Banks at Risk From $203 Billion Writedowns, Says UBS

 (Bloomberg) -- The world's banks ``remain at risk'' of up to $203 billion in additional writedowns, largely because the bond insurance crisis could worsen, UBS AG said.

``Banks have made progress in credit-market related writedowns,'' London-based UBS analyst Philip Finch said in a note to investors today. ``But more are expected,'' he added.

Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That could rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. ``Risks are rising and spreading and liquidity conditions are still far from normal,'' the note said.

U.S. monoline insurers MBIA Inc. and Ambac Financial Group Inc. are struggling to maintain the AAA ratings on their insurance units because of losses on residential mortgages, exposing banks to possible writedowns on CDOs guaranteed by the insurers. Monoline insurers guarantee the repayment of bond principal and interest in the event of defaults.

Ambac was the first monoline insurer to ever be downgraded when Fitch Ratings cut it to AA from AAA in January, citing ``significant uncertainty'' over the insurer's business model.

 

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U.S. December Trade Gap Narrows More Than Forecast

(Bloomberg) -- The U.S. trade deficit narrowed more than forecast in December as exports reached record levels and Americans spent less on imported autos and goods from China.

The gap between imports and exports shrank 6.9 percent, the biggest decrease in more than a year, to $58.8 billion from $63.1 billion in November, the Commerce Department said today in Washington. The deficit for all of 2007 decreased for the first time in six years.

A weaker dollar and expansion of emerging economies are feeding overseas sales for U.S.-made goods and may forestall a deeper slump at U.S. manufacturers. The narrowing deficit is one of the few remaining bright spots for the economy and will probably lead the government to increase its estimate of fourth- quarter gross domestic product later this month.

``The trade balance is going to continue to be a support for the economy,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``The drop in imports is probably consistent with the view the domestic economy is turning quite soft.''

Economists had forecast the gap would narrow to $61.5 billion, according to the median of 76 projections in a Bloomberg News survey. Estimates of the deficit ranged from $57 billion to $66.5 billion.

The dollar, which had fallen against the euro earlier today, stayed lower after the report. It traded at $1.4609 per euro at 8:37 a.m. in New York, from $1.4573 late yesterday. The U.S. currency was little changed versus the yen, at 108.30 yen per dollar.

2007 Deficit Shrinks

For all of last year, the deficit shrank 6.2 percent to $711.6 billion, the biggest decrease since 1991. Last year was the first time the trade gap narrowed since 2001.

Exports rose 1.5 percent to $144.3 billion in December, setting a record for a 10th straight month and reflecting more demand for U.S. made capital equipment and industrial supplies. For the year, exports rose 12 percent to a record $1.622 trillion.

Imports in December declined 1.1 percent to $203.1 billion, reflecting lower demand for foreign-made autos, consumer goods, food and capital equipment.

Also contributing to the drop in imports was a 14 percent decline in purchases from China, which helped shrink the month's trade gap with the Asian nation 22 percent to $18.8 billion. Petroleum imports rose 4.2 percent to a record $36 billion as the average price rose to $82.76 a barrel, also the highest monthly average ever. Prices increased in late December and early January and may push up the value of imports for the January report. They have since declined.

Fourth-Quarter Growth

Today's report may cause the Commerce Department to revise its estimate of fourth-quarter economic growth higher. The government projected last month that the trade gap narrowed to a $521 billion annual pace in the last three months of 2007. For all of last year, trade contributed 0.55 percentage point to growth, the most since 1991.

The government will release a revised estimate of the expansion for the last three months of 2007 on Feb. 28.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are scheduled to testify to the Senate Banking Committee later today on the state of the U.S. expansion. Central bank policy makers have forecast the economy will avoid a recession.

``The Fed's policy actions should help to promote a pickup in growth over time,'' Fed Bank of San Francisco President Janet Yellen said in a speech on Feb. 12. ``I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters.''

Fed's Rate Cuts

The Fed's Open Market Committee is scheduled to next vote on interest-rate policy on March 18. Policy makers lowered the benchmark rate by three-quarters of a percentage point in an emergency decision announced Jan. 22 and followed that with a half-point cut at the scheduled Jan. 29-30 meeting.

After eliminating the influence of prices, the trade deficit decreased to $49.3 billion from $53.6 billion. This is the figure the government uses in calculating GDP.

For the year, the trade deficit with China, the second- largest U.S. trading partner after Canada, increased 10 percent to a record $256.3 billion.

