Fed Selects Four Firms to Manage MBS Purchase Plan

By Craig Torres and Jody Shenn

Dec. 30 (Bloomberg) -- The Federal Reserve chose BlackRock Inc., Goldman Sachs Asset Management, Pacific Investment Management Co. and Wellington Management Co. to manage a $500 billion purchase of mortgage-backed securities it plans to complete by June.

“They picked the crème de la creme of the money managers,” said Art Frank, head of mortgage-bond research at Deutsche Bank AG in New York. “By doing $500 billion by June, no question they’re doing their best to try to hold down mortgage rates.”

The collapse of U.S. mortgage finance last year led to the worst credit crisis in seven decades and triggered write downs and losses at financial institutions exceeding $1 trillion. The central bank has expanded credit by $1.3 trillion over the past year through programs extending liquidity to banks, bond dealers and other financial institutions. The Fed plans to create money to purchase the bonds, boosting bank reserves.

Only fixed-rate agency mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae will be eligible for purchase, the central bank said in a statement released in Washington today. The purchases, to start early in January, will include securities with maturities of 30, 20, and 15 years, and will exclude riskier securities such as interest- only bonds, the Fed said.

The Fed’s program is intended to lower rates by reducing the supply of outstanding agency mortgage bonds, boosting their prices and thus lowering their yields. Lower yields in turn reduce the interest rates banks need to charge on new mortgages to ensure profitable sales of the securities.

‘Very Quickly’

“It looks like they’re really going to ramp this up and it’s going to be done very quickly,” said Credit Suisse analyst Mahesh Swaminathan. Thirty-year mortgage rates could fall to an average 4.75 percent, he said, and “this is going to take it down sooner rather than later.”

The average rate on a typical U.S. fixed-rate mortgage fell to 5.22 percent early yesterday, the lowest since 2005, from as high as 6.46 percent in October, according to Bankrate.com data. The Treasury also bought $49.7 billion of the companies’ home- loan securities from September through last month.

“The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal,” the central bank said. “Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team” that implements the Fed’s purchases from advisory and proprietary trading teams, the Fed said.

‘Minimal’ Risk

The central bank said risk on the securities would be “minimal” and “mitigated by the conservative, buy-and-hold investment strategy” of the program.

Fed officials announced the program Nov. 25 and said the action was taken to “reduce the cost and increase the availability of credit for the purchase of houses.”

The government hasn’t stemmed the decline in housing even after channeling $172 billion in new capital to banks. The Fed has provided $535 billion in loans to banks as of Dec. 24. Slumping sales and tight credit helped push home prices in 20 major U.S. cities a record 18 percent lower in the 12 months to October, according to the S&P/Case-Shiller index released today.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: December 30, 2008 18:52 EST

Dow falls for 5th straight session on grim data

By MADLEN READ, AP Business Writer Madlen Read, Ap Business Writer 1 hr 35 mins ago

NEW YORK – Wall Street pulled back again Tuesday in muted trading ahead of the holiday, as another round of reports showed further deterioration in the housing market and broader economy.

The Dow Jones industrial average finished lower for the fifth straight day, falling 100 points.

Tuesday's gloomy data was hardly surprising to jaded investors. And trading volume has been light this week, which tends to skew the market's movements; many traders are on vacation for Christmas, and the market will close early, at 1 p.m. EST, on Wednesday.

"It is a very quiet news week, and much of it has already been priced into the market," said Ryan Larson, head of equity trading at Voyageur Asset Management.

The reports offered Wall Street no reason to be upbeat, however, and the concern remains that the economy will keep weakening well into the new year. That anxiety is sapping the hope for a year-end rally in the Dow, which is has fallen 36.5 percent since 2008 began.

The Commerce Department reiterated Tuesday that third-quarter gross domestic product, a measure of the economy that tallies the value of goods and services, fell at an annual rate of 0.5 percent.

The government also said sales of new homes fell in November to the slowest pace in nearly 18 years, while prices of new homes dropped by the biggest amount in eight months.

Sales of existing homes keep dropping as well. The National Association of Realtors said existing home sales fell 8.6 percent to an annual rate of 4.49 million in November from a downwardly revised pace of 4.91 million in October. That was more than analysts expected.

The Dow Jones industrial average shed 100.28, or 1.18 percent, to 8,419.49. The Dow is well off the multiyear lows it tumbled to in mid-November, but it is still down more than 400 points, or 4.6 percent, so far for the month of December. Typically, December is the one of the best months for the stock market.

