Economy - writings in English

anchi22 · **•• 20:01 ••**

Mortgage rates: 30-year still rising

Home lending rates jump higher, with the 30-year fixed rate spiking to 5.45% in the week ended Wednesday.

Home mortgage rates jumped in the most recent week, pulled higher by rising Treasury yields, according to a report released Thursday.

The average 30-year fixed mortgage rate rose to 5.45% in the week ended Wednesday, up from 5.24% last week, according to a weekly national survey from Bankrate.com.

Even as mortgage rates continue to rise, they still remain much lower than last year, when the average 30-year fixed mortgage rate was 6.20%, according to Bankrate.com.

To translate the difference in mortgage rate into dollars for a homeowner, consider a $200,000 loan. At 6.2%, the monthly payment would come out to $1,224.94, or $95 higher than the $1,129.31 monthly payment at 5.45%.

Mortgage rates move in tandem with Treasury yields. In particular, the 30-year fixed mortgage rate tracks the benchmark, 10-year Treasury yield. In recent days, that benchmark yield has spiked to levels not seen since November 2008.

With the government spending hand-over-fist to jumpstart the economy, the Treasury has been forced to sell unprecedented amounts of debt. The volume of supply has pushed down prices, sending yields higher. Yields and prices move in opposite direction.

Rising mortgage rates could slow a housing recovery, which the Obama administration has been working hard to jumpstart in an effort to start pulling the economy out of its recession.

Bankrate's national weekly mortgage survey is conducted each Wednesday from data provided by the top 10 banks and thrifts in the top 10 markets.

By Catherine Clifford, CNNMoney.com staff writer

After the selloff, Treasurys rebound

Government debt prices bounce the morning after a massive sell off and ahead of the 7-year auction.

The price of government debt rebounded Thursday morning ahead of the last of three major auctions and the day after a massive sell off in the Treasury market that spilled over into Wall Street.

The Treasury market has been struggling to swallow $101 billion in debt in three major auctions this week. The Treasury sold $40 billion in 2-year notes on Tuesday, $35 billion in 5-year notes on Wednesday and was on tap to sell $26 billion in 7-year notes on Thursday.

The government has been issuing an unprecedented amount of debt to finance its multi-pronged bailout for the economy. With so much supply hitting the market, investors are wary that there will be enough demand to sop up Uncle Sam's overflow of debt.

The market has been keeping a watchful eye on the three auctions this week. With two down and one to go, investors are cautiously optimistic.

"The outlook for today's auction is favorable," said Nick Kalivas, vice president of financial research at MF Global, in a daily research note. "The 2-year and the 5-year had strong results with above average bid-to-covers."

The 7-year auction poses the greatest challenge to the market, however, as analysts think that demand for longer-dated debt is waning more than shorter term debt. "Even if the 7-year is poorly bid, two out of three auctions would be deemed successful on a statistical basis," said Kalivas.

Wall Street was worried on Wednesday. The Dow Jones Industrial average fell 173 points, as Wall Street fretted about rising bond yields. The yield on the benchmark 10-year note surged above 3.7% as prices dropped.

And the benchmark yield curve, which measures the difference between the yield on the 10-year note and the 2-year note, widened to 274 basis points, a near record spread, as the 10-year yield spiked. Thursday, the spread retreated to 271 basis points.

The reason that markets care about bond yields is that lending rates move in tandem with Treasury yields. The 30-year fixed mortgage rate moves off the benchmark yield, and with the yield on the 10-year note surging, the market fears that mortgage rates could work higher. A rally in home mortgage rates would threaten a recovery in the housing market.

In an effort to fight higher yields, the Federal Reserve has embarked on a campaign to buy back $300 billion of its own debt, a program called "quantitative easing." The Fed will buy an undisclosed amount of debt next week.

Bond prices. The benchmark 10-year note jumped 13/32 to 95-15/32 and its yield worked down to 3.68% from 3.71% late Wednesday, which was the highest the benchmark yield had been since November 2008. Bond prices and yields move in opposite directions.

The yield on the 5-year note fell to 2.42%.

The 30-year bond rallied 29/32 to 94-24/32, after plummeting almost 2 points Wednesday. Its yield dipped to 4.58% from 4.6%.

The 2-year note edged up 1/32 to 99-26/32 and its yield ticked was 0.97%. The yield on the 3-month note was dipped to 0.16% from 0.17%.

Lending rates. One key bank-to-bank lending was slightly off a record low. The 3-month Libor was 0.67% Thursday, up slightly from the record low of 0.66% set a couple days prior, according to Bloomberg.com.

Meanwhile, the overnight Libor rate was unchanged at 0.26%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London. The closely watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.

By Catherine Clifford, CNNMoney.com staff writer

anchi22 · **•• 20:01 ••**

What's driving the great bond freak out

Yields on long-term Treasurys have surged as investors worry about a supply glut and inflation. But rates aren't too high to be a cause for concern - yet.

The government is going deeper into hock and that's starting to make people nervous.

Investors have been dumping long-term Treasurys as of late on concerns about a glut of bonds flooding the market this week. And that's pushed rates, which move in the opposite direction of bond prices, to their highest level since November.

The yield on the U.S. 10-year Treasury note has shot up to about 3.7% this week following auctions of $40 billion auction in 2-year notes Tuesday, $35 billion in 5-year notes Wednesday and $26 billion in 7-year notes Thursday.

Simply put, it's growing increasingly difficult to imagine that there will be enough demand for all these Treasurys.

"The market is having a tough time absorbing all this debt. There's so much supply," said Stephen Mahoney, a portfolio manager with Glenmede Investment Management, an investment firm in Philadelphia with about $4 billion in fixed income assets.

