Archive for April, 2009

U.S. rulemaker eases mark-to-market’s bite (Reuters)

Thursday, April 2nd, 2009 | Finance News

NORWALK, Connecticut (Reuters) –
U.S. accounting rulemakers bowed to congressional and financial industry pressure on Thursday by allowing more flexibility in valuing toxic assets, a move expected to boost bank earnings and improve their capital levels.

The five-member Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in using mark-to-market accounting that has forced billions of dollars in writedowns and been blamed for worsening the recession.

But the board split 3-2 on backing guidance that would let lenders take smaller losses on impaired assets such as mortgage backed securities, a move critics said would let banks hide reality from investors.

The accounting changes were credited with helping U.S. stock rally for a third day, by supporting optimism the financial sector will stabilize in the short term.

Many lawmakers, banks and other supporters of the changes argue that pricing assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through the writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.

Investors and some former regulators take a different view, saying that more flexibility with the rules would let big banks hide the real value of their troubled assets.

"I think it's a mistake. If it's too cold in the room, you don't fix the problem by holding a candle under the thermometer," William Poole, former Federal Reserve Bank of St. Louis president, told Reuters at a conference in New Orleans.

"It may increase reported bank earnings by 20 percent, but it has nothing to do with the reality of bank earnings. It's very important to maintain that distinction," Poole said.

Initial euphoria among business lobbyists over the changes was tempered as it became clear FASB would not let banks presume that all transactions within a market are distressed just because a market for an asset is inactive.

"FASB has taken one step forward and one step back," said Thomas Quaadman, executive director for reporting policy at the U.S. Chamber of Commerce.

The changes would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results. The guidance documents should be issued next week, FASB staff said.

FASB SPLIT ON WRITEDOWN

FASB deliberated for three hours in a drab boardroom that was filled with dozens of representatives of accounting firms, banks and insurance companies. "I think this is an improvement," FASB Chairman Robert Herz said of the changes.

But board members Marc Siegel and Thomas Linsmeier cast dissenting votes on the guidance for how companies write-down assets that have dropped significantly in value.

"I'm afraid that this change will result in fewer impairments being recognized, and I don't think that will help the investor confidence in the balance sheet," Siegel told the meeting.

FASB said at its meeting that the objective of mark-to-market in inactive markets should be to determine what an asset could fetch in an "orderly" transaction between market participants. Such an "orderly" transaction would not include distressed transactions or fire-sales, it said.

A Congressional panel last month told Herz to move quickly to ease the mark-to-market guidance or lawmakers would take action. Four days later FASB issued two proposals: one to give banks more flexibility in applying mark-to-market accounting and another addressing when banks must take writedowns on impaired assets.

SCRUBBING TOXIC ASSETS

FASB's new guidance could affect a federal lending program for asset-backed securities and a public-private partnership to purchase troubled assets unveiled in March by the White House.

The Obama administration's plan to scrub toxic assets off banks' balance sheets depends heavily on banks' and potential investors' ability to agree on a value for an asset.

Robert Willens, a tax and accounting analyst, said if a bank gets to write up the value of securities in its available-for-sale portfolio, to levels beyond what potential bidders are wiling to pay, there could be a problem.

"Banks will be unwilling to sell these assets (into the government's Public-Private Investment Program) because they would have to record a loss. It could have a perverse impact on the whole process."

But the Financial Services Roundtable, representing big financial companies, disagreed.

"It would help the toxic asset purchase program for mortgage securities by creating a market value for those securities, which will narrow the difference between buyers and sellers," said Scott Talbott, the roundtable's senior vice president for government affairs.

The accounting board considered hundreds of letters and e-mails sent by banks, investors and others commenting on the FASB proposals.

Herz also said FASB "did extensive outreach to investors, particularly major investors in financial institutions" ahead of Thursday's meeting.

But FASB members Linsmeier and Siegel sparred over whether to call the writedown guidance "ridiculous" or "ludicrous," and Linsmeier said the board was making changes to address regulatory capital concerns.

"I find one of the most unfortunate parts of this to be the fact that we're continuing to take the responsibility on, rather than having the regulators to take this on," said Linsmeier, a FASB member for three years and former chairman of Michigan State University's accounting department.

Siegel joined the board in October. He had led an accounting research and analysis team at RiskMetrics Group that focused on investor-oriented issues.

(Additional reporting by Emily Chasan and Rachelle Younglai in Washington, Joseph Giannone in New York, Michael Erman and Paritosh Bansal in New Orleans; editing by Tim Dobbyn)

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CarMax 4Q profit rises on lower expenses (AP)

Thursday, April 2nd, 2009 | Finance News

RICHMOND, Va. – Auto retailer CarMax Inc. said Thursday its fourth-quarter profit jumped 72 percent as lower expenses and a profit in its financing arm offset the impact of falling sales.

The earnings beat Wall Street expectations but revenue fell short. Its shares rose almost 10 percent in afternoon trading.

CarMax said it couldn't offer a financial forecast for this fiscal year, citing unprecedented declines in traffic and sales and volatility in the credit market.

But it cautioned that if trends do not improve, it anticipates a double-digit decline this year in used car sales at stores open at least a year.

The Richmond, Va.-based company, which operates 100 stores, said it earned $37.5 million, or 17 cents per share, for the three months ended Feb. 28, compared with $21.8 million, or 10 cents per share, a year ago.

Total sales fell 28 percent to $1.47 billion from $2.04 billion a year ago. CarMax said that same-store sales, or sales at stores open at least a year, tumbled 26 percent during the quarter.

Thomson Reuters said analysts it surveyed expected a profit of 2 cents per share on $1.62 billion in sales.

