Budget deficit in 2008 surges to all-time high

WASHINGTON - The federal budget deficit soared to $454.8 billion in 2008 as a housing collapse and efforts to combat the economic slowdown pushed the tide of government red ink to the highest level in history.
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The Bush administration said Tuesday the deficit for the budget year that ended Sept. 30 was more than double the $161.5 billion recorded in 2007.

It surpassed the previous record of $413 billion set in 2004. Economists predicted a far worse number next year as the costs of the government's rescue of the financial system and the economic hard times hit the nation's balance sheet.

Some analysts believe that next year's deficit could easily top $700 billion, giving the next president a formidable challenge.

The administration blamed this year's record deficit on a litany of economic woes. The prolonged housing slump sharply reduced economic growth and has sent the unemployment rate rising, developments that reduce tax revenues.

"This year's budget results reflect the ongoing housing correction and the manifestation of that in strained capital markets and slower growth," Treasury Secretary Henry Paulson said in a statement accompanying the deficit report. "While it will take time to work through this period, we will overcome the current challenges facing our nation."

Democrats said the administration's economic policies were responsible for the growing deficit. They noted that when Bush took office in 2001, the budget was in surplus with projections that total surpluses over the next decade would reach $5.6 trillion. Those surpluses never materialized. The economy fell into a recession and then faced unexpected costs such as fighting wars in Afghanistan and Iraq and dealing with the aftermaths of Hurricane Katrina. Democrats also cite the costs of Bush's 2001 and 2003 tax cuts as further reasons for the budget imbalances.

"The eight years of this administration will include the five biggest budget deficits in history," said House Budget Committee Chairman John Spratt, D-S.C. "The resulting debt will be passed to our children and grandchildren."

Senate Budget Committee Chairman Kent Conrad, D-N.D., said the national debt had climbed by more than $1 trillion while Bush was in office and "the next president will inheriting a fiscal and economic mess of historic proportions."

The credit crisis that has swamped the financial system is boosting outlays because of the costs of protecting the depositors of failed banks.

Those costs will increase significantly in coming years. The government faces the prospects of paying for the $700 billion rescue plan that will boost spending as the government spends $250 billion in coming months to buy stock from banks to bolster their balance sheets and also buys up bad assets currently on banks' books.

Both of those programs are aimed at relieving strains on banks so they can resume more normal lending and ease a credit crisis that is threatening to push the country into a severe recession.

Many private economists believe the country will not be able to escape a recession even if the rescue program is successful at getting banks to resume lending.

The Bush administration is projecting that the deficit in the current budget year will rise to $482 billion, but that estimate made in the summer does not include the costs of the rescue program passed by Congress on Oct. 3.

The deficit for 2008 reflected the costs incurred in recent months for a $168 billion economic stimulus program that Congress passed at the beginning of this year in an effort to combat the economic slowdown. Those checks did give the economy a boost in the late spring and early summer. That impact has now faded leading many analysts to project that the current quarter and the first three months of next year will show declines in overall input.

Stocks pull back as profit-taking sets in

NEW YORK - Wall Street ended a relatively calm session with a moderate loss Tuesday as investors, while happy with the government's plans to spend up to $250 billion to buy stock in private banks, decided to cash in profits from the previous day's massive advance as they refocused their attention on the economy.
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It was the first time in nine sessions that the Dow Jones industrial average didn't close with triple-digit losses or gains although it did swing in a 700-point range. The Dow closed down 76 points a day after its record 936-point jump.

Big advances by many bank stocks helped offset some of the declines in the Dow and the Standard & Poor's 500 index, giving them a better showing for the day than the Nasdaq composite index, which fell more than 3 percent. The technology-dominated Nasdaq also lagged ahead of a profit report from Intel Corp., as investors were reminded of the troubled economy and its impact on corporate earnings.

Profit-taking set in after the Dow surged more than 400 points at the opening. Wall Street is expected to see jittery trading in the weeks and perhaps months ahead because of worries about the economy; stocks also tend to ratchet up and down when they're recovering from a plunge like the one Wall Street has suffered in the past two weeks.

"We don't know if the bottom is in," said Lincoln Anderson, chief investment officer and chief economist at LPL Financial, referring to the market's advance Monday after huge losses last week. "We certainly expect heightened volatility for a fair amount of time while we sort out just exactly what's going on."