The bond auctions are setting off alarm bells for people who believe the government is spending too much money to finance the myriad programs aimed at getting the economy back on solid footing.

The stimulus package passed by Congress and the alphabet soup list of rescue plans launched by the Treasury and Federal Reserve for the nation's financial system could cost more than $10 trillion.

The fear is that all this liquidity will lead to inflation down the road. To that end, some point to the recent deterioration in the dollar versus other currencies and the rise in oil prices as evidence that inflation is already starting to creep back into the economic picture.

Talkback: Are you worried about how much the government is spending in order to get the economy back on track? Leave your comments at the bottom of this story.

But let's take a step back and a deep breath for a moment. While the spike in bond yields is alarming because of how quickly it has taken place - the yield on the 10-year was as low as 2.2% in early January - rates are still, by all normal measures, relatively low.

Long-term Treasury yields are now around the level they were at in early September before Lehman Brothers filed for bankruptcy. And much of the slide in yields between that point and earlier this year was due to investors panicking. They were unloading stocks, commodities and other assets and flocking to what they thought to be the only safe bet left on the planet - U.S. Treasurys.

Investors have sold low-risk bonds to move into stocks as economic recovery hopes have grown. And falling bond prices push up bond yields.

Even though the yield on the benchmark 10-year Treasury has risen sharply in the past few months, rates are still considerably lower than where they were just a few years ago.

The world has changed a lot since then - or at the very least, the perception of it has. Most investors are no longer fearing massive bank failures and another Great Depression. Instead, many are betting on a recovery. So it's no coincidence that stocks have soared at the same time bonds have fallen.

"Investors are increasingly willing to take on more risk," said Bruce McCain, chief investment strategist with Key Private Bank in Cleveland. "There has been a change in market psychology and the perspective on the economy. And when the flight to quality ends, people often look to sell Treasurys to buy other assets."

With that in mind, it's important to try and figure out where bonds will go next. Are yields going to keep heading north or stabilize around this level? If it's the latter, that's not necessarily a terrible thing. Remember, the 10-year yield is now at a 6-month high, not a 6-year high.

"The rise in rates has not been severe enough to put recovery at risk just yet. Plus, rates usually rise heading out of recessions," McCain said.

But if rates head substantially higher, that could put upward pressure on the rates for many consumer and business loans. In fact, it's already happening.

According to the most recent weekly survey about mortgage rates from Bankrate.com, the average 30-year fixed-rate mortgage rose from 5.24% a week ago to 5.45% this week.

Mahoney said the yield on the 10-year could go as high as 3.75% in the short-term. (Yields briefly touched that level Thursday afternoon.) And he thinks that could cause the Fed to step up its purchase of long-term Treasurys in order to try and drive rates lower again.

The Fed announced in March it planned to buy $300 billion in long-term Treasurys, but Mahoney believes the Fed needs to be more aggressive to prove that it's committed to keeping rates low - particularly to investors like China and Japan that own a lot of Treasurys.

"If rates continue to go up because of more supply, that's not going to bode well overseas," he said. And that could just make things worse because sales by big foreign investors could fuel further spikes in bond rates.

"If rates continue to rise, it could slow down the economy," Mahoney said. "Mortgage rates would go higher which could hurt the housing market -- and the housing market is what brought us into this mess."

By Paul R. La Monica, CNNMoney.com editor at large

anchi22 · **•• 20:01 ••**

Gas price surge may stall recovery

Gas prices jump 20% in 32 days, nearing $2.50 a gallon and putting more pressure on the already battered economy.

The rising price of gasoline is putting pressure on cash-strapped motorists and throwing barricades into the path of a speedy economic recovery.

The national average price for a gallon of regular unleaded gas edged up to $2.488 on Saturday, from $2.467 the day before, according to motorist group AAA.

That marks the 32nd consecutive increase. In that one-month period, the average price of gas jumped more than 20%.

That surge is causing concern for drivers as the summer driving season gets underway.

Americans are already dealing with high unemployment and a collapsing housing market. If gas prices continue to climb at their heady rates, Americans who are living "paycheck to paycheck" could put the brakes on their plans to tool around this summer, crimping some of the government's efforts to pull the economy out of recession, said Tom Kloza, chief oil analyst for the Oil Price Information Service.

"There's way too much optimism about a driving season lift," said Kloza, who believes that higher prices, in conjunction with the recession, will dampen the typical summer travel surge.

Kloza said the impact will be especially painful in economic "sore spots" like California, Florida, Arizona and the rural South.

Gas is particularly expensive in California, where the average price is $2.725 a gallon. In Arizona, the average price is less expensive, at $2.341 a gallon.

Currently, the highest gas prices are in Alaska, where prices average $2.752 per gallon. The cheapest gas can be found in South Carolina, where the average is $2.299 a gallon.

Despite the recent surge, the average price of a gallon of gas remains 40% below its all-time peak of $4.114 on July 17, 2008. But the repercussions of that peak are still being felt.

Kloza said that drivers are more likely to focus on the recent increases, than to feel relieved that gas prices are off their 2008 peak.

"People are crazy when it comes to the price of gasoline," he said. "Nothing has quite the emotional component than gas prices do."

Last year's gas price spike also severely hampered demand for SUVs and trucks, hastening the downward spiral for the Big Three automakers.

Chrysler filed for bankruptcy on April 30 and is awaiting a ruling from a federal judge as to whether it may sell its assets and form a new company. General Motors (GM, Fortune 500) is expected to file for bankruptcy next week and its stock price is trading below $1 a share for the first time since the Great Depression.

