Archive for February, 2009

Obama budget plan forecasts soaring deficits (Reuters)

Thursday, February 26th, 2009 | Finance News

WASHINGTON (Reuters) –
President Barack Obama forecast the biggest U.S. deficit since World War Two in a budget on Thursday that urges a costly overhaul of the healthcare system and would spend billions to arrest the economy's freefall.

An eye-popping $1.75 trillion deficit for the 2009 fiscal year underlined the heavy blow the deep recession has dealt to the country's finances as Obama unveiled his first budget. That is the highest ever in dollar terms, and amounts to a 12.3 percent share of the economy -- the largest since 1945. In 2010, the deficit would dip to a still-huge $1.17 trillion, Obama predicted.

With that backdrop, his budget represents a gamble that Americans are ready for the sort of change they embraced by electing him in November -- a shift of wealth through higher taxes on the rich to pay for more government attention to healthcare, education, climate change and social programs.

The coming fight with Congress -- where the Republican opposition quickly opened fire on the plan -- will show whether Americans weary of paying for a raft of expensive bailouts for banks and the car industry can get on board with more hefty doses of big government.

Obama, a Democrat, promised to get the red ink under control even as he planned new spending priorities that veered sharply away from the policies of his Republican predecessor President George W. Bush.

"I don't think that we can continue on our current course. I work for the American people, and I'm determined to bring the change that the people voted for last November," said Obama, who took office on January 20.

Republicans condemned the plan as showing a dedication to "tax-and-spend" policies, presaging major political fights getting the budget passed.

"I think we just ought to admit we're broke. We can't continue to pile debt on the backs of our kids and grandkids," said John Boehner, leader of the Republicans in the House of Representatives.

The cost of extra borrowing to pay for the record budget deficit pushed U.S. stocks and government debt prices down on Thursday. The budget's healthcare plans delivered a hit to shares in health insurers and drugmakers.


House Speaker Nancy Pelosi, a California Democrat, praised Obama's spending priorities and chided Republicans for what she saw as their new found interest in limited government.

"Perhaps ... they (the Republicans) have amnesia," Pelosi said, noting that with Bush at the helm they turned budget surpluses into deficits, in part through significantly higher government spending.

But some analysts questioned whether Obama's goals were realistic at a time when the economy is still in crisis and the surging deficits threaten to burden a future recovery.

"There are some good things in this budget but a lot still seems very wasteful. The market is crumbling around us and economies are in the tank," said Dan Cook, senior market analyst with IG Markets in Chicago.

Obama sought to push ahead with a campaign promise of expanding healthcare to the 46 million people who are uninsured in the United States. His budget includes a 10-year, $634 billion reserve fund to help pay for the president's proposed healthcare reforms -- much of it paid for by raising taxes on those earning more than $250,000 a year.

The budget also raises the possibility of more than doubling the government's aid to the battered financial sector.

The administration put in a "placeholder" to buy as much as $750 billion of assets from financial firms, which have been nearly crippled by an overhang of bad mortgage debt. Assuming one-third is lost, the ultimate cost to taxpayers would be $250 billion, the budget said.

Obama has not decided whether to seek that money, but if he does, it would come on top of an existing $700 billion financial bailout program, which has been unpopular with many Americans who see it as rewarding Wall Street bankers who made risky bets on mortgages securities.

The proposed $3.55 trillion spending blueprint for the 2010 fiscal year that begins October 1 provides the broad outlines of a more detailed one to be released in April.

While Obama has broad support since Congress is controlled by Democrats, he could face a fight -- including among fiscal conservatives in his own party -- about spending goals.

The deficit figure reinforced concerns the government will need to sell record amounts of debt to pay for programs aimed at pulling the economy out of a deep recession.

Obama set a goal of slashing the deficit to $533 billion, or 3 percent of GDP by 2013. A rollback of the Bush tax cuts for wealthy Americans and a planned drawdown of U.S. troops from Iraq are expected to help rein in the shortfall.


Obama is seeking an additional $75.5 billion for wars in Iraq and Afghanistan for the rest of the current fiscal year. He is requesting $130 billion for military operations in the two wars for 2010, which would be down from the roughly $140 billion he expects will be needed this year.

