Actual finance blog

Australians are anxious to know if they will avoid recession and are turning to some unexpected, unofficial economic indicators to find answers.

Unconvinced by official data, which are sending mixed and sometimes dubious signals, pundits are instead turning to everything from muffin sales to home-brewing kits.

Even economists and the central bank are being forced to play private detective and rummage through the rubbish bin of economics in search of important clues.

“We look at everything,” said Craig James, chief economist at brokerage CommSec. “You need to paint a picture of the economy and you do that by looking at all the available indicators.”

Economists spend most of their time analysing official data, ranging from retail sales to job statistics, but they also rely on the street to tell them if the figures are lying.

Right now, the street is confirming that Asia Pacific’s star developed economy is slowing sharply but suggests that it is still weathering the global storm fairly well, at least for now.

The gloomier alternative indicators include reports that corporate Christmas parties are being canceled and, in a very dark sign, more Australians are brewing their own beer at home.

ALTERNATIVE THEORY

Newspapers report daily on big job losses and are themselves leavened with fewer job ads, while shop windows on the high street are plastered with “sale” signs freecreditscore.

But the real harbinger of recession — known as the “muffin effect” in alternative Australian economic theory — is far from conclusive. Muffin sales appear to be holding up.

Advocates of “the muffin effect,” as it was dubbed by the Australian Financial Review recently, believe that when the economy slams into reverse, office commuters deny themselves their usual muffin with their morning cup of coffee.

“We are selling the muffins with the coffees,” said Matthew Burke, owner of Prima Vera coffee shop in downtown Sydney, as office workers queued to place orders.

“I don’t think we have noticed the flow-on into the real economy yet. People are still getting their pay packets. But it will definitely start to affect us if people lose their jobs.”

Anecdotes and alternative indicators like the “muffin effect” are gaining ground as doubts grow over some of the official data produced by the state Australian Bureau of Statistics.

Budget cuts have forced the bureau to cut the size of sample surveys for its flagship series, retail sales and employment, at a critical time. Economists say the results can be more volatile and therefore less reliable. 

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Insurance firm Hartford Financial Services Group Inc. said Monday its capital position should be sufficient to maintain "AA" ratings levels at the end of the year, even assuming further deterioration in the markets.

Hartford Financial (HIG, Fortune 500) said that, to maintain investment-grade "AA" level ratings, it would need to have excess capital of about $2 billion if the Standard & Poor’s 500 index fell to 900. The company said its capital reserve totaled about $3.5 billion as of Oct. 6.

The S&P 500 closed Friday at 968.75.

The insurance firm also said its risk-based capital ratio was well above the levels historically associated with "AA" level ratings.

Should further capital be needed, Hartford Financial said it would not have to tap public markets during the ongoing credit crisis and instead could use a $500 million contingent capital facility and a $1 loan till payday.9 billion bank credit facility. Amid the downturn in credit markets, it has become difficult and expensive for financial firms to raise new cash.

Shares of Hartford Financial fell sharply last week after the company said it lost $2.6 billion, or $8.74 per share, during the third quarter, compared with a profit of $851 million, or $2.68 per share, in the year-ago period.

Hartford Financial shares plummeted 58% during the week, to close at $10.32. Shares fell as low as $8.23 during the week. 

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The U.S. Defense Department has decided to postpone a decision in a multibillion dollar satellite communications competition between Lockheed Martin Corp (LMT.N: Quote, Profile, Research, Stock Buzz) and Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz) until fiscal year 2010, an industry source informed about the decision said on Sunday.

The Pentagon’s Defense Advisory Working Group (DAWG) decided on Saturday to terminate the current competition for the Transformation Satellite (TSAT) program, and put off awarding a contract until the fourth quarter of fiscal 2010, said the source, who asked not to be identified.

The Air Force had hoped to award a contract for the new advanced military communications satellite program in December, after completing a thorough internal review, and “an independent scrub” by chief Pentagon arms buyer John Young.

Gary Payton, Air Force deputy undersecretary for space programs, told reporters last month that officials mounted the reviews to help avoid another major contract protest, but said they also needed to carefully evaluate the results of a new study of military satellite communications needs cash advance loan.

The TSAT program already suffered a 40 percent funding cut when the Bush administration announced its long term budget plans in February. Pentagon officials decided this weekend to scale down the program even further and postpone a scaled-down contract award for more than a year, said defense analyst Loren Thompson of the Virginia-based Lexington Institute.