Investors had snapped up stocks Monday in anticipation of the government's plan. President Bush said Tuesday the government would use a portion of the $700 billion financial bailout passed at the start of the month to inject capital into the nation's major banks, which have been slammed by souring mortgage investments. The move follows a similar one announced Monday by European governments to invest about $2 trillion in their own troubled banks.

The revised bailout plan differs from the original in that it aims to recapitalize banks, not just buy the troubled assets off their books at prices that could leave the banks with losses.

"This begins to penetrate the core of the problem," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.

Robert Dye, senior economist at PNC Financial Services Group, said the government's actions likely will help revive the credit markets, but now that the plan is place, investors are shifting back to concerns about the economy.

"These steps are not going to turn the real economy on a dime," he said of the government intervention. "The two keys to the fundamental economy right now are the job market and the housing market and both of those remain distressed."

"There isn't one bottom here. We're talking about multiple events. There will be a bottom in financial market and another in the labor market and one in the housing market. And they're not going to all line up," Dye said.

The Dow fell 76.62, or 0.82 percent, to 9,310.99.

Broader stock indicators also declined. The S&P 500 index fell 5.34, or 0.53 percent, to 998.01, and the Nasdaq fell 65.24, or 3.54 percent, to 1,779.01.

The Russell 2000 index of smaller companies, including many tech concerns, fell 16.24, or 2.84 percent, to 554.65.

Though the major indexes showed losses, advancing issues outnumbered decliners by about 9 to 7 on the New York Stock Exchange, where consolidated volume came to 7.97 billion shares, compared with 7.1 billion shares traded Monday.

Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, said investors pleased about the government's plan gravitated toward industrial companies, seeing them as more likely to benefit from a revived credit market than tech companies. That also helped send the Nasdaq lower.

"People are thinking more of the blue chips are going to respond," he said.

The Dow remains 34.3 percent below its Oct. 9, 2007 record close of 14,164.53, and could fluctuate around these levels as investors await signs of stabilization in the housing and job markets.

Cardillo said he believes the worst lows are behind the stock market, but other analysts have shied away from saying Wall Street had reached a bottom. The Dow has not yet fallen below its low during the last bear market, the closing level of 7,286.27 on Oct. 9, 2002.

Investors have been trying to regain their footing after a gruesome week that obliterated about $2.4 trillion in shareholder wealth. The Dow shot higher Monday after an eight-day losing streak that amassed point losses of just under 2,400, or 22.1 percent, bringing the blue-chip index to its lowest level since April 2003. That 18.2 percent weekly plunge in the Dow was the worst in the index's 112-year history.

Following the Columbus Day holiday, the U.S. government bond markets reopened Tuesday and indicated that investors' desire for safe assets remains strong. The three-month Treasury bill's yield, which moves opposite its price, rose to 0.30 percent from 0.21 percent late Friday, and the 10-year note's yield rose to 4.03 percent from 3.86 percent.

A drop in a key bank-to-bank lending rate indicates banks could be growing more willing to lend to one another. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.64 percent from 4.75 percent. Libor is important because many consumer loans, including about half of all adjustable-rate mortgages, are tied to it.

The recent sell-off in stocks came amid a seize-up in lending, as banks and investors around the world grew fearful about the creditworthiness of other institutions following the September bankruptcy of investment bank Lehman Brothers Holdings Inc. and the subsequent failure of thrift bank Washington Mutual Inc. Tight lending conditions make it harder and more expensive for businesses and consumers to get a loan, a headwind for economic growth.

Many of the nine banks the government identified as ones in which it will invest advanced Tuesday. Among them, Citigroup Inc. rose $2.87, or 18 percent, to $18.62, while Bank of America Corp. rose $3.74, or 16 percent, to $26.53. JP Morgan Chase & Co. fell $1.28, or 3.1 percent, to $40.71.

Intel fell $1.06, or 6.2 percent, to $15.93 ahead of its quarterly earnings report, which arrived after the closing bell. The chip maker's profit topped analysts' forecasts though the company warned the financial crisis is making it difficult to project results and that its fourth-quarter sales could fall short of Wall Street estimates.

Light, sweet crude fell $2.56 to settle at $78.63 per barrel on the New York Mercantile Exchange.

The dollar fell against most other major currencies, while gold prices declined.

Asian and European markets soared Tuesday. Hong Kong's Hang Seng index rose 3.19 percent, after a more than 10 percent increase on Monday. Japan's Nikkei index, catching up from the country's market holiday Monday, jumped 14.15 percent — the largest increase ever.

