Actual finance blog

The Obama administration’s pay czar said on Wednesday that renegotiating guaranteed bonus contracts at American International Group’s AIG Financial Products unit was a top priority for him in 2010.

Kenneth Feinberg, the U.S. Treasury bailout program’s “special master” for compensation practices, told the U.S. House of Representatives Oversight and Government Reform Committee that he believes renegotiation of such contracts will not cause large numbers of executives to leave the seven bailed out firms under his purview.

Feinberg said he took pains to retain key employees in his rulings on pay at the seven firms, and added that the lure of giving up cash for company stock that has a potentially higher value in the future would keep many top earners on the job no fax payday advances.

“I think that if you look at at the levels of total compensation that we established in our determination, we figured — I made this recommendation from my conclusion — they won’t jump ship,” Feinberg told the committee.

(Reporting by David Lawder, Editing by Chizu Nomiyama)

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The U.S. government’s “pay czar” played a critical role in Citigroup’s decision to sell off its lucrative commodities trading business, Phibro, a source familiar with the matter said Friday.

The sale of the unit to Occidental Petroleum Corp relieves beleaguered Citigroup of a massive political headache– what to do with Phibro trader Andrew Hall and his paycheck of up to $100 million.

Hall has become the poster child of Wall Street’s top earners; and while pay czar Kenneth Feinberg would have limited power over his pay this year, he would undoubtedly have dramatically restructured Hall’s pay in future years.

Feinberg made it clear to Citigroup that Hall would not be able to keep earning his eye-popping paychecks, leaving Citigroup with the decision of selling off Phibro and parting with Hall or keeping Phibro but losing the unit’s moneymaker, according to the source.

The source spoke anonymously because the negotiations between Citigroup and the pay czar have not been made public.

Citigroup’s decision to offload both Phibro, and so Hall, demonstrates the extent of Feinberg’s power over the seven firms that have received “exceptional assistance” from the government.

The other firms are Bank of America Corp, American International Group Inc, Chrysler Group LLC, General Motors Co, Chrysler Financial and GMAC.

Alan Johnson, a Wall Street compensation consultant, said the deal helped Citigroup unload what was becoming “an embarrassment on line pay day loans.”

Occidental did not disclose the terms of the deal but said that its net investment would be about $250 million and that it was paying roughly the net asset value of the business.

Citigroup has received multiple bailouts from the government, including $45 billion from the U.S. Treasury’s Troubled Asset Relief Program.

POWER PLAY

Feinberg is in the thick of a 60-day intensive review of the pay contracts for the top 25 earners at the seven firms, in which he has the power to approve or renegotiate their compensation packages.

Citigroup’s announcement that it is shedding Phibro comes just three weeks before Feinberg’s rulings are due.

Feinberg did not have explicit authority to approve or reject Hall’s pay for this year because the contract was signed before a cut-off date of February 11, 2009.

But in a demonstration of the reach of Feinberg’s powers, he would still have a say over Hall’s future pay. He would have likely forced much more of it to be in equity that vested over a longer time horizon, crimping Hall’s ability to take home cash. 

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Federal Reserve Vice Chairman Donald Kohn said on Wednesday policymakers would raise benchmark interest rates well before consumer spending and business investment overheats, adding that obstacles to borrowing are likely to subdue the economic recovery.

“We must begin to withdraw (monetary policy) accommodation well before aggregate spending threatens to press against potential supply, and well before inflation as well as inflation expectations rise above levels consistent with price stability,” he said at a monetary policy conference at the Cato Institute.

Kohn said he could not predict how rapidly the Fed would raise rates or withdraw its massive supply of money to the financial system. He said the Fed — the U.S. central bank –would watch carefully how its extraordinary efforts to support the economy are affecting spending decisions and inflation expectations in timing its exit strategy.

The Fed has the necessary tools to pull back its help for the economy, he said. Paying interest on bank reserves is chief among these, he added.

However, the Fed will also need to drain reserves at some point, he said.

The Fed might also consider sales of longer-term assets if it believes that longer-term rates are not responding appropriately to its removal of monetary stimulus, Kohn said.

The Fed has chopped benchmark interbank lending rates to zero and pumped hundreds of billions of dollars into the economy to pull it out of a devastating financial crisis and deep recession.

Policy-makers have in recent weeks noted signs the downturn may have ended, but promised at their most recent meeting to keep rates extremely low for a long time to support the recovery, which they expect to be slowed down by high unemployment.

Kohn renewed the Fed’s cautious assessment of the economic outlook and its low-rate pledge.

“Although economic conditions have apparently begun to improve … continuing restraints on credit are likely to constrain the speed of recovery,” he said.

(Reporting by Mark Felsenthal; Editing by James Dalgleish)

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My recent column about Roth IRA conversions unleashed a flood of (so far) more than 100 reader e-mails illustrating widespread confusion and misconceptions.

