Economy - writings in English

anchi22 · **•• 20:01 ••**

Warren Buffett: Inflation on the horizon

The Berkshire Hathaway chief says policymakers will have to raise money to pay off costly rescue plans - one way or another.

Berkshire Hathaway chief Warren Buffett defended the government's handling of the economic crisis, but warned that the purchasing power of the dollar may fall as policymakers stretch to finance expensive rescue plans.

Reflecting on the near implosion of the financial system last fall, Buffett said officials should be judged more leniently when facing "as close to a total meltdown as you can imagine."

But he warned that efforts such as the Treasury's $700 billion Troubled Asset Relief Program and the $787 billion fiscal stimulus plan passed this year by Congress will have to be paid for, one way or another.

And with political leaders showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency, Buffett said. The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets.

"I haven't had my taxes raised," said Buffett, who has run Berkshire for more than four decades. "My guess is the ultimate price will be paid by a shrinkage of the value of the dollar."

The billionaire investor made the comments Saturday morning at the annual meeting of Berkshire Hathaway (BRKA, Fortune 500) shareholders.

Buffett and Berkshire Vice Chairman Charlie Munger addressed investors on subjects ranging from the company's executive succession plans to Berkshire's derivatives portfolio and the strength of Buffett's biggest financial sector holding, Wells Fargo (WFC, Fortune 500).

Much of the discussion centered on who will take Buffett's place one day. Buffett, 78, hasn't set any plans to step aside but has noted that the Berkshire board spends considerable time planning for his eventual departure.

Buffett affirmed in response to a shareholder question that all three executives who have been identified by the board as candidates to succeed him as CEO are working at Berkshire now. Buffett said as much in the letter to shareholders Berkshire issued in February, declining to identify the candidates.

Buffett shrugged off a question asking whether the next CEO should spend more time at his side. All three CEO candidates are "ready for the job right now," he said. Each is running a big business within Berkshire, which owns numerous insurance, utility and retail companies.

Buffett also said the company's reinsurance chief, Ajit Jain, would be "impossible to replace" and that were he to depart, the company wouldn't expect to invest as much authority in his successor. Jain has been mentioned in press accounts as a leading candidate to replace Buffett as CEO.

Buffett also serves as Berkshire's chief investment officer, and he said that the four candidates to eventually replace him in that role come from both inside and outside the company. None of their identities have been disclosed.

Asked whether any of the candidates' investing portfolios had outperformed the market during last year's rout - the S&P 500 fell 37% in 2008 - he said none of them had, though he didn't view that as disqualifying.

None of the four "covered himself in glory" during last year's market rout, Buffett said. "But then, neither did I," he added, referencing the 10% decline in Berkshire's net worth last year.

Buffett said he still expects Berkshire to make money on the lion's share of the derivatives contracts it has written in recent years. Berkshire has taken substantial mark-to-market writedowns on those contracts as worldwide stock indexes have plunged, raising the odds that Berkshire will eventually have to make payments to its trading partners when the contracts expire.

But Buffett noted that Berkshire - unlike unsavvy derivatives players such as AIG - has no obligation to post collateral with its trading partners in most cases.

He added that the company recently restructured two of its so-called equity put contracts - agreements that give an investor the right though not the obligation to buy a bucket of stocks from Berkshire at a specified date in the future. Those contracts have emerged as a subject of some debate since the stock market's plunge last fall.

Under one of the restructurings, the S&P 500 would have to rise just 13% over the next 10 years for the put to expire worthless. Before that deal, the S&P would have had to rise 72% over 18 years to preclude Berkshire from having to make a payout.

Buffett also said the bank stress tests whose results are due to be released next week shouldn't punish stronger banks such as Wells Fargo, a major Berkshire shareholding that Buffett described as a strong earner.

Some analysts have speculated that regulators may push Wells to sell more stock to increase its capital cushion against future loan losses. The bank last month posted a $3 billion first-quarter profit, though some observers said Wells may not have added enough to its loan loss reserves given rising joblessness and falling asset prices.

Buffett said he would ideally own all of Wells Fargo, though bank ownership rules prevent Berkshire from owning more than 10%.

Buffett defended federal efforts to support the economy, ranging from last fall's financial rescues to the the $787 billion stimulus plan enacted earlier this year.

"Government does need to step in," Buffett said, referring to the 6% contraction of the U.S. economy in the fourth quarter of 2008 and the first quarter of 2009.

That's not to say he is pleased with the earmarks Congress has attached to some of the rescue legislation. Inevitably, Buffett said, when big organizations turn massive resources on a problem, "there's a fair amount of slop."

By: Colin Barr, CNNMoney.com

Citi may need $10 billion more - report

Wall Street Journal reports that Citigroup may need an additional $10 billion to meet the government's capitalization requirements.

Citigroup Inc. may need to generate up to $10 billion in new capital to meet the requirements of the U.S. government's stress tests, the Wall Street Journal reported on its Web site Friday.

Like other financial institutions, the bank is in talks with the Federal Reserve about whether it needs more capital.
0:00 /3:26The recovery is near

Citigroup may need less if regulators accept its arguments about its financial health. In a best-case scenario, Citigroup could have a roughly $500 million cushion above what the government requires, the paper reported, citing unnamed sources.

Calls to Citigroup were not immediately returned. A spokesman for the U.S. Treasury had no comment.

The government created the stress tests as a way to measure the capital needs of the nation's 19 largest banks and their ability to withstand a variety of economic scenarios.

According to a government source, the results are expected to be released to banks on Tuesday and publicly on Thursday.

Analysts believe the government will say all 19 banks are solvent, but that some will need to drum up more capital than others to cushion themselves as the U.S. recession deepens.

The results are expected to show that the banks must raise about $150 billion or more in fresh capital, a scenario that is likely to test the stocks of the neediest banks next week.

NEW YORK (Reuters), CNNMoney.com

anchi22 · **•• 20:01 ••**

Corporate tax crackdown just a start

If profits revert to trend, the extra revenue won't do much to lower the U.S. deficit.

The Obama administration's crackdown on tax haven use by U.S. companies is expected to raise the effective corporate tax rate by 1.5 percentage points to something north of 20%. That still leaves it well below its 1994 level.

If profits revert to trend, the extra revenue - estimated at $210 billion over ten years, around $25 billion annually after their phase-in - won't lower U.S. deficits much. But combining fewer loopholes with a reduction in the 35% headline tax rate would be helpful.

Tax haven curbs were a major plank in President Barack Obama's election platform, and are politically appealing. Monday's batch of them appears to make sense and to close obvious loopholes.

But even at the administration's revenue estimate, the changes won't make much impact on trillion-dollar annual deficits. And that estimate may well be high, because companies will find other ways to get around some of the tax.

On the revenue side, the long-term trend in corporate taxes as a percentage of GDP is approximately flat. They accounted for 2.05% of GDP in 1993-94 and 2.13% in 2007-08 - similar economic years, albeit with the economy heading in opposite directions.

But corporate profits were a far higher percentage of GDP in 2007-08, so the net effective tax rate declined from about 24.1% in 1993-94 to 19.4% in 2007-08. That means that if profits revert to, say, their 1994 share of GDP, government tax revenues will decline, probably by more than Obama's plans are expected to raise.

