Actual finance blog

The Senate on Wednesday approved a $15 billion job-creation bill that would give businesses tax breaks for hiring the unemployed and states more money for infrastructure projects.

The four-prong bill would:

• Exempt employers from Social Security payroll taxes on new hires who were unemployed;
• Fund highway and transit programs through 2010;
• Extend a tax break for business that spend money on capital investments, such as equipment purchases;
• Expand the use of the Build America Bonds program, which helps states and municipalities fund capital construction projects.

The legislation, approved by a 70-28 vote, is a scaled-down version of an $85 billion bipartisan draft bill that was crafted by Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa.

Some 13 Republicans, including newly elected Sen. Scott Brown, R-Mass., voted for the measure Wednesday.

"Today’s progress is a small step forward but an important one," said Senate Majority Leader Harry Reid, D-Nev., who surprised many lawmakers last week when he announced the slimmed-down measure. "This morning’s vote is a victory for hard-working Americans, especially those trying to find work. This will help our economy grow."

It now moves to the House, which may take it up as soon as Friday, said a Democratic aide at the House, which passed a more comprehensive $154 billion bill in December.

However, the bill does not extend the deadline to apply for unemployment benefits or the Cobra health insurance subsidy. Some 1.2 million people will run out of benefits after Feb. 28 if the deadline is not extended cash advance. Lawmakers are looking to pass a separate, shorter extension by the end of the week in order to give them time to enact a longer fix.

Also, unlike the House’s bill, the Senate’s jobs measure does not provide additional assistance for states. Many governors want the Obama administration to send more federal dollars so they can cope with yawning budget gaps.

The administration said on Monday that it strongly supports the $15 billion jobs measure but indicated it is only one step in the job-creation effort. The president wants lawmakers to take up a bill that would increase small businesses’ access to credit.

Reid said the Senate will vote on extending tax provisions and small business job measures in the near future. The majority leader also said lawmakers will consider providing additional Medicaid money for states, which governors have been requesting.

"We have other things in mind," Reid said. "Remember, we don’t have a jobs bill, we have a jobs agenda."

Still, labor leaders and left-leaning think tanks say the Senate must do more to spur job creation.

"We need to create 11 million jobs to get back to the level of unemployment we had before the recession began," said Lawrence Mishel, president of the Economic Policy Institute. "Yet the Senate jobs bill would create no more than a couple hundred thousand jobs."

CNN Radio Correspondent Lisa Desjardins contributed to this report. 

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The Federal Reserve raised the rate it charges banks that borrow from the central bank when they run short of funds.

The Fed said late Thursday it is raising its discount rate by a quarter percentage point, or 25 basis points, to 0.75%. The central bank said in a statement it made the move in response to improving financial market conditions.

The move is largely symbolic, because banks do little borrowing at the discount window.

The unanimous decision to boost the discount rate also has no effect on the more widely watched federal funds rate, which measures the rate banks charge each other for overnight loans. That rate is expected to remain between 0% and 0.25% for the foreseeable future, given the slack in the labor market and the still fragile state of the economy.

But raising the discount rate allows Federal Reserve chairman Ben Bernanke to take another small step toward normal monetary policy, after the past two-plus years were consumed in a financial firefight.

"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.

The Fed also shortened the term of some discount window loans and raised the minimum bid in the term auction facilities it uses to supply overnight funds to banks. Those facilities were among the many innovations Bernanke introduced since the onset of the credit crunch in mid-2007 to supply U.S. banks with funding.

As the recession deepened, the Fed moved to support the housing market by buying more than $1 trillion of mortgage-related securities. When buying those securities, the Fed credited the selling banks with reserves at the Fed. This huge sum of so-called excess reserves has led to worries that any upturn in the economy will be met with an inflationary lending spike from banks.

Bernanke has emphasized that the Fed will use multiple new tools to prevent the excess reserves from fueling inflation, including the payment of interest on reserves at the Fed and the sale of Fed assets.

But as eager as policymakers are to show that policy is on a track toward normalization — that is, a nonzero fed funds rate and a smaller Fed balance sheet — the process is clearly going to take time.

The Fed suggested as much Thursday, in explaining why it may be a while before the spread between the federal funds rate and the discount rate may return to its pre-crisis level of 1 percentage point. Following Thursday’s increase, the spread is now half a percentage point.