“This program is sinking fast,” Thompson told Reuters on Sunday. He said the decision would have grave consequences for the military’s goal of offering soldiers on the battlefield access to satellite communications anytime soon.

The delayed award means the first TSAT satellite would not be launched until around 2019, raising serious questions about the ability of the U.S. Army to move ahead with its Future Combat Systems modernization program, which is meant to rely heavily on advanced satellite communications, Thompson said.

The industry source agreed the Pentagon decision “will clearly have implications for Future Combat Systems.” 

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Battered British banks, along with the United Kingdom Treasury office, are expected to unveil details of a massive capital raising plan early Monday, according to The Wall Street Journal, citing people familiar with the situation.

On Sunday night, the paper reported that the British government was close to a plan to take control of the Royal Bank of Scotland, injecting at least 15 billion British pounds ($25.5 billion).

Last week, the British government said it would make $87 billion available to the nation’s eight largest banks in an effort to shore-up their capital positions. In return for the infusion of capital the British government will receive preferred shares of those banks.

In addition to RBS, affected institutionss include Barclays and HBOS, a mortgage lender.

The announcement last week came a day after the U.K. Treasury teamed up with five central banks around the world to cut interest rates in an effort to bolster global economies.

"A healthy banking system is the cornerstone of the economy. But many banks, all over the world, don’t have sufficient capital," British Finance Minister Alistair Darling said after the rate cuts were announced. "What started in America, last year, has now spread to every part of the world. And I’ve made it clear that we will do whatever is necessary to maintain stability."

The government has already moved several times to increase the amount of long-term funding it is providing to banks under a special liquidity plan announced in April guaranteed approval cash advance loans. The amount, which has totaled over $176 billion year to date, was recently increased to upwards of $350 billion.

According to the Journal, the rout on Wall Street was responsible for pushing the U.K. to speed up the announcement, with at least some banks expected to say by Sunday how the capital will be raised.

Nothing is set in stone, however, including Monday’s deadline.

Under the plan, the banks will be required to raise an additional £25 billion ($42 billion) by year end, according to the U.K. Treasury Web site. The institutions can either raise the funds through private investors or through the British government.

RBS and HBOS are considered the two most likely to seek the funds from the government, said the Journal, according to people familiar with the situation and analysts that cover the two banks. The paper also said RBS Chief Executive Fred Goodwin has intimated that he would step down if that’s what it takes to shore up the bank’s financial position.

A person familiar with the U.K. Treasury’s plan told the Journal that an injection of taxpayer money would most likely lead to talk of executive departures, including Mr. Goodwin. 

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NEW YORK — Now that the government has decided it will spend $700 billion to get the economy started again, don’t expect immediate results.

It’s a little bit like those ads for protein drinks that show skinny milquetoasts turning into Schwarzeneggers in 60 days — you want it to be true, but you know in your heart it will take months or years of sweating in the gym to pack on that kind of muscle.

The latest readings on the U.S. economy show just how far we have to go. House prices and auto sales are plummeting, manufacturing activity has tumbled and the consumer is feeling increasingly strapped.

The economy seems nearly dead, and things could get worse before they improve — even with Washington’s help.

Much attention has been paid recently to the wrangling over the taxpayer-funded emergency rescue package. As it should. That’s enough money to give every man, woman and child in the United States about $2,325 each.

Lawmakers say the bill is the best hope to save the financial system and revive the economy. It would allow the government to buy bad mortgages and other devalued assets held by troubled financial institutions, thereby inducing them to lend again to businesses and consumers instead of hoarding their cash.

The package, which was signed by President George W. Bush on Friday, also would include tax breaks for companies and the middle class.

History tells us not to expect miracles overnight. After the last big U.S. bailout — the formation of the Resolution Trust Corp. in 1989 to stop the U.S. savings and loan crisis — it took a year for the stock market to hit bottom, two years for the economy and three years for the housing market, according to Merrill Lynch.

And when Japan put a bailout plan in place in the late 1990s, its stock market took another five years to recuperate. By some measures, its economy still hasn’t had a sustainable recovery, according to Merrill’s chief North American economist, David Rosenberg.

Standard & Poor’s global investment policy committee, in notes from its weekly meeting, said that even with a rescue plan, "cascading concerns remain."

"Will it be enough to accomplish the required task of unfreezing credit markets? If so, are we just back to recession 101?" asked the group of the firm’s senior investment advisers.