In Europe, Britain's FTSE 100 jumped 3.23 percent, Germany's DAX index rose 2.70 percent, and France's CAC-40 rose 2.75 percent. source

Bulls keep running

NEW YORK -- Stocks surged Tuesday morning, adding to the prior session's historic rally, as investors cheered the Bush administration's plan to recapitalize major banks.

The Dow Jones industrial average (INDU) jumped 363 points in the early going. The Standard & Poor's 500 (SPX) index added 3.9% and the Nasdaq composite (COMP) gained 2%.

Stocks surged Monday, with the Dow industrials soaring some 936 points, or 11%, marking the largest-ever point advance for the blue-chip index. The S&P 500 and Nasdaq also hit point-gain records.

Investors reacted to global efforts over the weekend and into Monday aimed at unfreezing credit markets and getting money flowing through the pipelines.

Treasury trading resumed following the Columbus Day holiday, and could give a good indication of whether all the recent interventions are working.

On Tuesday, the Bush administration announced plans to recapitalize U.S. banks in an effort to end the credit freeze that has slammed the global economy. Among the moves announced: a $250 billion investment in nine major banks and a plan for the the Federal Deposit Insurance Corp. will back up new senior bank debt for three years.

"These efforts are designed to directly benefit the American people by stabilizing our overall financial system and helping our economy recover," President Bush said in a statement outside the White House.

Overseas markets extended their celebration, with Japan's Nikkei surging to a single-day record gain of 14.2%.

European markets rallied for the second straight day. London's FTSE-100 was up 5.5% in afternoon trading, while Frankfurt's DAX and Paris' CAC-40 climbed by 5%.

Numbers: Soft drink maker PepsiCo (PEP, Fortune 500) reported weaker-than-expected third-quarter earnings and said it would cut 3,300 jobs due to the global economic slowdown. Pepsi shares fell 3.8% in premarket trading.

Dow component Johnson & Johnson (JNJ, Fortune 500) reported higher third-quarter earnings that beat expectations. J&J shares rose 5% in premarket trading.

Dollar and oil. The dollar remained under pressure early Tuesday. The greenback was down against the 15-nation euro and the British pound, but was up slightly against the Japanese yen.

Crude prices, meanwhile, stepped higher. Prices, which have plunged some 43% from the record $147.27 a barrel set on July 11, were up $2.01 to $83.21 a barrel early Tuesday.

Oil prices have been under pressure amid worries that the global crisis would undercut demand. Late last week, OPEC announced it would hold an emergency meeting Nov. 18 to address the issue. source

Banco Santander buying rest of Sovereign for $1.9B

NEW YORK - Banco Santander of Spain said Monday it would buy the other three-quarters stake in Sovereign Bancorp that it doesn't already own for $1.9 billion, extending a wave of consolidation as the banking industry struggles to deal with a load of soured debt related to mortgages.
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The Spanish bank already had a nearly 25 percent stake in Sovereign, a Philadelphia-based thrift, and will buy the rest with stock valued at about $3.81 for each share of Sovereign, a premium of 3.5 percent to Sovereign's closing price on Monday.

The deal, which had been rumored earlier in the day, was announced after trading closed Monday.Sovereign's shares fell 13 cents to $3.68 in the regular trading session but jumped 16 cents in after-hours trading following the announcement.

Like many U.S. banks, Sovereign Bancorp has been pummeled by rising mortgage delinquencies as the housing market tumbles. Its stock has lost nearly two-thirds of its value in the year to date.

The spreading credit crisis has already resulted in consolidation among national banks including Wachovia Corp., which is being bought by Wells Fargo & Co., and analysts say they've been expecting mid-size, regional banks to be next. Sovereign had said earlier Monday that it was in advanced discussions with Banco Santander.

The driving force behind the consolidation of regional banks is a lack of capital, said Doug Landy, a partner in the U.S. banking practice of law firm Allen & Overy. Large banks and very small banks have a much easier time raising capital than regional banks because big banks can tap into the international markets for cash, while small banks have a local connection.

Ralph Whitworth, a member of Sovereign's board of directors and chairman of its capital and finance committee, said in a statement that the company made the choice because of the "unprecedented uncertainty" in the marketplace.

Banks and other companies in the financial industries are losing money on bad mortgage bets and products that have repackaged these debts as homeowners struggle to keep up with their payments.

