Economy Grows, But Storms Hurt Some Areas

The economy continues to grow slowly even though harsh snowstorms crimped activity in some parts of the country last month.

A new Beige Book survey by the Federal Reserve, released Wednesday, showed that the recovery is managing to plod ahead though not at a strong enough pace to persuade companies to ramp up hiring.

The Fed said that "economic conditions continued to expand ... although severe snowstorms in early February held back activity" in some places.

Of the Fed's 12 regions surveyed, the Richmond district, which includes Maryland, Virginia and the Carolinas, was hurt the most by the bad winter. That region reported economic activity had "slackened or remained soft across most sectors" because of the weather.

Although economic setbacks from the weather are temporary, they come at a fragile time: the economy is struggling to recover from the worst and longest recession since the 1930s.

After a big growth spurt at the end of last year, many economists believe the recovery lost steam in the first three months of this year. They predict it will grow at a pace of around 3 percent from January to March. That won't be fast enough to drive down the unemployment rate, now at 9.7 percent.

Even though companies have slowed the pace of massive layoffs, they aren't in the mood to hire. The jobs market "remained soft thoughout the nation," the Fed reported.

When the government releases its new employment report on Friday, analysts expect it will show that the unemployment rate nudged up to 9.8 percent in February as companies slashed 50,000 jobs. The snowstorms, however, could lead to much deeper job losses for the month.

With the economy only slowly healing, Federal Reserve Chairman Ben Bernanke told Congress last week that record-low interest rates are still needed to support economic activity. The Fed has held its key rate near zero for more than a year. The rationale: super-low rates will induce Americans to boost spending, which would aid economic growth.

The Fed's survey said that consumer spending did show signs of improvements in many parts of the country. However, retailers in the Richmond region said sales were hurt by last month's snowstorms. Merchants in the Philadelphia region said sales were moving up slowly until the snowstorms hit. And, tourism activity in New York City, which did pick up before the storms, did get pinched in early February because of the bad weather.

Meanwhile, manufacturing strengthened in most part of the country, especially for high-tech equipment, automobiles and metals. Demand for services also was generally positive, particularly for health care and information technology firms.

A separate report out Wednesday said that the service sector in February logged its fastest growth in more than two year, although jobs remained elusive. The Institute for Supply Management's index rose to 53 in February, from 50.5 in January. Any level above 50 signals growth.

Snowstorms Hurt Clothing Sales In February

Most retail sectors including electronics and luxury items saw sales gains in February, data released Wednesday show, though snowstorms that shut in shoppers also chilled sales at women's clothing stores.

The latest numbers from MasterCard Advisors' SpendingPulse also show online sales rose sharply and sales of footwear and men's clothing also increased compared with a year earlier.

The figures, which track transactions in all forms including cash, really just signal stabilization, however, analysts said, because February 2009 sales were abysmal and consumer confidence had hit an all-time low.

"The disruptive weather did impact things," said Michael McNamara, vice president of research and analysis for SpendingPulse.

But spending overall remains tepid amid high unemployment and tight credit, he said. Clothing sales fell 1.8 percent on top of an 11.8 percent drop in February 2009. Women's clothing sales fell 1.6 percent last month, while sales of men's clothing rose 5.7 percent and footwear rose 2.2 percent.

Showing the most improvement for Jan. 31 to Feb. 27, compared with a year earlier, were:

• Consumer electronics, up 5.8 percent, for a sixth monthly increase.

• Luxury sales, excluding jewelry, up 15.2 percent, following gains of 8.1 percent in January and 5.5 percent in December.

• Online sales, up 16.7 percent, though the average transaction shrank 3.7 percent.

The figures come a day before retailers report on their sales at stores open at least a year. Analysts predict chains saw the figure grow modestly for the third straight month. The sales comparison is considered a key indicator for retailers because it excludes sales at stores that open or close during the year.

Ken Perkins, president of RetailMetrics market research firm, said February customer "traffic was good in between the snowstorms," and shoppers appeared to buy regular-priced spring fashions despite the snow, an encouraging sign for the economy.

"Retailers seem not to have needed extreme discounting to drive traffic to their stores," McNamara agreed.

The real test will come later when monthly figures are being compared with last spring, summer and fall's more stable spending patterns. February -- sandwiched between post-holiday clearance and spring -- is the second-least important month of the year for retailers after January. Analysts see combined data for March and April as a more accurate measure of consumer behavior.

"The impacts from nature and the light volume of February sales make it difficult to read too much into the this month's performance," said Michael P. Niemira, chief economist at the International Council of Shopping Centers.

He estimated that his group's index of sales at stores open at least a year will show a 2 percent rise for February when it's released Thursday. The index gained 3 percent in January and 3.6 percent in December. In February 2009, it fell 4.3 percent.

The index includes about 30 retailers but not Wal-Mart Stores Inc., the world's largest retailer, which stopped releasing monthly results last year.

Analysts will study retailers' reports for signs the economic rebound might strengthen. That's because most economists agree that business investments and exports may drive a short-term recovery, but a robust turnaround in consumer spending is essential to keep it going.

Consumer confidence dove unexpectedly in February. And unemployment, 9.7 percent in January, was expected to increase to 9.8 percent in February. Economists say snowstorms could have inflated job losses by as much as 100,000. The Labor Department is to report job figures on Friday.

Some retailers have said February turned out better than expected. Victoria's Secret parent Limited Brands Inc., which had forecast flat sales, now expects to report sales to rise by a high single- to low double-digit percentage for February at stores open at least a year.

Taken from reports by The Federal Reserve, The Institute for Supply Management, SpendingPulse, RetailMetrics, International Council of Shopping Centers, AP, Reuters.

New Home Sales Hit Record Low In January

Sales of new homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department is reporting today that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who had expected sales would rise about 5 percent over December's pace.

While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

January's weakness was evident in all regions except the Midwest, where sales posted a 2.1 percent increase. Sales were down 35 percent in the Northeast, 12 percent in the West and almost 10 percent in the South.