By Aaron Smith, CNNMoney.com staff writer

anchi22 · **•• 20:01 ••**

The $4 trillion housing headache

House prices have returned to 2002 levels, but mortgage debt hasn't deflated from its bubbly highs.

House prices are taking a long ride in the wayback machine. Unfortunately, Americans' housing-related debt isn't going anywhere fast.

Prices in big U.S. cities posted their biggest-ever decline in the first quarter, according to the most recent S&P/Case-Shiller National Home Price index. After nearly three years of declines, house prices nationwide are back at 2002 levels -- and still falling.

Yet as bad as that is for overburdened homeowners and their bankers, the mighty mountain of mortgage debt Americans have taken on is an even bigger concern - especially for those who believe an economic recovery is in sight.

Even though the amount of home mortgage debt outstanding declined in 2008 for the first time since the Federal Reserve started keeping track in 1945, mortgage debt levels remain distressingly high.

Home mortgage debt outstanding was 73% of gross domestic product last year, according to government data. That's the third-highest reading on record, after the 75%-plus bubble years of 2006 and 2007.

Getting that ratio down to a more manageable number will mean more lean years ahead, as Americans further cut spending to rebuild their savings and banks struggle to boost their capital amid heavy loan losses.

How long this process might take is a key question for those trying to gauge the prospects for an economic recovery.

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy - a course of action that will do little to solve the problem of too much debt.

Of course, these figures reflect only back-of-the-envelope estimates. Depending on the level of interest rates and how successful officials are in restoring the vigor of the lending markets, mortgage debt may or may not need to drop that far to relieve some of the stress on consumers.

Still, there is little doubt that above-average debt levels will impede the sort of consumer-driven economic rebound that has taken place after the last few recessions.

"I don't think that there is any magic to the '90s debt levels," said Dean Baker, an economist at the Center for Economic and Policy Research in Washington. "The point is that with higher debt levels, people will be consuming less."

Borrowers who are overstretched on their mortgages are less able to spend money on other goods and services, and more apt to fall behind on payments. That could mean more painful writedowns ahead for already troubled banks.

The scale of the mortgage overhang may help explain why, even after banks such as JPMorgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500) received generally upbeat stress test results, some prominent skeptics of the housing bubble are warning that the financial system's problems aren't over.

"There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded," former Fed chief Alan Greenspan said last week in an interview with Bloomberg. He added that "until the price of homes flattens out we still have a very serious potential mortgage crisis."

By Colin Barr, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

States race clock on $19B in stimulus

States must spend 50% of their highway stimulus funds by the end of June or risk forfeiting millions of dollars.

Some 14 states have only a few weeks left to gain approval for highway projects or risk losing millions of stimulus dollars.

All states have until the end of June to "obligate" half their share of stimulus funds for road and bridge improvements. If they don't, the federal Department of Transportation will redistribute half the leftover money.

That means states must gain approval for their projects from the Federal Highway Administration, an agency of the Department of Transportation. The money doesn't actually have to be spent, which can take months as projects go through the contracting and construction process.

States are sharing $26.6 billion for highway infrastructure projects, though only $18.6 billion is subject to the June deadline. The road allocations are among the earliest of the $280 billion in funds going to states and municipalities as part of the $787 billion recovery act.

While many states have safely cleared the hurdle, several have to buckle down in coming weeks if they hope to reach the 50% mark.

Alaska has only obligated 6.3% of its $122.8 million in funds, while Ohio has gained approval for only 15.7% of its $648.2 million share, as of May 22, according to the department.

These states' progress stands in sharp contrast to places such as Wyoming, which has already won approval of 97.5% of its $110.3 million share.

Federal transportation officials are in close contact with their state counterparts to review and sign off on applications, said Joel Szabat, who co-leads the recovery effort for the department. They are approving nearly $1 billion in projects a week, nearly twice the typical rate.

More than 3,500 projects nationwide have already received the nod. Some states have dozens of projects approved in a day.

"One of our biggest focuses is that every state meets that deadline and is not penalized," Szabat said. The agency is "highly confident that every state will have over 50% obligated by the time the 120-day deadline comes around."

Ohio's unusual path

Ohio transportation officials know they are moving at a slower pace than many of their peers elsewhere in the nation. That's because they took a unusual path to decide what projects to fund, said Scott Varner, the state department's spokesman.

The state received 4,600 ideas after soliciting proposals from cities, counties and people. It then narrowed the list down to 2,200 eligible for federal funding, before choosing 200 to invest in.

The Buckeye State is also seeking to fund some non-traditional projects as part of its highway allotment. For instance, it won approval to spend $6.8 million on replacing a shipyard crane in Toledo, which supports ship maintenance and vessel construction projects and will create or save 187 jobs. It is also hoping to get the okay on a $20 million investment in design work for Cleveland's Opportunity Corridor, aimed at improving access from the city's central east side to the freeway.

These initiatives required closer collaboration with federal officials since they aren't the typical road repaving and bridge replacement work, Varner said.

"It did take a little more time in part because we had to work with our Federal Highway Administration office in Ohio," he said.

Still, state officials say they are not concerned they will miss the deadline. They are receiving approval for millions of dollars worth of projects a week, and have more than $50 million before federal reviewers now.

"We know which projects we have planned to meet the 120-day deadline," Varner said. "We think we're on target."

Still, the delay has meant shovels have yet to hit the Ohio roads. The state has awarded two contracts and expects to approve up to 20 more by week's end. Construction should start within the next month.

Wyoming working double-time

In Wyoming, transportation officials have sped up their contracting process in recent months. Work began on some projects in early May.

