The Star Online: Business
The Star Online: Business |
- US House passes bill to raise Govt debt limit and cut spending(update)
- Oil falls on weak economic reports
- Appeals court tosses former AIG executives' insurance fraud convictions
| US House passes bill to raise Govt debt limit and cut spending(update) Posted: 01 Aug 2011 06:05 PM PDT WASHINGTON: The deal passed by Congress to raise the debt ceiling and cut more than US$2 trillion in public spending should have only a minor impact on the economy for the next two years. Almost all the cuts would be made in 2014 or beyond. The approach heeds a warning by Federal Reserve Chairman Ben Bernanke and many private economists: Cutting too much too soon could harm the weak economic recovery. Yet the deal won't do much to help the U.S. economy, either, at least in the short term, economists said. Under the debt deal, discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut $21 billion in 2012 and $42 billion in 2013, according to an analysis by the Congressional Budget Office. Combined, those cuts come to less than 1 percent of the nation's $14 trillion economy. The impact "should be relatively minor," says Brian Gardner, senior vice president at Keefe, Bruyette and Wood, an investment bank. The spending cuts would increase to $75 billion in 2015 and $156 billion in 2021, the CBO estimates. Overall, the first phase of cuts would reduce spending by $917 billion over 10 years. A congressional committee would decide on a second phase of cuts totaling $1.5 trillion. Reduced government spending could mean less money for highway construction, housing assistance, government-sponsored scientific research or any number of other federal programs. Companies that work on Defense Department contracts could suffer, too. The stocks of Lockheed Martin Corp., General Dynamics Corp. and Raytheon Co. all sank about 1 percent Monday. If lawmakers fail to reach a deal on a second round of cuts, the Pentagon's budget would be cut automatically by about $500 billion. That measure is designed as a threat, to make sure congressional negotiators have strong incentives to compromise. Delaying the deepest cuts buys time for the economy to recover. Right now, it can't absorb shocks very well: Unemployment is still 9.2 percent, people are spending less, worker pay has stagnated, and economic growth is the slowest since the end of the recession in June 2009. Worries about the economy, including the weakest manufacturing in two years, were one reason the stock market couldn't sustain a rally after the debt deal was struck. The market was flat Monday. The Federal Reserve meets next week. Economists will watch for any signals that the Fed is considering new steps to help the economy, such as re-investing its government bond holdings indefinitely to keep interest rates down. The debt deal could restore some confidence among individuals and businesses by removing the fear that the U.S. government would default on its debt for the first time, says Troy Davig, an economist at Barclays Capital. Overall, the deal could subtract about 0.2 percentage point from economic growth in 2012, Davig estimates. While that is a relatively light blow, the economy only grew at an annual rate of 1.3 percent in April, May and June. In the first three months of the year, the economy grew even more slowly, at a rate of 0.4 percent. The third straight quarterly drop in government spending contributed to the slower growth. While Bernanke and other economists had warned against cutting too much in the first few years, they also urged Congress to reduce spending over the long term, arguing that solidifying the nation's finances would help the economy. "Bernanke will be pleased at least with the direction of the agreement," says David Jones, chief economist at DMJ Advisors, a Denver economic consulting firm. "There are no major cuts in the early years but at least a determination to make significant cuts over the 10 years of the deal." Democratic lawmakers favored smaller cuts over the next two years to avoid hurting the fragile economic recovery, said staffers from both parties with knowledge of the negotiations. Republicans wanted upfront cuts totaling tens of billions of dollars more. The staffers spoke on condition of anonymity because they were not authorized to discuss the negotiations. Republicans insisted on cuts in exchange for allowing an increase in the limit on how much money the government can borrow. Without the increase, the government would not have been able to pay all its bills after Tuesday, the White House said. While the deal enables the government to avoid a default, credit agencies could still downgrade their ratings of U.S. debt. That would make it more expensive for the government to finance its debt, and lead to higher interest rates for everyone. There is little in the debt package to promote economic growth, economists say. A "grand bargain" with reforms to the tax code, cuts in entitlement spending and more long-term deficit reduction would have put the U.S. debt on a sounder footing, they say. Some other measures meant to stimulate the economy expire at year's end. For example, a 2 percentage-point cut in the Social Security tax that will give most American households $1,000 to $2,000 to spend is set to expire after this year. Obama wants to extend the Social Security tax cut, White House spokesman Jay Carney says. That could prove difficult with a committee focused on finding up to $1.5 trillion in budget cuts at the same time. Michael Feroli, an economist at JPMorgan Chase, forecasts that cuts in federal spending and the end of the tax cut could reduce economic growth by 1.5 percentage points in 2012. - AP US House passes bill to avoid default WASHINGTON: The Republican-controlled House of Representatives passed bitterly fought, compromise