The central bank said Thursday’s increase should "encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds" and added that it will "assess over time whether further increases in the spread are appropriate." 

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Senior living community The Place at Gallatin has a new name and a new owner.

Seattle-based Emeritus Senior Living announced today that it has purchased The Place at Gallatin, which will now operate under the name Emeritus at Gallatin.

Publicly traded Emeritus currently operates 316 residential and assisted living communities in 36 states serving about 32,700 residents.

In a news release, Emeritus President Granger Cobb said the company plans to bring “additional improvements” to its newest facility.

Mary Ellen Mayfield, executive director for Emeritus at Gallatin, said the purchase allows the community to maintain its independence while benefiting from the support of a national senior living company.

“It will be great for this community to be a part of the Emeritus family, such a forward-thinking company that is committed to the highest standards of quality care for seniors,” Mayfield said.

Emeritus is on of the country’s largest operators of freestanding assisted living communities providing Alzheimer’s and related dementia care services to seniors.

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Electronic Arts Inc. won't have a new March Madness NCAA basketball game for the first time since 2003, another sign of the company's recent struggles.

The game was missing from the product release list that Redwood City-based EA (NASDAQ:ERTS) announced last week but it wasn't until Saturday that it acknowledged that it was dropping March Madness.

"We do not have an NCAA Basketball game in development at this time, and we're currently reviewing the future of our NCAA Basketball business," an EA Sports rep told the GameSpot Web site. "This was a difficult decision, but we remain a committed partner to the NCAA and its member institutions."

In its most recent quarter, EA posted a third quarter loss of $82 million, or 25 cents a share, narrowed from a loss in the same period last year of $641 million, or $2 a share business cards design.

Its revenue was $1.24 billion, down from $1.65 billion in the year-ago quarter.

The company said it expects fourth-quarter adjusted earnings of between 2 cents and 6 cents a share, far below analyst projections of 13 cents a share.

It said fourth-quarter net revenue is expected to be $925 million and $1 billion. Adjusted revenue is expected to be between $800 million and $850 million, below Wall Street's projection of $851 million.

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Forestview Senior Village, the last phase of Woodlands Residential Village, has been completed and residents are moving into the three-story building.

Forestview, developed by Wheatfield-based Calamar, features 92 independent-living senior apartments. Calamar has developed more than 300 units in the 26-acre Woodlands complex, located off of Forest Parkway in Wheatfield.

Since starting Woodlands Residential Village five years ago, Calamar has seen virtually all of its apartments leased. Some 27 units of the 92 apartments in Forestview have been leased, officials said.

Calamar invested more than $30 million to develop Woodlands Residential Village, including $8.9 million on Forestview. The project was aided by incentives from the Niagara County Industrial Development Agency.

Forestview units offer one- and two-bedroom models, with monthly rents ranging from $1,095 to $1,295 and amenities such as private patios, central air conditioning and kitchen appliances payday loans. The units are smoke-free and pet-friendly. Rents also include heat and a Time Warner package that includes cable, telephone and Internet services.

The complex was designed with a central game room, 15-seat theater/media room, billiards room and fitness center.

The entire Woodlands Residential Village helps anchor the Woodlands Corporate Center East, which features a number of offices.

Woodlands Corporate Center East is expected to see more than 1,500 jobs retained or created, with an annual payroll of more than $28 million.

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SWBC’s LendingXpress subsidiary has teamed up with Equity National to offer home valuation and analytic products to lenders to process real estate loans.

LendingXpress focuses on helping financial institutions order all of the products necessary to close a real estate loan, including property valuations and lien position. Equity National is a East Providence, R.I.-based company that provides lenders with a full range of valuation services to process mortgages.

“There are a lot of appraisal management companies fighting for business today, and after exhaustive due diligence, we chose Equity National to be our strategic partner based on their focus on the customer, (Home Valuation Code of Conduct) orientation, and their management team, which is unmatched in the industry,” says Ted Robinson, senior vice president and general manager of LendingXpress.

San Antonio-based SWBC is a financial services company that provides insurance, mortgage and investment services to financial institutions, businesses and individuals nationwide.