The gap with China is a political sticking point for the U.S. and other countries.

Group of Seven policy makers, meeting in Tokyo last weekend, said China should do more to defuse global trade tensions by allowing the yuan to climb against the dollar and other currencies. The G-7 also forecast the U.S. economy may slow further, eroding global growth.

 

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MBIA Says It Can Weather Slump, Doesn't Need Bailout

(Bloomberg) -- MBIA Inc., the world's biggest bond insurer, said it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.

``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.

Chaplin and Ambac Financial Group Inc. Chief Executive Officer Michael Callen will make their presentations on Capitol Hill as they try to fend off credit rating downgrades and critics who say the companies may be headed for bankruptcy. One of the most vocal skeptics, hedge fund manager William Ackman, will also deliver remarks today alongside the MBIA and Ambac executives.

MBIA, based in Armonk, New York, and Ambac are among five companies struggling to maintain their top bond insurance credit ratings after a slump in the value of mortgage-linked securities the companies guaranteed. Standard & Poor's, Moody's Investors Service and Fitch Ratings are reviewing MBIA's top rating for a possible downgrade. Fitch already cut its AAA ratings on New York-based Ambac's insurance unit to AA. Ambac is also being scrutinized by Moody's and S&P.

``MBIA is more than adequately capitalized to meet obligations to policyholders,'' Chaplin, 51, said in his testimony.

Rescue Plans

Ambac said in a statement last night that Callen will tell the committee the company's main challenge is to achieve ``ratings stability.''

MBIA rose 61 cents to $12.25 at 9:38 a.m. in New York Stock Exchange composite trading. Ambac climbed 19 cents to $9.56.

MBIA and Ambac tumbled more than 80 percent in the past year in New York trading as they posted record losses of more than $5 billion and concern grew the companies may not get enough capital to sustain their ratings, casting doubt on $2.4 trillion of municipal and structured finance debt.

New York Insurance Department Superintendent Eric Dinallo last month organized banks to begin plans for a rescue of the insurers and said he may consider strengthening his oversight. Dinallo will also appear before the committee today, as will New York Governor Eliot Spitzer, U.S. Securities and Exchange Commission director Erik Sirri and Keith M. Buckley, a group managing director at Fitch.

Buffett's Offer

Dinallo will tell lawmakers he will consider splitting the bond insurers into two businesses, according to prepared testimony. ``One would have the municipal bond policies and any other healthy parts of the business,'' Dinallo said. ``The other would have the structured finance and problem parts of the business.''

Billionaire investor Warren Buffett yesterday offered to take over $800 billion of the municipal debt guaranteed by MBIA, Ambac and FGIC Corp., the fourth-largest bond insurer. Ambac yesterday said it rejected the offer. Two other insurers haven't responded, Buffett told CNBC television this week.

Spitzer told CNBC today that while Buffett's proposal would benefit municipalities, it wouldn't help the ``bad bank'' piece of the bond insurers' business. ``We don't want to create that schism yet if it can be avoided,'' Spitzer said.

 

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YRC to cut 1,100 jobs

(Reuters) - North America's largest trucking company, YRC Worldwide Inc (YRCW.O: Quote, Profile, Research), said on Wednesday that as part of its plans to shut 27 service centers it will cut approximately 1,100 jobs.

In a presentation to analysts that was filed with the U.S. Securities and Exchange Commission, Chief Executive Bill Zollars said the company expects cash proceeds from property sales of between $8 million to $10 million.

YRC said that as part of the restructuring plan more than 600 trucks and 1,200 trailers would be removed from its fleet.

 

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NY AG probes health insurers over reimbursement

(Reuters) - New York Attorney General Andrew Cuomo said on Wednesday he is conducting an industry- wide probe of health insurers into an alleged scheme to defraud consumers by manipulating reimbursement rates.

At the center of the scheme is Ingenix, the nation's provider of health care billing information, which serves as a conduit for rate data to the largest insurers in the country, Cuomo said in a statement.

Cuomo intends to sue Ingenix, its parent, UnitedHealth Group Inc, and three additional subsidiaries.

 

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Paulson sees slower economy, to rush tax rebates

(Reuters) - Treasury Secretary Henry Paulson on Wednesday stood by his view that the economy will avoid recession this year and grow at a slower pace, and that the Treasury will act quickly to distribute tax rebate payments.