Later Monday, after the deal was announced, Sovereign showed just how much it was being affected by these bad bets as it pre-announced its third quarter earnings.

The company said it posted a loss of $982 million, or $1.48 a share in the period ending Sept. 30. That compares to net income of $58.2 million, or 11 cents a share, in the same period last year.

The loss includes a previously announced impairment charge on the bank's Fannie Mae and Freddie Mac perpetual preferred stock of $575 million. Those two companies, which bought mortgages and then resold them packaged as financial instruments, have been taken over by the government.source

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Prudential becomes latest insurer to warn

NEW YORK - Prudential Financial Inc (PRU.N) is the latest major insurer to warn its quarterly profits would miss forecasts, as the shares of rivals were pummeled on concern they would need to raise capital.
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The second-largest U.S. life insurer said on Thursday that third-quarter profit would be cut sharply by losses on poorly performing annuity and investment products and a charge for a legal settlement.

That followed recent profit warnings at U.S. life and property insurer Hartford Financial Services Group Inc (HIG.N) and MetLife Inc (MET.N), the largest life insurer in the United States.

The latter sold new shares at a discount on Wednesday to bolster its capital, raising $2 billion, while Hartford earlier this week received a $2.5 billion capital injection from Allianz SE (ALVG.DE), Europe's biggest insurer.

"Insurers made big investments in mortgage-related securities and are also big holders of stocks and bonds in financial firms that have been wiped out or badly damaged by the credit crisis, such as Lehman Brothers and Washington Mutual, said Alan Rambaldini, a life insurance analyst at investment research firm Morningstar.

"On top of that, bigger life insurers like Prudential get fees on the size of stock investments behind annuity products they sell to customers, which will drop sharply as the broader market plummets," he said.

'TRADING ON FEAR'

Among other life insurers, Lincoln National Corp (LNC.N), fell 35 percent to $18.31, Principal Financial Group Inc (PFG.N) lost 27 percent to $15.79 a share and Unum Group (UNM.N) fell 30 percent to $14.77.

Life insurance, as measured by the sectoral S&P Life & Health Insurance index (.GSPLIFE), was down 17 percent, making it the second-worst performing sector after automakers.

Even beyond life, XL Capital Inc (XL.N), a large Bermuda-based reinsurer, fell 54 percent to $4.01.

"The group (insurers) are trading on fear right now," said Bret Howlett, Standard & Poor's life insurance analyst. "A lot of investors are worried about capital positions in this unfavorable operating environment.

"People are worried about whether these companies are going to need to raise additional capital. In this environment, it's going to be difficult to raise that capital."

American International Group Inc (AIG.N) shares fell 25 percent to $2.39, one day after the company said it would get more liquidity from the government.

AIG, once the world's largest insurer, got an $85 billion loan from the government three weeks ago when it was on the brink of collapse. Under the new plan, the Federal Reserve Bank of New York will take up to $37.8 billion in investment-grade, fixed-income securities from AIG in exchange for cash.

"The government has effectively provided them support for $110 billion. I think they have exhausted that avenue and so I think as they move forward their options have diminished," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

UNDER PRESSURE

Citing market volatility and extraordinary events affecting financial markets, Prudential has suspended all purchases of its own stock.

It said it has liquidity to meet requirements at the parent company and at all operating subsidiaries and, unless it enters into any strategic deals, its need to access the capital markets before the end of the year would be modest.

"We are comfortable with our risk profile and believe that we are in a strong position to manage through the current environment," said Prudential Chief Executive John Strangfeld, in a statement.

Prudential did not say when it would report third-quarter earnings.

Insurers have been under pressure to keep solid capital positions to maintain their ratings after their investments lost value as financial markets sank in recent weeks.

Keeping high ratings is essential for insurers because lower ratings can mean higher costs and, in some cases, even a loss of business. source

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Insurance giant AIG's role in market crisis probed

WASHINGTON - Less than a week after the federal government had to bail out American International Group Inc., the company sent executives on a $440,000 retreat to a posh California resort, lawmakers investigating the company's meltdown said Tuesday.

The tab included $23,380 worth of spa treatments for AIG employees at the coastal St. Regis resort south of Los Angeles even as the company tapped into an $85 billion loan from the government it needed to stave off bankruptcy.

The retreat didn't include anyone from the financial products division that nearly drove AIG under, but lawmakers were still enraged over thousands of dollars spent on catered banquets, golf outings and visits to the resort's spa and salon for executives of AIG's main US life insurance subsidiary.