It also shows how much room there is for tax clean-ups such as Obama's proposed changes to cut out loopholes so as to make room a reduction in the nominal 35% U.S. corporate tax rate, which is high by international standards.

Even if the administration's plans do push the effective corporate tax rate above 20%, that will still be well below 1993-94 levels - and by no means prohibitive. Eliminating these loopholes and others could keep the government's tax revenues intact while allowing the headline rate to be reduced.

That could cut down on companies' expensive tax avoidance strategies that sometimes push economic activity out of the U.S. A lower corporate tax rate with fewer loopholes might well be economically more efficient and yield more revenue.

By Martin Hutchinson, breakingviews.com

Bankers see more losses ahead

Credit cards, commercial real estate are just two trouble spots in 2009, Fed survey of loan officers reveals.

Bankers are bracing for additional losses this year across a wide variety of loan categories, according to a report published Monday by the Federal Reserve, as the nation continues to suffer under the weight of a painful recession.

In the central bank's latest survey of loan officers, more than 90% of domestic lenders warned of further deterioration across such loan portfolios as credit cards, commercial real estate and non-traditional mortgages.

The threat of rising loan losses, which remains the biggest headwind for the nation's banking industry going forward, comes as industry regulators are poised to report the results of "stress tests" of the nation's 19 largest financial institutions later this week.

Some large financial institutions -- including Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) -- are believed to require additional capital as a result of regulators' findings, according to recent reports.

Hoping to minimize their exposure to future losses, senior loan officers at many financial institutions acknowledged that credit continued to remain tight during the first quarter.

Nearly 60% of those surveyed said they tightened their lending standards on credit cards, which was unchanged from when the Fed last delivered its reading on bank lending in February.

Lending standards on prime mortgages also remained elevated, even as demand for prime mortgages surged, according to the Fed.
0:00 /01:51Buffett: 'No big bank will fail'

Banks also moved to rein in existing lines of credit to both U.S. businesses and households during the latest quarter.

About 65% of loan officers surveyed said they had lowered credit limits to either new or existing credit card customers over the last three months.

Banks' willingness to lend money has become a focal point in the ongoing crisis as the U.S. government has provided a massive amount of aid to financial firms in an effort to get credit flowing again.

Despite criticisms from both lawmakers and taxpayers, industry executives maintain they are still making new loans and extending existing credit lines to both consumers and businesses.

Banks have also cited weakened demand for a variety of consumer and business loans, which was once again evident in Monday's survey.

By David Ellis, CNNMoney.com

anchi22 · **•• 20:01 ••**

Atlanta bank failure to have big impact

The collapse of 'bankers' bank' Silverton could lead to pain for 1,400 community banks that were its customers, but experts downplay fears of similar failures.

When regulators announced last Friday they had seized control of the relatively unknown Silverton Bank, its collapse struck many as just another minor casualty in the ongoing economic crisis.

But the demise of the Atlanta-based bank could have broad implications for the entire industry, given Silverton's unique role as a so-called "bankers' bank".

Unlike the 31 other banks that have failed so far this year, Silverton did not take deposits from, or make loans to consumers. Instead, its primary purpose was to offer a variety of services such as check clearing and credit card operations to community banks around the country that find it too costly to do this on their own.

Silverton also often acted as the lead banker on some syndicated commercial real estate loans, a business that helped contribute to its failure.

All told, Silverton serviced approximately 1,400 community banks in 44 states, according to the Federal Deposit Insurance Corporation, making it one of the largest of the 20 or so "bankers' banks" in the country.

But even as regulators attempt to smooth the transition for Silverton's clients, many community banks will suffer as a result of its collapse.

Arguably among the hardest hit will be the hundreds of community banks that were shareholders in Silverton's holding company. Their stakes have been completely wiped out as a result of the failure. Most bankers' banks are cooperatively owned by their community bank customers.

The total dollar impact may be tough to discern at this point, but some individual banks are already warning that they are on the hook for millions as a result.

Nashville-based Pinnacle Financial Partners (PNFP), for example, revealed last week that it would write off $21.55 million in its second-quarter results as a result of the Silverton failure.

Banks that participated on some of the troubled commercial real estate loans that Silverton helped generate may also find themselves at risk, notes Chris Cole, a vice-president and senior regulatory counsel for the Independent Community Bankers of America.

In addition, the institutions that relied on Silverton on a daily basis for services now have to deal with the disruption of finding a new provider.

"There will be some pain," said Cole.

Regulators maintained, however, that they did not expect to see any significant impact on the bank's clients. The FDIC moved to create a bridge bank to take over Silverton's assets, which will allow the institution to continue to operate for at least the next two months. The FDIC also said it had contracted The Independent Bankers Bank, out of Irving, Texas, to assist with the transition.

Silverton's stresses

Experts including Cole, however, have been quick to draw distinctions between Silverton and the nation's remaining bankers' banks.

Silverton was technically chartered as a commercial bank, and it also got caught up in the real estate market fever that swept though the country earlier this decade. Many other bankers' banks avoided the housing debacle.

Nearly half of the firm's total loans, according to a report published by law firm Jones Day, were focused on areas like construction and land development - two areas that have suffered dearly as new home and commercial real estate construction came to a screeching halt.
0:00 /01:51Buffett: 'No big bank will fail'

Compounding those problems was the fact that much of those loans were centered in the Southeast, a region that has become overrun with bank failures as a result of the housing market collapse.

Jerry Blanchard, a partner in the financial institutions practice at the law firm Bryan Cave, who is also helping represent Silverton, acknowledged that the fate of the bank was in some ways foreshadowed by the banking woes across the Southeast.

Look no further than Silverton's home state of Georgia, which leads the nation in failed banks during the credit crisis. Georgia has been home to six bank failures so far this year, and 11 since last fall.

"When community banks catch cold, bankers' banks get pneumonia," said Blanchard.

Still, it appears to be business as usual for other banker's banks, according to representatives of Silverton's peers. It may even be an opportunity for growth as Silverton's clients look for someone else to help out with their transaction needs.

"[Silverton] was in the wrong place at the wrong time," said Jason O'Donnell, a senior research analyst who tracks mid-Atlantic community banks at Boenning & Scattergood. "I would be surprised to see another large bankers' bank go under in the near term."

By David Ellis, CNNMoney.com

anchi22 · **•• 20:01 ••**

Stores won't buy into rebound talk

Retail insiders are betting that it could be 12 to 18 months before consumer spending returns to pre-recession levels.

NEW YORK (CNNMoney.com) -- You can't sell the nation's retailers on the idea that the economy will rebound soon.

Despite some economists' forecasts that the recession could be over by the end of summer, industry watchers say merchants are betting that it's going to be 12 to 18 months before consumer spending gets even close to pre-recession levels.

That's significant because no real rebound in the economy is possible without a pick-up in consumer spending, which accounts for two-thirds of economic growth.

"Anyone who thinks that consumers will return to carefree shopping by September, you have to wonder what they're smoking," said Paco Underhill, an expert on consumer psychology and CEO of retail-focused consulting form Envirosell.

Slashing orders: Merchants have dramatically slashed their orders for new merchandise that they expect to sell in the summer and later this year.

One sign of that, February's volume of retail imports -- such as clothes, shoes and home furnishings -- dropped to the lowest level in seven years, according to the latest Port Tracker report from the National Retail Federation (NRF) and forecasting firm Global Insight.

