Main Stream Media is Waking Up

The D word

WASHINGTON – A Depression doesn’t have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase “d.”

And it may be happening now.

The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn’t been one since the epic hardship of the 1930s.

But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.

“We’re probably in a depression now. But it’s not going to be acknowledged until years go by. Because you have to see it behind you,” said Peter Morici, a business professor at the University of Maryland.

No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.

Declaring a depression is much trickier.

By one definition, it’s a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn’t qualify yet: 15 months old and 7.6 percent unemployment. But both unemployment and the 6.2 percent contraction for late last year could easily worsen.

Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that’s happening now.

Morici says a depression is a recession that “does not self-correct” because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.

Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.

The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.

And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.

Let me out

David Moffett, chief executive of Freddie Mac, has resigned just six months after taking the helm of the US mortgage financier as it was put under government supervision.

The company said in a statement that Mr Moffett, formerly vice-chairman and chief financial officer of US Bancorp, wanted to return to a role in the financial services sector.

Freddie is working with its regulator, the Federal Housing Finance Agency, to appoint an interim chief executive by March 13, the company said.

Mr Moffett tendered his resignation to the board late on Friday evening, according to people familiar with the matter, who said that Mr Moffett’s decision was largely unexpected and entirely his own. These people said Mr Moffett preferred to seek a role in the private sector without the limitations of government supervision and a public policy mission.

James Lockhart, director of the FHFA, said: “We thank David Moffett for his service and leadership during the early days of the Conservatorship. FHFA will work with the Freddie Mac Board and management team to ensure a smooth transition.”

Freddie Mac is facing another year of steep losses as the housing downturn accelerates, and as the government boosts its use of the company and rival Fannie Mae to refinance home loans and stop foreclosures.

Investors feel the pinch

US investors are facing the worst year for dividend cuts since 1938, Standard & Poor’s has forecast, as a growing tally of blue-chip companies across the globe slash pay-outs for investors.

HSBC and heavyweight US stocks PNC Financial and International Paper on Monday joined the list of companies that moved to save cash by cutting previously sacrosanct dividend pay-outs, confounding investors who had sought the refuge of high yields in the belief they signified the stock market was cheaply valued.

The moves dealt a further blow to the confidence of investors still dealing with last week’s bombshell cut from General Electric, which had been the largest US payer of dividends at $13bn (£9.3bn) annually. The conglomerate slashed its quarterly dividend, reducing its annual pay-out to $4bn in its first cut since 1938.

That year marked a decline in S&P 500 dividends of 36.3 per cent, according to Standard & Poor’s. Dividend pay-outs for 2009 are forecast to slide at least 22.6 per cent, the worst year since 1938, said Howard Silverblatt, senior index analyst at Standard & Poor’s.

“Cash flow is crucial for companies now and their need to conserve cash will outweigh their desire to pay dividends,” he said.

JPMorgan took an axe to its dividend last week, while investors in US companies as diverse as Dow Chemical, Motorola and Pfizer and Europe’s insurance groups Axa and Allianz have seen their dividends shrivel.

Such cuts have undermined the rationale that high dividend yields for global benchmarks are a buy signal for equities.

The S&P’s current trailing dividend yield – the past pay-outs of companies as a percentage of market capitalisation – of 4 per cent has been well above that of the 10-year Treasury yield since last year, but already this year the S&P has slumped more than 20 per cent. Consensus estimates for the S&P 500 dividend pay-out for 2009 is 3.49 per cent.

The FTSE 100 yields 5.46 per cent, more than a percentage point higher than at the turn of the year.

However, there has been rising investor concern over whether there could be cuts from BP or Royal Dutch Shell, which comprise 20 per cent of dividends on the index.

Gareth Evans, UK strategist at UBS, said: “We do not expect BP or Shell to cut their dividends but there is still a lot of uncertainty given the persistent weakness in the oil price. If they did, this would have a big effect on the market yield.”

The trailing dividend yield on Europe’s DJ Stoxx 600 Index has risen to 5.27 per cent compared with 4.79 per cent at the start of the year.

Fromage = Cheese = More Money

NEW YORK (Reuters) – American International Group Inc posted a record $61.7 billion quarterly loss on Monday and got a new but not necessarily final government bailout, after officials concluded again that letting the insurer fail would threaten the world financial system.

AIG will get access to up to $30 billion of new capital after getting a commitment for $150 billion in aid last year that gave the government a stake of nearly 80 percent.

The latest bailout increases the government’s commitment to keeping AIG on life support, and avoids for now any crippling credit rating downgrades that could force AIG to come up with billions of dollars it might not have.

“It’s a pretty strong reminder that the U.S. Treasury is still all that stands between the current market environment and the ongoing threat of systemic financial meltdown,” said Christopher Garman, head of Garman Research LLC in Orinda, California, and a former Merrill Lynch bond strategist.

White House spokesman Robert Gibbs said “today’s actions were critical” to preventing AIG from further threatening the financial system.

Separately, the Treasury Department and Federal Reserve said urgent action was needed now to keep AIG in business.

“Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high,” they said in a joint statement.

Speaking on a conference call, AIG Chief Executive Edward Liddy called the market “a pretty crummy place” right now, and said fixing the insurer could take “several years.”

Monday’s agreement came three days after a new federal bailout for Citigroup Inc, which like AIG has struggled to sell businesses and raise cash to repay the government.

Federal Deposit Insurance Corp Chairman Sheila Bair said U.S. regulators are committed to preserving financial companies that are too important to the system to fail. U.S. Comptroller of the Currency John Dugan separately told reporters he did not see the AIG situation as a template for banks.

“BLEEDING TERRIBLY”

AIG’s fourth-quarter loss of $22.95 per share widened from $2.08 per share, or $5.29 billion, a year earlier.

Most of the loss stemmed from big writedowns tied to credit default swaps and other toxic debt.

The latest loss equaled about $465,000 a minute, and was a record for a U.S. company, according to Thomson Reuters data.

For all of 2008, AIG lost $99.29 billion, wiping out profits dating to the early 1990s. That amount is close to the gross domestic product of Kuwait. Continued…

Slash and burn those rates

After five rate cuts in as many months, the Bank of England’s rate-setting committee looks set to use the big guns in its efforts to keep inflation near the 2 per cent target. The minutes of the February meeting of the Monetary Policy Committee (MPC) and comments by many of the Bank’s leading figures since then indicate that the MPC is set to “print money” in an extra effort to boost the money supply.

Many economists expect the MPC to announce on Thursday that it has started a programme of “quantitative easing”, alongside its rate decision. While discussions over how much money to inject into the economy will surely take up much time at the MPC’s two-day meeting, the nine-strong committee will also have to peruse some dismal data when considering whether to cut interest rates further.

Growth and activity: Plummeting

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