Shares of CarMax rose 77 cents, or 6.2 percent, to close at $13.23 Thursday. The stock has traded between $5.76 and $21.99 over the past 52 weeks.

"We continue to be negatively impacted by weak consumer demand," Tom Folliard, the company's president and chief executive officer, said in conference call with analysts.

Used vehicle sales dropped 26.8 percent, while new vehicle sales fell 41.6 percent, the company said. The average selling price of its used vehicles declined 7.4 percent due to industrywide decreases in used car price.

"While we experienced a small decline in our share of the late-model used vehicle market for the quarter, we gained market share for the full year," Folliard said. "We believe that our superior consumer offer will allow us to continue to gain share over the long term."

The company's auto financing arm posted a profit of $28 million on lower funding costs in the fourth quarter. A year ago, the financing arm lost $1 million due in part to $31.4 million in one-time adjustments related to projected losses for defaulted loans.

CarMax also said it saw a 54.4 percent decline in its third-party finance fees, partially affected by a reduction in unit sales, a shift in providers and arrangements with certain providers.

Expenses for the fourth quarter fell 10.6 percent to $196.7 compared with the year-ago period due to efforts to curb store and corporate overhead costs.

CarMax also said its total number of associates declined to about 13,000 at of the end of fiscal 2009 from a peak of about 16,400 in May 2008.

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More signs of economic hope; grim jobs report due (AP)

Thursday, April 2nd, 2009 | Finance News

WASHINGTON – Fresh signs that factories are coming back to life and a bank CEO's encouraging outlook fueled more hopes Thursday that the economy may soon emerge from the cellar, briefly lifting the Dow Jones industrials over 8,000 for the first time in two months.

The job market, among the last to turn around in an economic recovery, remains weak, though. New claims for unemployment last week were worse than forecast, and Friday's reading on how many jobs the nation lost in March is widely expected to be grim.

At the G-20 meeting of world powers in London, President Barack Obama said international agreements, including a plan to commit $1.1 trillion to fight the downturn, were a "turning point in our pursuit of global economic recovery."

The Commerce Department said orders for manufactured goods rose 1.8 percent in February, reversing six straight monthly declines and easily beating estimates of another drop.

"There is now some solid evidence that the period of economic free-fall is now behind us, that the next step will be a slower rate of decline," said Nigel Gault, chief U.S. economist for consulting firm IHS Global Insight.

Gault predicted in an e-mail that the economy will bottom out in the second half of the year, cautioning that he did not believe the economy was yet ready to grow again.

Economists expect Friday's jobs report to show U.S. employers cut 654,000 jobs in March, with the unemployment rate rising to 8.5 percent from 8.1 percent, according to a survey by Thomson Reuters. Some economists estimate as many as 750,000 jobs lost for March.

Gault expects the unemployment rate eventually to rise to 10 percent before reversing.

Still, recent economic reports have indisputably been more positive. Earlier this week, pending home sales and construction spending both came in better than expected, and there have also been signs shoppers are loosening the death grip on their wallets.

"Some of the recent economic indicators have been more encouraging than they were in the winter, when every indicator pointed in the same direction: straight down," said Stuart Hoffman, chief economist at PNC Financial Services Group.

But layoffs continue to pile up. Last week alone, the Labor Department said, initial claims for unemployment insurance rose to a seasonally adjusted 669,000, the highest in a generation and up from the previous week.

And unemployed workers are having difficulty finding new jobs. The tally of laid-off workers claiming benefits for more than a week rose 161,000 to 5.73 million, setting a record for the 10th straight week.

While initial jobless claims reflect recent layoffs, the monthly jobs report takes into account new hires and calculates a net change.

Traditionally, the job market doesn't pick up until well after a recovery starts. The stock market, on the other hand, generally bottoms out before the economy does, and stocks have been on a steady march higher for three weeks.

The Dow Jones industrial average spent most of the trading day over 8,000, its first time in that territory since early February, then dipped to close at 7,978, a gain of 216 points, or almost 3 percent.

In downturns over the past 60 years, the Standard & Poor's 500 index has hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak.

Financial stocks led the rally on Wall Street after the board that sets U.S. accounting standards gave banks and other companies more leeway in how they value assets and report losses.

Bank of America CEO Ken Lewis also bolstered the financial markets when he told CNBC that the recession is "getting close to the bottom."

At the G-20, world leaders pledged $1.1 trillion in loans and guarantees to struggling countries and agreed to crack down on tax havens and hedge funds. But they remained divided on how to attack the global recession. The United States and Britain want more stimulus measures, while European politicians want more regulation.

The European Central Bank also agreed to cut a key interest rate to a record low of 1.25 percent. In the United States, the key Federal Reserve interest rate has been at a record low for more than three months.

Employers are eliminating jobs and taking other cost-cutting measures to deal with sharp reductions in consumer and business spending. The current recession, now in its 17th month, is the longest since World War II.

Just this week, 3M Co., the maker of Scotch tape, Post-It Notes and other products, said it will cut 1,200 jobs, or 1.5 percent of its work force, because of the global economic slump. That includes hundreds in 3M's home state of Minnesota.

Companies reduced their payrolls by 651,000 jobs in February, a record third straight month of job losses above 600,000. As a proportion of the work force, the number of people on the jobless rolls is the highest since May 1983.

If job losses in the U.S. continue to mount, it could derail the "little flicker of light we've seen in the economic data," said Carl Riccadonna, senior U.S. economist at Deutsche Bank. That could mean a pullback in consumer spending and more late payments on credit cards, auto loans and other debt.

The Obama administration's $787 billion stimulus package, approved by Congress in February, is trying to counter the recession by providing money for public works projects, extending unemployment benefits and helping states avoid budget cuts.

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AP Business Writer Jane Wardell in London and Tim Paradis in New York contributed to this report.

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