I’ll try clearing them up with this primer:

Traditional and Roth IRAs are types of individual retirement accounts. Contributions to traditional IRAs may be tax deductible, but withdrawals are taxed. Roth IRA contributions are never deductible, but withdrawals can be tax-free. Converting a traditional IRA to a Roth offers the potential of future tax-free growth in exchange for being taxed on the conversion.

The conversion itself is merely a paperwork transaction. Your IRA custodian (basically, the institution where you have your account) can guide you through it. You may choose to convert all or part of the traditional IRA.
You don’t need "earned income," which is mostly income from work, to convert. You need earned income to make a direct contribution to any type of IRA, but conversions are not the same as direct contributions.

For 2009, you can convert unless your modified adjusted gross income is more than $100,000 or you are married and file separate tax returns. Beginning in 2010, anybody with a traditional IRA can convert.

To answer numerous questions, anybody means anybody, including you.

If your traditional IRA contains non-deductible contributions, they are not taxed on conversion. (If you convert a $100,000 IRA with $20,000 in non-deductible contributions, only $80,000 is taxable upon conversion.) But you cannot "cherry pick" and convert just the non-taxable amounts. Instead, you must pay your "pro-rata" share of taxes. If you convert only part of this IRA, for example, you would pay tax on 80 percent of the converted amount, the same ratio as in a full conversion.

Converted amounts can always be withdrawn from a Roth IRA without having to pay ordinary income tax (you already paid it when you converted) cash advance america. But converted amounts withdrawn before five years are subject to a 10 percent penalty if you are under 59

Japan’s exports slipped in July as annual drops in exports to the United States and China accelerated, in a sign that the impact of stimulus measures in major economies worldwide may be starting to wane.

Exports to the United States have lagged improvements in shipments to Asia as the world’s largest economy struggles to pick up steam, while the yen’s rise against the dollar also played a part.

But exports to the fast-growing Chinese economy also fell at a faster annual pace as a surge in state spending and loan growth failed to mask tepid domestic demand there.

The annual fall was largely in line with market expectations, but in another sign of slowing momentum, Japan’s exports fell from the previous month for the first time in two months.

Some overseas stimulus programs have already expired, and economists warn that as such fiscal support runs its course, exports could slow while weak labor markets in the United States and Europe mean consumers won’t be able to pick up the slack.

In a sign demand within Japan isn’t strong either, prices for business-to-business services marked a record annual fall for the third straight month in July, as deflation deepens.

“Falls in exports have been moderating in recent months on companies’ restocking efforts and government stimulus worldwide. But the July datas indicate that the recovery momentum is losing steam,” said Seiji Shiraishi, chief economist at HSBC Securities.

“It is questionable whether exports will continue to recover once the stimulus effect runs out because global final demand may not turn up fully.”

On a seasonally adjusted basis, exports fell 1.3 percent in July from June, trade data showed on Wednesday, the first drop in two months.

Compared with a year earlier, Japan’s exports fell 36.5 percent in July. That was slightly less than the median forecast for a 38.6 percent fall in July, but faster than the 35.7 percent annual decline in June.

Exports fell at a faster annual rate due to slower shipments of cars to the Middle East, Russia and the United States. Exports of steel and semiconductors to Asia also saw faster annual falls.

In July, the yen was 12.4 percent higher against the dollar than in the same month last year, which also weighed on Japan’s exports, the data showed.

Altogether, Japan logged a trade surplus of 380.2 billion yen ($4 billion) in July, just short of the median estimate for a 385.0 billion yen surplus.

Exports of steel to China were weak, said Junko Nishioka, chief Japan strategist at RBS Securities, raising worries about a China-driven recovery scenario. Shipments of steel to China declined 29 percent in July from a year earlier, faster than the 19.1 percent annual decline in the previous month.

“I think material exports to China will garner more attention in coming months,” she said. 

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French carmaker Renault on Thursday posted a worse-than-expected loss on for the first half in line with results at its European rivals as auto sales fell sharply but it said the outlook is stabilizing.

In Japan two second tier automakers, Mazda Motor Corp and Mitsubishi Motors Corp, also posted losses for a third straight quarter but kept their annual forecasts unchanged, relying on cost cuts to offset the weak demand.

Automakers have seen sales crumble in the past 12 months due to global economic downturn and tight credit markets that have already driven U.S. rivals General Motors and Chrysler to bankruptcy and restructuring. [nCARS1]

Renault, which has a 44 percent stake in Japanese carmaker Nissan Motor Co, expects the world automotive market to fall 12 percent in 2009 compared with last year to over 57 million units.

Automakers are squeezing costs to reduce losses as production capacity remains severely underused, but they mostly foresee an improvement in output on a quarterly basis for the rest of the year as they bring inventory under control.

