Archive for April, 2009

GM would require quick bankruptcy: judge (Reuters)

Thursday, April 16th, 2009 | Finance News

VILLANOVA, Penn. (Reuters) –
A bankrupt General Motors Corp (GM.N) could be reorganized in as little as a month, a top bankruptcy attorney said on Thursday, and if the case lingered then a "tremendous sinkhole" could open in the U.S. economy, a Delaware bankruptcy judge said.

GM would have to reach agreement with most parties prior to filing and then move its healthy operations quickly to a new entity that is free of pre-bankruptcy liabilities, said Mark D. Collins, director of Richards, Layton & Finger in Wilmington, Delaware.

"The key is speed," he said, speaking at a panel discussion hosted by the ABF Journal and the New York Institute of Credit. Broad consensus prior to a filing would allow GM to use the courts to force holdouts to any deal.

"The last one not on board with a deal will get run over," he said.

The judge who handles the case, should GM file, would be under pressure to accelerate the proceedings, said Kevin Gross, a judge for Delaware's bankruptcy court.

"It has to be out in 30 to 60 days," he said. "It would open a tremendous sinkhole (in the economy) not to make it happen."

Gross added the case would present a challenge for the court. "How long would it take for a judge to understand it?" he asked.

Gross and fellow Delaware bankruptcy court judge, Kevin J. Carey, said they had no special knowledge of whether GM might file or how the case may proceed, although they both said they expected it to enter bankruptcy.

GM is surviving on more than $13 billion in emergency loans from the government, which has given the company until June 1 to present a plan to restructure its roughly $28 billion in unsecured debt. The government and the company have said bankruptcy is a possibility.

Gross said a court could take steps to speed up the process, such as eliminating some issues relating to federal law regarding mass layoffs.

Carey said it was possible Congress might pass legislation to move GM through bankruptcy more quickly.

The risk of Congress getting involved, said Collins, was that they might attach stipulations such as requiring GM to buy more U.S. auto parts, which could complicate a reorganization.

Collins also said he expected GM to file in New York because of the court's experience and speed, such as in the sale of Lehman Brothers Holding Corp's brokerage business.

Adam H. Isenberg, a partner with Saul Ewing in Philadelphia, said the main difference between Lehman and a possible GM filing was that the Lehman deal was so sudden.

"With GM, every large sophisticated creditor is lawyered up," he said. "If there is opposition from unions or bondholders they are well poised to assert their opposition (to a quick sale of GM's healthy assets) in a coordinated fashion."

(Reporting by Tom Hals; Editing by Richard Chang)

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Fed officials see signs of improvement (Reuters)

Thursday, April 16th, 2009 | Finance News

NEW YORK (Reuters) –
Two top Federal Reserve policy-makers took divergent views on the U.S. economy on Thursday, with the head of the Atlanta Fed seeing a return to growth later this year, while the head of the San Francisco Fed saw the potential for an even deeper contraction.

Both policy-makers -- Dennis Lockhart, president of the Atlanta Fed, and Janet Yellen, president of the San Francisco Fed -- told a conference in New York that it was important to address how to regulate systemically important institutions, those seen as "too big to fail."

Lockhart said he expects the recession to end by mid-year with growth slowly picking up in the following months.

"Today, the economy is still very weak, but there are some encouraging signs that support cautious optimism," Lockhart told the conference at the Levy Economics Institute in New York.

"I do not expect a strong recovery, but I do expect the economic contraction we're now experiencing to give way to slow and tentative growth as early as the third quarter."

The United States has been mired in the most severe recession in a generation since the collapse of the housing bubble in 2007, but some economic data has stabilized, at albeit low levels, and hopes have grown that the downturn is finally bottoming.

Yellen, however, took a more cautious interpretation of the latest economic data, saying signs of improvement should not be taken to mean the U.S. economy is out of the woods.

"The negative dynamics between the real and financial sides of the economy have created severe downside risks," Yellen said. While Fed credit policies have created "a few welcome signs of stability", financial markets remain highly stressed, making them an impediment to recovery, she warned.

"While we've seen some tentative signs of improvement in the economic data very recently, it's still impossible to know how deep the contraction will ultimately be."

Both Yellen and Lockhart are voting members of the Fed's policy-setting committee this year.

Despite his generally optimistic outlook, Lockhart said he remains wary about the impact of weakness in the commercial real estate sector and the harm this could yet do to banks, as well as further nasty shocks from employment and the slide in house prices.

Over 5 million U.S. jobs have been lost since the recession began at the end of 2007, forcing unemployment to 8.5 percent last month, and economists fear employment conditions will get worse before they get better.

SYSTEMIC REGULATION?

Lockhart, a former commercial banker, said the prospect of better times ahead is a good moment to think about the regulatory structure needed to prevent a repeat of the financial crisis, sparked by the collapse in the U.S. subprime mortgage market.

"The post-crisis environment will require agile oversight. This regulatory approach should stress actively managing risk as it evolves," Lockhart said.

He also discussed so-called resolution authority to wind down systemically important financial firms, and emphasized this was much easier to talk about than achieve.

However, tackling this issue is crucial to prevent a repeat of the too-big-to-fail problem that has forced the Fed to bail out key institutions.