Broader indexes also declined on Tuesday. The Standard & Poor's 500 index fell 8.47, or 0.97 percent, to 863.16. The Nasdaq composite index fell 10.81, or 0.71 percent, to 1,521.54. The Russell 2000 index of smaller companies fell 6.43, or 1.35 percent, to 468.64.

Declining issues led advancers by 3 to 2 on the New York Stock Exchange, where consolidated volume came to 3.63 billion shares, down from 4.31 billion shares on Monday.

Government bond prices were narrowly mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, was flat at 2.18 percent. The yield on the three-month T-bill, considered one of the safest investments, was unchanged at 0.02 percent from late Monday.

News from corporate America on Tuesday brought little cheer.

Greeting-card company American Greetings Corp. said it swung to a third-quarter loss, hurt by hefty charges and a decline in sales. Shares fell $3.42, or 35 percent, to $6.40.

And the shape of the financial industry continued to shift, as two more companies got government funding.

Credit card lender American Express Co. and commercial financial firm CIT Group Inc. said Tuesday they each received preliminary approval to obtain billions in funding from the government's $700 billion bank investment program.

American Express fell 46 cents, or 2.5 percent, to $17.96, and CIT Group rose 8 cents to $4.26.

Shareholders approved two acquisitions that were forced by banks' massive credit losses.

PNC Financial Services Group Inc. and National City Corp. shareholders approved PNC's acquisition of the Cleveland-based bank, and Wells Fargo & Co. and Wachovia Corp. shareholders approved Wells Fargo's $11.8 billion purchase of the Charlotte, N.C.-based bank.

Shares of Pittsburgh-based PNC rose 33 cents to $43.01, and National City shares edged up 4 cents, or 2.5 percent, to $1.65 on its last day of trading.

Shares of San Francisco-based Wells Fargo fell 43 cents to $26.99, and Wachovia shares fell 15 cents to $5.30.

The dollar was mixed against other major currencies, while gold prices fell.

Oil prices fell on concerns that energy demand is evaporating in the face of a severe global economic slowdown. Light, sweet crude fell 93 cents to settle at $38.98 a barrel on the New York Mercantile Exchange, after dipping below $38 earlier in the day.

The plunge in energy prices has brought little comfort to stock investors. The downturn should give consumers a break when they heat their homes and fill their cars' tanks, but it is a glaring sign of the grim economic outlook and the shattered financial industry.

In overseas markets, Japan's Nikkei stock average rose 1.57 percent, and Hong Kong's Hang Seng index fell 2.75 percent. Britain's FTSE 100 rose 0.16 percent, Germany's DAX index fell 0.21 percent, and France's CAC-40 fell 0.73 percent.

___

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

NYPD: Madoff investor commits suicide in office

By ADAM GOLDMAN and TOM HAYS, Associated Press Writers Adam Goldman And Tom Hays, Associated Press Writers 28 mins ago

NEW YORK – The founder of an investment fund that lost $1.4 billion with Bernard Madoff was discovered dead Tuesday after committing suicide at his Manhattan office, marking a grim turn in a scandal that has left investors around the world in financial ruin.

Rene-Thierry Magon de la Villehuchet, 65, was found sitting at his desk at about 8 a.m. with both wrists slashed, NYPD spokesman Paul Browne said. A box cutter was found on the floor along with a bottle of sleeping pills on his desk. No suicide note was found.

De la Villehuchet was one of several fund managers to be hit hard in Madoff's alleged $50 billion Ponzi scheme. Investment funds that lost big to Madoff are also facing backlash and investor lawsuits for not protecting their clients from the alleged fraud.

It is not immediately known what kind of scrutiny de la Villehuchet was facing over his Madoff losses through his Access International Advisors, located on Madison Avenue a couple blocks from Rockefeller Center.

But on Monday night, he told cleaning crews in his building that he wanted them out of his office by 7 p.m. because he was going to be working late.

Workers returned Tuesday morning and found the door locked. He was later discovered dead at his desk, with a garbage can placed near his body to apparently catch the blood, Browne said.

De la Villehuchet (pronounced veel-ou-SHAY) was a prominent investor who came from a long line of aristocratic Frenchmen, with the Magon part of his name referring to one of France's most powerful families.

The Magon name is even listed on the Arc de Triomphe in Paris, a world-famous monument that was commissioned by Napoleon in 1806.

His fund enlisted intermediaries with links to the cream of Europe's high society to garner clients. Among them was Philippe Junot, a French businessman and friend who is the former husband of Princess Caroline of Monaco, and Prince Michel of Yugoslavia.

De la Villehuchet, the former chairman and CEO of Credit Lyonnais Securities USA, was also known as a keen sailor who regularly participated in regattas and was a member of the New York Yacht Club.