Import volume for March is expected to be down 19.7% from a year earlier, with April 22% lower, the report said.

Retailers typically order new goods six to eight months in advance of when they expect to sell the products in stores. Declining orders indicate that sellers don't see a pick-up in sales in the coming months.

Craig Shearman, NRF's vice president for government affairs, agreed.

"The retail import volume is a leading indicator of how much retailers think they can sell," Shearman said. "So a lower amount [of volume] is a clear indication that retailers think sales will be down in the spring and summer."

Recovery in 2010? Retail buyers, professionals who help stores select and buy merchandise, are bracing for a tough year.

Although Underhill expects improvement in housing starts and consumer lending by the fall, he cautions that no one should expect consumers "will party like it's 1999."

"It will be another year before spending truly picks up," he said.

"I've talked to fellow buyers and some have cut [orders] by more than half," said Andy Beauchamp, found of the National Association of Retail Buyers, a non-profit buyers' networking group that lists Macy's (M, Fortune 500) among its members.

Because of the economic uncertainty, Beauchamp said some buyers have stopped importing certain items and turned to domestic vendors to better manage inventory levels.

"I was a junior buyer in the 1980s and I remember that it took 18 months before I saw strength come back in spending," he said. "Even after 9/11, it took nine months before confidence returned and people were spending well again."

Experts don't expect consumers to come back to stores on a spree. "Our retail culture is in a major transition. Conspicuous consumption is now bad manners," Underhill said.

But if there is a big consumer comeback, the stores may be out of luck.

"A friend of mine who is a senior buyer for Macy's is terrified," said Beauchamp. "She's being told to keep inventory low. So what happens if sales pick up in the fourth quarter and she has nothing to sell?"

"Usually in a strong economy, vendors can ramp up production quickly and turnaround a new order in 10 days," Beauchamp said. "But the economy has made vendors cautious and many don't have the resources to do such a fast turnaround."

Besides the big chain stores, Main Street mom-and-pop sellers are also "ordering products very close to their need," said Ed Butler, founder of the Butler Group, which represents wholesale manufacturers and importers of gift and home decor items.

"Their orders are running about 20% less than last year," Butler said. "I think this level will continue in the second half of the year."

"We don't see a change [in spending levels] until the first quarter of 2010," Butler said.

By Parija B. Kavilanz, CNNMoney.com

anchi22 · **•• 20:01 ••**

Weeding the budget of $17 billion

Obama administration proposes cuts in funding for more than 100 federal programs in latest salvo in 2010 budget fight.

President Obama on Thursday offered a more detailed look at his 2010 budget proposal, which includes recommendations to cut funding for 121 federal programs and save $17 billion in 2010.

"There is a lot of money being spent inefficiently, ineffectively, and -- in some cases -- in ways that are actually pretty stunning," Obama said.

The $17 billion in savings amounts to roughly 0.5% of the more than $3.5 trillion in spending approved for next year, or 1.2% of the projected $1.4 trillion deficit next year if the president's overall budget is adopted.

Obama said it nevertheless is real money -- even by Washington standards.

"To put this in perspective, this is more than enough savings to pay for a $2,500 tuition tax credit for millions of students as well as a larger Pell Grant -- with enough money left over to pay for everything we do to protect the National Parks," he said.

But it's not necessarily money that would represent an actual reduction in spending. Rather, it's money that is more likely to be reallocated to other endeavors - from a program the administration assesses is not working to a similar program that is.

"The spirit is to eliminate duplication and measure what works and what doesn't and put additional resources into things that are working," said White House budget director Peter Orszag in a call with reporters.

Roughly $11.5 billion of the savings would come from the discretionary side of the fiscal 2010 budget -- that is, for programs whose funding is not automatic. And roughly half of the savings would come from non-defense programs.

The biggest proposed cuts and reductions in the president's budget are defense-related:

* Recruiting and retention adjustments: $6.24 billion
* Future combat systems of manned ground vehicles: $2.98 billion
* F-22 raptor fighter aircraft: $2.9 billion
* Transformational satellite: $768 million
* Joint strike fighter alternate engine: $465 million

In any given year, defense spending typically accounts for more than 20% of the total budget.

Among the smaller programs on the president's chopping block are a long-range navigation system made obsolete by the GPS (cost: $35 million); an early education program called Even Start, the performance of which had been poor (cost: $66 million); and a Department of Education attaché position in Paris (cost: $632,000).

The cuts and reductions are likely to be the first of many to come, the president promised.

A few weeks ago, Obama announced that he had asked his cabinet members to cut $100 million from their agencies' expenses, a number budget analysts characterized as symbolic at best.

On Thursday, he also noted that he has moved to reform the way government funds are awarded, including ending the practice of "unnecessary" no-bid contracts, for a projected savings of up to $40 billion a year. And he has called for the elimination of subsidies paid to private insurers through Medicare, for a savings of $22 billion a year.

Whether or not lawmakers adopt the president's recommended cuts is another matter. They are likely, however, to come up with their own cost-saving proposals. House Speaker Nancy Pelosi, D-Calif., for instance, has given her House committee chairmen until June 2 to provide a list of ways they can reduce expenses.

Deficit on the horizon

Fiscal discipline is among the pillars of the new economic foundation Obama has said he wants to build.

Yet it's unlikely the $17 billion will be used to run down the deficit. A few weeks ago, in previewing the cuts to come, the president said the money saved would be put toward his proposed initiatives in health care, education and energy. Indeed, the $2,500 tuition tax credit and the larger Pell Grant are among his proposals and temporary provisions for them already exist in the $787 billion stimulus package enacted in February.

The House and Senate have agreed to amore than $3.5 trillion budget outline for fiscal 2010, which begins Oct. 1. That's roughly the size of the president's budget request. The proposals Congress and the president are making, however, would push the long-term deficit significantly higher over a 10-year period, even though they would reduce it over the first 5 years.

While few suggest the government retract its spending largesse while the economy is still struggling, deficit hawks caution that lawmakers must do more than pay lip service to the long-term debts situation.

Thanks to the financial crisis, tax receipts are down sharply this year while spending demands have grown to record levels. Forecasts of a slow recovery and estimates of a large price tag for Obama's proposed health care, energy and education initiatives have worsened somewhat the already tough fiscal outlook.

The Government Accountability Office estimates that all federal revenue will be eaten up by government costs for Medicare, Medicaid, Social Security and public debt interest by 2025. Last year, the estimate was 2030, said Charles Konigsberg, an expert on the federal budget at deficit watchdog group the Concord Coalition.

Orszag reiterated the administration's position that the biggest deficit-cutting efforts will come from curbing the growth in health care costs.

Former Congressional Budget Director Rudolph Penner, an institute fellow at the Urban Institute, agrees. And that's why he characterizes the $17 billion in proposed cuts as also largely symbolic in nature.

"It looks trivial in that it won't have a big impact on the long-term fiscal problem. ... [But] there's some symbolic merit to what he's doing," Penner said.

On top of that, the United States is borrowing near record amounts to fund the cost of reviving the economy and financial system.

But ultimately buyers of U.S. debt will want to see harder evidence that the administration is serious about dealing with the country's deficits by reforming Medicare and Social Security and demonstrating a willingness to raise taxes to keep the deficit under control, Penner said.