“The business environment is still uncertain,” Mazda Chief Financial Officer Kiyoshi Ozaki told a news conference.

In Europe, Renault, which ranked as about the 10th largest car maker in the world by the end of the first half, expects Europe’s car market to finish the year with an 8 percent decline, after a 13.7 percent fall in the first six months.

Renault itself is showing “resilience,” Chief Executive Carlos Ghosn said, adding the group was preparing for the post-crisis period with zero emission vehicles, expansion of its entry-level range and a move to expand synergies with alliance partner Nissan color business cards.

The group said that despite the effects of incentive schemes to scrap older cars in major European markets, Europe made up half the total revenue decline. Group revenues fell 23.7 percent to 15.99 billion euros ($22.5 billion) in the period.

Governments around the world have introduced stimulus measures to revive the sector which is also racing to reposition itself for more ecologically-minded buyers with hybrid cars and electric vehicles.

“The product mix has been pulled downwards,” Renault said. Smaller, cheaper models are eligible for government scrapping schemes, under which drivers are paid cash bonuses to trade in old cars for newer, greener ones.

Renault posted a group operating loss of 946 million euros for the first half, against an operating income of 845 million euros in the same period a year earlier.

Ghosn, who is also CEO of its Japanese alliance partner Nissan, said earlier in July that he expected 2010 to be “as difficult as 2009″ as the auto industry crisis continues.

French carmaker PSA Peugeot-Citroen on Wednesday posted a first half loss and said it did not see a recovery in Europe starting before the end of 2010 but said it saw good potential from the Chinese and Brazilian markets.

French car parts maker Valeo on Wednesday posted lower sales and a 54 million euros second-quarter net loss but forecast a rebound in automobile production in the third quarter. 

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Goldman Sachs Group Inc executives sold almost $700 million worth of stock since the collapse of rival Lehman Brothers last year, the Financial Times said on Monday.

The newspaper said that most of the stock sales took place while the biggest U.S. investment bank was bailed out by the government with $10 billion of taxpayer money, according to filings with the Securities and Exchange Commission.

A Goldman Sachs spokeswoman declined to comment.

Goldman executives sold stock worth $691 million between September 2008 and April 2009, more than the $438 million in stock sold between September 2007 and April 2008, when the average share price was substantially higher, the Financial Times said.

The stock sales peaked between December and February, when Goldman Sachs’ shares traded near record lows, the newspaper said.

After Lehman Brothers collapse froze financial markets, Goldman Sachs was forced to convert into a bank holding company to have access to government funding, and received $10 billion of taxpayer money cash advance online.

The bank also reported its first quarterly loss since going public in 1999. However, Goldman has managed to sidestep the worst of the financial crisis, which has caught rivals with much higher losses and massive asset writedowns.

Last month, the bank repaid the government the bailout funds, along with other big banks.

Analysts expect Goldman Sachs will report strong quarterly earnings on Tuesday, boosted by sold trading income and improving equity underwriting markets.

(Reporting by Juan Lagorio; Editing by Bernard Orr)

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The slumping New York state factory sector shrank at a more severe rate in June than during the previous month, the New York Federal Reserve said on Monday, confounding expectations of a slight improvement.

The New York Fed’s “Empire State” general business conditions index fell to minus 9.41 in June from minus 4.55 in May.

Economists polled by Reuters had expected a June reading of minus 4.5, and the surprisingly weak result challenges analysts who believe the U.S. economy is poised for a rebound.

“We’ve got a little bit of cold water thrown on the manufacturing sector’s recovery after seeing some persistent improvements. We’re now back down a little bit,” said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto, Canada.

On Wall Street, U.S. stock futures added to their losses after the unexpectedly weak number. U.S. government bonds, which generally benefit more from signs of economic weakness, maintained the day’s earlier gains.

The index was launched in July 2001.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U compare car insurance rates.S. factory conditions.

The fall in the main index came as shipments dropped into negative territory, coming in at minus 4.84 in June from positive 1.29 in May.

New orders remained negative at minus 8.15 but not quite as bad as May’s 9.01.

Inventories fell further, hitting 25.29 versus May’s 21.59, continuing a liquidation of stockpiles that many economists say is necessary before the economy can recover.

Inflationary pressures also remained negative but much less so than in May, with the prices paid gauge coming in at minus 5.75 compared with May’s minus 11.36.

Similarly, the prices received measure came in at minus 12.64 compared with minus 27.27.

The employment index came in at minus 21.84 versus minus 23.86. Though decidedly negative, this was the highest since October 2008.

Looking ahead, the six-month business conditions rose to its highest since July 2007.