"The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. I believe our economy will continue to grow, although at a slower pace than we have seen in recent years," Paulson said in prepared testimony to the U.S. House of Representatives Budget Committee.

President George W. Bush on Wednesday is expected to sign into law a $152 billion fiscal stimulus package that will provide tax rebates to some 130 million Americans, with most about $600 for an individual and $1,200 for a couple.

Paulson said the Internal Revenue Service would simultaneously manage the spring tax filing season and preparations for issuing the rebate payments starting in early May.

"Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth," he said. "Together, the payments to individuals and the incentives for businesses will help create more than half a million jobs by the end of this year."

Paulson also called on Congress to aid the housing sector by passing legislation that will modernize the Federal Housing Administration and create a new, stronger regulator for Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises.

Under the stimulus plan, Fannie and Freddie will be temporarily allowed to invest in larger mortgages, providing more resources for refinancing troubled mortgages in costly coastal housing markets.

 

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Fed Interest-Rate Cuts Fail to Lower Borrowing Costs

(Bloomberg) -- The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.

Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines.

``It's the clogging up of the credit markets that worries me most,'' Harvard University economist Martin Feldstein said in an interview in New York. ``The Fed has done a lot of cutting, the question is whether it's going to get the traction that it did in the past.''

Banks and investors are demanding greater compensation for offering credit as losses mount on subprime-mortgage securities and concerns grow that ratings of bond insurers will be cut. Elevated borrowing costs mean Fed Chairman Ben S. Bernanke will have to reduce rates further to revive the economy, Fed watchers said.

``The problem is that every piece of news we're getting continues to be bad,'' said Stephen Cecchetti, a former New York Fed bank research director, and now a professor at Brandeis University in Waltham, Massachusetts. ``They will have to ease more. It's the only thing they can do.''

`Close to 50-50'

Feldstein, who heads the National Bureau of Economic Research, the group that sets the dates for U.S. economic cycles, said the chance of a recession is ``close to 50-50.''

Traders now see a 100 percent chance of at least a half- point reduction at or before the Federal Open Market Committee's March 18 meeting, up from 68 percent on Jan. 31, when the Fed cited tighter credit conditions as a reason for lowering rates. Futures show 20 percent odds of a three-quarter point move.

Futures rallied even after a government report today showed retail sales rose 0.3 percent in January from December, against the median forecast in a Bloomberg News survey for a decline. Economists said the gain, led by car and gasoline purchases, wasn't enough to indicate Fed rate cuts are affecting spending.

Bernanke may give an update of his outlook tomorrow when he testifies before the Senate Banking Committee at a hearing on the economy and financial markets. Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox are also scheduled to appear.

Bond Premiums

The extra yield investors demand to buy investment-grade U.S. corporate bonds rose to 2.37 percentage point Feb. 12 from 2.24 percentage point on Jan. 21, Merrill data show. For high- risk, high-yield securities, premiums over Treasury securities have risen a quarter-point, Merrill data show.

``The increase in credit spreads has sort of worked against our policy,'' San Francisco Fed President Janet Yellen told reporters at her bank yesterday. ``The fact that the spreads went up so dramatically really resulted in an effective tightening of financial conditions that our cuts were partly meant to address.''

Those cuts were the fastest since the federal funds rate became the principal policy tool around 1990. The Fed lowered the rate by 75 basis points on Jan. 22 in an emergency move, then by an additional 50 basis points at the regular meeting on Jan. 30. A basis point is 0.01 percentage point.

More Rate Cuts

Beyond March, traders expect quarter-point rate reductions at the following FOMC meetings in April and June, based on futures prices on the Chicago Board of Trade.

In the market where banks lend to each other, borrowing costs have receded since the Fed began special auctions of funds in December. The three-month dollar London Interbank Offered Rate fell to 12 basis points over the Fed's target rate today, from more than 1 percentage point above it two months ago.

Yellen acknowledged in a Feb. 7 speech, repeated yesterday, that borrowers with greater default risk are paying more for loans. The markets for securities backed by mortgages ``are not functioning efficiently, or may not be functioning much at all,'' she said.

``As long as the credit strains remain and might even still be intensifying, it certainly supports the case for continuing to ease aggressively,'' said Brian Sack, a former Fed research manager who is now senior economist at Macroeconomic Advisers LLC in Washington. ``We don't need spreads to come down. We do need them to stop widening.''

 

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