Normally, it can take six weeks for the state to advertise projects and for contractors to submit bids. Now it takes only three weeks. Also, the Wyoming Transportation Commission meets twice a month to award contracts, rather than just once.

As a result, the state has obligated nearly all of its stimulus funds for highway projects. And, officials feel that the rapid pace has brought in more competition, especially from out-of-state companies. Instead of having just two or three bidders per project, it is now seeing seven on average. And bids are coming in below estimates, freeing up money to fund more projects.

"If we could get our jobs out the door quicker, we felt we could get more competition from contractors," said Del McOmie, chief engineer for the Wyoming Department of Transportation.

By Tami Luhby, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

Detroit layoffs threaten housing-market recovery

The plant closings may delay the nascent Detroit rebound and hurt other Midwestern housing markets. Some realtors see positive signs if this is rock bottom.

Just what the devastated Detroit housing market didn't need: more plant closings, more layoffs.

The Motor City absorbed the news Monday that General Motors would close 14 plants and three warehouses around the nation over the next 18 months. More than 20,000 workers will be affected, and two of the largest closings - an assembly plant in Orion with 3,405 workers and a truck plant in Pontiac that employs 2,671 - are both in the Detroit metro area.

The layoffs threaten to derail a slight market recovery that has been happening over the past several months, according to Bill Martin, the CEO of the Michigan Association of Realtors. "The real estate market in Michigan has shown a dramatic increase in sales," he said, "but values continue to be stagnant or are going down."

In Detroit, for example, home sales had risen 23% for the first four months of the year compared with the same period in 2008. The average price of homes sold in April, however, was just $20,514.

"Adding an additional 40,000 laid-off autoworkers will increase inventory and add to foreclosure issues," said Martin.

Detroit has been one of the nation's foreclosure hot spots for years. In April, there were 6,259 foreclosure filings in the metro area, one for every 303 housing units, according to RealtyTrac, the online marketer of foreclosure properties. That was down 26%, however, from last April.

"This will definitely have an impact on our community," said Bob Curran, a Century 21 broker in Dearborn, Mich., where Ford Motor Co. is headquartered. "But we've already been in this situation for more than two years. This is almost an anticlimax now."

Bargain hunters

First-time homebuyers taking advantage of rock-bottom prices, low interest rates and the $8,000 stimulus tax credit have been propping up Detroit home sales. But the past several months has also seen an infusion of out-of-town cash into the market.

"We have Canadians and Australians coming here to buy properties," Curran said. "Californians are buying five, six, seven houses at a time."

Many bank-repossessed properties are selling in big bundles of 100 or more, with each house in the lot going for less than $10,000. Other homes, especially in well-kept communities, are selling in the $40,000 to $50,000 range, according to Curran.

What's not moving, according to both Curran and Martin, are more expensive homes, of which the area has an abundance thanks to decades of well-paying auto-industry jobs. Those jobs are disappearing and are not being replaced, forcing middle and upper management to move and pursue opportunities elsewhere.

"The high end is very challenging," said Martin, "and values there are dropping drastically."

Other high-end employees are finding new jobs in other fields, according to John North, a broker with Coldwell Banker. "They're turning to alternative technologies like medical and green technolgies," he said.

That will eventually leave Detroit with a much more diversified economy, one better able to resist wide cyclical swings. The plant closings may even turn out to be a good thing for housing, in a counter-intuitive way, according to North.

"The uncertainty is gone," he said. "That caused as much of the decrease in home sales as anything."

Contagion

The auto industry's woes have had similar, though generally lesser, impact on other cities in the Midwest. In Mansfield, Ohio, which lies between Columbus and Cleveland, a stamping plant that employs more than 800 is closing. That is bad news for a market already in deep decline: Volume is down 18% this year and prices have dropped about 7.8% from already low levels.

"Things have been going downhill for the past year," said Dan Danhoff, a real estate broker there with Century 21. "It's one of the most affordable areas in the state."

The good news, he said, is that there has been an up-tick in first-time homebuyer sales thanks to increasing affordability. The median home sold for $70,000 in the Mansfield metro area during the first three months of 2009, according to the National Association of Homebuilders and Wells Fargo Bank. At the market peak in the third quarter of 2005, the median home price was $95,000.

In Indianapolis, a GM stamping factory with 670 workers will be closing as part of the cuts announced Monday. But the city's economy is diverse enough to withstand this round of pain.

Having several major employers - including pharmaceutical maker Eli Lily (LLV), insurer Conseco (CNO), medical device manufacturer Guidant, Clarian Health and Dow (DOW, Fortune 500) AgroSciences - will insulate the Indianapolis market from the lay-offs without too much trouble, according to Glenn Bill, an agent with Century 21 Sheetz.

"Where the plant closings are really hitting hard is the smaller cities like Kokomo," he said.

As in the other hard-hit industrial cities, it's the sales of higher end homes that are plaguing Indianapolis. "The upper managers have big homes they just can't sell," said Bill.

By Les Christie, CNNMoney.com staff writer

anchi22 · **•• 20:01 ••**

Banks get ready for life after TARP

Long frustrated by TARP, some big banks are poised to win approval to pay back taxpayers next week. But experts say regulatory scrutiny is far from over.

At long last, the end of TARP may be here for some big banks.

Next week, the Federal Reserve will unveil which of the 19 banks that underwent the government's stress test program will be allowed to repay money under the Treasury Department's controversial Troubled Asset Relief Program.

Industry analysts estimate that as many as 10 banks, and as few as four, could win approval to exit TARP next week.