"Average Americans are suffering economically. They're losing their jobs, their homes and their health insurance," Democratic House Oversight Committee Chairman Henry Waxman scolded. "Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation."

The hearing also revealed that AIG executives hid the full range of its risky financial products from auditors as losses mounted, according to documents released Tuesday by a congressional panel examining the chain of events that forced the government to bail out the conglomerate.

The panel sharply criticized AIG's former top executives, who cast blame on each other for the company's financial woes.

"You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insurance companies in the history of our country," said Democratic Rep. Carolyn Maloney. "You were just gambling billions, possibly trillions of dollars."

AIG, crippled by huge losses linked to mortgage defaults, was forced last month to accept the $85 billion government loan that gives the US the right to an 80 percent stake in the company.

Waxman unveiled documents showing AIG executives hid the full extent of the firm's risky financial products from auditors, both outside and inside the firm, as losses mounted.

For instance, federal regulators at the Office of Thrift Supervision warned in March that "corporate oversight of AIG Financial Products ... lack critical elements of independence." At the same time, Pricewaterhouse Cooper confidentially warned the company that the "root cause" of its mounting problems was denying internal overseers in charge of limiting AIG's exposure access to what was going on in its highly leveraged financial products branch.

Waxman also released testimony from former AIG auditor Joseph St. Denis, who resigned after being blocked from giving his input on how the firm estimated its liabilities.

Three former AIG executives were summoned to appear before the hearing. One of them, Maurice "Hank" Greenberg — who ran AIG for 38 years until 2005 — canceled his appearance citing illness but submitted prepared testimony. In it, he blamed the company's financial woes on his successors, former CEOs Martin Sullivan and Robert Willumstad.

"When I left AIG, the company operated in 130 countries and employed approximately 92,000 people," Greenberg said. "Today, the company we built up over almost four decades has been virtually destroyed."

Sullivan and Willumstad, in turn, cast much of the blame on accounting rules that forced AIG to take tens of billions of dollars in losses stemming from exposure to toxic mortgage-related securities.

Lawmakers also upbraided Sullivan, who ran the firm from 2005 until June of this year, for urging AIG's board of directors to waive pay guidelines to win a $5 million bonus for 2007 — even as the company lost $5 billion in the 4th quarter of that year. Sullivan countered that he was mainly concerned with helping other senior executives.

Sullivan also came under fire for reassuring shareholders about the health of the company last December, just days after its auditor, Pricewaterhouse Cooper, warned of him that AIG was displaying "material weakness" in its huge exposure to potential losses from insuring mortgage-related securities.

AIG's problems did not come from its traditional insurance subsidiaries, which remain healthy, but instead from its financial services operations, primarily its insurance of mortgage-backed securities and other risky debt against default. Government officials feared a panic might occur if AIG couldn't make good on its promise to cover losses on the securities; investors feared the consequences would pose a threat to the US financial system, which led to the government bailout.

AIG suffered huge losses when its credit rating was cut, thanks largely to complex financial transactions known as "credit default swaps." AIG was a major seller of the swaps, which are a form of insurance, though they are not regulated that way.

The swap contracts promise payment to investors in mortgage bonds in the event of a default. AIG has been forced to raise billions of dollars in collateral to back up those guarantees.

Sullivan said many of the firm's problems stemmed from "mark to market" accounting rules mandating that its positions guaranteeing troubled mortgage securities be carried as tens of billions of dollars in losses on its balance sheet.

This in turn, said former AIG chief executive Willumstad, who ran the company for just three months after Sullivan left, forced the firm to raise billions of dollars in capital. The federal rescue came after AIG suffered disastrous liquidity problems after its credit rating was lowered, forcing the company to come up with even more capital.

"AIG was caught in a vicious cycle," Willumstad said in the testimony.

Greenberg said that AIG "wrote as many credit default swaps ... in the nine months following my departure as it had written in the entire previous seven years combined. Moreover, "unlike what had been true during my tenure, the majority of the credit default swaps that AIGFP wrote in the nine months after I retired were reportedly exposed to subprime mortgages."

But Sullivan said the complex swaps had underlying value, even as the market for them froze, sending their book value plummeting and forcing AIG to scramble for collateral.

"When the credit markets seized up, like many other financial institutions, we were forced to mark our swap positions at fire-sale prices as if we owned the underlying bonds, even though we believed that our swap positions had value if held to maturity," Sullivan said.