debt-limit legislation Monday night that would prevent a U.S. default on its obligations but at a cost of deep cuts in government spending. The measure still must gain approval in the Senate before it goes to the White House where President Barack Obama has promised to sign it into law. It passed the House 269-161. Passage in the Senate was seen as nearly certain. The upper chamber was slated to vote on it at noon Tuesday, just hours before the midnight deadline for lifting the $14.3 trillion cap U.S. borrowing. In the minutes before the legislation won approval, applause rang out through the lower chamber as Democratic Rep. Gabrielle Giffords made a dramatic appearance on the House floor, her first since she was shot during a meeting with constituents at a Tucson, Arizona, shopping center in January. Giffords has been undergoing rehabilitation since she was gravely wounded by a gunshot that pierced her brain. She acknowledged her warm welcome, standing among well-wishing colleagues, raising her left hand to waive to fellow legislators in the House. Her office said she had returned Monday in support of the measure that was passed by the House. While the odds were in favor of House passage, the compromise deal deeply angered both right-wing Republicans and left-wing Democrats. The measure was crafted through the crucible of one of the United States' nastiest political fights in recent history. It carefully threaded the needle between the philosophically opposite ends of the political spectrum. Polls showed that Congress and even Obama have taken a sharp hit in U.S. public opinion because of the prolonged battle over lifting the debt ceiling, something that past Congresses have done as a matter of course. Without legislation in place by the end of Tuesday, the Treasury would run out of cash needed to pay all its bills which could interrupt payments to investors in Treasury bonds, recipients of Social Security pension checks, anyone relying on military veterans' benefits and businesses that do work for the government. Administration officials say a default would ensue that would severely damage the economy. Beyond merely avoiding disaster, Obama and congressional leaders hoped their extraordinary accord would reassure investors at home and around the world, preserve the United States' Aaa credit rating and begin to slow the growth in America's soaring debt. News of the agreement initially buoyed global investors, but European markets surrendered those increases and closed down significantly on worries about the American economy. U.S. stocks also climbed after opening but slipped well into negative territory after a bad report on American manufacturing. Shares closed the day, however, down only about 11 points, or .09 percent. Before the vote, Obama sent a video to Congress aimed at selling Democrats on the plan. "This has been a long and messy process," he said. "As with any compromise, the outcome is far from satisfying." As the Senate opened for business Monday, Majority leader Harry Reid declared the deal shows that the often-dysfunctional Senate can come together when it counts. "People on the right are upset, people on the left are upset, people in the middle are upset," he said. "It was a compromise." The deal came together Sunday night when Obama sealed a deal with leaders of both parties in both houses of Congress on the plan that would initially cut about $1 trillion from U.S. spending. Obama and many economists and financial experts predicted global chaos and plunging stock markets without the legislation. House Speaker John Boehner, obviously pleased and relieved at the House vote, gaveled the measure as passed. His standing took a beating in the long fight as he struggled to meld the wishes of the low-tax, small-government tea party wing of his party - 87 new members elected last year - and more mainstream Republicans in the House. The tea party and Republicans more largely successfully blocked Obama's attempts to raise taxes as part of the plan to slash the deficit, but the president was successful in blocking opposition attempts at a short-term debt ceiling extension. That would have returned the now-poisonous issue to the national agenda early next year, in the midst of the presidential and congressional election campaign. At a news conference Monday afternoon Boehner said the compromise would "solve this debt crisis and help get the American people back to work." House Democratic leader, Rep. Nancy Pelosi, was far less effusive. "I'm not happy with it, but I'm proud of some of the accomplishments in it. That's why I'm voting for it." The broadest outlines of the emerging plan, a deal that involved deep negotiations between Senate Republican Leader Mitch McConnell and Biden, would raise the federal debt limit in two stages by at least $2.2 trillion, enough to tide the Treasury over until after the 2012 elections. The cuts in government spending would be phased in over a decade. Thousands of programs could be trimmed to levels last seen years ago. No benefit cuts were envisioned for the Social Security pension system or Medicare, the federal programs that provide health care payments to the elderly. But other programs would be scoured for savings. The possibility of higher taxes taking effect were hotly disputed and off the table in the near future. The first step would take place immediately, raising the debt limit by nearly $1 trillion and cutting spending by a slightly larger amount over a decade. That would be followed by creation of a new congressional committee that would have until the end of November to recommend $1.8 trillion or more in deficit cuts, targeting benefit programs, such as Medicare and Social Security, or overhauling the tax code. Those deficit cuts would allow a second increase in the debt limit, which would