Cuts shouldn't be made all at once, but phased in giving future retirees time to plan for the adjustments, Penner said.

Sounding a similar note was David Walker, who runs the Peterson Foundation, which seeks to raise awareness of the country's long-term fiscal situation.

"To put things in perspective, $17 billion is equivalent to a little over 3 days of federal deficits at current rates. The federal government needs to engage in more comprehensive efforts on both the spending and tax preference sides of the ledger," Walker said in a statement.

The White House budget office's cost-saving proposals are part of a two-stage release on the final details of Obama's budget request. Next week, the OMB will release more analysis on the country's fiscal policies, along with "minor updates and changes" to the administration's summary tables of budget forecasts, first put out in February.

By Jeanne Sahadi, CNNMoney.com

anchi22 · **•• 20:01 ••**

Big banks to the feds: Thanks but no thanks

Banks needing to raise capital because of stress-test results rush to emphasize they won't be needing further government assistance, thanks very much.

Now that the stress tests are over, the big banks can't emphasize enough that they don't need any more help from the government.

Federal regulators unveiled the findings of their Supervisory Capital Assessment Program on Thursday afternoon, saying 10 banks need to raise a total of $74.6 billion in new common equity. Bank watchdogs at the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have been working on the tests since Treasury Secretary Tim Geithner introduced them in February.

Within minutes of the release of the findings, though, three major institutions - Wells Fargo (WFC, Fortune 500), Morgan Stanley (MS, Fortune 500) and Citigroup (C, Fortune 500) - had unveiled plans to raise capital from private investors. Two others - regional banks PNC (PNC, Fortune 500) of Pittsburgh and Fifth Third (FITB, Fortune 500) of Cincinnati - said they would meet their increased capital requirements by working with private funding sources, though they didn't specify how.

The bottom line: Banks that might not have made it through last fall's market collapse without government assistance - ranging from capital injections to expanded deposit insurance to debt guarantees - are now turning cartwheels to show that they don't need federal help.

The comments come after Geithner told reporters in a conference call Thursday that the stress tests would bolster the strength of the banking system while minimizing government intervention.

"Our sense is these banks are reasonably confident they will be able to raise incremental capital needs from private sources," Geithner said in the conference call. He said the transparency and increased disclosure associated with the stress test would "clear the way" for private capital to return to the banking system.

So far, so good on that count.

Wells Fargo, which needs to boost its common equity by $13.7 billion as a result of the test, said it would sell $6 billion of stock to the public. Morgan Stanley, which was ordered to raise $1.8 billion, said it will sell $2 billion of stock and $3 billion of bonds that aren't guaranteed by the FDIC - a precondition of repaying funds received last fall under the Troubled Asset Relief Program.

PNC, which was told it needs to boost its common equity by $600 million, didn't make definitive plans but said it will meet its obligations "through a combination of growth in retained earnings and other capital market alternatives."

Likewise, Fifth Third, which needs to boost its common equity by $1.1 billion, said in a statement that it "expects to utilize available private market alternatives."

Even Citi, the financial services giant that has taken $45 billion in federal capital and some $300 billion in asset guarantees, was quick with a plan to bring in new common equity. It expanded a program announced in February that will swap privately owned preferred shares, along with some government-owned ones, for common stock.

The lengths banks will go to to show they aren't going to take any more money from the government was illustrated by the stance taken by Bank of America (BAC, Fortune 500), which has taken $45 billion in federal capital and $118 billion in asset guarantees.

Regulators told BofA to raise its common equity position - reflecting the stake held by the direct owners of the company - by $34 billion. BofA responded by emphasizing that it doesn't need more money to meet that demand - and won't need additional help from taxpayers.

"We are comfortable with our current capital position in the present economic environment," CEO Kenneth D. Lewis said. Of the bank's plan to raise new capital, he said, "While it would have a number of components, we will not need any new government money."

Of course, Lewis is particularly eager to avoid taking any new government funds, because of his weakening hold on BofA. Shareholders, irate over his ill-advised decisions to pay up for Countrywide and Merrill Lynch when both were on the brink of collapse, stripped Lewis last week of his chairmanship.

Geithner, asked Thursday whether the government would change managers or directors at banks receiving further federal aid, responded that "we would at that point evaluate whether management is strong enough to lead institution."

Banks that seem unlikely to find themselves in that tight spot were quick to point that out Thursday. Institutions including American Express (AXP, Fortune 500), Goldman Sachs (GS, Fortune 500), State Street (STT, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) were out with statements noting they had passed the tests with flying colors.

"We are committed to supporting healthy economic growth and to doing our part to help our country through these tough times," JPMorgan Chase chief Jamie Dimon said in a statement. "In particular, we remain committed to safe and sound lending and to being a responsible corporate citizen."

By Colin Barr, senior writer, CNNMoney.com

anchi22 · **•• 20:01 ••**

Stress tests: What they mean for lending

The nation's biggest banks have to raise $75 billion in capital, but it won't have much impact on their loan-making. An economic recovery is more important.

Now that we know from the government's stress tests that the American banking system will survive, the question remains what will happen to lending.

The answer is not clear. In fact, experts can't even agree about how much banks are lending now. Some say they've increased the availability of credit since receiving government capital injections, while others say they're still holding back.

They do agree, however, that the stress testing the major banks have recently undergone will have little impact on their lending practices. The tests focused on how much capital the nation's largest banks would need if the economy continued to weaken. While some institutions passed with flying colors, 10 will need to raise a total of $75 billion.

What's even more important than more capital is a more stable economy. As long as home prices are falling and unemployment is rising, banks will be hesitant to lend.

"Politicians expect banks to increase lending in the midst of a recession," said analyst Nancy Bush, founder of NAB Research. "That's just stupid. Lending won't loosen that much for a long time."

And, of course, few industry observers want to return to the days when all you needed to qualify for a loan was the ability to fog a mirror. The current credit contraction is painful, but necessary, they say.

Shifts in lending

To be sure, banks are still making loans. But, as everyone knows, they've tightened their lending standards amid the economic meltdown. Therefore, many people with marginal, or even average, credit are finding it harder to get a loan.

"Banks are trying to lend to qualified customers in every instance they can," Bush said. "It's simply that the qualifications have changed."

Also, a major source of credit has run dry. Many consumers used to turn to non-bank institutions to get loans for cars, college and even homes. But these financial firms depended on bundling these loans into securities and selling them, a market that has evaporated.

And, with the economy in a tailspin, many people have shifted to saving rather than spending money. This has cut into some of the demand for new loans.

Overall, the median change in lending at the top 21 institutions that received capital infusions from the government was a decline of 2% in February, compared to January, according to the Treasury Department. Nine banks increased their lending, while 12 pulled back.

Credit availability differed considerably depending on the type of loan. Mortgage origination, for instance, jumped 35.4%, while consumer loan origination for cars and college fell by 47%.

Where one goes to get a loan matters, too. JPMorgan Chase (JPM, Fortune 500), for instance, says that it made 32% more mortgage loans in the first quarter than it did in the same period a year earlier, and 87% more than it did in the fourth quarter. Its auto loan origination is down 22% year-over-year but has doubled from last quarter.