The bailout doesn’t even attack one of the biggest problems for our economy: the housing sector. Government officials from Treasury Secretary Henry Paulson on down have said the economy won’t recover until housing does.

Falling house prices were behind a wave of foreclosures that pushed many banks to take multibillion-dollar writedowns and some banks to fold or be rescued by the government or rivals. The contagion from that caused a crisis of confidence in the banking system that has led lending to freeze between banks, and to businesses and people (quick payday loan).

House prices tumbled in July by the sharpest annual rate ever, a 16.3 percent year-over-year decline, according to the latest reading from the closely watched Standard & Poor’s/Case-Shiller 20-city housing index. That was the biggest pullback since the index’s inception in 2000, and represents a 20 percent decline in prices since the peak in July 2006.

As weak as this report was, it also didn’t reflect the most recent turmoil in the financial markets at the end of the summer. Since then, credit conditions have tightened significantly.

That showed up in the awful September auto sales. Ford Motor Co., Toyota Motor Corp. and Chrysler LLC all posted steep drops of more than 30 percent.

Americans are turning increasingly cautious about spending and are buckling under the burden of excessive debt. Citigroup Inc. now anticipates surprisingly large credit losses of up to $10 billion — a 30 percent rise from the second quarter — due in part to its credit card holders not paying their bills.

The jobs outlook is dimming by the day. New applications for unemployment benefits are at a seven-year high. Employers slashed payrolls by a bigger-than-expected 159,000 in September, and the unemployment rate held steady at 6.1 percent, according to a Labor Department report on Friday.

Manufacturing activity has fallen off a cliff. After looking resilient for months, the September survey by the Institute for Supply Management showed manufacturing was at the lowest since after the Sept. 11, 2001 terrorist attacks. It was the biggest one-month decline since January 1985.

"Such a big drop would be remarkable under any circumstances, but the element of surprise in this report was especially big because there was no warning of it," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

All this gloomy data is convincing economists that a recession is upon us, with the gross domestic product possibly contracting in the third quarter for the first time in this economic downturn.

They say the Federal Reserve might have to lower its overnight bank lending rate, which has already gone from 5.25 percent to 2 percent in the last year. Fed Chairman Ben Bernanke and his colleagues may even have to make that move before the central bank holds its next regularly scheduled meeting on Oct. 28-29.

Even if they did cut the key rate, many economists believe it won’t have a lasting effect unless lending begins to thaw.

Until then the wait continues, and the economy will suffer more.

RACHEL BECK IS THE NATIONAL BUSINESS COLUMNIST FOR THE ASSOCIATED PRESS.

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Google Inc.’s announcement last year that it would give away software that could run cell phones was met by dizzy accolades from analysts who thought it would let the search engine company conquer the world of mobile advertising.

Fruit of that announcement is set to drop: T-Mobile USA will reveal Tuesday the first phone to use Android, Google’s software platform.

But a lot has happened in the world of cell phone software in the intervening year, and Google looks set for an uphill battle in trying to capture the desires of consumers and wireless carriers.

Research firm Strategy Analytics estimates T-Mobile could sell 400,000 phones this year, giving Google about 4 percent of the U.S. market for "smart" phones, a category dominated by Research in Motion Ltd.’s BlackBerry phones with competition from Apple Inc.’s iPhone, Palm Inc.’s Treos and Centros, and phones running Microsoft Corp.’s Windows Mobile software.

The new phone, called the G1 according to T-Mobile’s invitation, is widely expected to be a design from HTC Corp. of Taiwan. Based on previous Google demos of its software, it’s assumed that it will have a touch screen and a slide-out, full-alphabet keyboard.

The Wall Street Journal reported last week, citing unidentified sources, that the phone would sell for $199 and carry the Google brand absolutely free credit report. It’s likely that the phone will go on sale in a few weeks. Other details are scant, and it’s not clear exactly what the phone will be capable of, but Web browsing and e-mail are safe bets.

"This is the right moment for Google to answer some of the big questions that have been outstanding since Android was announced," said Morgan Gillis, executive director of the LiMo Foundation, which has created a rival cell phone software platform. "What will the consumer do on this handset that can’t be done on other handsets?"

The LiMo Foundation is behind one of the developments that has undermined the prospects for Android. In May, Verizon Wireless said LiMo, or Linux Mobile, would be the "preferred" software for its phones, starting next year, joining some European carriers.