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President Barack Obama’s “Volcker Rule” to ban proprietary trading at U.S. banks may not survive in Congress, hampered by criticism that the administration waited too long and offered too few details.

The proposal’s timing is viewed by some as “transparently political and not substantive,” Senate Banking Committee Chairman Christopher Dodd said on Feb. 2. It was “airdropped” into the Senate debate on legislation to overhaul U.S. financial rules, said Senator Richard Shelby, the panel’s top Republican.

“It’s tough to take on another issue at this point,” Dodd, a Connecticut Democrat, said at a hearing in Washington yesterday that included executives from Goldman Sachs Group Inc. and JPMorgan Chase & Co. “It was never my intention, or I believe the intention of this committee, to solve every issue surrounding the financial-services sector.”

Members of the Senate panel have been working for weeks to translate into legislation the plan Obama released in June to overhaul U.S. financial rules. The focus is on the Senate after the House passed its version of the legislation in December.

Obama named the Jan. 21 proposal after its chief proponent, ex-Federal Reserve Chairman Paul Volcker, now a White House adviser. Based on an idea circulated in a January 2009 report by the Volcker-led Group of Thirty, composed of former central bankers and finance ministers, it would force banks to stop the trading they do on their own accounts and give up their stakes in hedge funds and private-equity funds.

Citigroup Trader Quits

Some traders have already taken note. Matthew Carpenter, head of a Citigroup Inc. unit that trades U.S. stocks using the bank’s money, quit to join hedge fund Moore Capital Management LP, people briefed on the matter said yesterday. Leaving with him is his deputy, Matthew Newton, amid concern the government may order banks to exit such businesses, the people said.

Dodd and Shelby told reporters yesterday they hadn’t ruled out incorporating the plan into the bill. Dodd, who on Feb. 2 said he “strongly” supported the proposal, said he’d consider language empowering regulators to carry out the recommendations without having lawmakers write the rules, and Shelby said he wanted to see whether regulators already have the power.

The announcement came two days after a Republican victory in the Massachusetts Senate race that cost Democrats their supermajority in the Senate — timing that stoked speculation it was motivated by politics.

Volcker said Feb. 2 that the timing was “sheer coincidence.” Obama decided to back the proposal weeks before the Massachusetts election, he said. Volcker wasn’t available for comment yesterday, according to his assistant, Anke Dening.

Client Business

The White House defines proprietary trades as those not done for the benefit of customers, a senior administration official said when the Volcker plan was announced. Regulators would have the power to ask banks whether certain trades are related to client business, the official said. If they’re not, the regulators could order firms to exit the positions.

“We’re working closely with the Congress to rein in risky practices on Wall Street,” Treasury Department spokesman Andrew Williams said in an e-mailed statement. “The House passed a strong bill in December and now we’re working with the Senate to get the job done.”

Senator Michael Crapo, an Idaho Republican, pressed Deputy Treasury Secretary Neal Wolin at the Feb. 2 hearing to release details of the plan “so that we can understand specifically what we are talking about or what the proposal is with regard to proprietary trading.”

Wolin responded by telling Crapo the administration is working with regulators to prepare a draft legislative proposal that it will send to Congress “soon.”

Drawing a Line

Drawing a line between bank and customer trading won’t be easy, said Hal Scott, a professor at Harvard Law School who specializes in international financial systems.

A narrow definition probably won’t reduce risk, Scott said, while a broad one could “seriously impair the basic function of modern banks as market-makers” in government and non-government securities and as packagers of consumer debt into bonds.

Goldman Sachs’s E. Gerald Corrigan, who like Volcker is a past president of the Federal Reserve Bank of New York, said at yesterday’s hearing that banks should be allowed to own and sponsor hedge funds and private equity funds because any risks can be managed. Corrigan is chairman of the firm’s regulated bank subsidiary.

Barry Zubrow, JPMorgan’s chief risk officer, told the committee the activities the administration is proposing to restrict didn’t cause the financial crisis.

“Indeed, in many cases, those activities diversified financial institutions’ revenue streams and served as a source of stability,” Zubrow said in his prepared testimony. “Further, regulators currently have the authority to ensure that risks are adequately managed in the areas the administration proposes to restrict.”