The bank, however, opened fewer new credit card accounts in the first quarter. The number fell 35% from the previous year and 42% from the previous quarter.

Mortgage originations at Citigroup (C, Fortune 500), meanwhile, fell 40% in the first quarter from the year-earlier period but rose 35% from the prior quarter, according to company filings. Auto loans dropped 88% from a year ago and 40% from a quarter ago.

There are fewer credit cards available at Citigroup, as well. The number of open accounts dropped 10% from a year ago and 3% from the previous quarter.

Touting their lending

Under attack from politicians and people alike, many banks have been touting the lending they are doing.

"In particular, we remain committed to safe and sound lending and to being a responsible corporate citizen," said JPMorgan Chase CEO Jamie Dimon, after the stress test results were made public Thursday. "In the first quarter of this year alone, JPMorgan Chase lent more than $150 billion to consumers, small businesses, non-profits, municipalities, corporations and others."

Of course, there are more than just 21 banks in America. The retreat of the largest institutions has meant opportunities for the nation's 8,000 community banks.

Some 40% report an increase in loan originations over the last year, according to a February survey by the Independent Community Bankers of America. Only 11% said the crisis has "significantly" curtailed their ability to lend.

"A lot of community banks are picking up business from bigger banks," said Bert Ely, a longtime industry analyst.

By Tami Luhby, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

Capital race is on for banks

Wells Fargo and Morgan Stanley are finding stock sales to be a breeze. Those banks that wait, however, may find themselves in a more difficult spot.

The race to raise capital among banks has begun.

Less than a day after the federal government warned that the nation's largest financial institutions face an estimated $75 billion capital shortfall, banks are already scrambling to raise the necessary funds to keep regulators happy.

Some financial institutions, namely Morgan Stanley (MS, Fortune 500) and Wells Fargo (WFC, Fortune 500), hardly gave investors a chance to digest Thursday's results from the government's two-month-long "stress test" program before revealing plans to raise capital through the sale of common stock. Both firms quickly followed that up by pricing their offerings on Friday.

And there are signs that other leading institutions are already looking to follow suit.
0:00 /1:56Stress test reaction

Bank of America (BAC, Fortune 500), whose nearly $34 billion capital shortfall eclipsed that of any of the other 19 institutions tested, registered Friday to sell 1.25 billion shares, which the company estimates will raise nearly $11 billion. In a conference call with investors late Thursday, executives at the Charlotte, N.C.-based lender indicated that they planned to raise much of the $34 billion through new stock issuance.

As recently as a month ago, investors would have scoffed at the notion of a bank successfully issuing stock, given the variety of threats facing the industry. There were, of course, ongoing fears about the underlying assets of many U.S. financial institutions and the impact of the quickly sinking economy, as well as concerns about how much of the government's preferred stakes in various banks might be converted into common stock, which would effectively dilute existing shareholders.

Thursday's release of the official results of the government's stress-test program helped silence many of those fears, says Samuel Hayes, professor emeritus of investment banking at Harvard Business School.

Even as regulators estimated that losses for the group could reach $599 billion under a severe economic scenario, all of the 19 tested were deemed solvent and well-capitalized.

"Now that these issues have been settled, there is considerable interest by investors in establishing a position they don't have or increasing their position in those banks that are going to be the dominant forces," Hayes said.

A capital squeeze?

Renewed interest in U.S. financial institutions is hardly novel, as subsiding fears over the sector have made investors increasingly bullish on banks over the last two months. Since the end of March, the S&P Banking index, one of the closely watched gauges of the industry, is up 49%.

Without that recent run-up, many experts wonder whether banks would have been able to raise as much capital as they did. With both of their offerings oversubscribed, Morgan Stanley and Wells Fargo raised billions of dollars more than they had originally anticipated as part of Friday's stock sale.

Helping to grease the wheels was the fact that both firms issued shares at an 11% discount to where their stock ended in the previous session - a trend that may persist to keep investor interest in banks piqued, experts says.

Of course, those institutions deemed in need by regulators as a result of the stress tests do not have to solely rely on stock sales. Banks may opt to raise capital by selling loans or securities through the government's Public-Private Investment Program (PPIP), entering joint ventures or selling business lines altogether. Bank of America said Thursday that it is actively shopping both its First Republic Bank and Columbia Management divisions.

If a bank is unable to raise capital on its own, it will have to turn to regulators for assistance, which many anticipate would mean converting the government's preferred stake into common stock.

"I'm not expecting a major problem for most banks in getting the [private] capital they need," said Fox-Pitt Kelton analyst Albert Savastano.

But with many lenders rushing to issue stock, there are those analysts who fear that banks that dither about their plans, including some of the regional lenders included in the test, may find it much more difficult to pull off a stock sale.

After all, it might only take one terrible quarterly performance or another painful turn in the economy for investors to sour again on the nation's banking industry.

"Those may be a harder sale," said Ben Holmes, head of Colorado-based research firm Morningnotes.com, which tracks both initial and secondary public offerings.

By David Ellis, CNNMoney.com staff writer

anchi22 · **•• 20:01 ••**

Gas prices surge 10%

Prices at the pump are up 20 cents over the last 14 days but analysts say $4 a gallon is not in the cards.

There's plenty of economic pain to go around these days because of the recession. Now there's this: Gas prices have surged nearly 10% over the past two weeks.

That's a gain of 20 cents during the past 14 days, and the national average hit $2.248 a gallon on Tuesday, according to a survey by motorist group AAA.

The good news: Analysts say a return to last summer's record highs of $4 a gallon is not on the horizon. Indeed, while prices have been on a tear, they are still some 46% lower from the all-time high of $4.114 a gallon hit last July.

The recent spate is not the first time this year that gas prices have risen dramatically for a short period. In January, prices jumped more than 10% in less than two weeks.

And the current runup is not surprising because prices typically increase ahead of the Memorial Day holiday -- the unofficial beginning of the peak summer driving season.

"A bump-up is to be expected this time of year but we're not on the way to another spike," said AAA spokesman Troy Green. He said he would be "surprised" to see prices reach $3.50 a gallon, barring unforeseen supply disruptions such as a hurricane, and he would be "shocked" to see $3.75 a gallon this summer.

The oil factor. Many analysts expect gas prices to continue climbing over the next few weeks, largely because of rising crude oil prices, the main ingredient in gasoline.

"Gas prices have trended higher in lockstep with crude prices," said Chris Lafakis, economist at Moody's Economy.com. "Crude is the biggest input in the price of gasoline."

Oil prices have rallied some 73% over the past three months as signs the economy is headed for a recovery have raised bets that demand for oil and gas will rebound sooner rather than later. Oil prices edged lower Monday after closing at their highest level of the year Friday.

Despite the recent increase in oil prices, the fundamental backdrop for crude market does not support higher prices, analysts said. And that may help keep gasoline prices in line.

"There's some irrational optimism about the future," said Tom Kloza, chief oil analyst for the Oil Price Information Service. "People are looking at the bright side and not the actual data points for supply and demand."

Demand for oil is at its weakest level since 1995 and the nation's supplies of crude are at their highest since 1990, according to the Department of Energy.

Ebb and flow of driver demand. While there are some indications that demand for gas is firming up and that drivers are gradually increasing the number of miles they drive each month, the lousy economy is expected to keep a lid on gas prices.