The drop in sales pushed the median sales price down to $203.500. That was down 5.6 percent from December's median sales price of $215,600, and off 2.4 percent from year-ago prices.

New home sales for all of 2009 had fallen by almost 23 percent to 374,000, the worst year on record. The National Association of Home Builders is forecasting that sales will rise to more than 500,000 sales this year, an improvement from 2009 but still far below the boom years of 2003 through 2006 when builders clocked more than 1 million new home sales per year.

January's data will increase concerns that the housing rebound could falter in coming months as the government withdraws the support it has used to try to bolster the housing market, which stood at the epicenter of the country's overall recession, the worst downturn since the 1930s.

A $1.25 trillion program from the Federal Reserve which has held down mortgage rates is set to end March 31 and tax credits to bolster home buying are scheduled to expire at the end of April.

First-time home buyers could qualify for a credit of up to $8,000 while homeowners who have lived in their current properties for at least five years could claim a tax credit of up to $6,500 if they decided to move into another home.

Though the overall economy started growing again this past summer, economists are worried because unemployment remains high. This weakness is causing consumers to shy away from spending, especially on big-ticket items such as homes.

In other economic news, the Conference Board reported Tuesday that its Consumer Confidence Index fell almost 11 points to 46 in February, pushing the index down to its lowest reading since last April. At 46, the index is a long way from the 90 reading that economists generally view as depicting healthy consumer attitudes.

Commerce Dept; Conference Board

EconomicWatch: New Credit Card Rules May Bring Some Relief to Consumers

The Federal Reserve is expected to vote Thursday on credit card reforms that may relieve customers faced with late fees, universal defaults and shorter payment periods, Reuters reported.

The new rules, which were proposed earlier this year, are expected to prohibit credit card companies from increasing rates at will, with some exceptions, and to ban universal default, which permits changing card terms if the borrower defaults on another bill.

The rules are also expected to ban double-cycle billing, where card companies reach back to earlier billing cycles to help calculate interest charged in the current cycle.

Consumers will also likely see easier-to-read tables on monthly statements.

Credit card companies that initially resisted the changes, however, warn borrowing limits may be reduced and interest rates charged on credit cards will rise for borrowers.

The new rules need the approval of the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration, all are expected to act on Thursday.

Lisa

EconomicWatch: Mutual Fund Industry Gets Extra Lumps Of Coal For Bad Behavior

After years of expecting a little something extra around the holidays, most people in the mutual-fund world are getting nothing extra for Christmas this year.

That said, it's my job to fill some of those holiday stockings. It's the annual Lump of Coal Awards, my holiday tradition of finger-pointing at the bad boys and girls of the fund business, the ones who should get nothing more than an inky chunk of carbon from Santa this year.

The Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-world types for action, attitude, behavior or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.

With the average equity fund down by more than 40%, it would be easy to carpet-bomb the entire industry with insults this year, but the losing actually has made it harder to pick "winners" -- the buffoons and miscreants who added insult to injury by blunder, ignorance or arrogance.

The 2008 Lump of Coal Awards go to:

1. Bruce Bent, co-founder of the first money-market fund and chairman of the Reserve Funds.

Category: Forgetting that talk is cheap

For years, Bent railed against money funds holding anything riskier than Treasury bills and bank certificates of deposit. He ridiculed competitors for buying commercial paper, short-term corporate debt that's routinely unsecured.

But in 2006, when Reserve's money funds were lagging the field in yield, Bent's firm started buying the same things he once described as "garbage." Reserve's money-fund yields climbed the charts.

Meanwhile, Bent continued ranting well into 2008 about the horrible investment behavior of others, ignoring the fact that his funds had become the most dangerous of the bunch.

Holding $785 million in Lehman Brothers paper, Reserve's Primary fund was forced in mid-September to "break the buck," after that debt was officially declared as garbage in light of Lehman's financial troubles.

2. The Investment Company Institute

Category: Doing too little, too late

The money fund crisis came into full bloom in mid-September. The ICI -- the fund industry's trade association -- established its money fund working group in November, long after the focus of the economic crisis had moved on to other parts of the financial world.

3. DWS Investments

Category: Forgetting why investors gave them money in the first place

When DWS decided to close its miserable small-cap value fund, logic dictated that it move the assets into DWS Dreman Small Cap Value Fund, a sister fund in the same asset category and with a similar investment style.

But DWS Dreman Small Cap Value (KDSAX) was -- and remains -- closed to new investors, so DWS instead folded the fund into DWS Dreman Mid Cap Value Fund (MIDVX) .

As a result, investors wound up in an asset class they didn't pick, missing out on David Dreman's top-rated small-cap issue and getting his below-average mid-cap fund, thereby enduring a much larger loss on the year.

4. Every 2010 target-date fund

Category: Missing the bulls-eye

At the very time that investors most needed life-cycle and target-date investing to work, it failed.

Target-date funds are all-in-one portfolios built to age with an investor, so that the closer they get to the target date, the more conservative they become. As such, 2010 funds -- built for investors less than two years from hitting retirement age -- should be a comparatively safe haven.

Instead, the average 2010 fund is down nearly 30% this year. See related story on target-date funds' losses.

5. Oppenheimer's target-date funds

Category: The year's most off-target performance

Oppenheimer is dead last in its peer group for funds targeted for 2010, 2015, 2020 and 2030. By comparison, Oppenheimer 2025 is a star, standing next-to-last in its category. And Oppenheimer 2040 and 2050 didn't launch until March, but since their inception date, both rank dead last in their peer groups too. With performance like that, Oppenheimer may not be running "life-cycle funds," so much as "death spiral funds."

(Second place in this category goes to AllianceBernstein. Were it not for Oppenheimer's misery, Alliance Bernstein would be dead last in every target-date category tracked by Lipper Inc..)

6. Fritz Reynolds of Reynolds Blue Chip Growth Fund

Category: Faking his way to the top

Reynolds runs the top-performing "multi-cap core" fund in the Lipper database, and the top large-growth fund tracked by Morningstar Inc. The average competitor is down about 41.5% this year, but Reynolds Blue Chip Fund (RBCGX) has lost just 5%. You'd think that would earn him kudos and not coal, but Reynolds topped those stock-picking categories by being mostly in cash; for much of the year, he's been 0% in blue-chips and 100% in cash.