be needed by early next year. If the committee failed to reach its $1.8 trillion target, automatic spending cuts totaling $1.2 trillion would kick in, and the debt limit would rise by an identical amount. The conservative campaign to force Congress to approve a balanced-budget amendment to the Constitution has been jettisoned. Social Security, as well as the Medicaid and food voucher programs that provide health care and grocery money for the poor, would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare. - AP Experts say US could still lose AAA debt rating NEW YORK: Even though the House of Representatives approved a deal to raise the federal government's debt ceiling, the U.S. could still lose its coveted AAA debt rating sometime in the next six months, largely because the agreement does not cut enough spending. The three main ratings agencies declined to comment Monday on the prospect of future downgrades. But the agencies, along with economists and analysts, have signaled that doubts about America's debt will persist. The Senate is due to vote on the bill Tuesday. Moody's Investors Services has said it will probably rate the U.S. debt as AAA for now but with a negative outlook - a rating that indicates a possible downgrade yet to come. Fitch Ratings has indicated the deficit must be reduced to a "more sustainable level" for the U.S. to maintain its AAA rating. And Standard & Poor's has said any deal to raise the debt ceiling must cut at least $4 trillion from future budget deficits or the rating will probably be lowered to AA. The proposal crafted by Obama and congressional leaders cuts only about half that amount, which led at least one expert to suggest that S&P could still downgrade the rating as early as next month. "The details (of the deal) don't look as pretty as the headlines," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. Ratings agencies probably won't look favorably on the fact that most of the spending cuts in the current plan won't be made until after 2013, LeBas said. "That means you're waiting longer to do the saving, and you would have accumulated more debt," LeBas said. Avalon Partners chief economist Peter Cardillo believes there is a 70 percent chance of the U.S. being downgraded to a AA credit rating within the next six months, as more details of the spending cuts emerge. But both Cardillo and LeBas said a downgrade - once considered highly unlikely and catastrophic - might not be that bad for the U.S. A credit rating downgrade usually leads to higher interest rates, said Kim Caughey-Forrest, senior stock research analyst at Fort Pitt Capital Group. That would make it more expensive for governments, companies and consumers to borrow money. The 10-year Treasury note is considered the floor for all other interest rates, so higher rates could raise borrowing costs on everything from mortgage loans to credit cards. But the conventional wisdom that rates will rise sharply on a downgrade might not hold up. A study released last week by JPMorgan Chase bond strategists points to a more gradual increase. The study showed just a slight increase in lending rates when countries lose their AAA rating. In May 1998, S&P knocked Belgium, Italy and Spain from AAA to AA. A week later, 10-year rates had barely budged. In some cases, rates actually fell. A week after S&P took Ireland's AAA rating away in March 2009, 10-year rates in that country fell 0.18 percentage points. Analysts and bond traders are not convinced rates will rise much if the U.S. loses its AAA rating. Caughey-Forrest and others note the recent high demand - and the resulting falling yield - for Treasurys. Global investors still consider U.S. debt one of the safest investments. Many mutual funds, money market funds and banks find U.S. debt so safe they hold Treasurys as a proxy for cash. And they've continued to do so, despite the threat of a debt default and a downgrade. The yield on the 10-year Treasury note was at or below 3 percent in July and dropped to 2.75 percent on Monday, an eight-month low. A downgrade could spur a "quick jolt of nervous, knee-jerk selling" of bonds, LeBas said. Some money-market funds could be forced to sell U.S. government debt if they require client money to be invested in only AAA-rated debt. The combination would likely cause yields on Treasurys to rise in the short term, said Brad Hintz of Bernstein Research. LeBas expects yields on 10-year Treasurys to jump above 3.5 percent this year - not a level traders consider to be a significant increase. When the recession began in December 2007, yields were as high as 4.20 percent. But Hintz, LeBas and others said demand for Treasurys will return quickly, sending yields back down. "A downgrade won't frighten foreign buyers away because this is the largest market and there's no other place to go," Cardillo said. Treasurys have a solid appeal for the world's central banks. China's central bank holds an estimated $1.16 trillion. Japan, the second largest foreign owner, holds $912 billion. And at $9.3 trillion, the U.S. government bond market is massive compared to other countries. Treasurys are also considered the easiest security to buy and sell quickly. Daily trading of Treasurys runs at $580 billion, far higher than British gilts ($34 billion) or German bunds ($28 billion), according to a recent study by Fitch. "I think no matter what happens, Treasurys are the safe haven," said Dan Greenhaus, chief global strategist at the brokerage BTIG in New York. "No other market is as large or as liquid." - AP