For drivers, income is the number one issue when it comes to how far and how often they drive, Lafakis said. With unemployment at 8.9% and rising, consumers are likely to remain frugal, keeping downward pressure on gas prices.

"In an environment where income growth is very weak or has declined, you're not going to get the kind of demand that is necessary to push gas prices to $2.50 or $3.00 a gallon," he said. "That won't happen this summer because the macro economic environment is putting a ceiling on gas prices."

By Ben Rooney, CNNMoney.com staff writer

How they'll save $2 trillion on health care

Industry groups promise to work with President Obama to cut costs, but consumer groups raise questions.

Advocating preventive care and streamlining administrative costs are among the steps being promised by the health care industry to help cut $2 trillion in health care expenses over the next decade.

A number of leading industry trade groups -- including those representing insurers, doctors, health care workers and drugmakers -- made that pledge to President Obama on Monday.

"What's brought us all together today is a recognition that we can't continue down the same dangerous road we've been traveling for so many years, that [health care] costs are out of control, and that reform is not a luxury that can be postponed, but a necessity that cannot wait," Obama said at a White House event with representatives of the trade groups.

"The groups who are here today represent different constituencies with different sets of interests," Obama said. "They've not always seen eye to eye with each other or with our government on what needs to be done to reform health care in this country. In fact, some of these groups were among the strongest critics of past plans for comprehensive reform."

But at least one consumer advocate said he was disappointed by the lack of details from the industry groups laying out exactly how they plan to contain rising health care expenses for consumers.

"To me it seems that the industry is saying they will cut health care costs by rationing care," said Greg Scandlen, founder of Consumers for Health Care Choices. "That could mean they will pay only for services that have proven to be effective."

"I think people can ration their own care and not spend on procedures that aren't worthwhile," Scandlen said. "Consumers don't need a government committee or insurers to make that decision for them."

But Paul Ginsburg, president of the Center for Studying Health System Change, took a more moderate view.

"Although I am troubled by the vagueness of the efforts, it is still very positive that these groups that are most affected are recognizing the importance of efforts to contain [health care] costs," Ginsburg said.

While consumers have legitimate concerns about what they won't get through any cost containment efforts, Ginsburg maintained that "consumers have to get on board."

"We have lots of wasteful expenditures in the system," Ginsburg said. "If we don't reduce it, it will increase chances of rationing,"

Industry effort: Among the industry groups, the Service Employees International Union (SEIU), which represents 110,000 nurses and 40,000 doctors, pledged to cut excess administrative costs.

"Cutting health care costs means improving the quality of care patients receive, putting money back into families' pockets and keeping businesses open on Main Street," SEIU health care chairman Dennis Rivera said in a statement.

"SEIU and its members are committed to creating a new American healthcare system by increasing efficiency of care without sacrificing quality of care, and creating a system of wellness, where we now have a system of illness," Rivera added. "We may not always agree, and haven't in the past, but we know that this is the moment and now is the time to fundamentally change the way we take care of American families and workers."

The pharmaceutical industry maintained that proper use of medicines can be one of the most effective ways to achieve better health outcomes and reduce costs.

The Pharmaceutical Research and Manufacturers of America (PhRMA) said in a statement Monday that non-adherence to prescribed medicines has been estimated to cost $100 billion to $300 billion annually, including costs from avoidable hospitalizations and nursing home admissions.

Addressing this issue is part of a quality-focused way to lower healthcare cost growth, the trade group said.

"The coalition also recognizes the importance of encouraging medical innovation as a key element in both improving patient health and reducing the growth of overall health costs," PhRMA president and CEO Billy Tauzin, said in a statement.

Doctors, device makers: For its part, the American Medical Association (AMA), said it has initiated a program to improve "medication reconciliation."

"Patients with multiple conditions often see several physicians," J. James Rohack, AMA president-elect, said in a statement Monday. "Every physician that comes in contact with a patient needs to be aware of all the drugs the patient takes to avoid drug interactions and eliminate unnecessary prescriptions."

"All Americans can help in the effort to keep health-care costs down," Rohack said. "The combination of large-scale national initiatives and efforts by individual patients to engage in prevention and wellness efforts is key to reducing spiraling health costs, preventing chronic disease and keeping America healthy."

The Advanced Medical Technology Association (AdvaMed), an industry association representing medical device manufacturers and medical software suppliers said it was "developing the specifics of how to best achieve the ambitious goals set today."

"Achieving these goals will not be easy, but we are committed to working with the other organizations represented in this group and with the Administration and Congress to better manage rising health care costs while enhancing health care quality," AdvaMed president and CEO Stephen Ubl, said in a statement.

Other groups participating in the initiative include America's Health Insurance Plans and the New York Hospital Association.

By Parija B. Kavilanz, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

Can big banks escape the TARP?

Experts warn of risks involved if the government makes good on its promise to let more banks return taxpayer funds and exit the controversial bailout program.

With the stress tests behind them, banking regulators now face the potentially thornier issue of deciding which banks, if any, should be allowed to repay government funds.

Since regulators unveiled a long-awaited blueprint for returning money from the Treasury Department's Troubled Asset Relief Program last week, lenders have been scrambling to raise cash so they can pay back TARP funds.

Four companies that were among those included in the stress test -- BB&T (BBT, Fortune 500), U.S. Bancorp (USB, Fortune 500), Capital One (COF, Fortune 500) and Bank of New York Mellon (BK, Fortune 500) -- all announced plans Monday to raise capital which would go towards buying the preferred stock and warrants associated with the government's stake.

Before they can return taxpayer funds, banks first have to prove that they can issue debt without having to rely on the Federal Deposit Insurance Corp.'s debt guarantee program.

Even if they are able to do that, many experts contend that regulators may be tempting fate by allowing banks to carry out their TARP repayment plans.

Consider the issue of compensation. As a result of legislation passed earlier this year, banks that participate in TARP are required to rein in outsized bonuses for senior executives and top earners.

Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) are two financial firms widely believed to very close to getting out from under the TARP program. Should they get approval to pay back taxpayer funds, they would no longer be subject to those compensation restrictions.

As a result, they may have a huge advantage over rivals given their ability to lure top earners away from banks that still have to place limits on salaries and bonuses. That could make it even tougher for some of the struggling banks to remain competitive.

"If you let a big firm out, they can hire the best 200 people on Wall Street at a discount," said one compensation consultant who could not speak publicly on the subject.

There is also the potential impact on bank stocks. Even though shares of many banks have rallied in the past two months, Jeff Davis, director of research at investment bank Howe Barnes Hoefer & Arnett, said some investors may now steer clear of lenders that are operating under heightened government and taxpayer scrutiny.

"All other things being equal, over time, [banks that have paid back TARP] are going to have substantially better valuations than those that remain semi-wards of the state," he said.

But perhaps the biggest risk in scaling back the program remains the fact that the government could very well sabotage what the TARP program was originally designed for: to keep credit flowing in the nation's economy.

Until last week, federal officials had offered few indications on how they would respond to the growing chorus of larger banks like JPMorgan Chase and Goldman Sachs that are looking to pay back government funds.

So far, a dozen TARP recipients have managed to repurchase their shares from the Treasury Department, according to agency transactions records.