Worse yet, with a 2% expense ratio, when Reynolds goes all to cash in current market conditions, he's virtually dooming shareholders to a loss. If Reynolds was so convinced it was time to hit the sidelines, he should have told shareholders to sell his fund, park the cash in an account paying a bit of interest, and then asked them to re-up when he thinks it's time to buy again.

7. Dreyfus Emerging Markets

Category: Opening the doors and punching new visitors in the face

Dreyfus Emerging Markets Fund (DRFMX) re-opened to new investors the first week of December. Even in a troubled economy, solid funds re-opening to new money attract a lot of interest, mostly from people who had previously been kept out.

But the Dreyfus fund reopened less than two weeks before it is scheduled to pay out a 38% capital gain. In short, anyone who bought in when the fund re-opened will get kicked in the teeth with a big fat tax bill on the money they invested.

8. Regions Morgan Keegan

Category: Not knowing when to quit

Two former high-fliers, RMK's Select Intermediate Bond Fund (MKIBX) and Select High Income Fund (MKHIX) , may have been the industry's biggest travesties over the last two years.

Manager James Kelsoe -- the Lump of Coal (Mis)Manager of the Year in 2007 -- had a huge slug of money in subprime paper, so that both bond funds lost more than 50% last year, then watched things go from bad to worse in 2008.

High Income is down nearly 80% and Intermediate Bond has lost 85% this year. For every $1,000 invested in the funds at the start of 2007, there's less than $100 left now. You'd be hard-pressed to find two funds more deserving of liquidation,

Regions Morgan Keegan finally got rid of Kelsoe, but inexplicably kept the funds open, with a new subadviser running the money.

9. Ron Fielding of the Oppenheimer Rochester Municipal funds

Category: Sticking to your guns when they're aimed at your own feet

The Rochester funds have traditionally flown high on the muni-bond performance charts, largely because of Fielding's penchant for diving headlong into the riskiest portions of the bond market - notably sectors like tobacco, housing and airlines - to capture extra yield. As a result, Fielding's funds - and he's ultimately responsible for 18 Oppenheimer-owned issues - took on a lot more credit risk than the competition.

Results have been a horror show. Most of the Rochester single-state funds are down more than 35% this year, and Oppenheimer Rochester National Muni Fund (ORNAX) is down 48% this year, which is far more abysmal than the average stock fund in 2008.

Fielding has remained bullish, but a combination of redemptions and the continued credit crunch is likely to make things worse before they get better, which in turn could cripple the entire Oppenheimer family. Oppenheimer's target-date funds are suffering because of their bond exposure through Fielding's National Muni portfolio.

Lisa

EconomicWatch: Your Money As Bailout Play Money

Tracking the $700 Billion Bailout

Dozens of banks and a handful of insurers have applied for funds from the Treasury Department as part of the $700 billion Troubled Asset Relief Program. The Treasury Department has transferred capital to many of these companies. More are expected to announce their participation in the coming weeks.

(Click to enlarge)

KB Toys Declares Bankruptcy, Plans Closings

In another sign of the grim holiday season, KB Toys filed for bankruptcy protection for the second time in four years on Thursday and plans to begin going-out-of business sales at its stores immediately.

The 86-year-old company said in a filing that its debt is "directly attributable to a sudden and sharp decline in consumer sales" because of the poor economy.

That a toy retailer filed for bankruptcy just before Christmas shows how bleak things have become, since such stores make up to half of their sales during the holidays. But analysts expect toy sales this holiday season to be flat or down slightly from last year's total of $10.4 billion, according to market research firm NPD Group, because consumers are cutting back amid the recession.

In response, toy retailers, including KB Toys, amped up their discounts. KB Toys had aggressively cut prices to entice cash-strapped shoppers, offering hundreds of toys for $10 or less. It also expanded its value program, which offers deals on new items each week, and offered "Buy 2, Get 1 Free" promotions.

But the deals weren't enough. In the filing in U.S. Bankruptcy Court in Delaware, KB Toys said that between Oct. 5 and Dec. 8 sales in stores open at least one year, a key retail metric known as same-store sales, fell nearly 20 percent.

The company said it considered its alternatives and decided the most viable way to cover its debt was to begin liquidating its stores via immediate going-out-of-business sales. KB Toys also plans to sell its wholesale distribution business, according to the filing.

Filing for Chapter 11 protection rather than Chapter 7 liquidation allows a company to retain more control over selling off assets. Under Chapter 7, the court immediately appoints a trustee to take over the case.

The company operates 277 mall-based stores, 40 KB Toy Works stores which are mainly in strip malls, 114 outlet stores and 30 short-term holiday stores. It has 4,400 full-time employees and 6,515 seasonal employees.

KB Toys, which says it has about $480 million in annual sales, said in the filing that it had debts between $100 million and $500 million and total assets in the same range.

Vendors top the list of unsecured creditors. The toy retailer owes Hong Kong-based toy manufacturer Li && Fung about $27.2 million, El Segundo, Calif.-based Mattel Toys $1.3 million and St. Louis-based Energizer Battery more than $728,000. Other creditors are Hasbro Inc. and the maker of Legos.

Pittsfield, Mass.-based KB Toys filed for bankruptcy in 2004 and emerged nearly two years later as a subsidiary of investment firm Prentice Capital Management, which owns 90 percent of the company's common stock. During that bankruptcy, KB sold its retail Internet operation to eToys Direct Inc., cut the number of retail stores from 1,200 to 650 and closed a distribution center.

Jim Silver, a toy analyst at timetoplaymag.com, said KB had been struggling since emerging from its first bankruptcy protection in 2005.

"Manufacturers were concerned about shipping to them over the last couple of months," he said. "This did not happen all of a sudden."

