Congress Examines $700 Billion Bailout PlanWhile the Bush administration shifts course on its $700 billion rescue plan, Congress is examining whether even bigger changes should be made in the program in light of the deteriorating economy and soaring mortgage foreclosures. The debate may not be resolved until President-elect Barack Obama takes office on Jan. 20 and pursues policies for administering the rescue program that are likely to be more closely aligned with his Democratic allies in Congress.
In anticipation of the change of administrations, Democrats were holding hearings in both the House and Senate on Thursday examining various aspects of the most serious financial crisis to hit the country in 70 years. The House Oversight Committee was examining the role that hedge funds may have played in recent market turbulence. Among those scheduled to testify was billionaire investor George Soros, chairman of Soros Fund Management.
Meanwhile, the Senate Banking Committee will hear from executives of a number of financial institutions including Bank of America, JPMorgan Chase and Wells Fargo on the issue of how the government's $700 billion rescue effort is operating and particularly whether the government should be requiring more commitments on the use of the money to address rising mortgage foreclosure problems.
Treasury Secretary Henry Paulson announced Wednesday that the administration had decided to scrap what had originally been the centerpiece of the program -- a proposal to buy troubled assets to get them off the books of banks as a way of promoting increased lending.
Instead, Paulson said the administration will proceed with an alternative plan to spend $250 billion to buy stock in the banks as a way of bolstering their financial situation and accomplishing the same goal -- getting the institutions to return to more normal lending. However, critics contend the administration should be imposing more restrictions on the stock purchases as a way of insuring that the banks will use the government resources to increase lending rather than just hoarding the cash or using it to acquire other banks or boost dividends for stockholders.
Sen. Charles Schumer, D-N.Y., said even with the changes in the rescue plan he was still disappointed in the administration's unwillingness to issue strict guidelines to ensure that participating firms use the funds to increase lending.
"In these difficult times, fear is still overwhelming confidence," Schumer told reporters on Tuesday.
More reports detailing the difficulties facing the economy were expected on Thursday with the Labor Department releasing its latest look at weekly applications for unemployment benefits, the Commerce Department reporting on the trade gap for September and the government reporting on the budget deficit for October. The level of jobless claims was expected to remain at levels indicating the labor market is under severe strains, reflecting what many economists fear could be a deep and prolonged recession.
The government reported last Friday that the unemployment rate soared to a 14-year high of 6.5 percent in October as businesses cut another 240,000 jobs (see story details below). The trade deficit was expected to show some improvement, declining to $57 billion in September, compared to $59.1 billion in August, reflecting a big drop in the price of imported oil and a weakening economy, which is dampening demand for other imports.
The budget deficit, however, was expected to show a big increase in October, the first month of the new budget year, rising to $101.5 billion, compared to $57 billion in October 2007. The soaring costs of the bank rescue and the weak economy are expected to put the country on track to run up a record deficit for the current budget year of between $700 billion and $1 trillion, a staggering sum for a single year.
Despite its new flexibility, the administration said Wednesday it remains opposed to using the rescue fund to bail out the ailing auto industry or to provide guarantees for home loans, an idea that supporters contend offers the greatest hope for helping legions of Americans who are facing foreclosure.
Congressional Democrats felt otherwise on autos, and strongly. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid were pressing for quick passage of a major package for carmakers during a postelection session that begins next Tuesday, and one key House Democrat was putting together legislation that would send $25 billion in emergency loans to the beleaguered industry in exchange for a government ownership stake in the Big Three car companies.
Paulson told reporters Wednesday that the administration was exploring the possibility of setting up a program in conjunction with the Federal Reserve that would provide support for the $1 trillion market in securities that fund such vital consumer products as credit cards, auto loans and students loans. About 40 percent of consumer credit is supplied through the sale of these securities that are backed by payments consumers make on their credit cards and other loans.
The administration has already spoken for all but $60 billion of the initial $350 billion supplied by Congress, including the $250 billion for direct stock purchases from banks and $40 billion for a new loan supplied on Monday to help stabilize troubled insurance giant American International Group.
Jobless Claims Vault To 7-Year High
The number of newly laid-off individuals seeking unemployment benefits has jumped to a seven-year high, the government said today. The Labor Department reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That is the highest total since just after the Sept. 11 terrorist attacks and second-highest since 1992.
The total was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000. The four-week average of claims, which smooths out fluctuations, rose by 13,250 to 491,000, the highest tally in over 17 years.