He lived in an affluent suburb in Westchester County with his wife, Claudine. They have no children. There was no answer Tuesday at the family's two-story house.

"He's irreproachable," said Bill Rapavy, who was Access International's chief operating officer before founding his own firm in 2007.

De la Villehuchet's death came as swindled investors began looking for ways to possibly recoup their losses. A handful of lawsuits have already been filed, all claiming that the hedge funds failed to properly vet Madoff and overlooked some red flags that could have steered them away.

Guy Gurney, a British photographer living in Connecticut, was friends with de la Villehuchet. The two often sailed together and competed in a regatta in France in November.

"He was a very honorable man," Gurney said. "He was extraordinarily generous. He was an aristocrat but not a snob. He was a real person. When he was sailing, he was one of the boys."

The two were supposed to have dinner last Friday but Gurney called the day before to cancel because of the weather. But during the call, de la Villehuchet revealed he had been ensnared in Madoff scandal. "He sounded very subdued," Gurney said.

___

Associated Press Writers Rachel Beck and Joe Bel Bruno and the AP News Research Center in New York; Jim Fitzgerald in New Rochelle, N.Y.; and Joelle Diderich in Paris contributed to this report.

Real Estate Cycles
Peaks in Land Value	Interval (Years)	Peaks in Construction	Interval (Years)	Depressions	Interval (Years)
1818	—	—	—	1819	—
1836	18	1836	—	1837	18
1854	18	1856	20	1857	20
1872	18	1871	15	1873	16
1890	18	1892	21	1893	20
1907	17	1909	17	1918	25
1925	18	1925	16	1929	11
1973	48	1972	47	1973	44
1979	6	1978	6	1980	7
1989	10	1986	8	1990	10
2006	17	2006	20	2008	18
* Note: Table Summary by Fred Foldvary, Economist, Santa Clara University

Real Estate Triggered Recession

Real estate crashes have led to recessions in the U.S. economy the majority of times major recessions or economic depressions have developed since the early 1800's.

In California, Santa Clara University economist Fred Foldvary may have been the first to predict a recession for 2008 back in 1997. "Macroeconomists are not always familiar with the real estate literature," Foldvary said, "and I wanted to use it to come up with a better explanation for the causes of business downturns."

Not all recessions are real estate related, but the majority of real estate busts start most recessions. There have been six economic depressions in the U.S. since 1837.

Foldvary made the prediction in a paper called "The Real Estate Cycle and the Depression of 2008," published in the journal GroundSwell. He researched the studies of real estate economist Homer Hoyt, who identified an 18-year cycle of real estate in Chicago, and other historical trends to come up with his forecast.

Real estate values peak a year or two before a recession. A real estate boom and a growing overall economic boom proceed the recession. Real Estate depressions can be tracked every 16 to 20 years roughly since 1818, which indicates real estate slowdowns are a harbinger of things to come for the overall economy.
Real Estate Cycles
Peaks in
Land Value

Interval (Years)

Peaks in Construction

Interval (Years)

Depressions

Interval (Years)
1818

—

—

—

1819

—
1836

18

1836

—

1837

18
1854

18

1856

20

1857

20
1872

18

1871

15

1873

16
1890

18

1892

21

1893

20
1907

17

1909

17

1918

25
1925

18

1925

16

1929

11
1973

48

1972

47

1973

44
1979

6

1978

6

1980

7
1989

10

1986

8

1990

10
2006

17

2006

20

2008

18
* Note: Table Summary by Fred Foldvary, Economist, Santa Clara University

It is Foldvary's belief that it is land inflation not other real estate appreciation, and the primary belief in society that inflation or price increases will continue that causes a land grab sort of mania to develop.

Isaac Newton, who may be the greatest genius in history, invested in the real estate bubble of the early 1700s, selling at a large profit. But when prices continued to rise he bought back in and suffered a large loss when the bubble turned to panic. Disgusted with himself as a result, Newton wrote, "I can calculate the motions of the heavenly bodies, but not the madness of people."

"Mortgages are paid from wages and profits, so eventually real estate prices stop rising," wrote Foldvary. "When that happens sales volume drops. New construction is dampened. The demand for furniture, appliances and office equipment goes down and unemployment and interest rates rise, and a recession is around the corner."

Foldvary expects this recession or economic depression, if it in fact turns into one to be particularly hard hitting because the growth of the secondary loan market, fraud and Wall Street manipulations made this boom bigger.
Published October 31, 2008

Top Markets with Best Chance to Robust Return

There's nothing wrong with having a little luck on your side when it comes to a bad economy. So with that made clear we list the Top markets with the Best Chance to a Robust Return in real estate.