The hearing is the second in two days into financial excesses and regulatory mistakes that have spooked stock and credit markets and heightened fears about a global recession source

Retirement accounts have lost $2 trillion — so far

WASHINGTON - Americans' retirement plans have lost as much as $2 trillion in the past 15 months — about 20 percent of their value — Congress' top budget analyst estimated Tuesday as lawmakers began investigating how turmoil in the financial industry is whittling away workers' nest eggs.

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The upheaval that has engulfed financial firms and sent the stock market plummeting is also devastating people's savings, forcing families to hold off on major purchases and even delay retirement, Peter Orszag, the head of the Congressional Budget Office, told the House Education and Labor Committee.

As Congress investigates the causes and effects of the meltdown, the panel pressed economists and other analysts on how the housing, credit and other financial troubles have battered pensions and other retirement funds, which are among the most common forms of savings in the United States.

"Unlike Wall Street executives, America's families don't have a golden parachute to fall back on," said Rep. George Miller, D-Calif., the panel chairman. "It's clear that their retirement security may be one of the greatest casualties of this financial crisis."

More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30 said they worry they will have to work longer because the value of their retirement savings has declined.

Orszag indicated the fear is well-founded. Public and private pension funds and employees' private retirement savings accounts — like 401(k)'s — lost about 10 percent between the middle of 2007 and the middle of this year, and lost another 10 percent just in the past three months, he estimated.

Private retirement plans may have suffered slightly more because those holdings are more heavily skewed toward stocks, Orszag added.

"Some people will delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire and will continue working," Orszag said.

A new AARP study found that because of the economic downturn, one in five workers 45 and older has stopped putting money into a 401(k), IRA or other retirement savings account during the past year, and nearly one in four has increased the number of hours he works. More than one-third of these workers have considered delaying retirement, according to the study, which also found that more than half now find it difficult to pay for basic items such as food, gas and medicine.

The hearing came just as workers are receiving — or about to receive — their quarterly retirement savings account statements, which are likely to show disheartening drops in the value of holdings.

Jerry Bramlett, the head of BenefitStreet Inc., a retirement savings plan administration company, said there's a risk that people will overreact to the bad news by pulling their money out of the accounts, which could add to their potential losses.

"For participants with many years of retirement, a drastic abandonment of equity positions in their retirement account will only serve to lock in as-of-yet-unrealized losses. Markets do go up and down, and 401(k) participants must try to think long-term," Bramlett said.

Still, he said workers should do their best to diversify their retirement savings accounts and "perhaps consider less volatile investments."

On the heels of enacting a $700 billion market bailout, lawmakers are searching for ways to help workers who are feeling the ripple effects of the financial crisis.

"What should we be doing to try to find a way to salvage the retirement position of American workers?" said Rep. Dennis Kucinich, D-Ohio, an opponent of the government rescue plan. Congress, he added, "rushed to protect Wall Street in hopes that some benefits would trickle down to workers."

The massive losses have already reopened a bitter and long-running debate about what role — if any — the government should play in helping workers save for retirement.

Some experts argue that the hefty tax subsidies that Congress has put in place in recent decades for 401(k) and other worker-contribution accounts have made people's retirement income less secure by shifting risks, decisions and costs from employers to people who often know little about investing.

"They are fatally flawed," Teresa Ghilarducci, an economist at the New School for Social Research, said of the tax-advantaged plans. "They're too risky, and it's not good policy to have workers run their own retirement plan. They want government help."

Common mistakes workers make include overinvesting in a single stock — often their company's — and participating in funds that carry large fees or involve excessive risk, the witnesses said.

"You cannot tell the participants at the bottom of your fund prospectus, 'Warning: Your psychology may lead you to make irrational choices,'" said Christian E. Weller of the University of Massachusetts Boston.

The current market turmoil adds to an already difficult retirement savings picture for Americans, who are increasingly shouldering the burden of managing and funding their own company-sponsored retirement savings plans as firms eliminate traditional pensions.

Even before the recent downturn, older Americans were on track to continue working longer. Twenty-nine percent of people in their late 60s were working in 2006, up from 18 percent in 1985, according to the Bureau of Labor Statistics. Over the next decade, the number of workers who are 55 and older is expected to increase at more than five times the rate of the overall work force, the BLS reported.

Falling home values and now the decimation of much of their savings could plunge older Americans into period of austerity not seen in decades, Miller said: "The fear factor is huge, and they don't see the availability of resources to them to get well."