Thursday's figure is the first time claims have topped 500,000 during the current economic slowdown. Jobless claims above 400,000 are considered a sign of recession. A year ago, claims stood at 338,000. The number of individuals continuing to seek unemployment benefits jumped by 65,000 to 3.9 million, above analysts' estimates of 3.85 million. That's the highest total since January 1983, though the labor market has grown by about half since then.
Initial claims have been driven higher in the past several months by a slowing economy hit by the financial crisis, and cutbacks in consumer and business spending. Claims also rose in late September due to the impact of Hurricanes Ike and Gustav, but the department said last week that the impact of the hurricanes has passed.
The rise in claims has been mirrored by an increase in the unemployment rate. Unemployment reached a 14-year high of 6.5 percent in October, the Labor Department said last week, as the ranks of the unemployed swelled to 10.1 million.
Shariah-compliant banking, sometimes called Islamic banking, is growing in popularity in the Western and Islamic worlds. But critics say American interest in the system at a time of economic crisis is opening the door to increased Islamic influence in the American banking system. Worse yet, some fear the banks may be helping to finance international terrorism.
In Shariah-compliant banking, lenders may not charge interest and investors cannot make money from forbidden industries like gambling, alcohol, pork and pornography. Selling debt, devising derivatives and short selling are also prohibited, and investments must be closely tied to actual assets. In the U.S., the Dow Jones Islamic Index tracks Shariah-compliant companies and funds, and funds have sprung up like the Amana Mutual Funds Trust and the Azzad Asset Management.
American investment funds, like those offered by TD Ameritrade and Charles Schwab, can invest in Shariah-compliant companies, and those companies can offer investments in American companies. Top holdings in the Azzad Ethical Midcap Fund, for example, include Western Digital Corp., Southwest Electric Co. and Apple Computer, Inc.
But allowing Shariah-compliant finance in the U.S. is green-lighting a seditious system that supports jihad, said Frank Gaffney, founder and president of the Center for Security Policy in Washington, D.C.
"If you understand what Shariah is, you understand that it is a pretty awful system. Not something that you'd want insinuated in your society and becoming a major feature of your economic system," Gaffney said.
"Shariah (Islamic law as dictated by the Koran) governs all aspects of life, from the personal practice of the faith to how you relate to your family to how you relate to your business partners, to your community ... all the way up to how the world is run, and it is all one seamless program. You can't say 'I'll take the personal pietistic practice ... and skip the beheading and the flogging and the stoning and the global theocracy,'" he said.
Punishments for some crimes under Shariah law include amputation and stoning to death. On Tuesday it was revealed that a 53-year-old Egyptian doctor had been sentenced under Shariah law in Saudi Arabia to 15 years in prison and 1,500 lashes for allegedly getting a Saudi princess in his care addicted to drugs.
But despite Islamic banking's association with Shariah's harsh practices, the U.S. government is taking an interest in it. On Oct. 25, while on an official visit to Saudi Arabia, Deputy Secretary of the Treasury Robert M. Kimmitt told reporters that the U.S. was interested in learning more about Islamic finance, and the Treasury Department held an "Islamic Finance 101" course in Washington on Nov. 6 to educate government officials on its ins and outs.
Islamic banking and investment products sprang up beginning in the 1970s when the Middle East experienced its first oil boom, and have been growing in popularity as oil prices soared in the past few years. Yet it's unclear who is investing in Shariah-compliant mutual funds and other investments, Gaffney said. "An awful lot of them seem to be petrodollar-rich potentates and companies and royal families."
Nicholas Kaiser, fund manager at Amana Mutual Funds Trust in Bellingham, Wash., said that his company's Shariah-compliant mutual fund products are no different from any other religious funds and that the company carefully screens its investors.
"Our shareholders are American. We don't take money from non-Americans because of money-laundering laws. We have to know our shareholders and be sure they aren't engaged in nefarious activities. We screen and check and verify every shareholder," Kaiser said. He disagrees with Gaffney's assertion that Islamic funds are a threat to the American way of life.
"We simply take people's money, invest it and give it back to them when they want it. We don't try and convert the country. We don't have any religious position. We aren't evangelical. We aren't zealots. We're money managers," Kaiser said. "I happen to be Episcopalian."
Azzad Asset Management has declined comment.
Estimates put the Islamic banking industry in the hundreds of billions of dollars. And while it's a small portion of the global finance industry, the Islamic sector is growing -- by more than 30 percent in 2007. A board of Shariah scholars determines which investments are compliant.