He said that the timing of the filing was a surprise, however, since he expected it in January. But as manufacturers balked at shipping "hot" holiday toys, their sales dropped off. KB Toys also suffered from deciding not to sell video-game consoles such as the Nintendo Wii, one of the few toy items selling well this year, Silver said.

"Their business model didn't work," he said. "They're selling closeouts, today people want the hot toys."

Amid the consumer spending slowdown and recession, KB Toys joins a growing list of retailers filing for bankruptcy protection. Others include Mervyns LLC, The Sharper Image, Steve && Barry's, to Linens 'N Things and Circuit City Stores Inc.

MICHELLE

NPD Group

EconomicWatch: Bank Of America To Lay Off 35,000 Over Next 3 Years

Bank of America Corp. said this week it expects to eliminate 30,000 to 35,000 jobs over the next three years, as it faces a deteriorating economic environment and tries to absorb Merrill Lynch & Co.

Charlotte, N.C.-based Bank of America said it hasn't yet completed its analysis for eliminating positions, and a final number will not be determined until early next year. It said the cuts will affect workers from both companies and all types of businesses.

Thursday's announcement of job cuts was hardly unexpected, considering the merger and the wave of job losses seen in the banking industry and in other sectors over the past few months. Bank of America and Merrill Lynch have already eliminated thousands of investment banking jobs over the past year, as have other banks, in an effort to lower costs as they face increasing defaults in mortgages, credit card debt and other loans.

Bank of America is considered one of the country's healthier banks, and its decision illustrates how widespread the wave of layoffs hitting the United States is. The nation lost more than half a million jobs in November alone.

New York-based Citigroup Inc. has been slashing jobs the most - by next year, Citigroup expects to have shrunk its work force by 75,000, or 20 percent, since its headcount peaked in late 2007.

JPMorgan Chase & Co. is shedding about 7,000 employees, or 10 percent, of its investment bank staff, and cutting 9,200 jobs at Washington Mutual Inc., the bank it acquired in September. Goldman Sachs Group Inc. and Morgan Stanley, meanwhile, are reducing their staffs by about 10 percent.

The shotgun deal between Bank of America and Merrill, valued at $50 billion when it was initially announced in September, was struck as the solvency of investment banks was in grave doubt, and kept Merrill from a complete meltdown like the one suffered by Lehman Brothers Holdings Inc., which was forced to file for bankruptcy. Shareholders of both companies voted to approve the deal last week and it is expected to close by Jan. 1.

Bank of America shares fell $1.78, or 11 percent, to close at $14.91 on Thursday, while Merrill shares fell $1.43, or 10 percent, to $12.67. In after-hours trading, Bank of America shares rose 12 cents to $15.03, and Merrill shares rose a penny to $12.68.

Will

Various Wire Services

Economic Briefs

Pump Price Hits 5-Year Low

The price of gasoline keeps going down.

Analyst Trilby Lundberg said the average price fell 22 cents a gallon during the past two weeks to its lowest level in nearly five years. The average price of regular on Friday was $1.75 a gallon.

The all-time high was in July, when the price peaked at $4.11 a gallon.

Of cities surveyed, the nation's lowest price was $1.46 in Cheyenne, Wyo. The highest was $2.54 in Anchorage, Alaska.

'Christmases' Keeps Cash Registers Jingling

Movie crowds are staying in the holiday spirit, making "Four Christmases" the box office leader for the second straight weekend.

The Reese Witherspoon and Vince Vaughn comedy earned $18.2 million. Next was the spooky "Twilight" with $13.2 million and "Bolt" with $9.7 million.

Rounding out the top five were "Australia," with $7 million and Quantum of Solace, with $6.6 million.

Despite the economy, Hollywood is continuing to outperform last year's holiday season, with revenues up for the fifth weekend in a row.

Will

EconomicWatch: The World's Worst Banker

In the past couple of years, the entire global lending industry has covered itself in shame. Virtually every banker was suckered by the credit and housing bubble. But who made the sorriest choices? Who forced shareholders and the public to bear the highest financial cost? Who, in short, is the Worst Banker in the World?

There's no dearth of candidates. Richard Fuld of Lehman Bros. and James Cayne of Bear Stearns presided over the remarkably disruptive failures of their respective firms. But Bear and Lehman weren't banks, properly speaking: They were hedge funds lashed to investment banks. And their demises didn't require much of a public bailout. The failures of AIG, Fannie Mae, and Freddie Mac necessitated massive bailouts, but they weren't exactly banks, either. Iceland's bankers have effectively brought their entire country to ruin. But since Iceland's population is a mere 300,000, they're off the hook. In an interview Monday, Nobel laureate Paul Krugman nominated the gang that ran Citigroup into the ground. But Citi was so big it took three CEOs-Sandy Weill, Chuck Prince, and Vikram Pandit-to bring it to the brink of disaster.

No, my nominee is someone whose name may not be familiar to American readers. He's Fred Goodwin, who until October served as CEO of the Royal Bank of Scotland. Goodwin took the helm of RBS in 2000 and proceeded to turn it into an international powerhouse. Known as "Fred the Shred" for his willingness to cut costs-and jobs-he emerged as Britain's leading banker. He was even knighted in 2004 for services to banking. But the bank, which this summer was Britain's largest, is now neither Royal nor Scottish nor much of a bank. RBS's slogan is "Make it happen." A review of the record shows that Goodwin indeed made it happen. He aced every requirement for a hubristic CEO.

Let's review the record.

Carrying off mergers and acquisitions and calling them growth? Yes. After buying British bank Natwest for about 26.4 billion pounds in 2000, Goodwin used RBS's cash and high-flying stock as a currency for more deals. Among the biggest was the $10.3 billion purchase of Charter One Financial, a Cleveland-based bank, in 2004, thus expanding the bank's footprint in the Rust Belt.

Ill-advised, history-making, massive merger precisely at the top? Yep. In November 2007, RBS and its partners, Fortis and Banco Santander, completed their acquisition of Dutch bank ABN Amro. As proud adviser Merrill Lynch noted, the $101 billion deal was "the world's largest bank takeover and one of the most complex M&A transactions ever." And it closed almost precisely when the air started to come out of the global lending bubble.