Weary of the intense scrutiny and fickle nature of lawmakers, banks have been scrambling to comply with the rules associated with repaying taxpayer funds. Most notably, several have been busy raising massive amounts of capital in order to redeem the preferred-shares the government acquired in them.

Just this week, JPMorgan Chase (JPM, Fortune 500), Morgan Stanley (MS, Fortune 500) and American Express (AXP, Fortune 500), announced plans to raise a combined $7.7 billion through the sale of common stock.

JPMorgan Chase, AmEx,Goldman Sachs (GS, Fortune 500), State Street (STT, Fortune 500) and Bank of New York Mellon (BK, Fortune 500) have all been widely mentioned as banks capable of repaying government funds after they were deemed well capitalized as part of the stress-test program.

Others thought to be included in that group are regional banking giants Capital One (COF, Fortune 500), BB&T (BBT, Fortune 500) and U.S. Bancorp (USB, Fortune 500).

Investment bank Morgan Stanley, which faced a $1.8 billion capital shortfall following the stress tests, may be the one exception as the firm has raised most of the $6.2 billion in capital it planned to sell through common stock over the past month.

Others are racing to catch up as well, including Bank of America (BAC, Fortune 500), which revealed Tuesday that it had raised almost $33 billion of the nearly $34 billion in capital it needed as a result of the stress-test program.

The Charlotte, N.C.-based lender added that it would "comfortably exceed" that amount soon enough, suggesting that it too was eyeing to free itself from the clutches of TARP, although it is widely doubted the nation's largest bank by assets will win approval as part of next week's announcement.

What troubles many lenders about TARP nowadays, said Standard & Poor's equity research analyst Stuart Plesser, is that they will remain at a severe competitive disadvantage.

Not only are those banks obligated to pay a hefty dividend on the government's preferred shares that weighs on their quarterly results, these banks also stand to be viewed by clients and the market as weaker than rivals.

And there is also the issue of compensation. Banks stuck in TARP will likely be obligated to abide by more severe restrictions on salaries and bonuses, potentially allowing their peers to lure top earners away. That could make it even tougher for some of the struggling banks to remain competitive.

"Banks don't want to let that kind of talent leave," said Plesser.

The ins and outs of TARP

Those banks that exit the Treasury program will, among other things, need to prove that they can issue debt without having to rely on the Federal Deposit Insurance Corp.'s debt guarantee program. They will also need to have enough capital to continue lending to creditworthy consumers and businesses.

Banks' ability to keep lending after paying back TARP has remained a key concern for regulators.

Credit is already tight at those 500 or so lenders that took taxpayer funds, according to a report published this week by the Treasury Department. But there are fears that the availability of credit could deteriorate further among big banks once they return TARP funds as they try to insulate themselves from future loan losses.

"The administration and regulators would really prefer not to get the money back at this point," said Douglas Elliott, a former investment banker who now serves as a fellow at the Brookings Institute. "They need to let the strongest banks repay, but they're not trying to make it easy."

To date, just 20 of the 500 or so banks that have taken TARP funds have managed to repurchase their shares from the Treasury Department, according to agency transactions records. Many of those firms have been smaller regional banks or community lenders.

One question that regulators have not directly addressed is what they intend to do with the warrants, or rights to purchase shares, the government acquired when it injected capital into many of these banks last fall.

Banks have been anxious to buy back these obligations, but there have been concerns that allowing banks to redeem warrants would be to the disadvantage of U.S. taxpayers who stand to make significant gains should bank stocks continue to move higher in the months and years ahead.

But even as banks race to escape the clutches of TARP, analysts say they are hard pressed to believe that those firms will be free and clear of scrutiny.

Robert Maneri, managing director at Victory Capital Management, whose firm owns shares of names like Bank of America, JPMorgan and U.S. Bancorp, said banks will face more regulatory pressure over their loan portfolios and capital levels as the U.S. economy attempts to navigate the ongoing recession.

"Let's face it, regulators don't need TARP money if they want to be involved," said Maneri.

By David Ellis, CNNMoney.com staff writer

anchi22 · **•• 20:01 ••**

Oil rises as Goldman forecasts $85

Crude tip $67 as Goldman Sachs raises its 2009 forecast from $65 to $85 a barrel and introduces 2010 forecast of $95.

Oil rose above $67 a barrel on Thursday after a 3.5% decline the previous day, boosted by forecasts of higher oil prices from U.S. investment bank Goldman Sachs.

U.S. crude for July delivery rose 69 cents to $66.81, after reaching as high as $67.38 earlier in the session.

Further support for oil prices came from a weaker U.S. dollar, which can boost the appeal of oil and other commodities as a hedge against inflation.

"For the better or for the worse, a switch in the Goldman price forecast rarely does not have a price influence and we will need to take it as a market input for the next few days," said Petromatrix analyst Olivier Jakob.

Goldman Sachs (GS, Fortune 500) raised its end of 2009 oil price forecast to $85 a barrel from $65 and introduced a new end of 2010 forecast of $95.

"The recent rally in WTI (U.S. crude) prices is likely to be but the first stage in the oil price rally that we expect will accompany a recovery in economic activity," Goldman said in a research note.

Oil closed down more than $2 on Wednesday following a report by the U.S. Energy Information Administration that U.S. crude inventories rose 2.9 million barrels, against expectations for a decline of 1.4 million barrels in a Reuters poll.

Saudi Oil Minister Ali al-Naimi has said the producer group OPEC would wait until crude inventories fall to around 53 days of forward cover before considering raising output, nearly 10 days below current levels.

London's FTSE 100 share index turned lower on Thursday after the Bank of England kept interest rates unchanged at a record low of 0.5%.