But many of those firms have been community banks - institutions that provide just a small amount of credit to the overall economy.

Part of the problem is that regulators may be worried about allowing a big bank to repay the money, only to find that the economy takes a severe turn for the worse, notes Kevin Petrasic, a former Office of Thrift Supervision official who is now an attorney in Washington at the law firm Paul Hastings.

"The last thing you want to have is a company pay the money back and find out 3, 6 or 9 months later they really shouldn't have," Petrasic said.

In theory, the stress tests should solve that problem since most of the big banks eager to pay back TARP were found to not need more capital.

Still, some think regulators may only be willing to allow community banks or other non-traditional banks like asset manager Northern Trust (NTRS, Fortune 500) to be among those institutions that return taxpayer money in the weeks and months ahead.

But for the major financial players like JPMorgan Chase that are responsible for making billions of dollars of loans every quarter across the country? Don't be surprised if regulators drag their feet a little longer in order to prevent them from quickly returning TARP funds, experts warn.

By David Ellis, CNNMoney.com staff writer

Biz owners still hurting, but gaining optimism

Sales and employment fundamentals are grim, but small business owners are starting to see a glimmer of light ahead.

The fundaments of their businesses are still bad, but for the first time since last year small business owners are hopeful that economic conditions will soon improve, according to a new survey by the National Federation of Independent Business.

NFIB's monthly "optimism index" rebounded to 86.8, up 5.8 points from April's reading, which marked the second lowest in the survey's 35-year history. Eight of the index's ten components improved, lead by big gains in business owners' expectations that the overall economy and their own company's sales will get better in the next three to six months.

"The most important thing for business owners is that someone is coming in their door," said NIFB Chief Economist Bill Dunkelberg. "They are seeing some more people right now, and they're hoping that that will continue. If it does, we'll see those soft indicators turn into hard indicators."

The survey's hard indicators are still grim. Employment, capital spending, inventories, sales and earnings are still at historically low levels, according to the NFIB's poll of 1,794 small business owners. Just 4% of those surveyed increased employment at their company within the last three months, while 30% reduced it.

Despite a marginal improvement from last month's reading, a majority of business owners said their sales have fallen in the past three months. A record-high 11% reported reducing compensation for their workers, and inventory stockpiles hit a new record low.

"But they have apparently seen something," Dunkelberg said of the survey's finding that business owners' outlook is growing more optimistic. A majority of those polled still expect poor sales for the next three months, but this month's survey saw a 20-point rise in the percentage of business owners expecting their sales to improve in the next quarter. For the first time since October, there are more owners who believe general business conditions will improve than who think that they will worsen.

"While the numbers aren't great, they're definitely an improvement," Dunkelberg said.

The NFIB is comparing the data collected from this recession to the readings it recorded in the early 1980s. Dunkelberg believes that while the optimism index from month to month may wobble, it will generally continue to go up from here.

"We won't know for sure until we have hindsight, but I predict the private sector is starting to heal itself," he said

By Emily Maltby, CNNMoney.com staff writer

anchi22 · **•• 20:01 ••**

Treasury pressed banks to take bailout

Legal watchdog group has obtained documents which seem to indicate banks had no choice but to take TARP funds.

Newly released documents highlight the urgency last fall at the Treasury Department for the CEOs of nine major banks to accept billions of taxpayer dollars as the government worked to rescue the nation's banking system.

The documents, which were obtained by the conservative legal watchdog group Judicial Watch through the Freedom of Information Act (FOIA), were released Wednesday.

They seem to indicate the banks were given no choice but to take the money.

According to a document marked "CEO Talking Points" prepared for then-Treasury Secretary Henry Paulson, "if a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance ..." and warned, "We don't believe it's tenable to opt out because doing so would leave you vulnerable and exposed."

The talking points also showed how the department would announce the move, and how it would characterize the banks' participation.

"We plan to announce the program tomorrow and that your nine firms will be the initial participants. We will state clearly that you are healthy institutions, participating in order to support the U.S. economy," the documents said.

The Treasury Department had no comment.

The crisis talks between the bank CEOs and the Treasury Department were widely reported last fall, but these documents reveal the minute-by-minute drama behind the scenes as the government pressured the banks to take the bailout money.

The Treasury Department gave the CEOs a one-page form containing four bullet points. Written in by hand on each form was the name of the bank and amount of money the bank would take from taxpayers.

In exchange, the banks agreed in writing to "expand the flow of credit to U.S. consumers and businesses."

E-mail communications among Bush administration officials reveal the concern at Treasury when they spotted the cameras staking out the entrance of the department as the CEOs arrived, and their attempts to keep the CEOs moving quickly into the building and away from the cameras.

Other e-mails reveal that Paulson reached out to the presidential campaigns of both Barack Obama and John McCain to brief them on the program.

By Christine Romans, CNNMoney.com

U.S. moving ahead on bank oversight

Treasury chief Geithner says new regulatory structure needs to be 'cleaner' and consolidated - says administration will unveil legislation within weeks.

With bank stress tests out of the way, the Obama administration has turned its focus to reshaping how the government oversees financial institutions and could potentially push to consolidate regulators.

On Wednesday, in a speech to community bankers, Treasury Secretary Tim Geithner said he and President Obama believe the nation needs a "much more simplified, consolidated oversight structure."

Geithner said his agency would unroll a new bill proposing "substantial changes" to the regulatory system in the next couple of weeks. Top Treasury staffers met Friday with leading industry lobbyists to discuss regulatory overhaul, according to industry sources.

Two months ago, Geithner unveiled proposed new regulatory changes to prevent future financial collapses.

The debate over how to carry out such a plan has focused on so-called resolution authority -- or a new system for unwinding financial firms considered too big to fail -- and the creation of a strong, single regulatory agency with more power to monitor risk throughout the financial systems.

High-ranking Obama administration staffers told the group of banking industry lobbyists Friday that they believed the Federal Reserve should have that broader risk-monitoring power, according to a banking official who attended the meeting.

The idea of consolidating agencies has also been discussed, but officials have talked about the idea far less, at least in public forums. It's a touchy subject.

Changing the current regulatory power structure likely would result in folding some agencies into others, experts say. Even in March, Treasury warned against allowing turf wars to get in the way of such changes.

The Securities and Exchange Commission, Federal Deposit Insurance Corp. and Federal Reserve all play major roles supervising banks and other financial institutions.

Yet, a host of other regulatory agencies, including the Office of Comptroller of the Currency, a bureau of the Treasury, which regulates national banks, are also involved. The U.S. Commodities Futures Trading Commission oversees commodity futures and option markets and the Office of Thrift Supervision regulates many mortgage lenders.

The OTS is among those agencies that experts say is on the hot seat. OTS was in charge if overseeing American International Group (AIG, Fortune 500) and failed lenders IndyMac and Washington Mutual.

Some experts have accused troubled companies of "regulator shopping" during the run-up to the financial crisis. Geithner on Wednesday said he wanted to make it tougher for businesses to "just migrate around and move around where regulation is less carefully designed."

Geithner, during his speech to the Independent Community Bankers of America, also revealed a new plan to help smaller banks get access to bailout dollars, extending the deadline small banks can apply for relief another six months.