Washington spent about $190 billion on the wars in 2008. Obama looks likely to order U.S. combat troops to withdraw from Iraq over about 18 months, according to U.S. officials. At the same time, he is ramping up the military effort in Afghanistan.

Obama's budget proposal lays out spending cuts in farm subsidies and other areas to meet the deficit-reduction goal. [ID:nN262396]. But such programs are popular with lawmakers -- both Republicans and Democrats --from states with big agricultural sectors who may be loath to allow cuts.

The budget includes billions in revenues, starting in 2012, from a greenhouse gas emissions trading system. That is central to Obama's proposals to fight global warming, which are a major departure from the policies of Bush, who was widely criticized by environmentalists for resisting action.

The $85-billion U.S. college student loan business reeled from a budget proposal to axe the giant federally guaranteed student loan program. In a major shift that severely undercut shares in top student lender Sallie Mae, the budget called for moving most student lending into the direct-loan program run by the U.S. Education Department.

The $1.75 trillion budget deficit forecast for this year reflects shortfalls accumulated under Bush as well as new spending proposals under the $787 billion economic stimulus package Obama signed earlier this month.

While Obama is still basking in high approval ratings from the U.S. public, his stimulus package and other efforts to revitalize the economy have done little to win over Wall Street. U.S. stocks prices hit 12-year lows this week.

(Additional reporting by Thomas Ferraro, Jeremy Pelofsky and Emily Kaiser in Washington and Leah Schnurr in New York, editing by Frances Kerry)


AIG, U.S. government discuss easing aid terms: source (Reuters)

Thursday, February 26th, 2009 | Finance News

NEW YORK (Reuters) –
The U.S. government may agree to finance the purchase of some American International Group Inc (AIG.N) businesses, take stakes in assets and ease terms of its aid package to the insurer, a person familiar with the matter said on Thursday.

These are some of a wide range of options under discussion between the government, the insurer and credit rating agencies, as AIG, once the world's largest insurer by market value, looks to avoid a credit downgrade that would trigger a host of liquidity issues and hurt its business, the source said.

Other options that are being discussed include changing the terms of a $40 billion preferred stock investment that has a 10 percent coupon, the source said. New terms could include reducing or even eliminating the dividend on that.

The sides are also looking at the possibility of lowering the interest rate on the government's credit line to AIG, and swapping debt for equity for some businesses, the source added.

AIG may also get an additional equity commitment of several billion dollars from the government, which could come as an expanded credit line, the source said.

But the options are still under discussion, and it was unclear what the final plan would look like exactly, the source said.

"We continue to work with the U.S. government to evaluate potential new alternatives for addressing AIG's financial challenges," AIG spokesman Joe Norton said.


One idea being discussed with the government is that AIG is too big and unwieldy, and some businesses may be more valuable outside of the company than inside, the source said.

Talks include possibly breaking out certain units, including American Life Insurance (Alico), American International Assurance Co (AIA) and the U.S. auto insurance business, the source said.

Under one scenario, there could be a debt-to-equity swap, where the government would take a stake in these businesses and reduce AIG's debt. But the valuation of the businesses was unclear, the source said.

The talks come as AIG expects to post a record $60 billion quarterly loss, according to another source -- that's about $460,000 a minute.

A ratings downgrade could have serious ramifications on the insurer's liquidity and hurt businesses. Customers could cancel their insurance policies if a minimum rating is no longer satisfied.

AIG was first rescued in September after bad mortgage bets left it on the verge of collapse. The government stepped in with $85 billion in bailout financing, as the credit crisis peaked with Lehman Brothers Holdings Inc (LEHMQ.PK) filing for bankruptcy and Merrill Lynch agreeing to be bought by Bank of America Corp (BAC.N).

The government subsequently offered additional financing, bringing the support up to $123 billion.

And in November, the government had to revise its bailout package, raising its aid further, to about $150 billion.

Last year, AIG said it would sell all assets except its U.S. property and casualty business, foreign general insurance and an ownership interest in some foreign life operations, to pay back the government.

While the company has announced some sales, it has been difficult to find buyers and get a good price for assets amid the financial crisis.

Credit for deals remains difficult to arrange due to the crisis and as many would-be buyers struggle with their own problems.