The latest signal on the state of the U.S. economy will come from employment data due on Friday.

U.S. non-farm payroll jobs likely fell by 520,000 jobs last month, the smallest number in seven months, a Reuters poll showed, but economists expect the U.S. unemployment rate to rise to 9.2% in May, the highest since September 1983.

CNNMoney.com

anchi22 · **•• 20:01 ••**

Rio Tinto scraps Chinalco deal

Mining giant walks away from $19.5 billion merger with Chinese firm and forms alliance with BHP Billiton instead.

Miner Rio Tinto scrapped a planned $19.5 billion tie-up with China's Chinalco struck at the height of a global financial crisis, turning instead to an iron ore joint venture with rival BHP Billiton and a share sale to slash its debts.

The collapse of the Chinalco deal, put together in February in a bid to halve Rio's $38 billion of debt, leaves the world's biggest steel making nation vulnerable to just two suppliers -- a Rio/BHP combination and Brazil's Vale -- controlling 70% of global iron ore trade.

Shares in Rio (RTP) jumped as much as 13% to a 7-month high, while BHP (BHP) rose 10%, as investors welcomed an alternative route to resolving Rio's big debt burden.

"Rio has effectively been talking to BHP behind Chinalco's back and Chinalco is entitled to feel like a two-timed lover this morning," said Paul Bartholomew at Steel Business Briefing in Shanghai. "This is a big slap in the face for China."

The new plan represents a victory for Rio shareholders who had argued the Chinalco deal favored the Chinese state firm and could give China greater influence over pricing of key resources.

"We were not supporters of the Chinalco transaction. We're happy to see this alternative approach to solving Rio's issues with its debt," said Ross Barker, managing director of Australian Foundation Investment Co, Rio Tinto's sixth-largest shareholder in Australia and a BHP shareholder, according to Reuters data.

"A deal like this was really essential from Rio's point of view. And it's a good deal for BHP," he said.

Rio said it would pay Chinalco a $195 million break-up fee.

Rights offer

Rio and BHP, the world's second- and third-largest iron ore miners, agreed to combine their operations into a 50-50 joint venture, generating savings of at least $10 billion.

A Rio/BHP combination would supply around 270 million tons of ore a year, while Vale supplies around 240 million tons.

BHP will pay Rio Tinto $5.8 billion to take its equity interest in the venture to 50%, but stressed the agreement was non-binding at this stage.

"This deal has been 10 years in the making and well worth the wait," BHP Chief Executive Marius Kloppers told reporters.

To cut debt, Rio said it was raising $15.2 billion through a 21-for-40 rights offer, the fifth-largest rights issue on record, according to Thomson Reuters data.

Rio and BHP agreed to keep their iron ore marketing separate, a key factor designed to win approval from competition regulators, especially the European Commission, which last year raised concerns about BHP's proposed takeover of Rio due to the impact on iron ore markets.

Chinalco said it regretted Rio's decision after it had worked hard to try to revise the deal to reflect changed market conditions as well as shareholders' and regulators' concerns.

"As a result, we are very disappointed with this outcome," Chinalco President Xiong Weiping said in a statement.

Australia and China, which are trying to start free trade talks, played down the impact of the collapse of the deal, which would have been China's largest foreign investment, on diplomatic ties or the future of Chinese offshore investment.

"It is a commercial matter, and I think it's very important that our friends in China focus on that fact," Australian Prime Minister Kevin Rudd said.

In China, an official at the State-owned Assets Supervision and Administration Commission characterized the deal's failure as "normal market behavior", and state banks said they stood ready to back any future foreign investments by Chinalco.

Massive savings

"My initial reaction is that it will be overwhelmingly positive for both companies because of the cost savings (and) the synergies," said Michael Bentley, resources portfolio manager at Northward Capital.

The cost of insuring Rio Tinto's debt fell by more than a third, with the spread on its credit default swaps (CDS) narrowing to around 190 basis points from 290 bp.

"We consider these initiatives are a superior outcome for Rio's credit quality as opposed to the Chinalco deal," Monaural International said, adding it was better for Rio to sell equity instead of convertible bonds, maintain greater ownership of its assets and gain joint venture savings.

The prospects for Chinalco were less clear.

Chinalco Vice President Lou Outing said the firm had not decided whether to participate in the rights offer.

"This is a big thing and is not determined by a single person," Lou told Reuters, adding the decision not to revise the deal with Rio Tinto was made by both sides.

Under the deal agreed in February, Chinalco would have paid $12.3 billion for stakes in Rio's key iron ore, copper and aluminum assets and $7.2 billion for convertible notes that would have doubled its equity stake in Rio to 18%.

BHP launched a 3.4-for-1 share swap to take over Rio in February 2008, which Rio rejected saying it vastly undervalued the firm and its prospects. BHP dropped the deal last November after commodity markets collapsed.

Reuters, CNNMoney.com

anchi22 · **•• 20:01 ••**

Avoiding the next big financial crisis

In the next few weeks, the Obama administration will detail proposals to fix regulation. It's controversial territory full of political minefields.

The Obama administration plans to release updated details in the coming weeks to guide Congress on the best way to reshape the nation's financial regulatory system and prevent future collapses.

It promises to be controversial and even politically dicey.

In fact, the administration is already shelving one idea, because it's just too messy.

Treasury Secretary Tim Geithner has spoken of the need to consolidate agencies in the patchwork world of financial regulations to prevent companies from shopping for the easiest overseers. But the Obama administration has now decided to keep separate two similar regulatory agencies whose duties often overlap.

Both the Securities and Exchange Commission and the Commodity Futures Trading Commission regulate complicated financial products. Many experts have long argued that their consolidation would result in stronger oversight.