As Shariah law forbids charging interest, Shariah-compliant mortgages, like those offered by Devon Bank in Chicago and Guidance Residential, which operates in 23 states, are attracting pious Muslim buyers. In one type of Shariah-compliant mortgage the bank buys a home and then either leases or re-sells it to the purchaser in monthly installments -- interest-free, but at a higher price.
The bank's profit and the buyer's payments wind up being similiar to what they would be if the bank charged interest, said Ibrahim Warde, adjunct professor of international business at Tufts University.
"In the Koran there's a verse saying that making money from trade is good and making money from money lending is not, so basically whenever transactions are structured, they are sales transactions," he said.
Rachel Ehrenfeld, director of the American Center for Democracy, said that whether they're sound investments or not, conforming to Shariah shouldn't be American policy.
"We should not allow Islamic banking to continue and definitely not to flourish in this country," Ehrenfeld said.
"Muslims in the United States who want to conduct their business according to Islamic banks can do it with mortgages ... but to allow Islamic banking as a rule to operate -- it's our money and we shouldn't be abiding by Islamic laws. Period. I don't want to have any kind of association with any laws that dictate wife-beating in Saudi Arabia," she said.
Ehrenfeld said that the practice of "zakat" -- giving alms to the poor -- while innocent on the surface can in fact be used to promote terrorism and the spread of radical Islam. She said that that the money the Shariah banks give to charities goes to build madrassas and mosques and spread radical Islam and anti-American sentiment.
"They also send money to Hamas. They also send money to Al Qaeda," she said. "This is a huge Pandora's box. We don't know what the hell is going on with their charities ... even if nobody will say openly that they're giving money to terrorism."
In June, the Kuwait-based charity Revivial of Islamic Heritage Society was designated by the U.S. Treasury for providing money and material support to Al Qaeda, its affilitates and to acts of terrorism.
"It is illegal for anyone in the United States to provide funds to charities that have been designated by the Treasury Department as supporters of terrorism under Executive Order 13224. If the Treasury Department has information that anyone in the United States were engaged in such activity, we would take appropriate action," said Treasury spokesman Andrew DeSouza.
Warde, however, said that there is no reason to think that all Islamic financial institutions have terrorist ties.
"There are some people who equate all things Islamic to terrorism," he said. "Some people look at the world that way. We've seen that during the presidential campaign with the insinuations that Obama was a Muslim, therefore a terrorist. I don't think we should give much credence to that."
He said critics are not being fair to the system.
"People who don't like Islam and who are afraid of Islam would obviously not like the notion of Islamic finance. I'm not sure that those who hold this view necessarily know much about it, but it's some kind of visceral view that some people hold," Warde said.
Holidays May Not Be Merry For Retailers
Americans have slammed their wallets shut since the financial meltdown, and the future is looking downright scary for stores across the country and the whole U.S. economy.
On Wednesday, Best Buy Co. slashed its earnings forecast and said the changes in consumer behavior have been nothing less than "seismic," creating "the most difficult climate" the company had seen in its 42-year history.
And Macy's Inc., which turned a profit in the third quarter of last year, swung to a loss this time, warned that the upcoming holiday season would be "a nail-biter" and slashed its budget for 2009 capital expenditures by almost half.
Shoppers from the well-heeled to the low-income have cut back as they worry about shriveling retirement funds and job security. The changes could tilt the economy into a deeper, more painful recession.
"We're definitely spending less. The first thing to go was the housekeeper and clothes spending," said Melanie Coyne of Dardenne Prairie, Mo., who is dining out less, using more coupons and taking her lunch to work. She's also "wearing what I have."
The downbeat forecasts from retailers Wednesday came two days after Circuit City Stores Inc. filed for bankruptcy protection. It's also laying off thousands of workers and closing 20 percent of its stores.
Analysts believe consumers -- who usually account for about 70 percent of economic activity -- will no longer be the key driver of the economy, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.
"This is the end of the consumer-based economy," said Peter Schiff, who runs the investment firm Euro Pacific Capital Inc. in Darien, Conn. "Americans have been buying too much stuff, and now the epic shopping spree is over. It is a permanent change."
For years, consumers tapped into inflated home equity and use credit cards to finance their spending. Now those spigots are being shut off, and job losses are mounting.
Even when home prices recover and credit becomes more available, Hoyt notes, Americans will have learned something: "They can't count on asset appreciation to meet their long-term goals."