"The financial crisis in this country has resulted in financial industry consolidation. The effect of industry consolidation is greater concentration without, as yet, much reduction of systemic risk," Lockhart said.

Yellen said systemically important institutions, including certain banks, insurance firms, investment firms, and hedge funds, should be subject to consolidated supervision by a single agency.

And she said the carnage of the credit market bust has made her reconsider whether the Fed should take preemptive action against developing asset bubbles, which she said can be economic "time bombs."

The Fed's standard line has usually been that monetary policy is too blunt a tool to use to target asset bubbles.

"Now that we face the tangible and tragic consequences of the bursting of the house price bubble, I think it is time to take another look," Yellen said.

Another official of the U.S. central bank, Christine Cumming, first vice president of the Federal Reserve Bank of New York, said at a panel at the conference that a systemic regulator would face a difficult task when trying to identify where such risks really lie. "That's a non-trivial task... it's very hard to do," she said.

(Additional reporting by Alister Bull, Ros Krasny and Gertrude Chavez; Editing by Leslie Adler)

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Recession drags but U.S. recovery hope grows (Reuters)

Thursday, April 16th, 2009 | Finance News

WASHINGTON (Reuters) –
The number of Americans claiming jobless aid hit a record in early April and groundbreaking for new homes slumped last month, but a top Federal Reserve official voiced hope the recession was ending.

"Today, the economy is still very weak, but there are some encouraging signs that support cautious optimism," Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech in New York on Thursday.

Wall Street stocks, taking heart from expectations of reassuring results from corporate bellwethers as economic conditions start to turn the corner, closed higher, with the Dow Jones industrial average rising 1.2 percent to 8,125.

New claims for jobless aid dropped unexpectedly last week in a potentially brighter sign for employment -- although the timing of the Easter and Passover holidays might have skewed the data -- while a steep decline in new housing starts may help work off a heavy overhang of unsold homes.

In addition, contraction in factory activity in the U.S. mid-Atlantic region slowed in April, according to a survey by the Philadelphia Fed. Its business index came in at minus 24.4 from minus 35 in March, somewhat better than a Reuters forecast for minus 32. A reading below zero signifies contraction.

There have also been other promising signs the severity of the recession may be fading. Nokia said on Thursday that mobile telephone destocking, as shops run down inventories before putting in new orders, had bottomed in some markets.

In addition, U.S. officials have clearly begun to talk up the recovery. Fed Chairman Ben Bernanke noted tentative signs of stability this week and Lockhart repeated this theme.

GREEN SHOOTS

"I do not expect a strong recovery, but I do expect the economic contraction we're now experiencing to give way to slow and tentative growth as early as the third quarter," Lockhart told the Levy Economics Institute at Bard College.

But the tone of the key data was still pretty bleak, emphasized by news that General Growth Properties Inc, the second-largest U.S. shopping mall owner, had filed for bankruptcy in the largest real estate failure in U.S. history.

"Taken together, both (housing and jobs) releases will put a damper on the nascent optimism we've seen in the markets in the past couple of weeks," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"While the situation in housing and in the labor markets is not necessarily deteriorating, it's clear that there is no real sign of recovery whatsoever," he said.

The U.S. Commerce Department said housing starts fell 10.8 percent in March to a seasonally adjusted annual rate of 510,000 units, the second lowest on records dating back to 1959, from February's 572,000 units. Analysts polled by Reuters had expected an annual rate of 540,000 units for March.

"The trend seems to be leveling after a calamitous plunge after the Lehman blowup. Single-family (home) permits have been a bit more volatile than starts but tell essentially the same story; we think they too have hit bottom," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Separately, the Labor Department said the number of U.S. workers filing new claims for jobless benefits unexpectedly fell 53,000 last week to 610,000. But so-called continued claims rose to a record 6.02 million in the week to April 4.

The most severe U.S. recession in a generation has already cost five million jobs, driving the unemployment rate up to 8.5 percent in March, and many economists see it heading higher.

The four-week average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, fell to 651,000 from 659,500 the week before.

"The four-week moving average for initial claims usually peaks about two months before the trough of a business cycle, which means the recession could end as early as June," Michael Darda, chief economist at MKM Partners, LLC wrote in a note.

"That would still give us a 19-month downturn, the longest in post-World War Two history," he said.

The Federal Reserve, in a regular survey of business conditions, said on Wednesday the labor market remained soft with lay-offs and hiring freezes widespread. But five of its 12 regional banks saw the pace of decline in the economy slowing.

The Fed -- the U.S. central bank -- also said there were signs the housing market was stabilizing, with an increase in the number of prospective buyers improving confidence.

House hunters are being lured by very low mortgage rates following hefty efforts by the Fed to drive down home loan costs. It has cut key interest rates to almost zero and pumped over $1 trillion into credit markets, including massive buying of mortgage-backed securities, to encourage spending and investment.

However, a report earlier on Thursday from RealtyTrac showed U.S. foreclosure activity was up 46 percent in March from a year earlier, hitting a record high as programs stunting the torrid pace of failing mortgages expired.

(Additional reporting by Lucia Mutikani in Washington and Lynn Adler and Richard Leong in New York; Editing by James Dalgleish)

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