But combining them could have created a power struggle between their congressional overseers, pitting farm state lawmakers who speak the language of pork bellies and corn bushels against East Coast senators who talk stocks and bonds.

By sidestepping the merger issue, the administration avoids a political turf war that threatened to slow efforts to regulate the kind of financial products that caused the collapse of American International Group (AIG, Fortune 500).

However, the decision provides a window into the kinds of fights and compromises to come with bigger tougher turf wars between regulators like the Federal Reserve and the Federal Deposit Insurance Corp.

Both the Fed and FDIC stand to gain or lose power as officials grapple with which gets new powers to decide when the government needs to shut down or prune troubled companies that threaten the greater financial system.

"This becomes a big political dance," said Robert Litan, an economist and attorney at the Brookings Institution. "It's very difficult to merge these activities, because some people gain power and some people lose power. But if you don't do it now, you are probably never going to do it."

A tale of two regulators

The division of labor between the SEC and CFTC works like this: The SEC oversees securities -- which include shares of companies, like stocks and bonds, that can be invested or traded. The CFTC oversees trading of bets made on the future price of things like oil or corn and even currencies.

But there's still a lot of overlap between the two, especially with new kinds of financial products that could fall into either category.

For example, it took years to figure out who should keep an eye on a product called a "single stock future," which is a contract that allows traders to bet on the future position of a stock without actually owning it. (Both agencies regulate single stock futures.)

Such overlap is why former Treasury Secretary Henry Paulson suggested combining the two regulators in his March 2008 blueprint for "modernized regulatory structure." He warned that globalization and "market linkages" make maintaining two separate agencies "potentially harmful and inefficient."

A lot of people agree with that idea. Among them: SEC Chairwoman Mary Schapiro, who told lawmakers on Tuesday that "there is a logic and an efficiency that can be achieved through the merger of the two agencies."

But politics comes into play when you look beyond the two agencies and consider the congressional committees that control and fund them.

The SEC answers to the House Financial Services and Senate Banking committees.

The CFTC, originally created to regulate agricultural financial products, answers to the agricultural committees on Capitol Hill -- even though agricultural futures are less than 15% of what the CFTC now deals with.

Most veteran congressional watchers say a merger would give the banking committees more power, while the agricultural committees would lose power. The agricultural panels don't like that idea much. Their chiefs have espoused the importance of maintaining the CFTC, saying its expertise would get lost at the SEC. They've even filed bills that bulk up the CFTC's power to regulate.

In addition, lawmakers who lose jurisdiction over the CFTC could lose lucrative campaign contributions from banks and investment firms.

During the 2008 election cycle, House agricultural committee members collected $8.6 million and Senate agricultural committee members collected $28.4 million from the financial services sector, according to the Center for Responsive Politics.

What's next?

For the past few weeks, Geithner has been talking more and more about streamlining and combining agencies without giving any details as to how he planned to do it.

During a dinner Wednesday for key lawmakers who sit on both the banking and agricultural committees, Geithner indicated he would not pursue a merger of CFTC and SEC, according to an industry official familiar with the conversation.

On Thursday, newly-appointed CFTC Chairman Gary Gensler told the Senate Agricultural Committee that a "merger for merger's sake" wouldn't address any of the "lessons learned from the crisis."

"While it will always be out there in the ether, and will be debated and discussed," Gensler said, "we have an heavy agenda here for Congress. I don't see it really in the lead here."

House Financial Services Chairman Barney Frank, D-Mass., had never been a vocal proponent of such a merger and has recently said he's more interested in "filling in the gaps in the financial regulatory structure" rather than "moving boxes," spokesman Steven Adamaske said.

Frank's committee has begun trying to figure out what full-blown regulatory reform should look like, starting with oversight of the kinds of products that the CFTC currently doesn't oversee. Gensler suggested that the SEC and CFTC should share such oversight.

By Jennifer Liberto, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

Michigan shuts 8 prisons to save $120M

Struggling state looks to stem budget bleeding by closing 3 prisons and 5 prison camps. Michigan is facing a $1.4 billion budget deficit for fiscal 2010.

Michigan officials said Friday that the state is closing three prisons and five prison camps in hopes of narrowing a $1.4 billion budget gap for fiscal 2010.

The state, which has been hammered by the auto industry meltdown, estimates that it will save $120 million by shuttering the eight facilities. None of the 4,149 prisoners in the facilities will be released early, but up to 1,000 workers may lose their jobs.

Michigan is not alone in turning to its prison system for savings. Some 25 states cut spending on corrections in fiscal 2009 and another 25 are proposing to do so in fiscal 2010, as they struggle to address massive budget shortfalls.

"It's a trend we'll be seeing more and more of in coming months given the dire revenue situation states are in," said Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments, a research group.

The Wolverine State is targeting the correctional system because it takes up 22% of the state's general fund budget, the largest component. (Education is funded separately.) The state must close the $1.4 billion gap before its fiscal year ends on Sept. 30.

In part because of a 5-year-old initiative to reduce recidivism, Michigan has seen its prison population decline to 47,552, down 7.3% from January 2007. It already closed two prisons and a camp earlier this fiscal year for a savings of $30 million, Cordell said. The latest downsizing eliminates 6,400 beds from the system.

"Rightsizing our prison system is the responsible thing to do," said John Cordell, a spokesman for the Michigan Department of Corrections.

The facilities being closed are Camp Cusino in Shingleton, Camp Kitwen in Painesdale, Camp Lehman in Grayling, Camp Ottawa in Iron River and Camp White Lake in White Lake.