Massive commitment of capital to investment banking, trading in funky securities, and poor credit controls? Yes, yes, and yes. As this excellent Bloomberg postmortem notes, by June 2008, RBS had become Europe's largest lender. "Under Goodwin's tutelage, RBS also became Europe's biggest backer of leveraged buyouts," reporter Simon Clark notes. Goodwin also jacked up the bank's trading, "boosting derivatives assets 44 percent to 483 billion pounds in the first half of 2008," which was greater than the bank's net deposits. "Meanwhile, its reserves of Tier 1 capital, a measure of financial strength and the vital reserve set aside to cover losses, was the lowest among its U.K. rivals at the start of 2008." In other words, Goodwin designed a house that would teeter when the slightest ill wind began to blow.

Building an expensive, self-indulgent new headquarters building just in time for the collapse? Right-o. In 2006, RBS started construction on a huge new headquarters in Stamford, Conn., which would house its expanding U.S. investment banking and trading operations. The centerpiece of the 12-story, $500 million building is one of the largest trading floors in the world. It should be ready for occupancy (or, given recent job cuts, partial occupancy) next year.

Telling shareholders you don't need more capital, and then raising it-and then having that capital lose value rapidly? Yep. In February 2008, Goodwin said, "There are no plans for any inorganic capital raisings or anything of the sort." But in June, RBS sold 12.3 billion pounds (about $20 billion) in shares at 200 pence per share, which was a significant discount to the then-market price. By October, as this chart shows, the stock was slumping.

And finally: Dump problems on fellow citizens by messing things up so badly the bank has to be nationalized? Bingo. With the stock continuing to slip, RBS staged another rights offering, giving brutalized shareholders an opportunity to add to their sharply discounted holdings at a sharp discount-in this case at 65.5 pence per share. But shareholders passed, and the government last Friday had to step in as buyer of last resort, ponying up 20 billion pounds and assuming an ownership stake of about 60 percent. (The Guardian tells the grim tale.)

The result? RBS's stock (here's a two-year chart) has lost 91 percent of its value since March 2007 and retains value thanks only to massive government intervention. A job well-done, Sir Fred!

Lisa

Wikipedia, Wall Street Journal

EconomicWatch

Report: GM and Chrysler Considering Bankruptcy to Get Bailout

General Motors Corp and Chrysler LLC are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multi-billion dollar government bailout, Bloomberg reported Thursday, citing a person familiar with internal discussions.

In response to automakers' bailout plea, staff for three members of Congress have asked restructuring experts if a pre-arranged bankruptcy -- negotiated with workers, creditors and lenders -- could be used to reorganize the sector without liquidation, Bloomberg said.

Publicly GM CEO Rick Wagoner has said bankruptcy would mean liquidation because consumers would refuse to buy cars from a company that might not be able to back warranties or supply parts. Bankruptcy is "way down the list of options," GM board member George Fisher told Bloomberg this week in an interview.

The automakers are returning to Congress today for a high-stakes hearings they hope will persuade skeptical lawmakers to save them with $34 billion in emergency aid, but a top Senate Democrat wants to hand their problem to the Federal Reserve.

Two weeks after a botched attempt on Capitol Hill, repentant leaders of General Motors Corp., Ford Motor Co. and Chrysler LLC were appealing to the Senate Banking Committee on Thursday with three separate survival plans that include massive restructuring, the ditching of corporate jets and vows by CEOs to work for $1 a year.

But they could expect a chilly reception on Capitol Hill. Even a top Democrat in charge of evaluating their aid requests made it clear he was eager to avoid voting on a bailout. Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, wrote to Federal Reserve Chairman Ben Bernanke on Wednesday asking the central bank chief whether there was anything stopping him from using his considerable lending authority to help the automakers.

And Senate Majority Leader "Dirty" Harry Reid, D-Nev., said it was up to the Bush administration to unilaterally rescue the Big Three with loans drawn from the $700 billion Wall Street rescue fund, since Congress was still unwilling to do so. "I just don't think we have the votes to do that now," he told The Associated Press.

Dodd's committee was hearing testimony on the companies' plans from GM CEO Rick Wagoner, Ford CEO Alan Mulally, Chrysler CEO Bob Nardelli, UAW president Ron Gettelfinger and the head of the Government Accountability Office. The House Financial Services Committee was to hold a similar session on Friday.

Automakers were trying to make the case that the billions in loans would be a bridge to survival and profitability. In the streets outside the Capitol, all three companies were showcasing their futuristic, green models in hopes of counteracting their image as purveyors of gas-guzzling SUVs. Wagoner planned to drive to the hearing in a test version of the Chevrolet Volt, an extended-range electric vehicle expected to go on sale in 2010.

Reid and House Speaker Nancy "Psycho" Pelosi, D-Calif., said the hearings would help determine whether Congress would consider a massive aid package for the industry in a special session next week. Critics say the companies have been poorly managed and failed to show they won't be back for another government rescue.

The Big Three are struggling to stay afloat heading into 2009 during an economic recession, a steep decline in sales and a tight credit market. The three companies burned through nearly $18 billion in cash reserves during the last quarter.

Chrysler said it needed $7 billion by year's end to keep operating. GM asked for an immediate $4 billion as the first installment of a $12 billion loan, plus a $6 billion line of credit to use if economic conditions deteriorate. Both said in plans submitted to Congress that they could drag the entire industry down if they fail. Ford requested a $9 billion "standby line of credit" in case one of its Detroit competitors fails.

Wagoner and Mulally both say said they'll work for $1 a year -- a move Chrysler's Nardelli has already made -- if their firms accept government loans. All three plans envision the government getting a stake in the auto companies that would allow taxpayers to share in future gains if they recover.

In Detroit, the United Auto Workers union said it would delay the three companies' payments to a multibillion-dollar, union-run health care trust and essentially end a jobs bank program in which laid-off workers are paid most of their salaries. They also decided to let the Detroit leadership begin renegotiating elements of landmark contracts signed last year, a move that could lead to wage concessions.