Like Android, LiMo is based on Linux computer software and is given away free to phone makers. But the LiMo Foundation is designed as consortium of industry participants to assuage their fears that a single company would dominate phone software, like Microsoft does on PCs.

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NEW YORK — Morgan Stanley and Wachovia Corp. are in talks about a possible combination as the investment bank tries to come up with ways to survive the ongoing credit crisis, according to media reports.

John Mack, Morgan Stanley’s chief executive, received a call from Wachovia about a potential deal, according to The New York Times and Wall Street Journal. Both newspapers cited people familiar with the discussions. The talks are described as preliminary. Spokesmen for Morgan Stanley and Wachovia declined to comment.

Wachovia’s retail securities brokerage unit is based in St. Louis.

Other banks also have expressed interest in Morgan Stanley, according to the reports.

Shares of Morgan Stanley and fellow investment bank Goldman Sachs plunged Wednesday, a sign that investors fear they can’t survive in their present form as the last two major independent investment banks.

Executives of both companies insisted a day earlier, when they were reporting profits for the most recent quarter, that they do have the financial wherewithal to go it alone.

But analysts said the question increasingly is whether continued market turmoil could force them to acquire or be acquired by commercial banks, whose deposit-taking operation would provide a stable source of funding. The upheaval in the U.S. financial system has driven Merrill Lynch & Co. and Bear Stearns Cos. into emergency sales, and Lehman Brothers Holdings Inc. into bankruptcy.

Those in favor of such combinations believe that the sale of Merrill Lynch and collapse of Lehman Brothers might force the remaining investment banks to pursue some kind of transaction to stabilize results. The steady funding base of deposits held by commercial banks would go a long way in assuage investors concerned about volatility.

Anxious investors on Wednesday bid up the price of protecting against a default of debt issued by the two investment banks. The spike in credit default swaps has fanned fear on Wall Street that the investment banking model is in jeopardy of extinction.

John Mack, Morgan Stanley’s chief executive, struck back on Wednesday. He told employees in an e-mail that the No. 2 U.S. investment bank was "in the midst of a market controlled by fear and rumors."

"I know all of you are watching our stock price (Wednesday), and so am I," he said in the e-mail guaranteed cash advance. "After the strong earnings and $179 billion in liquidity we announced — which virtually every equity analyst highlighted in their notes this morning — there is no rational basis for the movements in our stock or credit default spreads."

Shares of investment banks have been sideswiped by a wave of short selling, which can cause big swings as investors bet that a stock’s price will fall so they can profit from it. Morgan Stanley shares fell as much as 44 percent Wednesday and closed down 26 percent, and Goldman shed more than 35 points before narrowing its loss to about 18 percent.

The Securities and Exchange Commission on Wednesday took measures to rein in aggressive forms of short-selling.

Roy Smith, a professor of finance at New York University’s Stern School of Business, believes the companies can survive on their own but remains concerned about the current environment in which they operate.

Morgan Stanley had hoped to stem investor panic about its financial health by releasing third-quarter results a day earlier than planned. On Tuesday, the company posted better-than-expected profits, and while Goldman Sachs’ profit slumped 70 percent, it did finish the quarter in the black.

Goldman Sachs Chief Financial Officer David Viniar and Morgan Stanley CFO Colm Kelleher both said their firms were able to navigate through the market dislocation and vowed to remain independent. The CFOs said their firms have enough cash on hand and no need to raise more.

Spokesmen for both investment banks declined to comment Wednesday about the plunge in their shares.

Glenn Schorr, an analyst with UBS, on Wednesday said the market reaction was "insanity." He said Goldman and Morgan Stanley aren’t running out of money and remain profitable.

"The world should really be concerned about this because if we continue to squeeze the financial system’s balance sheet and see fewer players in the business, the available credit to corporations and hedge funds will shrivel up and the cost of capital will continue to skyrocket across the board," he said.

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The likely disappearance of investment banks Lehman Brothers and Merrill Lynch presents a double-barreled hit to an already wounded job market, and will likely depress salaries on Wall Street.

With Lehman headed for bankruptcy and Merrill swallowed by Bank of America, two of Wall Street’s four pillars have crumbled overnight.

Headhunters and consultants said the U.S. financial services sector, already suffering from a glut of unemployed talent after shedding more than 100,000 jobs this year, must now brace for up to 50,000 more.

“The resume flow will start on Monday like there’s no tomorrow,” said Michael Karp, chief executive at executive search and consulting firm Options Group in New York.

