter compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter.

Prices in Case-Shiller’s separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%

With foreclosures soaring at record rates, the economic picture dimming and job losses ramping up, all the elements were in place to push prices lower.

“The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals,” said David Blitzer, Standard & Poor’s spokesman for the indexes, in a press release. “All three aggregate indices, and 13 of the 20 metro areas, are reporting new record rates of decline…Prices are back to where they were in early 2004.”

The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.

Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.

In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops – 2.7% in Dallas and 3.5% in Charlotte. more

Obama Says Wall Street Executives Should Forgo Holiday Bonuses

Obama Says Wall Street Executives Should Forgo Holiday Bonuses

President-elect Barack Obama said executives at Wall Street banks should forgo their Christmas bonuses.

By Kim Chipman

Nov. 26 (Bloomberg) — President-elect Barack Obama said executives at Wall Street banks should forgo their Christmas bonuses.

“That’s an example of taking responsibility,” Obama told Barbara Walters in an interview to air on ABC later today, referring to executives who have already said they won’t take holiday bonuses. “If you are already worth tens of millions of dollars, and you are having to lay off workers, the least you can do is say, ‘I’m willing to make some sacrifice as well.’”

Obama also said chief executive officers at General Motors Corp., Ford Motor Co. and Chrysler LLC — who last week flew to Washington in private planes to ask lawmakers to back an aid package for the industry — are “tone-deaf” to the struggles of ordinary Americans, according to excerpts of the interview released by ABC.

Obama called for CEOs to pay attention to the well-being of their workers, communities and shareholders.

“There’s got to be a point where you say: ‘I have enough, and now I’m in this position of responsibility. Let me make sure that I’m doing right by people and acting in a way that is responsible,’” Obama said.

Obama also spoke to Walters about his concerns that he could become too isolated from everyday life once in the White House. more

Pandit Says Citi Rescued to Keep ‘America’s Strength’

Pandit Says Citi Rescued to Keep ‘America’s Strength’

Citigroup Inc. Chief Executive Officer Vikram Pandit said the U.S. government pumped $20 billion into the bank to send a signal that regulators will stand behind the country’s financial system.

By Bradley Keoun

Nov. 26 (Bloomberg) — Citigroup Inc. Chief Executive Officer Vikram Pandit said the U.S. government pumped $20 billion into the bank to send a signal that regulators will stand behind the country’s financial system.

“We’re in 109 countries around the world, and Citi’s strength is viewed to be America’s strength in many ways,” Pandit, 51, said in an interview with PBS’s Charlie Rose show that aired yesterday. The bailout “was really about the entire financial system. It was about confidence in the financial system. It was about stability,” he said.

Citigroup’s stock last week fell below $5 for the first time since 1994, sparking concern that customers might pull their money and destabilize the New York-based bank, which has $2 trillion in assets. The government on Nov. 23 agreed to support the company with a $20 billion capital injection and a shield against losses on $306 billion of mortgages and other loans.

Pandit, who took over as Citigroup’s chief 11 months ago, was making his first public comments since the deal with the government was announced. The guaranteed assets had a face value of about $340 billion to $350 billion, he said, before they were written down amid the credit crisis.

All banks have experienced declines in the value of their loans and securities partly because so many of the assets are being dumped into the market at the same time, he said.

“Some of them are toxic, some of them are good,” Pandit said. “There is just too many of them. And there has to be a plan to clean out these assets and have institutions and/or funds buy them, and the Treasury has been working on them.”

Better Deal?

Citigroup’s deal, which followed a $25 billion infusion from the Treasury in October, drew criticism from U.S. legislators including Senate Banking Committee Chairman Christopher Dodd. The government should have struck a better deal and insisted on management changes, Dodd said yesterday.

The bank has reported four straight quarterly losses totaling $20 billion. The stock price plunged as low as $3.77 a share on Nov. 21. Since the government pledged its support, the stock has rallied 61 percent to close yesterday at $6.08 in New York Stock Exchange composite trading.

“Some of the issues about Citi’s assets and asset quality were being translated into people taking action on the stock, not only some people who had stock they were selling, but particularly short sellers,” Pandit said, referring to investors who try to profit from betting on a stock’s decline. more

Consumer Spending in U.S. Probably Dropped by Most in 7 Years

Consumer Spending in U.S. Probably Dropped by Most in 7 Years

The U.S. sank into a deeper recession as consumer spending, the biggest part of the economy, dropped in October by the most since the 2001 contraction, economists said before a government report today.

By Shobhana Chandra

Nov. 26 (Bloomberg) — The U.S. sank into a deeper recession as consumer spending, the biggest part of the economy, dropped in October by the most since the 2001 contraction, economists said before a government report today.

Purchases fell 1 percent after declining 0.3 percent in September, according to the median forecast in a Bloomberg News survey. Orders for long-lasting goods, sales of new houses and consumer sentiment also fell, other reports may show.

The biggest spending slump in three decades is likely to persist as home prices fall and job losses mount, threatening the holiday sales outlook at retailers from Zale Corp. to Best Buy Co. Faltering demand has caused the Federal Reserve, Treasury and President-elect Barack Obama to ratchet up plans to ease the credit crisis.

“Consumers are likely to continue to pare back spending,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. The pullback is “setting the stage for a bleak holiday shopping season.”

The Commerce Department’s spending figures are due at 8:30 a.m. in Washington. Estimates of the 72 economists surveyed ranged from declines of 0.4 percent to 2 percent. Incomes probably grew 0.1 percent, the smallest gain in three months, the survey also showed.

Also at 8:30 a.m., Commerce may report that orders for durable goods, those meant to last several years, fell 3 percent in October, according to the survey. Excluding transportation equipment, orders probably fell 1.6 percent, a third consecutive decline.

Sentiment Fades

The Reuters/University of Michigan’s final estimate of consumer sentiment for this month, due at 10 a.m., probably fell, approaching June’s 28-year low, according to the survey median.

A jump in firings is one reason Americans’ moods have darkened. A Labor Department report at 8:30 a.m. may show initial claims for jobless benefits last week held close to the 16-year high reached the prior week, according to the survey.

Retailers are concerned about the November-December holiday season, which brings in one-third or more of annual revenue. Zale, the biggest U.S. jewelry chain by stores, yesterday rescinded its annual forecast, saying in a statement that it “does not believe it can reliably gauge likely holiday performance or sales in the balance of fiscal 2009.”

Today’s spending report is also likely to confirm that inflation is retreating as demand wanes. The Fed’s preferred price gauge, which is linked to purchases and excludes food and fuel costs, was probably unchanged in October, according to the survey median. It would be the first time in almost two years it didn’t increase.

Bigger Drop

Consumer spending dropped at a 3.7 percent annual pace in the third quarter, more than the government had previously forecast and the biggest plunge since 1980, revised Commerce figures showed yesterday. The economy shrank 0.5 percent, also faster than initially estimated. more