The companies, union officials and car dealers were lobbying feverishly for the loans, arguing that the collapse of one or more of the Detroit carmakers would throttle the already weakened U.S. economy and jeopardize the nation's manufacturing sector.

Yet the bailout remains unpopular with the public. Sixty-one percent oppose providing the auto companies with billions in federal assistance, according to a CNN-Opinion Research Corp. poll released this week. Fifty-three percent said it would not help the country's economy.

The auto executives were roundly criticized for taking corporate jets to the hearings last month and this time made the 520-mile trip to Washington aboard hybrid cars. Underscoring the different approach, Wagoner and GM officials ate lunch Wednesday at Quiznos at a Pennsylvania rest stop along the way.

MICHELLE

Bloomberg, CNN

Panel: U.S. Recession Began A Year Ago

The National Bureau of Economic Research panel said today the U.S. economy fell into a recession last year. The panel's group of academic economists who determine business cycles met and decided that the U.S. recession began in December 2007.

The nonprofit, nonpartisan NBER is the official source to determine when U.S. recessions begin and end. Many economists believe the current downturn will last until the middle of 2009 and will be the most severe slump since the 1981-82 recession.

Stocks Fall Sharply Amid Dour Economic News

Wall Street is down sharply Monday amid a pair of downbeat economic reports. The Dow has been down between 350 and 450 points for much of the day's trading.

Investors were already selling stocks lower on concerns about the holiday shopping season before the Institute for Supply Management, a trade group of purchasing executives, said its index of manufacturing activity fell to a 26-year low in November.

The reading of 36.2 from the Institute for Supply Management's monthly survey of manufacturing activity is below October's 38.9. It is also worse than Wall Street economists' expectations of 38.4 as measured by a survey by Thomson Reuters. A reading below 50 indicates the sector is contracting.

The ISM said the November figure is the lowest since May 1982 when the economy was in the midst of a painful recession. At the same time, the Commerce Department said construction spending fell by 1.2 percent in October, much bigger than the 0.9 percent decline that many analysts had expected.

The weakness was led by another sizable drop in home construction, which has fallen every month but two over the past 2½ years. Nonresidential building also weakened as developers face tougher times getting financing because the banking system is going through a severe credit squeeze.

Both the housing and manufacturing sectors have been suffering for some time, so the reports were ultimately unsurprising. Wall Street is concerned that consumers, by curtailing their spending further, won't be able to help lift the economy from its slump. The market is coming off last week's strong performance, amid indications that the start of the holiday shopping season went better than expected for retailers.

MICHELLE

National Bureau of Economic Research

Crisis Drives Up Interest In Economics

Stocks are down, down, down. But student interest in economics appears to be trending upward.

The financial crisis has made "the dismal science" more relevant and immediate to many high school and college students, and they are suddenly paying closer attention in class.

"Now we can actually see the examples while they happen, instead of relying on history. It's been the most engaging class ever," said New York University junior George Schwartz, who dropped macroeconomics the first time he took it, but is so fascinated this time that he has decided to major in economics.

Instructors are delighted by the opportunity to use the dramatic events on Wall Street to explain concepts students might otherwise find dry, such as liquidity and Federal Reserve monetary policy.

"It is a great time to be in this business," said Jonathan Peters, a College of Staten Island professor. "It's a tremendous opportunity. It's a teachable moment. It's a chance to explain these topics in a very direct way."

Instead of simply discussing the theory surrounding a recession, Peters can show students a real one, step by step. While usually he has to fight to convince them that regulation is useful, that has become very easy nowadays, he said.

At the High School of Economics & Finance in New York's financial district, computer science teacher Aristedes Lourdas is also finding it easy to engage students.

Last year, his students were so unenthusiastic about analyzing the financial markets that Lourdas assigned his class to chart NBA players' salaries and statistics. But this year, "I haven't had to use the NBA at all," he said. Now they are each following the performance of three stocks of their choosing.

Lourdas said students are more interested because they are realizing that the dealings a few blocks away on Wall Street do affect their lives. The downturn has some worried they may not be able to afford college.

"The inner-city kids were kind of indifferent," Lourdas said. But now "all of a sudden, you see it's clicking. They're getting it. Last year, it was more like feeding them the information."

At Plano West Senior High School in a prosperous Dallas suburb, Advanced Placement economics teacher Sally Meek said her students keep veering off into politics and policy, debating the presidential candidates' plans during the election and grappling with questions of how big a role government should take in trying to turn the economy around.

The Arizona Council on Economic Education is helping teachers design classes based on the crisis. Senior program adviser John Morton said that in one lesson he is designing, students will create a market bubble and watch it pop. In other lessons, students will try to apply lessons from the Great Depression to the current crisis.

Eric Branting was months away from graduating from NYU when Wall Street's troubles hit. Immersed in his first economics course, he decided to major in the subject, delaying his graduation by a year.

"I think it's a great time to be getting into economics," the 21-year-old said. His macroeconomics professor, Branting said, is "throwing out three or four chapters of the textbook and desperately rewriting them and rethinking how he's teaching the class."

"People like me who are getting this education right now are learning a whole different way of looking at things. It's exciting."

But Hong Man Lam, an 18-year-old high school senior in New York who once hoped to become a stock trader, is starting to think that a career as an English teacher looks more appealing.

"This is the exact opposite of what I expected," he said a few blocks from the New York Stock Exchange. "I don't want to be part of this big mess."

MICHELLE

Arizona Council on Economic Education

EconomicWatch: Citi Dodges A Bullet

The troubled bank secures an additional capital injection from the U.S. government and guarantees on troubled assets.

NEW YORK - The U.S. federal government on Sunday announced a massive rescue package for Citigroup - the latest move to steady the banking giant, whose shares have plunged in the past week.

The plan has two key features:

First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

The government will impose other restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share and will face limits on executive compensation. Plus, it will be expected to adjust mortgages for troubled borrowers, according to procedures outlined by the FDIC.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," said a joint statement by Treasury, Federal Reserve and the FDIC.