Chief among all of the candidates to return from the housing bust sooner is Austin, Texas, which hasn't really had it all that bad in comparison to other places during the housing bust. A high-tech corridor should keep this mostly youthful town out of the real bust this time around. You might want to put your money on Austin.

The real estate market started diving more than three years ago in Jacksonville, Florida, where growth is still believe it or not still occurring even at a snails pace as the state's now largest metropolitan area to make the list.

Durham is part of the famous Research Triangle, along with Raleigh and the home of North Carolina State University and Chapel Hill, where the University of North Carolina is located. This area encompasses one of the strongest college areas in the nation and as a result of plenty of college students to rent residences has a strong chance of returning to be one of the country's stronger real estate markets sooner than most of the country.
# Raleigh-Durham, NC


# Austin, TX


# Seattle, WA


# Jacksonville, FL


# San Francisco, CA

The City by The Bay as San Francisco is known has one of the most diverse economies in the country. The 1.8 million residents in San Francisco, Marin and San Mateo counties will see their market's continuing to decline in home prices, but should whether the housing bust much better than the majority, making San Francisco a prime candidate to return from the bust sooner than the rest.

The Port of San Francisco should also help the greater Bay Area during the economic downturn as Americans purchase cheaper consumer goods from over seas.

The collapse of the housing market is having major impacts on the Seattle economy. Washington Mutual and Starbucks have jettisoned tens of thousands of employees. But Seattle still has big time Boeing and Microsoft among a throng of supporting smaller companies to boost the local economy, triggering an economy that will dip but not fallout all together to place Seattle on the list.
Published November 4, 2008

Obama ups jobs goal to 3 million

With a grimmer forecast on the horizon, the president-elect has raised his outlook for increasing employment.
By Ed Henry, CNN senior White House correspondent
December 20, 2008: 9:49 PM ET

WASHINGTON (CNN) -- President-elect Barack Obama has decided to increase his goal for creating new jobs after receiving economic forecasts that suggest the economy is in worse shape than had been predicted, two Democratic officials told CNN.

The officials said Obama is increasing his goal from 2.5 million to 3 million jobs over the next two years after receiving projections early this week that suggest the recession will be deeper than expected.

One of the officials said Obama "challenged the team to think bolder" as some economists warn there is danger in the government doing too little to curb the recession.

They said the stimulus plan in the works in the Obama camp would have "oversight and transparency measures" to ensure spending on the plan would be focused on stimulating the economy and not devolve into just handing out congressional pork projects.

They said it also would include measures that will "lay a foundation for a stronger economy in the future" - such as health care, education and energy spending.

On Friday, Obama had repeated his original goal while announcing appointments to his cabinet and economic team.

"Together with the appointees that I have announced, these leaders will help craft a 21st century economic plan with the goal of creating 2.5 million jobs and strengthening our economy," Obama said.

The Obama team isn't putting a price tag on its economic stimulus plan, which Democratic leaders want to have ready for the president-elect to sign either on or very soon after Inauguration Day. Currently, the initial package is expected to cost somewhere between $500 billion and $700 billion over two years. To top of page

Wall Street extends big rally to 2nd session

By JOE BEL BRUNO and TIM PARADIS, AP Business Writer Joe Bel Bruno And Tim Paradis, Ap Business Writer 1 hr 7 mins ago

NEW YORK – The stock market showed renewed confidence Monday, extending its rally and lifting the Dow Jones industrials to their highest level in a month following President-elect Barack Obama's promise to increase infrastructure spending to lift the economy.

The Dow advanced nearly 300 points, gaining 560 points in the last two sessions to extend a period of relative tranquility on Wall Street. The Dow and the Standard & Poor's 500 have risen in nine out of 11 sessions with investors absorbing bad economic news without signs of the panic that rocked the market for much of the fall.

The Dow rose 298.76, or 3.46 percent, to 8,934.18, its highest close since it finished at 8,943.81 on Nov. 7. The blue-chip index, which added 259 points on Friday, is now up for December.

Broader indexes also rose. The Standard & Poor's 500 index advanced 33.63, or 3.84 percent, to 909.70; and the Nasdaq composite index jumped 62.43, or 4.14 percent, to 1,571.74.

The Russell 2000 index of smaller stocks rose 20.29, or 4.40 percent, to 481.38.

Obama's plan calls for the largest U.S. public works program since the creation of the interstate highway system a half-century ago. That could bolster the economy by putting thousands of people to work building schools and other construction projects.