The Treasury Department intends to loosen up the rules to allow banks with under $500 million in assets to apply for funds under the Troubled Asset Relief Program. Treasury plans to use some of the TARP money it expects to be returned by big banks like Goldman Sachs.

By Jennifer Liberto, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

Specialist lenders profit as big banks pull back

For small businesses looking for loans, banks that focus on specific communities and industries have become the most reliable financing source.

Here's something you probably haven't heard a lot these days: Despite an industrywide credit clampdown, many banks have sustained their lending to small businesses, and some are even making more loans now than they ever did before.

They aren't household names and they don't often show up on high-volume lender lists, but community banks and specialty lending companies have kept their coffers open even as the vault doors at bigger banks swing shut.

"Those that are doing SBA loans on the sidelines are more willing to walk away. In top commercial banks, SBA lending is not a big part of their business," says Bob Judge, Partner at Government Loan Solutions, a firm that analyzes activity on loans backed by the Small Business Administration. "But for others it's a major part of their business and if they pull out, their whole business would come undone."

The number of loans made through the Small Business Administration's flagship program is down 57% in the first three months of the year, with participating banks lending $1.59 billion, almost half as much as they did in the same quarter last year.

The biggest pullback has come from some of the largest lenders: Bank of America (BAC, Fortune 500) and Capital One (COF, Fortune 500) have essentially stopped making new SBA loans, and nine of last year's ten biggest lenders have sharply cut their loan volume.

The cuts have come for a variety of reasons, including the reduced creditworthiness of small businesses struggling against a recession. But small business owners still need loans and credit lines, and for many, the best place to find them right now are smaller lenders with specific geographic or industry expertise.

Talk back: Have you had trouble getting a loan?

"Community banks may not look at the underwriting criteria the way a big business does," Judge says. "It's now about getting back to basics - the community bank has an invested interest in making sure the community succeeds."

That's been the case at Seattle-based Fortune Bank, which lends in Washington, Oregon and Idaho. In the SBA's 2008 fiscal year, the bank made 20 loans totaling $8.5 million, which was quickly topped by the $10.3 million in loans the bank made within the first five months of the 2009 fiscal year.

"This shakeup is changing banking back to what it was traditionally - relationships," says Scott Harvey, executive vice president of Fortune Bank. "A lot of lenders have expanded into areas where they see dollar signs, but they don't know what they're doing. The real future is having a bank actually work with customers."

Live Oak Bank in Wilmington, N.C., knows its customers' business models thoroughly because it lends to clients of just one kind: veterinarians.

"We asked the SBA, 'Who pays the best?' Vets," says Live Oak chief founder Chip Mahan. "Vets are diligent. We were comfortable with that subsegment."

Since receiving its banking charter in May 2008, Live Oak has originated 125 loans totaling just under $150 million.

The secondary market meltdown

Live Oak originally planned to fund its operations by reselling bundles of its loans to investors. That's a common way for banks to raise capital to issue the next round of loans: 45% of the guaranteed portion of SBA loans issued last year was resold on the secondary market, according to a recent Government Accountability Office audit of SBA data.

But after Lehman Brothers' failure, that market quickly fell apart. Banks were stuck holding loans they couldn't profitably sell, and several major lenders stopped making new loans.

Live Oak decided to find other funding sources and maintain its lending volume. "We didn't want to tell customers no because the secondary market is frozen," Mahan says. "We just had to deal with it and raise more capital."

For banks that don't rely on the secondary market, its collapse left them in a stronger position than their competitors. Huntington National Bank (HBAN), a large regional lender that keeps all the loans it originates, is likely to be one of the few large banks to increase its SBA lending volume this year. Executives there say their tight geographic focus is key to the bank's success: Huntington, based in Columbus, Ohio, only originates loans in areas of the Midwest where it has a local office.

"It's critical to see where the business has been and where it's going," Jeff Rosen, Huntington's business banking director, says of his bank's emphasis on getting close to the business owners it lends to. "Our bankers are local. Our SBA specialists are local."

Other lenders have developed expertise not in a geographic or industry niche, but in a specific type of loan. Mercantile Commercial Capital specializes in the SBA's 504 lending program, which backs loans for commercial property purchases.

For Mercantile, other banks' lending pullback is an opportunity to grab market share. CEO Christopher Hurn says he's raising additional capital, increasing his marketing, and hiring some of the SBA loan officers laid off by other financial institutions. Mercantile won't reveal how many small business loans it has made this year, but as of April, Hurn says the total is up 31% compared to last year, with a 22% increase in the dollar volume lent.

He's also able to be pickier about the loans he funds. "We're seeing a lot of physicians and lawyers buying property right now," he says. "They're coming to me, a specialist firm, because there's no credit elsewhere."

Fortune recently funded an expansion loan for the Perio Institute, a dental surgery training business in Snoqualmie, Wash., that borrowed from Fortune to buy two companies. Those acquisitions will help Perio expand its offerings and boost sales. (For more stories from business owners who have gotten loans from banks that have increased their lending this year.

Credit squeeze

Specialist lenders across the board say they're seeing increased demand as customers that once got loans from national banks get turned down and go searching for other options. Superior Financial, based in Walnut Creek, Calif. specializes in SBA express loans, which are capped at $25,000. Its loan volume is down about 20% from last year, but it's still a robust lender: The company issued 560 loans in the first three months of 2009.

"From established businesses, we're seeing a lot of businesses that have equity lines that have been canceled or reduced. These borrowers have good credit, but the bank has shut down [their credit line] because equity has evaporated," Superior CEO Tim Jochner says. "We doubled the applications we've received over the past year."

It's a change community banks welcome. In recent years, with credit flowing freely, critics say that big banks cherry-picked their borrowers, making loans to the most attractive candidates and forcing local banks that rely on small business lending to hunt for riskier deals. Now, those banks can choose more carefully from among a broader applicant pool.

That's a tough reality for entrepreneurs seeking financing, but it's a transformation those in the industry hope will strengthen the nation's banking system. The lending standards community bankers embrace are better for businesses and better for the nation's economy, proponents say. "We do not have a past-due loan in the bank today," boasts Live Oak founder Chip Mahan.

"Big banks intruded into areas they had never been before," says Keith Ward, CEO of United Central Bank in Garland, Texas, a 20-year-old bank that specializes in serving Asian business owners. "Liquidity is tighter than ever, and the competitive playing field is so uneven. Small banks are paying for the mistakes of larger banks."

In the first quarter of 2008, United Central originated 57 SBA-backed loans, totaling $33.4 million. But in this year's first quarter, its volume dropped to just eight loans, worth $3.2 million, a plunge Ward attributes entirely to the secondary-market freeze.

Unable to sell its existing loans, United Central began looking elsewhere for the funds to keep making new ones. In late February, the bank collected a $22.5 million investment from the Treasury's bailout program, which it plans to use to increase its small business lending.

This crisis may give small banks an opportunity to level the playing field and finally compete with the large national lenders, Ward says - an shift that he believes can help prevent the current economic crisis from recurring. He is looking forward to recapturing some of the customers his bank has lost to larger rivals.

"I've been in banking many years now, but right now is very unique. We have strengthened our standards. We're receiving applications from people who [have good collateral] and can make extraordinary purchases," he says. "Interest rate is not an issue. They just want a bank."

By Emily Maltby, CNNMoney.com staff writer