Under the terms of the Citigroup rescue package, the bank would be on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. It would cover 10% of losses above that amount, with the government shouldering the rest.

A Scary Week

The plan comes after the company's stock plummeted over fears about its exposure to toxic mortgage assets.

Citigroup ( C, Foretune 500) shares lost close to two-thirds of their value last week amid concerns about the underlying health of the bank - over the past year, the company has recorded close to $21 billion in losses. As of Friday's close, Citigroup shares had dipped below $4 a share, down 87% this year.

The most recent slide comes on the heels of news earlier this month that the Treasury Department was abandoning its initial rescue plan to buy troubled assets from banks - Citigroup had been seen as a major beneficiary of that strategy.

Instead, as part of the $700 billion bailout package that was signed into law in early October, Treasury has focused on making direct investments in banks. In exchange for equity stakes, the agency has injected $25 billion into Citigroup and an additional $100 billion into eight other major U.S. financial institutions.

That rescue package has yet to fully calm markets.

Will

Money, FOX News, WSJ

Arrogant & Out of Touch Auto Execs Fly Corporate Jets; Tin Cups in Hand

There are 24 daily nonstop flights from Detroit to the Washington area. Richard Wagoner, Alan Mulally and Robert Nardelli probably should have taken one of them.

Instead, the chief executives of the Big Three automakers opted to fly their company jets to the capital for their hearings this week before the Senate and House -- an ill-timed display of corporate excess for a trio of executives begging for an additional $25 billion from the public trough this week.

"There's a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands," Rep. Gary L. Ackerman (D-N.Y.) advised the pampered executives at a hearing yesterday. "It's almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . . I mean, couldn't you all have downgraded to first class or jet-pooled or something to get here?"

The Big Three said nothing, which prompted Rep. Brad Sherman (D-Calif.) to rub it in. "I'm going to ask the three executives here to raise their hand if they flew here commercial," he said. All still at the witness table. "Second," he continued, "I'm going ask you to raise your hand if you're planning to sell your jet . . . and fly back commercial." More stillness. "Let the record show no hands went up," Sherman grandstanded.

By now, the men were probably wishing they had driven -- and other members of the House Financial Services Committee weren't done riding the CEOs over their jets. "You traveled in a private jet?" Rep. Nydia M. Velázquez (D-N.Y.) contributed. Rep. Patrick T. McHenry (R-N.C.) felt the need to say that "I'm not an opponent of private flights by any means, but the fact that you flew in on your own private jet at tens of thousands itself dollars of cost just for you to make your way to Washington is a bit arrogant before you ask the taxpayers for money."

It was a display of stone-cold tone-deafness by the automaker chiefs. In their telling, they have no responsibility for the auto industry's current mess. Threatening the nation with economic Armageddon if they are not given government aid, they spent much of the session declaring what a fine job they've been doing in Detroit.

"Chrysler really is the quintessential American car company!" Chrysler's Nardelli boasted.

"We have products that are winning car and truck of the year regularly," General Motors' Wagoner proclaimed.

"We are equal to or better than Honda and Toyota," Ford's Mulally added. "Every new vehicle that we make, whether it's small, medium or large, is best in fuel efficiency. The given is safety. And we have more, at Ford, more five-star quality and safety ratings than any other automobile."

Committee Chairman Barney Frank (D-Mass.) cut him off. "Thank you, Mr. --"

"And the best value!" Mulally blurted out.

"Commercials can go later," the chairman proposed.

They would have to go later, because members of the committee wanted to turn the session into a special edition of "Car Talk." Rep. Mike Castle (R-Del.) spoke of his '99 Jeep: "It probably has about 150,000 miles on it, and it's still running doggone well." Rep. Jeb Hensarling (R-Tex.) invoked his '98 Jeep Cherokee: "Small problem with the back hatch staying open; we can talk about that afterwards." Rep. Michele Bachmann (R-Minn.) praised her Chrysler minivan. Rep. Judy Biggert (R-Ill.) had good words for her Jeep but complained that it didn't come in a hybrid version.

"I drive the same '66 Plymouth Valiant that I've always had," Ackerman proffered. He went on to discuss a problem with the GPS system in his Cadillac. "I wanted a loaded car in blue; I had to reach out to five states to find one in blue," he complained.

It seemed everybody had a car story to tell. Rep. John Campbell (R-Calif.) let it be known that he was a car dealer for 25 years. Rep. Stephen Lynch (D-Mass.) disclosed that he had worked at the GM plant in Framingham. Rep. Donald Manzullo (R-Ill.) wanted to see more ads for the car made in his district, while Rep. Michael Capuano (D-Mass.) said the Edsel was once made in his home town. Rep. Walter Jones (R-N.C.) read from Cicero and held up photos of cars. And Rep. David Scott(D-Ga.) had no car stories to tell but delivered the surprising news that the problem with the Titanic was not its collision with an iceberg.

Detroit area lawmakers made passionate arguments that the carmakers had already done what "they possibly can to restructure and become globally competitive," as Rep. Thaddeus McCotter (R-Mich.) put it.

But the executives were not helping their own case. When Rep. Paul Kanjorski(D-Pa.) tried to find out when GM would run out of cash, Wagoner hemmed and hawed until the lawmaker protested that "I don't quite understand what the hell you just told me." When Rep. Ed Perlmutter (D-Colo.) asked about GM's outlook for the quarter, Wagoner informed him that "we don't provide financial guidance in earnings."

So it was hard to feel sorry for the executives when Rep. Peter Roskam (R-Ill.), late in the hearing, reminded them again that "the symbolism of the private jet is difficult," and mischievously asked the witnesses whether, in another symbolic gesture, they would be willing to work for $1 a year, as Nardelli has offered to do.

"I don't have a position on that today," demurred Wagoner (2007 total compensation: $15.7 million).

"I understand the intent, but I think where we are is okay," said Mulally ($21.7 million).

"I'm asking about you," Roskam pressed.

"I think I'm okay where I am," Mulally said.