“This is seriously going to impact compensation this year, across the Street and all over the world as well,” he said.

“The golden years of compensation in the financial services industry are over, and it doesn’t help with the Bear Stearns people still looking for work.”

On Sunday, eleventh-hour talks to sell Lehman failed, making bankruptcy a certainty instant payday advance.

At the same time, Bank of America, the second-largest U.S. bank, was wrapping up a surprise acquisition of Merrill, the world’s largest brokerage, in a deal that would save Merrill from Lehman’s fate. 

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OPEC oil ministers agreed Wednesday to trim overall output by more than 500,000 barrels a day in a compromise meant to avoid new turmoil in crude markets while seeking to bolster falling prices.

The news sent oil prices rising. Light, sweet crude for October delivery rose 97 cents to $104.23 a barrel in electronic trading on the New York Mercantile Exchange.

The OPEC announcement reflected the organization’s efforts to cover all bases in an oil market that saw prices spike to a record high just short of $150 a barrel in July, only to shed nearly 30% off those peaks in subsequent months.

Oil prices had lost more ground Tuesday ahead of the decision, falling $3.08 to settle at $103.26 on the Nymex, the lowest settlement price since April 1.

A statement issued by the Organization of Petroleum Exporting Countries issued after oil ministers ended their meeting early Wednesday said the organization agreed to produce 28.8 million barrels a day.

OPEC President Chakib Khelil said that quota in effect meant that member countries had agreed to cut back 520,000 barrels a day in production over the established quota.

Saudi Arabia alone accounts for more than that amount of output over its official quota — all members of the 13-nation OPEC have such formal production limits allotted to them except violence-torn Iraq. But Khelil said that the cutbacks in overproduction would apply proportionally to all OPEC members bound by quotas.

OPEC overall regularly churns out oil above the organization’s overall quota, last set in November at 27.3 million barrels a day, and it remained unclear whether group members would abide by the decision to keep to their limits.

Still, the decision could have the psychological effect of steadying eroding prices at or above the $100 mark — the red line for many OPEC nations concerned about their rapid loss of revenue in recent months.

While the new production limit of 28.8 million barrels a day is above that set in November, the statement said it reflected adjustments to include new members Angola and Ecuador and exclude Iraq, as well as Indonesia, which used the Vienna meeting to announce it was suspending its full membership.

Saudi Arabia was widely believed to be leaning toward maintaining the status quo heading into this week’s meeting — a view shared by its Arab Gulf neighbors. Wednesday’s compromise, while promising to tighten up global supplies, does not amount to an official cutback by the cartel.

"At the end of the day, all they’re saying is: ‘we’ve been cheating for the past year,"’ said analyst and trader Stephen Schork, who was monitoring the meeting in Vienna. "I wouldn’t say the Saudis backed down. I’d say it was a respectful nod to the other members of the group."

Saudi Arabia and others opposed to a major pullback are concerned that high oil prices will kill demand — a trend that has already begun in the U.S. and other big oil-consuming nations.

But at the same time, OPEC countries’ economies are being buoyed considerably by crude’s historically high price and members are not eager for the flow of money to ease.

Some observers said Saudi Arabia and other U.S payday loans application. allies in the Middle East also do not want OPEC to become more of a target for American consumers fuming over historically high fuel prices in a highly charged presidential election season. The impact of Wednesday’s compromise remains to be seen.

The half a million barrels OPEC said it will shave from the market is similar to the amount of additional crude Saudi Arabia unilaterally promised to pour onto the market over the summer when prices were setting new weekly, if not daily, highs.

OPEC’s statement Wednesday noted that "prices had dropped significantly in recent weeks driven by a weakening world economy … with its concomitant lower oil demand growth, coupled with higher crude supply, a strengthening of the U.S. dollar and an easing of geopolitical tensions."

And it warned of the possibility of further price erosion, forecasting a possible "shift in market sentiment, causing downside risks to the global oil market outlook."

But analysts said several factors could stem any further slide in prices over the next few months. "There are good reasons ahead for prices to turn toward the upside," said Johannes Benigni, managing director of JBC Energy in Vienna. "Take the next hurricane," he said, alluding to the chances that — after a few near misses in recent weeks — further storms could savage oil installations in the Gulf of Mexico.

He also warned against expectations that non-OPEC suppliers could make up for any added demand for crude in the traditionally high-use Western Hemisphere winter season, saying "OPEC will have to step in to fill the gap" if other suppliers come up short.

