Wednesday, October 29, 2008

EconomicWatch: The Fed, Wall Street and Cuomo's Letter

Fed Rate Cut Does Little For Stocks

Wall Street got the interest rate cut it wanted, but still turned in a baffling late-day performance, shooting higher and then skidding lower in the very last minutes of trading as some investors rushed to cash in profits after the market's big advance.

The Dow was up nearly 280 points after the Federal Reserve slashed a key interest rate by half a percentage point, but another bout of last-hour volatility wiped out the advance. Some analysts said hedge funds were cashing in their gains, while others said some investors were giving a bleak interpretation to the Federal Reserve's statement on the economy that accompanied its half-point rate cut.

The Dow closed 74 points down at the 8,890 level. The broader market indexes have ended the day mixed.

The central bank tried to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades. The Federal Reserve reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.

In a release the Federal Reserve said, "Recent policy actions, including Wednesday's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth."

The central bank said it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.

While many economists believe the country has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.

The Fed's action was expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.

NY Attorney General Requests Bonus Info

The New York attorney general has asked nine banks that are getting a piece of the Wall Street bailout to turn over information about how they are spending money on executive bonuses.

The New York attorney general has expanded his investigation of bonus payments to Wall Street executives whose banking companies are receiving $125 billion in support from the federal government.

In a letter sent today to the nine financial institutions receiving government aid, the attorney general, Andrew M. Cuomo, asked for "a detailed accounting regarding your expected payments to top management in the upcoming bonus season."

The letter also raised the prospect of a lawsuit relying on a New York law that, Mr. Cuomo has said, permits the recovery of payments worth more than the services provided by executives. Mr. Cuomo sent his letter to Citigroup, Bank of America, Bank of New York Mellon, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo.

In recent weeks, Mr. Cuomo's office reached an agreement with the American International Group, the troubled insurance conglomerate, freezing millions of dollars in payments to former executives. The letter sent on Wednesday appears to represent an expansion of the inquiry into executive compensation at companies getting government money.

"As my office has told A.I.G.," Mr. Cuomo wrote, "now that the American taxpayer has provided substantial funds to your firm, the preservation of those funds is a vital obligation of your company. Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them."

The looming question is getting the nine banking companies to explain why they are paying billions of dollars in compensation and bonuses after they accepted the cash injections of $125 billion as part of the government’s $700 billion bailout program.

Andrew Cuomo said Wednesday that the bailout has essentially made taxpayers shareholders in these companies, and they have a duty to be upfront with the public about huge bonuses. The request followed an Associated Press report last week that found that the nation's biggest banks are preparing to pay their workers as much as last year or more, including bonuses tied to personal and company performance.

Cuomo's office is among several agencies that are investigating banks about their role in the Wall Street meltdown.

Average National Gas Price At 3-Year Low

A national survey shows gas prices continued to fall Wednesday, tumbling nearly 4 cents a gallon from the day before, according to a AAA report. The average price of a gallon of regular gasoline at self-serve stations was $2.589 Wednesday. Mid-grade was at $2.700, and premium was at $2.781. Gas has fallen every day since Sept. 17, and the last time gas was this low was Aug. 18, 2005, according to wire reports.

Prices are down 37.1 percent, or $1.485, from the highest recorded average of $4.114 a gallon, which was set on July 17, according to news reports. The average price dropped below $3 a gallon on Oct. 18 for the first time in nearly nine months, AAA reported.

In 18 states, gas price averages were below $2.50 a gallon, while on the flip side, Alaska, Hawaii and California reported gas prices above $3 a gallon, according to the AAA survey. The cheapest gas is in Oklahoma at $2.20 a gallon, while Alaska has the most expensive gas prices, at $3.622 a gallon, according to AAA's Web site. The drop in oil prices have benefited retail gas prices. Crude has declined sharply since mid-July.

Today, oil prices bounced off a 17-month low in Asia. A rally in stock markets around the world boosted investor confidence that the worst of a global economic slowdown and its impact on crude oil demand has been priced in.

Oil investors have been closely tracking equity indexes for signs of market sentiment about how deep and widespread the global downturn will be. They took heart from a rally in stocks that began Tuesday in Asia, followed through to Europe and the U.S. and continued again in Asia today.


AAA, Associated Press, New York Attorney General's Office, Federal Reserve, The Dow Jones Company

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