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Watching interest rates may be about as exciting as a snail race this year.

As the economy eases out of its doldrums, some upward rate movement by the Federal Reserve can be expected. But it will likely be a very modest move some months down the road during a relatively flat year for rates, say most experts.

The fixed-income investor is therefore left to handicap a rather unexciting field of choices. Locking in long-term rates doesn’t make sense with prospects for higher future rates, while short-term rates are extremely low.

Investors are, however, increasingly deciding to put money in a safe investment backed by the full faith and trust of the U.S. government: Treasury Inflation-Protected Securities, known as TIPS, that provide protection against inflation.
The principal of TIPS increases with inflation and decreases with deflation as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted or original principal, whichever is greater. TIPS are issued in terms of five, 10 and 30 years with a minimum purchase of $100. They pay interest twice a year at a fixed rate and can be held until maturity or sold before maturity.

"One of the trends we’re definitely seeing is investors shifting some of their portfolios into the TIPS market," said Michael Pond, interest rate strategist at Barclays Capital in New York. "TIPS yields are low, but they add some safety to a portfolio by adding an inflation hedge at a very cheap price."

Investors should look at TIPS as a structural shift in their portfolio for diversification, Pond believes. While no one will make a lot of money in TIPS the next three months, that’s not their role right now, he said.

"TIPS are attractive for the five- to 10-year horizon in which you’re concerned about conserving your buying power," added Greg McBride, financial analyst with Bankrate.com. "They’re free from default risk, and the interest rate risk is minimized by the fact there’s an inflation adjustment."

Demand was strong at the government’s recent sale of 10-year TIPS despite their low 1.430 percent yield. That auction was more than 2½ times subscribed, with large institutional investors taking more than 40 percent of the new notes.

Not everyone’s completely sold on TIPS right now.

"TIPS are wonderful, wonderful, but I’m not buying them now because their yields are so low," said Evelyn Zohlen, certified financial planner and president of Inspired Financial, Huntington Beach, Calif. "Instead, I’m buying two-year bonds as a placeholder as I wait for interest rates to come back up, and then I will use the money to buy TIPS."

TIPS can be purchased directly from the Treasury or through a broker. They’re also available in a number of mutual funds and exchange-traded funds that invest in a portfolio of different durations.

Vanguard Inflation-Protected Securities Fund, holding TIPS with an average maturity of nine years, had a 12 percent total return for the last 12 months and a three-year annualized return of 7 percent. Total return represents yield plus value of underlying securities.

That "no-load" (no sales charge) fund’s goal is to provide inexpensive entry into the inflation-protected bond market. Its initial purchase requirement is $3,000 and it has an extremely low 0.20 percent annual expense ratio.

Meanwhile, the iShares Barclays TIPS Bond Fund ETF, which is traded like a stock and therefore requires broker commissions when bought or sold, also had a 12 percent rise in net asset value the past 12 months and a 7 percent three-year annualized gain. It, too, has a low annual expense ratio of 0.20 percent.

With a fund, you needn’t keep track of maturities of individual TIPS and can automatically buy more shares with their earnings. You have annual taxable income with either funds or direct ownership, but if you own individual TIPS, you face a tax bill on appreciation from the inflation adjustment, a noncash "phantom" event.

Most advisers consider TIPS for only a portion of a personal portfolio, primarily to hedge against inflation. TIPS also make most sense in tax-sheltered accounts.

Other current choices in fixed-income investments mostly represent biding your time for the future.

"If you lock in a five-year certificate of deposit at 3.5 percent, it won’t take much of a rebound in interest rates or inflation to be losing," cautioned McBride, whose www.bankrate.com site lists free of charge the best bank savings account and money-market account rates. "You want to bide your time in short-term investments so that as interest rates rise, you can lock into a longer-term CD."

He warns against high-yield bonds because adding risk to find yield isn’t the right move now.

"We do think there will be better buying opportunities in bonds later this year, particularly for bonds longer out on the curve," advised Pond. "Interest rates are historically low, but we do expect them to head higher in 2010."

Zohlen, who recommends only AAA or AA rated bonds for her clients, is convinced that this is no time to be taking on risks. To her way of thinking, avoiding long bonds of eight or nine years in duration altogether will be a smart decision this year.

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