Others said that OPEC’s concerns were well founded. Oil analyst Cornelia Meyer said she expected OPEC to "wait and see what is happening to the global economy and depending on whether China and India are (also) affected, we will see them do a cut" in December.

Oil demand from China’s and India’s booming economies have helped fuel oil demand and drive up prices.

Ehsan ul-Haq, head of research at JBC Energy, also said it that OPEC "might have to cut production below its set target." He mentioned a further downturn in the U.S. economy and the possibility of a mild winter as possibly depressing the world’s appetite for crude by year’s end.

Khelil said the request to curb overproduction was effective immediately with a 40-day window for it to take effect. And he suggested bigger cuts may be in the offing if prices continue to slide, telling reporters that OPEC would "swiftly respond to energy developments which may threaten oil (market) stability."

At the next OPEC meeting Dec. 17, in Oran, Algeria, the organization would "reassess the market situation," he added.

Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27%. Still, prices remain close to 14% higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago. 

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Two months ago, Missouri Banking Commissioner Eric McClure wouldn’t have given a second thought to seeing preferred stock in Fannie Mae and Freddie Mac in a bank’s investment portfolio.

Then over the weekend, the federal government placed the two mortgage giants in conservatorship, yanking them from the private sector to government control. Dividends on the already battered preferred shares were suspended, and they lost much of their remaining value this week.

"It’s changed totally now," McClure said. Shares once seen as investment grade have suddenly become junk.

However, McClure said none of the 300 Missouri banks regulated by the state is in jeopardy because of their investments in Freddie and Fannie.

"In no case is a bank going to fail because of that," McClure said. State-chartered banks in Missouri have capital ratios averaging 9 percent, well above the 6 percent of total assets the state requires, he said.

Jorge Solis, director of Illinois’ banking division, said a review of investments by the 480 state-chartered banks in Illinois shows that those that held preferred shares in Fannie and Freddie have enough capital to continue operating safely.

Creve Coeur-based Pulaski Bank was among those dumping the stocks this week. The bank’s parent, Pulaski Financial Corp., Wednesday issued a statement saying that it had sold its 350,000 preferred shares in Fannie, taking a loss of $5.2 million. The company expects to take a charge of 51 cents a share against earnings for its fourth quarter, which ends Sept. 30.

Missouri doesn’t regulate Pulaski, which is a federally chartered savings association.

Ramsey Hamadi, Pulaski’s chief financial officer, said that as recently as July, Fannie Mae preferred shares still were considered solid investments, though their value had declined. The bank noted in a filing that month that its $8.9 million investment in the shares had declined in value to $8 million.

"Now it is a speculative investment," which isn’t suitable for the bank’s portfolio, Hamadi said fast cash online. "We are disappointed. It certainly is not something that you could have forecasted to occur and not as quickly."

Pulaski’s capital is still well above the 6 percent of assets required by regulators to be considered well-capitalized, Hamadi said. It’s core capital stood at 8.29 percent before selling the shares. The sale would take the ratio to 7.93 percent.

Kansas City-based Commerce, the largest Missouri-based bank,; Enterprise Bank & Trust Co. and Centrue Financial Corp., both of Clayton; and First Banks Inc. of Creve Coeur did not hold the shares, they said. None of the other locally based banks has given notice that it has the shares or plans to sell them.

U.S. Bank, the market share leader here, has $97 million in preferred stock of government-sponsored entities, said Lisa Clark, a spokeswoman. The bank considers the amount "very manageable," at less than one percent of its capital, she said.

Frank Sanfilippo, chief financial officer at Enterprise, said the government takeover of Fannie and Freddie has sent a shock wave through the industry. About 8,000 banks held the shares, regulators have said.

A bank that holds the shares has two choices, Sanfilippo said. It can either sell them and take the loss against earnings directly, as Pulaski did. Or it can hold them and write their value down to the current market price. Either way, bank earnings can take a hit.

A loss can affect the bank’s total equity capital, and in some cases, it can change the bank’s rating from "well-capitalized" to "adequately capitalized." Dropping to "adequate" can have a number of effects on a bank’s finances.

For one thing, the rates the Federal Deposit Insurance Corporation charges to insure the bank’s deposits will go up. Insurance rates already were going up because of bank failures that put a strain on the FDIC’s reserves.

Lower capital ratios also could cut off a bank’s access to the wholesale deposit market, Sanfilippo said. Some banks have turned to so-called