If consumer spending can't lead the economy out of its deepening funk, what can? Even receding gas prices in recent weeks haven't provided a boost to shoppers dealing with multiple economic worries.
"When you've got bills and you're only getting one income, it's hard," said Christine Ferguson, 63, a retired former day-care employee in Baltimore who rents an apartment and lives on her Social Security check. "With everything going up, every time you look at something it's going up, and your paycheck is not, you can't do it."
The recent data has been startling: For the third quarter, consumer spending fell 3.1 percent, the worst performance in 28 years. Sales at established stores for October were the worst since at least 1969. The slump is continuing into November: Macy's says it expects a decline of at least 10 percent this month.
Even those with appetites for Prada and Gucci aren't immune. Among the hardest hit are luxury stores. Saks Inc. and Nordstrom Inc. reported same-store sales fell at least 10 percent. At Neiman Marcus Group Inc., the drop was nearly 27 percent.
Some stores make as much as 40 percent of their yearly profits during the holiday season, and the outlook for this year's is growing even darker. For toy merchants, that figure is up to 50 percent. That could mean more bankruptcies in the new year.
Stores have been cutting prices far earlier than usual to try to draw shoppers in and save the season. Many have pushed up sales typically reserved for the day after Thanksgiving.
This year, many holiday shoppers will be waiting until the last minute not because they're procrastinators or looking to outsmart the stores, but because they simply don't have the money to spend.
"We always bought something," said Cindy Schneirson of Phoenix, who hasn't bought new clothes in more than a year. "I used to get my hair done, nails done. I don't do any of that now."
The sharp cut in Best Buy's outlook shook Wall Street analysts, who thought it was well-placed to benefit from Circuit City's woes.
Foreclosure Rates Up 25 Percent Since 2007
The number of homeowners caught in the wave of foreclosures in October grew 25 percent nationally over the same month in 2007, data released Thursday showed.
More than 279,500 U.S. homes received at least one foreclosure-related notice in October, an increase of 5 percent over September, according to RealtyTrac Inc. One in every 452 housing units received a foreclosure filing, such as a default notice, auction sale notice or bank repossession.
More than 84,000 properties were repossessed in October, RealtyTrac said. In RealtyTrac's data, three states -- Nevada, Arizona, Florida -- had the nation's top foreclosure rates. Other states in the top 10 were California, Colorado, Georgia, Michigan, New Jersey, Illinois and Ohio.
A nasty brew of strict lending standards, falling home values and a tough economy is filtering through the housing market. By the end of the year, the company expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.
The collateral damage in the financial markets forced the government to pass a $700 billion financial rescue package last month. The plan was initially to buy bad assets from banks, but Treasury Secretary Henry Paulson said Wednesday that the rescue package won't purchase those troubled assets.
That plan would have taken too much time, he said, so instead the Treasury will rely on buying stakes in banks and encouraging them to resume more normal lending.
Also Wednesday, Housing and Urban Development Secretary Steve Preston said the government may let more borrowers qualify for a $300 billion program designed to let troubled homeowners swap risky loans for more affordable ones. The program was launched Oct. 1, but there are concerns that lenders won't participate because they have to voluntarily reduce the value of a loan and take a loss.
Nevada posted the nation's highest foreclosure rate for the 22nd consecutive month in October. One in every 74 homes in the state received a foreclosure filing last month. Arizona saw one in every 149 housing units receive a foreclosure filing, and in Florida it was one in every 157 homes.
While California had the highest total number of foreclosures in October, RealtyTrac noted that the rate in that state was down 18 percent from the previous month.
James J. Saccacio, chief executive officer of RealtyTrac, said new laws requiring delays in the foreclosure process have reduced the volume of foreclosure filings in several states. In California, lenders are now required to contact borrowers at least 30 days before filing a default notice. A similar law in North Carolina gives borrowers an extra 45 days.
"While the intention behind this legislation -- to prevent more foreclosures -- is admirable, without a more integrated approach that includes significant loan modifications, the net effect may be merely delaying inevitable foreclosures," Saccacio said. "And in the meantime, the apparent slowing of foreclosure activity understates the severity of the foreclosure problem in these states."
Among cities, Las Vegas had the highest October foreclosure rate among the 230 metro areas tracked by RealtyTrac, with one in every 62 housing units receiving a foreclosure filing.
Four Florida metro areas ranked in top 10 -- Cape Coral-Fort Myers was second, Miami third, Fort Lauderdale eighth and Orlando 10th. California also had four metro areas in the top 10: Stockton fourth, Merced fifth, Riverside-San Bernardino seventh and Modesto ninth.