Orszag said the situation has little precedent in American history.

"The period that we're experiencing is arguably the greatest collapse in confidence that we've experienced since the Great Depression," he said.

said Source

Philamlife awaits buyer as parent firm sells assets

NO SINGLE domestic insurer can afford to buy Philippine American Life Insurance Co. (Philamlife) and any taker will need the help of a foreign financier, analysts said, unless Manila’s top financial companies opt to expand their own insurance businesses.

And while the country’s conglomerates may have the ready cash to match Philamlife’s P170 billion in assets and net worth of P49.5 billion, the question is whether they would be willing to dip their hands into a non-core business, they added.

Even the Yuchengco Group of Companies, which has launched an offer, may need to find a partner, and an outside one at that, to purchase Philamlife, put up for sale by its parent firm in the US in the wake of a worsening financial crisis.

American International Group, Inc. (AIG) on Friday announced that it would be selling assets, Philamlife included, to repay an $85-billion lifeline extended by the US government. Philamlife, a wholly-owned unit, will be sold with some local affiliates.

Yuchengco group officials declined to comment when asked on the progress of talks following AIG’s announcement. Lorenzo V. Tan, president and CEO of Yuchengco-owned Rizal Commercial Banking Corp. (RCBC) said there was "no word at this time".

Philamlife has eight subsidiaries whose businesses include pre-need plans, bancassurance, healthcare, banking, credit cards, asset management, property and casualty insurance, property management and development, and business process outsourcing.

These subsidiaries are Philam Equitable Life Assurance Company, Philam Plans Inc., Philam Care, AIG Philam Savings Bank, Philam Asset Management Inc., Philam Properties, AIG Business Processing Services, Inc. and Philam Insurance.

"Philamlife is a very good candidate for acquisition. The ones interested in the financial assets would be foreign institutions," Astro C. del Castillo of First Grade Holdings, Inc. said.

"They [Yuchengcos] can get a good partner and sweetener and be part of a consortium and at the end of the day, they’ll have the controlling stake," another analyst said, noting how the Yuchengcos were able to buy Nippon Life’s insurance business. Nippon Life, a joint venture of the Yuchengco group and a Japanese firm, has been renamed Great Life Financial Assurance Corp.

The Yuchengco’s insurance business includes Great Pacific Life Assurance Corp. (Grepalife), unlisted non-life insurer Malayan Insurance Co. Inc., and Great Life Financial Assurance Corp. It also lists Funeraria Paz Sucat, Inc. and Lifetime Plans as insurance businesses.

Industry officials doubt the possibility of local insurers forming a consortium as a majority of Philippine insurance firms are mainly family-owned.

"I would discount forming a consortium. Who would have the controlling stake would be an issue," said Peter G. Coyiuto, former chief of the 34-strong Philippine Life Insurance Association and president of First Life Insurance.

Despite Philamlife being AIG’s "crown jewel" in Asia, analysts said prospective foreign buyers may cherrypick from the American financial giant’s insurance units in Taiwan, China and Hong Kong where the business is more lucrative.

"If you buy a company, you look at the future stream of income. AIG’s peak operation is in China, Hong Kong and Taiwan," Mr. Coyiuto said.

Conglomerates owned by the Gokongwei family, tobacco magnate Lucio Tan and retail tycoon Henry Sy would have the liquidity AIG needs but insurance may not be their cup of tea, analysts said.

The banking industry’s big players Metropolitan Trust and Bank Corp. (Metrobank) and Bank of the Philippine Islands (BPI) are unlikely takers with each already having their insurance affiliates, analysts said. Metrobank has Axa Philippines, while BPI has Ayala Life. - source

Citi: Wells Fargo blocked from buying Wachovia

Citigroup says NY judge temporarily agrees to block Wells Fargo from acquiring Wachovia

NEW YORK (AP) -- The fight over control of Wachovia intensified Saturday, as a judge temporarily agreed to block the sale of the bank by Wells Fargo, Citigroup announced in a news release.

State Supreme Court Justice Charles Ramos issued the order blocking the sale of Wachovia Corp., which Wells Fargo & Co. had agreed to purchase in a $14.8 billion deal.

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Citigroup Inc. accused Wells Fargo of trying to cut off its earlier takeover offer of Wachovia's banking operations for $2.1 billion in a deal struck with the assistance of the Federal Deposit Insurance Corp. On Friday, four days after that deal was struck, Wells Fargo said it was buying Wachovia.