And don't even think about asking him to fly commercial.

Lisa

Reuter's, AP, Congressional Record

EconomicWatch: Americans Return To Thriftiness

Frugality is making a comeback.

Fearful that economic conditions could get worse and stay that way, Americans are showing an enthusiasm for thriftiness not seen in decades.

This behavioral shift isn't simply about spending less. The New Frugality emphasizes stretching every dollar. It means bypassing the fashion mall for the discount chain store, buying secondhand clothes and furniture, or trading down to store brands.

There's more business for repairmen and less for salesmen. Consumers are clipping more coupons and swiping their credit cards less.

Not long ago, yoga teacher Gisele Sanders shopped at the Nordstrom's in Portland, Ore., and didn't think twice about dropping $30 for a bottle of Chianti to go with dinner. That was before her husband, a real estate agent, began to feel the brunt of slowing home sales. Now Sanders, 53, picks up grocery-store wine at $10 or less per bottle, shops for used clothes and plans to take her mother's advice about turning down the thermostat during winter. "It's been a long time coming," she said. "We were so off the charts before."

That kind of scrimping may be good for stressed family budgets, but it's bad for the nation's overall economy -- and that has the potential to reinforce the miserly mood. Yet with home prices, 401(k)s and job stability suffering, such frugality is likely to be more than a fad.

"It is a whole reassessment of values," said Candace Corlett, president of the consulting firm WSL Strategic Retail. "We've just been shopping until we drop and consuming and buying it all, and replenishing before things wear out. People are learning again to say 'No, not today.' "

The trend is evident in where cash registers are ringing, and where they are not.

Wal-Mart, BJ's Wholesale Club and Goodwill thrift shops are thriving, while Saks and Abercrombie & Fitch are struggling. Likewise, as casual dining chains such as O'Charley's and Red Lobster see fewer customers, McDonald's is serving more, including people who have given up $4 Starbucks drinks in favor of the fast-food chain's expanding coffee menu. Even Spam has made a comeback. Tellingly, Wal-Mart said recently it has seen a 2 percent jump this year in shoppers from households earning at least $65,000. Retail sales fell 2.8 percent in October, the fourth straight monthly drop, as unemployment hit a 14-year high of 6.5 percent.

The National Association for Business Economics on this week projected that the overall U.S. economy, after shrinking at the annual rate of 0.3 percent in the July-September period, will contract at a rate of 2.6 percent in the current October-December quarter.

The housing bust, credit crunch and stock market plunge have eaten away at the retirement savings and confidence of consumers who for years operated on a buy-now, pay-later ethos, chasing bigger homes, bigger cars and better brands. That is forcing families to bring their spending in line with their income and to rethink priorities.

"Everybody has been trying to keep up with the Joneses and trying to look rich when they're not," said Erin Pettingill, 24, a married mother of two preschool children in Provo, Utah, who started a blog called "Iamfrugal."

"You can't necessarily have everything you want when you want it," she added. "And there's nothing wrong with that."

Not long ago, if Ann DeRoo needed something for the house or another ingredient for that night's dinner, she would simply jump into her car and go get it. Not anymore.

"Now we stop and think a little bit," said the mother of three in suburban Cincinnati. "We don't just run errands and buy things. We have everything listed that we need." And that list doesn't include DVD rentals, dinners out or new plants and flowers for the yard.

And even though gas prices have plunged below $2 a gallon from double that level a couple months ago, DeRoo said her family will continue to combine trips to save on fuel.

Economists and consumer experts say it's difficult to predict how long the pullback will last, particularly among generations of consumers who have never seen such a sharp economic downturn.

"This is scary stuff and confidence is such an elusive thing," said Larry Waldman, senior research scientist at the University of New Mexico's Bureau of Business and Economic Research.

Timothy Duy, an economics professor at the University of Oregon, is convinced "the economy is moving away from consumerism." Just how far remains to be seen, but a recent Pew Research Center survey found that more than half of Americans say they have cut back in the past year and about half agreed that people "should learn to live with less."

People are not only buying cheaper, they're buying less, said Joachim Vosgerau, an assistant professor of marketing at Carnegie Mellon University's Tepper School of Business who specializes in consumer behavior.

"It seems like this trend is only going to continue," Vosgerau said.

It doesn't require a lost job or decimated retirement account to make shopping for new things seem wasteful.

In Maine, Sindi Card said her husband's job is secure. But because the couple has two sons in college in the uncertain economy, she tried to fix her broken 20-year-old clothes dryer. It was a stark change from the past, when she would have taken the old model to the dump and had a new one delivered.

With help from an appliance-repair Web site, she saved hundreds of dollars. "We all need to find a way to live within our means," she said.

Corlett said one recent WSL Strategic Retail survey detected a "saving is cool" culture developing, with more than half of those polled agreeing they take pride in the ways they've found to save money. "The longer this (downturn) lasts, the more entrenched it will become," Corlett said.

Faced with a spending decision, Baby Boomers sometimes ask: "What would Ward Cleaver do?" They know the proudly prudent father from "Leave it to Beaver" wouldn't let his wife, June, rush to buy the hot new toy their son Beaver wanted; he would tell the boy to get a paper route and save his money until he could buy it himself.

"When I was growing up, we heard 'No' a lot," Corlett said. "It wasn't done in a mean way. Then a generation of parents grew up successful, and their kids had to have their own rooms, and there was a run on Elmos and Wiis and whatever else."

Indeed, some of the behavior associated with the New Frugality betrays an America having difficulty letting go of expensive tastes.

Donna Speigel has built a Cincinnati-area chain of upscale consignment shops called The Snooty Fox aimed at women who still have to have their Louis Vuitton and Ann Taylor products, but want them at a fraction of the retail price. Her sales were up 17 percent in October.

In the suburbs of Dallas, Kay Smith still drives a black Lexus, but now passes by the high-end malls and heads to Wal-Mart.

"I think about everything I buy now," Smith said.

Will

WSL Strategic Retail, University of New Mexico, Carnegie Mellon, University of Oregon