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| Oil falls on weak economic reports Posted: 01 Aug 2011 06:04 PM PDT NEW YORK: Oil fell Monday as early enthusiasm about a deal on America's debt ceiling turned to concern about the global economy following weak readings on U.S. and Chinese manufacturing. Benchmark West Texas Intermediate crude for September delivery fell 81 cents to settle at $94.89 per barrel on the New York Mercantile Exchange. It was as high as $98.60 earlier in the session. Brent crude, used to price many international oil varieties, added 7 cents to settle at $116.81 per barrel on the ICE Futures exchange in London. Oil, which usually moves with global markets, climbed early in the day after U.S. lawmakers came up with a last-minute deal to raise the nation's debt ceiling and avoid default. "It looks like we dodged a bullet," said Michael Lynch, president of Strategic Energy & Economic Research. "The question long-term, though, is what's going on with the economy." The government may continue to pay its bills, but the economy is still sluggish. Traders noted that spending cuts won't spark energy demand in the U.S. Independent oil analyst Jim Ritterbusch said soft oil demand will be a rising concern "once the initial hoopla of the debt ceiling deal subsides." The dollar rose in afternoon trading, which also helped push crude lower. Oil, which is traded in U.S. currency, tends to fall as the dollar rises and makes crude more expensive for investors holding foreign money. Oil has been sliding since the middle of last week following reports that gasoline demand continues to be weak, while the economy grew just 1.3 percent from April to June. New reports on manufacturing in the U.S. and China added concerns about petroleum demand overall. The Institute for Supply Management said manufacturing activity in the U.S. barely grew in July. While it's expanded for 23 straight months, the July reading was the lowest since July 2009 - a month after the recession officially ended. That followed a report on Sunday that China's manufacturing sector slowed. HSBC's purchasing managers' index for China fell to its lowest level in 16 months. The drop in Chinese manufacturing is particularly significant for economists and oil traders. The country's burgeoning economy is expected to drive global oil demand in coming years. If its economy cools off, many analysts will need to revise their bullish price estimates for oil. In other Nymex trading for September contracts, heating oil and gasoline futures both fell less than a penny to settle at $3.0974 and $3.054 per gallon, respectively. Natural gas rose 4.3 cents to settle at $4.188 per 1,000 cubic feet. - AP Latest business news from AP-Wire Full Feed Generated by Get Full RSS, sponsored by Used Car Search. |
| Appeals court tosses former AIG executives' insurance fraud convictions Posted: 01 Aug 2011 06:01 PM PDT HARTFORD, Connecticut: Former executives of American International Group Inc. and General Re Corp. who were convicted in a US$500 million fraud case deserve a new trial, because the judge at their 2008 trial wrongly admitted stock-price data into evidence and gave improper jury instructions, a federal appeals court ruled Monday. The 2nd U.S. Circuit Court of Appeals threw out the fraud convictions for the five officials and sent the case back to U.S. District Court in Hartford. Prosecutors had accused the executives of participating in a scheme in which New York-based AIG secretly paid Stamford-based Gen Re to take out reinsurance policies with AIG in 2000 and 2001 to boost AIG's falling stock price. Reinsurance policies are backups purchased by insurance companies to completely or partly insure risk they have assumed for their customers. Ronald E. Ferguson, Elizabeth A. Monrad, Robert D. Graham and Christopher P. Garand, all former executive officers of Gen Re, and Christian M. Milton, AIG's vice president of reinsurance, were sentenced to prison in 2009 for their involvement in the scheme, which authorities estimate cost AIG shareholders more than $500 million. Testimony from two cooperating witnesses associated with Gen Re helped convict the five executives of conspiracy, mail fraud, securities fraud and false statements to the Securities and Exchange Commission. They received sentences ranging from one to four years in jail, but remain free on bail pending the outcome of the appeal. "We are very gratified by the decision, we look forward to a new trail," said Frederick P. Hafetz, a lawyer for Milton. Messages seeking comment were left Monday with the U.S. attorney's office in Connecticut. AIG declined to comment. In his ruling, Chief Judge Dennis Jacobs wrote that most of the arguments in the defendants' appeal were without merit. However, he said the verdicts had to be vacated because of how U.S. District Judge Christopher Droney handled stock-price evidence and because Droney gave jury instruction that influenced the verdict. The lower court was inconsistent in its rulings on displaying stock-price charts, Jacobs said. One chart showing the full decline in stock price was excluded as overly prejudicial, but it was "functionally identical" to another chart shown during prosecutors' opening statement, he said. "The court's solution, to allow only isolated ranges of stock-price data, did not mitigate the prejudice," Jacobs wrote. "Instead of a downward line, there were three dropping sets of dots; it is inevitable that jurors would connect them." In instructing the jury, the trial judge erred by offering an ambiguous standard of conviction that allowed the jury to convict without determining what caused the fraud, Jacobs wrote. General Re is part of Berkshire Hathaway Inc., which is led by billionaire investor Warren Buffett of Omaha, Nebraska. The executives who were convicted claimed Buffet was involved in the fraud, but he denied the allegations and was never charged. Prosecutors say he did not approve the deal. - AP Latest business news from AP-Wire Full Feed Generated by Get Full RSS, sponsored by Used Car Search. |
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