His weekend announcement lifted a range of companies, from machinery makers to materials producers. Alcoa Inc., the world's third-largest aluminum producer, surged 18 percent on the news; while heavy-equipment maker Caterpillar Inc. jumped 11 percent.

Investors also grew more confident as the government neared a deal to dole out billions to America's three biggest automakers. The White House said Monday that it was "very likely" to strike an agreement with Congress on funneling money to General Motors Corp., Chrysler LLC and Ford Motor Co. The package is expected to total about $15 billion.

The stock market has surged despite a host of bad economic news, including Friday's Labor Department report that showed the nation lost more than a half million jobs last month. The report raised hopes that the government would take more steps to stimulate the economy.

"I think people recognize that the government is going to throw everything that they can at this market, everything they can at the economy to make it work," said James Cox, managing partner at Harris Financial Group. "We had bad jobs numbers on Friday. To be able to overcome those type of job losses and have that kind of rally, that is technically significant. If that doesn't make you bullish, I don't know what does."

Still, many analysts, cognizant of the fact that recoveries from bear markets tend to be tumultuous, were still cautious despite the market's recent string of gains.

"My gut feeling is investors aren't going to quite believe this rally and there is probably going to be some profit taking," said Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc. "There are a lot of different balls bouncing in the air right now. You still have a pretty jittery investor base out there."

While big moves in stocks have continued in recent weeks the trading has much of the time been more orderly. There have been some gyrations, like a 680-point drop in the Dow on Dec. 1, but some market observers contend that the market is slowly forming a bottom. Stocks are up sharply from Nov. 20, when the benchmark S&P 500 finished at its worst level since April 1997. Since then, the S&P 500 is up 20.9 percent, the Dow is up 18.3 percent and the Nasdaq is up 19.4 percent.

Bond prices fell as investors put money back into stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.74 percent from 2.70 percent late Friday. The yield on the three-month T-bill, considered one of the safest investments, was unchanged at 0.01 percent, still indicating a high degree of investor uneasiness.

The dollar was mixed against other major currencies, while gold prices rose.

David Kelly, chief market strategist at JPMorgan Funds, said professional investors are being drawn to the market by cheap stock prices and a sense that while the economy is weak now it will eventually begin to regain its strength.

"The reality in the economy is it's getting worse but eventually the economy will turn around," he said. "Even if the economy is lousy in 2009 stocks are a long-term investment and are cheap."

But Scott Fullman, director of derivative investment strategies with WJB Capital, warned that the move higher for U.S. markets should be treated cautiously. He said credit still remains tight around the world, and that there are still a number of other worries hanging over the market.

"I'd be very cautious about jumping in with both feet and expecting what could be a Santa Claus rally going into the New Year," he said. "The fact is, we're not seeing the credit markets opening up, we're not seeing buying of the distressed debt, and that leads to additional worries for stocks."

With little in the way of economic data to trade on, investors closely monitored corporate news for direction.

Among the automakers, GM rose 85 cents, or 21 percent, to $4.93, while Ford rose 66 cents, or 24.2 percent, to $3.38. Chrysler isn't publicly traded.

Consumers hungry for a deal boosted worldwide sales at McDonald's Corp.'s established locations by 7.7 percent in November. The company said that U.S. same-store sales — or sales at locations open at least a year — rose 4.5 percent. Shares of the company fell $1.80, or 2.9 percent, to $60.92.

Tribune Co. filed for bankruptcy Monday, as expected. The privately held owner of the Los Angeles Times and Chicago Tribune, other newspapers and the Chicago Cubs and Wrigley Field, is struggling with $13 billion in debt. A steep slump in advertising revenue has hurt the company. Most of its debt stems from a complex transaction in which the company was taken private by real estate mogul Sam Zell last year.

Oil prices bounced off four-year lows after OPEC's president suggested the group could surprise investors with a large production cut later this month. Light, sweet crude rose $2.90 to settle at $43.71 a barrel on the New York Mercantile Exchange.

The move higher follows a global rally as investors took heart from signs the world's largest economies are redoubling efforts to revive growth. In China, government officials this week are meeting to discuss possible new steps to expand the $586 billion stimulus that is already in place.

Stocks that rose outpaced those that fell by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to 6.42 billion shares compared with 6.03 billion shares traded Friday.

Hong Kong's Hang Seng index vaulted 8.7 percent to its highest close in seven weeks, while Japan's Nikkei 225 average rose 5.2 percent. Major European bourses also showed big gains. Britain's FTSE-100 climbed 6.2 percent, Germany's DAX jumped 7.6 percent, and France's CAC-40 surged 8.7 percent.

___

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