(Additional Reporting by Mary Angela Rowe)

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Senior managers from some of the world’s largest over-the-counter (OTC) derivatives firms, currently accustomed to little government scrutiny, are scheduled to testify on Tuesday before a U.S. congressional panel looking into the possibilities for regulation.

As lawmakers and the Obama administration push for regulation of the OTC derivatives market, two sources familiar with an upcoming hearing said CME Group Inc Executive Chairman Terrence Duffy was among those invited to testify.

Others on the witness list for the House capital markets subcommittee hearing are Jeffrey Sprecher, chief executive officer of IntercontinentalExchange, and Thomas Callahan, CEO of NYSE Liffe, the sources said.

It was not known which of the dozen invitees had accepted, but most were expected to make an appearance before the panel and Democratic Representative Paul Kanjorski, its chairman.

A panel spokesman was not immediately available for comment.

The hearing witness list, obtained by Reuters, also included Christopher Edmonds, CEO of International Derivatives Clearing Group, and Larry Thompson, general counsel at Depository Trust and Clearing Corp.

Also asked to testify were Robert Pickel, CEO of the International Swaps and Derivatives Association, and Don Thompson, managing director and associate general counsel at JPMorgan Chase & Co, a major player in derivatives.

Kanjorski announced the hearing last week. He said it was meant to “advance the discussion in Congress on derivatives and swaps regulation, especially in considering what new steps we must take to provide transparency in and meaningful regulation of this dark corner of the financial services industry free business card.”

The OTC derivatives market, pegged at greater than $590 trillion in notional value at the end of 2008, is where trading takes place in credit default swaps and other exotic financial instruments widely implicated in the global credit crisis.

The massive, high-risk market functioned has operated for years with little government oversight, partly by design. Congress in 1990 adopted a law that protected it from too much regulation.

But many OTC derivatives flew off the rails in 2007 when the housing bubble burst and credit tightened, leaving banks, such as the now defunct Lehman Brothers, with huge losses. Credit defaults swaps played a major role in the troubles at American International Group that led to its bailout.

GEITHNER CALLS FOR REGULATION

Treasury Secretary Timothy Geithner in May called for legislation to require many derivatives to be traded on exchanges or clearinghouses, rather than over-the-counter.

Banks and dealers have opposed greater regulation, which could make it more costly to issue and trade derivatives.

Warren Buffett in 2003 famously labeled derivatives as “financial weapons of mass destruction.” 

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The number of home sales contracts signed in April continued to bounce back from record lows hit last winter, according to a widely watched industry report. This is the third consecutive month of gains.

The Pending Home Sales Index from the National Association of Realtors rose 6.7% in April after jumping 3.2% in March. That was far above the forecasts of experts surveyed by Briefing.com, who predicted a 0.5% increase. The index was 3.3% higher than 12 months earlier.

Pending home sales are a forward-looking indicator since many of the contracts don’t result in completed deals for many weeks or months.

"Housing affordability conditions have been at historic highs, but now the $8,000 first-time buyer tax credit is beginning to impact the market," said Lawrence Yun, NAR’s chief economist in a prepared statement. "Since first-time buyers must finalize their purchase by Nov. 30 to get the credit, we expect greater activity in the months ahead, and that should spark more sales by repeat buyers."

The credit allows many homebuyers who have not owned a home in the past three years to claim up to an $8,000 refund on their taxes. The result has been a flood of first-time homebuyers even into lukewarm markets like Indianapolis, according to Glenn Bill, an agent there for Century 21 Sheetz.

"Our first-time homebuyer market is exploding," he said. "That’s one good thing to come out of the stimulus package."

Low prices

Also driving sales is falling home prices. The national median home price is down more than 30%, according to the S&P/Case-Shiller Home Price Index Overnight payday loans. That has drawn many bargain-hunting homebuyers back into the market.

Mortgage rates in April were also very favorable, averaging well under 5% for a 30-year, fixed-rate loan. However, rates have risen recently.

All those factors have raised NAR’s index of affordability to near record highs. It went up to 174.8 in April from an upwardly revised 171.9 in March, its second highest monthly reading ever. This index measures the relationship between home prices, mortgage interest rates and family income.

Regionally, the biggest improvement in home sales came in the Northeast, where they shot up 32.6%. Sales ramped up 9.8% in the Midwest, inched up 1.8% in the West and cooled 0.2% in the South.

Also boosting sales, according to NAR president Charles McMillan, a Coldwell Banker broker in Dallas, is that some states and non-profit agencies are helping first-time homebuyers come up with down payments.

"Some states are offering bridge loans that allow first-time buyers to use the tax credit for down payment and closing costs, but there are many other local government and nonprofit programs available to buyers, depending on location," he said.

The Department of Housing and Urban Development announced last week an additional program that enables homebuyers to add the tax credit to their down payments on FHA mortgages at closing, which should also help to enhance affordability and give a push to home sales. 

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