Stores See Surge In Holiday Job Applicants
The odds of landing a part-time job at department store operator Bealls Outlet Stores Inc. this holiday season are slimmer than getting into Harvard: It's one out of every 45. Don't think the chances are any better at 7-Eleven. One California store received more than 100 applicants in a week and a half for jobs that pay $8.50 per hour -- and the retailer doesn't even usually hire holiday workers.
From department stores and convenience chains to call centers, managers who only a year ago had to scramble to fill holiday jobs are seeing a surge in the number of seasoned applicants -- many of them laid off in other sectors and desperate for a way to pay the bills.
The flood of jobseekers comes even as the retail industry drastically cuts back on holiday hiring because of the drop-off in consumer spending, and the applicants -- who differ from the usual pool, teens or stay-at-home moms looking for extra spending money -- reflect the nation's fast-deteriorating job market.
"I thought it was going to be pretty easy, but I am not the only one looking for a job. There are thousands of us going for the same thing," said Kimberly Caparo of Chesterfield, Mich., who has applied for part-time jobs at Toys "R" Us Inc., Home Depot Inc. and Lowe's Cos. Inc. in recent weeks since she and her husband were laid off by American Axle & Manufacturing Holdings Inc.
At UPS Inc., which is just starting to ramp up its holiday hiring, as much as 30 percent of the seasonal hires in the Northeast are coming from the ranks of the recently laid off, said spokeswoman Ronna Charles Branch. In the past, she said, applicants for holiday jobs at the world's biggest shipping carrier were largely students.
Jean Telfort, a 41-year-old Army veteran, has applied for dozens of part-time jobs, including at Macy's and Nordstrom Inc., with no success. He needs money to help pay the rent and to pay down his $60,000 credit card bill, which includes his college tuition charges.
"I am looking for anything to carry me over," said the Freeport, N.Y., who returned full-time to Hofstra University where he's pursuing a degree in public relations after he served 11 years in the Army. He expects to graduate in May.
Since the financial meltdown intensified in September, leading to massive layoffs across several industries, a growing number of the unemployed have been turning to lower-paying jobs in the retail sector, which they thought could help them get by until they found full-time work in their specialized fields or retrain in other areas.
"It would be money coming in even if it's a little bit," said Caparo, 32, who's finishing up a college degree in business administration and does not plan to go back to the battered auto industry. "It's money that I don't have to take out."
But given the shakiness of the retailing industry amid a series of bankruptcies, store closings and liquidations, laid-off workers are even having a hard time finding any jobs. The situation got even tougher Monday, when consumer electronics chain Circuit City Stores Inc. filed for bankruptcy and said it would be laying off more people than previously announced.
John Challenger, chief executive of Chicago-based outplacement firm Challenger, Gray & Christmas, noted that holiday hiring will fall significantly below last year's total, which was the lowest since 2003. And those with pink slips shouldn't count on new job opportunities even after the holidays, since even more retailers are expected to file for bankruptcy.
The U.S. retail industry alone shed 38,100 jobs in October, bringing the total since January to 297,000, according to Michael P. Niemira, chief economist at the International Council of Shopping Centers. That accounts for 25 percent of the 1.2 million jobs lost in the U.S. so far this year. Yet retail employment only accounted for about 11 percent of total payroll employment -- meaning the retail industry is losing a higher proportion of its jobs.
Such retail losses have helped push the nation's unemployment rate to a 14-year high of 6.5 percent in October as another 240,000 jobs overall were cut last month, according to government data released Friday. And many economists believe the unemployment rate will climb to 8 percent or 8.5 percent by the end of next year.
As far back as September, Bealls Outlet Stores -- which operates most of its 450 stores in Florida -- was being flooded with up to 40 to 50 applicants a week, said Conrad Szymanski, president of the Bradenton, Fla.-based chain. A year ago, they saw one or two applicants a week per store.
Each store hires about 10 part-time holiday workers -- meaning that about 450 applicants are competing for 10 jobs per store. Those are tougher odds than Harvard, which accepted about 7 percent of all applicants for the class of 2012.
"What we are seeing is a profound increase," particularly in Florida, California, and Arizona, where the real estate market has been hit hard, said Szymanski.
What's so striking, store executives say, is how desperate the applicants are.
Lisa
Wall Street Journal, US Dept of Labor, US Dept of Treasury, Thomson Reuter, RealtyTrac
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