The litigation pits two of the largest remaining financial institutions against one another as the ongoing credit crisis leads the federal government to arrange marriages and sales among banking entities.

Wells Fargo and Citigroup did not immediately respond to messages left late Saturday seeking comment about the temporary order blocking the sale.

Wachovia spokeswoman Christy Phillips-Brown said in a statement the company believes its agreement with Wells Fargo is "proper, valid and ... in the best interest of shareholders, employees and the American taxpayers."

She said Citigroup is free to make a better offer to Wachovia under that agreement.

The FDIC said Friday that it "stands behind its previously announced agreement with Citigroup." It also said it would review all proposals and work with regulators of all three institutions to resolve the tug-of-war.

Citigroup says it has an exclusivity agreement that bars Wachovia from talking with other potential buyers. Its shares fell sharply after the surprise announcement of the Wells Fargo-Wachovia agreement. source

Colleges scramble as investment fund freezes

By JOHN CHRISTOFFERSEN, AP Business Writer Fri Oct 3, 1:02 AM ET

NEW HAVEN, Conn. - An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.
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Wachovia Bank, trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could only withdraw 10 percent of their money, but that figure was increased to 34 percent by Wednesday and 37 percent by Thursday.

Commonfund, a Wilton, Conn.-based nonprofit that advises colleges and schools on money management, also said Thursday it put a 30 percent limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said Keith Luke, managing director of Commonfund.

About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment plant purchases, he said.

"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."

Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.

"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."

Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, according to Matthew Hamill, senior vice president of the National Association of College and University Business Officers. That means borrowing costs that effectively reduce their rate of return in the original investment, he said.

Hamill said he does not expect the issue to affect students and their families and noted that the crisis has eased somewhat with a greater percentage of cash allowed to be withdrawn.

"I think most institutions are feeling far more confident in the short run the fund will be there for what its needs are," Hamill said. "The remaining question on everyone's mind is exactly when the remaining balance in the account will be available."

Assumption College in Worcester, Mass. had about $20 million in the fund, but was able to get back nearly a third of that, said Christian McCarthy, the school's executive vice president and treasurer. The redemption and other funds enabled the college to pay all its bills, he said.

"It's been a tremendous inconvenience," McCarthy said. "It really did come as quite a shock. It is disconcerting."

The fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue chip companies, while the rest is in securities backed by mortgages and other assets, Luke said.

Amid the housing industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors seek safer options like Treasury bills.

Commonfund said recently volatile markets have hurt the 15 percent to 20 percent of the Short Term Fund's portfolio held in mortgage- and asset-backed securities.

There have been no defaults in the fund's portfolio so far, Luke said.

"Credit markets have frozen, which has made trading of even the highest quality short term financial assets impossible at virtually any reasonable price," Commonfund wrote in a letter to clients Wednesday. "In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action."

Commonfund said it pledged $50 million of its corporate reserves in April to back the fund. Commonfund also said it was looking for a new trustee for the Short Term Fund in order to re-establish the program in largely the same form.

Fay said Wachovia's decision was not affected by last week's announced $2.1 billion deal for Citigroup to buy Wachovia's banking operations.

Wachovia's decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid the recent market turmoil.

A slow liquidation helps protect investor returns and ensure each investor would be treated equally.

A rescue package approved by the Senate late Wednesday would let the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.

By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Luke said. Asked if investors will ultimately get all their money back, Luke said, "We certainly expect that."

Commonfund is working with the colleges and schools to help them find alternative sources of financing, Luke said.

"We feel terrible for them," Luke said. "We want to help them. We're working very hard to do so."

Bethany College — a Lutheran school in Lindsborg, Kan., with 600 students and a $12 million budget — has $700,000 invested in the fund.

"Obviously we weren't planning on withdrawing all at once," said Aubrey Streit, a spokeswoman. "We're just re-evaluating our plan for how we will work with the cash flow over the course of the next academic year."

Bethany College is not in a state of panic, Streit said, but she noted that the investment was a significant part of its budget.

"It wasn't something we expected," Streit said. "It really makes it real to see the financial impact coming here."

Grinnell College in Iowa had about $4.8 million in the fund, but was able to withdraw 34 percent, said Russell Osgood, the college's president. With a $1.5 billion endowment, he was not worried.

"It has had no effect," Osgood said. source