AIG was in talks to sell its U.S. auto insurance unit to Swiss insurer Zurich Financial Services AG (ZURN.VX) in a deal that was expected to be worth around $2 billion, a source has told Reuters, but the transaction has run into problems because of the credit crisis.

Some buyers, especially for the large businesses such as its aircraft leasing unit, International Lease Finance Corp, have been looking for government help with financing, another source has said.

Deadlines for bids for the Asian assets are due Friday, according to sources. The sales could raise tens of billions of dollars for AIG. [ID:nHKG137257]

But there is a sense that prices for the businesses in the current environment will not reflect their true value, a source said.

AIG's shares closed up 6 cents at 52 cents on the New York Stock Exchange.

(Additional reporting by Lilla Zuill; editing by Jeffrey Benkoe)


Sears profit slides, closes more stores (AP)

Thursday, February 26th, 2009 | Finance News

CHICAGO – Struggling retailer Sears Holdings Corp. said Thursday its fourth-quarter profit was cut in half as charges weighed down results and shoppers continued to avoid buying pricey appliances — keeping sales mired in their prolonged slump.

Still, adjusted results for the owner of Kmart and Sears stores managed to top Wall Street estimates, sending the company's stock up nearly 12 percent before it retreated in a broadly lower market.

Chairman Edward Lampert, who acquired Kmart in 2003 and Sears, Roebuck and Co. in 2005, told investors in his long-awaited annual missive that the company's cautious approach to investing capital in stores and closing unprofitable locations — 28 during the fiscal year and another 24 announced Thursday — while paying down debt has helped the chain.

"In the future, there will be many opportunities for us and we intend to seize them," Lampert wrote in the long and sometimes philosophical public letter.

More closures may be possible this year, Lampert said.

The company has been hurt badly by the housing downturn, which particularly affected home appliance sales at its domestic Sears locations. It also cited the pullback in consumer spending brought on by the recession, which hurt home, household goods and apparel sales at Sears and Kmart stores as well as lawn and garden sales at Sears stores.

"Many of our large businesses are highly related to the economy and to housing — appliances, tools, lawn and garden, electronics and fitness," Lampert wrote. "They are not just economically related, but credit-related as well, as they are all big-ticket items that are typically purchased on credit. ... When these sectors rebound, we expect our earnings to rebound as well."

The Commerce Department said Thursday that manufacturers saw orders for big-ticket goods plunge a bigger-than-expected 5.2 percent in January — the sixth straight month of declines.

Overall sales at Sears Holdings fell 12 percent to $13.28 billion, missing analysts' forecast. Same-store sales — a retail industry metric of sales in stores open at least a year — sank 8.3 percent.

Sears' domestic same-store sales dropped 11 percent and Kmart's same-store sales slipped 5 percent, helped by the discount store's lower prices and the promotion of a popular layaway program for holiday shopping.

For the three months ending Jan. 31, the Hoffman Estates-based company earned $190 million, or $1.55 per share. That's down from $426 million, or $3.17 per share, during the same period last year.

Excluding the impact of charges at its Orchard Supply Hardware subsidiary, severance and store closings as well as one-time gains, Sears Holdings earned $360 million, or $2.94 per share — ahead the $2.68 per share analysts surveyed by Thomson Reuters expected.

Lampert said the company's search for a permanent chief executive continues and that the retailer is being "highly selective" as it meets prospective candidates. Interim CEO Bruce Johnson has filled the role for the past year.

Morningstar analyst Kim Picciola said she was glad to get an update on the company's CEO search and said the company — particularly at its Kmart stores — did a better job of managing inventory.

"I think Sears is still continuing to struggle given their merchandising mix," she said. "When you're selling big-ticket items like appliances in this environment it's going to be very difficult to drive sales."

For the full year, Sears said, net income plunged 94 percent to $53 million, or 42 cents per share, from $826 million, or $5.70 per share, in the previous year. Revenue slipped 8 percent to $46.77 billion. Same-store sales dropped 8 percent, while Sears domestic same-store sales fell 9.5 percent and Kmart same-store sales declined 6.1 percent.

Sears has about 3,800 full-line and specialty retail stores in the U.S. and Canada.

Sears shares fell 29 cents to $35.54 in Thursday trading, near the low end of its 52-week range of $26.80 to $112.80.


AP Retail Writer Michelle Chapman in New York contributed to this report.