Camps are the lowest security facilities in the system and house the lowest-risk prisoners who are within two years of release. Camp detainees, who do public works projects for the state or local communities, will be transferred to other locations. These are the last remaining camps in the system, signaling an end to the program that has existed for more than 50 years.

The three prisons that are closing are Muskegon Correctional Facility, a medium security institution in Muskegon, Hiawatha Correctional Facility, a minimum security location in Kincheloe, and Standish Maximum Correctional Facility in Standish.

Instead, the state will put $60 million toward increased supervision of some paroled prisoners. The savings include that figure.

Dire straits

Friday's announcement was the latest in a string of spending cuts in Michigan.

With tax revenues coming in below estimates, Gov. Jennifer Granholm last month was forced to slash spending by $350 million, including a 4% across-the-board reduction. The move comes after the governor cut $134 million from the budget in December.

"Michigan government can no longer afford to be all things to all people," Granholm said in a May 5 statement. "We expect to have to make more cuts like these in the future, which are the very type of wrenching cuts we have worked so hard to avoid in the past."

The cuts made in May mean adults on Medicaid are losing dental and vision coverage. New state trooper graduates are losing their jobs, and local communities are losing 1/3 of their remaining state revenue-sharing funds.

Like other states, Michigan is seeing its tax revenues dry up. Personal income taxes are down 22.6%, while sales taxes fell 7.6%.

By Tami Luhby, CNNMoney.com senior writer

anchi22 · **•• 20:01 ••**

Can the 3-month long stock rally continue?

The Dow has risen in 11 of the last 13 weeks and is on its best tear in 26 years. Investors will try to stretch the run in a busy week ahead.

Stocks have been on the best three-month tear since 1982 -- and there's little in the week ahead to interrupt the flow.

But as the typically sluggish summer months on Wall Street take hold, momentum is bound to slow.

"The move up is going to be slower and we're going to have periods of sideways movement," said Gary Webb, CEO at Webb Financial Group. "But slow and steady is good because it's more sustainable."

The week ahead brings readings on the deficit, jobless claims, retail sales and consumer sentiment. Monday is also the deadline for "stress tested" banks that need to raise more capital to explain just how they plan to do it.

But lately, all news has been good news, or at least neutral news. Investors took in stride the bankruptcy filing of General Motors last week. They also welcomed a May jobs report Friday that showed employers cut 345,000 jobs from their payrolls, versus forecasts for 520,000 jobs. The rationale was that the number was shy of forecasts and suggests the pace of job losses is slowing.

Indications that the intensity of the recession is abating have boosted stock prices and consumer sentiment for three months. Since hitting a more than 12-year low on March 9, the Dow has risen more than 32%, its best 13-week run since Nov. 1982, according to Dow Jones.

Over the summer months stocks will churn in response to different news events, but the trend should remain up, if only because the government has put so much money into the financial system, said Will Hepburn, chief investment officer at Hepburn Capital Management.

"Hopefully that money will build us a stronger foundation, so that when this sugar high gives out, we have something to stand on," he said.

Autos: The automakers will continue to make news next week, although so far the bankruptcy filings of both General Motors (GMGMQ) and Chrysler have not had much of an impact on stock market sentiment.

Chrysler is expected to exit bankruptcy Monday afternoon following an appeals court ruling late Friday that set aside an Indiana pension fund's objections. The ruling lets Chrysler sell a majority of its assets to a new company to be called the Chrysler Group.

The new company will be owned mostly by a United Auto Workers union trust, Italian automaker Fiat and the U.S. government.

The Senate Banking Committee will hold a hearing on auto industry restructuring Wednesday afternoon.

GM's bankruptcy means its being kicked out of the Dow Jones industrial average, come Monday. It will be replaced by Cisco Systems (CSCO, Fortune 500). Also leaving the Dow: Citigroup (C, Fortune 500), which will be replaced by insurer Travelers (TRV, Fortune 500).

On the docket

Monday: The 10 banks that were told to raise additional funds as a result of the government's "stress tests" must submit detailed plans Monday.

Already, the banks have managed to raise a substantial portion of the collective $75 billion, with Bank of America (BAC, Fortune 500) and Morgan Stanley (MS, Fortune 500) among the banks that have already met or exceeded the requirements.

Tuesday: The government's April wholesale inventories report is due in the morning. Inventories likely fell 1% after falling 1.6% in the previous month.

In Washington, the Joint Economic Committee will further examine the bank bailout program, the House Financial Services Committee is holding a hearing about regulating derivatives and the Senate Energy Committee will discuss energy legislation.

Wednesday: A slew of economic reports are due out throughout the day, highlighted by the Federal Reserve's "beige book" reading on economic activity in the afternoon.

In the morning, the Census Bureau will release the April trade balance, with the deficit expected to have widened to $28.7 billion from $27.6 billion in March.

The weekly crude oil inventories report from the Energy Information Administration is also due in the morning, while the May Treasury budget is due in the afternoon.

Thursday: May retail sales are expected to have risen 0.3% after falling 0.4% in April. Retail sales, excluding volatile auto sales, are expected to have risen 0.2% after falling 0.5% in the previous month.

April business inventories, from the Census Bureau, are expected to have fallen 1% after falling 1% in March.

The weekly jobless claims report is also on tap from the Labor Department, along with the May foreclosure report from industry tracker RealtyTrac.

Friday: May import and export prices are due from the Labor Department and the June consumer sentiment index is due from the University of Michigan.

The G8 finance ministers are meeting in Rome Friday and Saturday. Treasury Secretary Timothy Geithner is expected to speak Friday.

By Alexandra Twin, CNNMoney.com senior writer