Banks in Need of Even More Bailout Money

WASHINGTON — Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama’s transition team: the banks need more taxpayer money.

In all likelihood, a lot more money.

Mr. Obama seems to know it; a week before his swearing-in, he is lobbying Congress to release the other half of the financial industry bailout fund. Democratic leaders in Congress seem to know it, too; they are urging their rank and file to act quickly to release the rescue money. And Ben S. Bernanke, the chairman of the Federal Reserve, certainly knows it.

On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.

The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts.

Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.

Even some of the bailout program’s harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system.

Since last September, no major banks have failed and the credit markets have thawed somewhat.

But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.

Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates.

Citigroup is not alone. JPMorgan Chase, Bank of America, Wells Fargo and most other big banks all expect enormous losses as millions of consumers default on their mortgages, credit cards and automobile loans. Other losses are expected on loans made to commercial real estate developers, small businesses and for highly leveraged corporate buyout deals.

Mr. Bernanke bluntly warned on Tuesday that the government would probably have to infuse more money into financial institutions in the months ahead.

“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” Mr. Bernanke said in a speech to the London School of Economics.

Mr. Bernanke, tacitly acknowledging the unpopularity of the bailout program, said the public was “understandably concerned” about pouring hundreds of billions of taxpayer dollars into financial companies — especially when other industries were getting the cold shoulder.

But, he insisted, there was no escape. “This disparate treatment, unappealing as it is, appears unavoidable,” Mr. Bernanke said. “Our economic system is critically dependent on the free flow of credit.”

Mr. Obama and his economic team have assured Congress that they would use a sizable chunk of the new money from the Troubled Asset Relief Program to help distressed homeowners refinance mortgages and escape foreclosure. That would be a big shift from the Bush administration, which refused to use TARP for reducing foreclosures.

Lawrence H. Summers, Mr. Obama’s choice to head the White House National Economic Council, assured Democratic lawmakers in writing on Monday that the administration would use some of the money to help reduce foreclosures.

But Mr. Bernanke appears to be warning Mr. Obama and Congressional Democrats that most of the remaining $350 billion — and possibly more — has to go to shoring up banks if they are to resume lending at normal levels.

During the first three quarters of 2008, banks were able to raise enough capital to offset more than their hundreds of billions in losses by tapping the giant government bailout fund as well as some early private investors.

But that was only a stopgap.

“The capital raises finally caught up with the losses,” said Michael Zeltkevic, a partner at Oliver Wyman, a consulting firm specializing in the finance industry. “It doesn’t make the situation better, but at least we caught up.”

The new tidal wave of losses stems from the worsening economy and rising unemployment, and analysts say it will take several quarters before it peaks.

Regulators require banks to keep a healthy cushion of capital. But this time around, the banks are struggling to plug their deepening holes. Private investors are scarce. For all but a small group of healthy banks, bankers and analysts say, the government may be the only investor left.

“Most banks are going to be in a defensive posture,” said Christopher Whalen, a managing partner with Institutional Risk Analytics. “You are probably not going to see the industry expand its overall balance sheet until 2010 or 2011.”

Mr. Obama’s economic team is planning a broad overhaul of the program to impose more accountability and more restrictions on executives at companies that receive government money.

Policy makers are also looking at reviving the original idea of TARP — have Treasury buy up unsalable mortgage-backed securities from financial entities.

Henry M. Paulson Jr., the Treasury secretary, had dropped the idea, concluding it would be more efficient to inject capital directly into banks by buying preferred shares.

Mr. Bernanke revived the idea, along with several other approaches, in his speech in London. So did Donald L. Kohn, vice chairman of the Federal Reserve, in a hearing on Tuesday before the House Financial Services Committee. He suggested the Treasury could buy the unwanted securities directly, or set up special banks to buy them.

Some analysts, even those who agree that the government needs to prop up the banking system with more taxpayer money, were skeptical about TARP.

Adam S. Posen, deputy director of the Peterson Institute for International Economics, said that the Bush administration had been right to inject capital into banks but wrong in not pushing banks hard enough to fix their problems or accounting.

“The problem isn’t that we’ve wasted money,” Mr. Posen said. “The problem is that we’ve put too few conditions on the banks.”

Holiday sales begin before turkey grows cold

Thanksgiving Day may mean leisurely time with family for many Americans, but some U.S. stores were set to open to shoppers on the holiday itself, hoping to salvage what could be a disastrous holiday sales season.

The traditional start to holiday shopping begins on Friday and runs through year's end, with the lion's share of sales occurring up to Christmas Day on December 25.

Known as "Black Friday", the day after Thanksgiving used to allow some stores to turn their profit, or move into the black, for the year.

But in 2008, U.S. retailers fear that a contracting economy and mounting job losses could cost them billions of dollars during their most crucial season of the year when they can make up to 40 percent of annual sales. Some are staying open on Thursday in hopes of capturing as much business as possible.

"Consumer spending on gifts for the holiday season is going to be down considerably," said Eric Anderson, professor of marketing at the Kellogg School of Management, Northwestern University. "Black Friday will be the first indicator of how bad it's going to be."

Experts predict this could be the worst sales season since the early 1990s as Americans hit hard by a housing slump and credit crunch make do with fewer gifts.

Based on analyst forecasts, retail sales at stores open at least a year could fall 2.2 percent for the entire month of November compared with a 4 percent rise a year ago, according to Thomson Reuters data.

Excluding expectations for growth at discounter Wal-Mart Stores Inc, one of the few companies that may prosper this season, the decline is a more precipitous 6.6 percent.

At stake is the ability for many retailers, from department stores like Macy's to specialty chains such as AnnTaylor Stores, to keep their loyal customers and eke out a profit as rivals cut prices up to 40 and 50 percent.

With times this grim, some are willing to sacrifice more profit rather than risk losing clients for good.

"It's the retailers in the middle who are trying to avoid losing customers," said Anderson. "Macy's is worried about customers who have never spent a lot of money at Wal-Mart trying out Wal-Mart and liking it."

Some consumers said they are putting a different emphasis on celebrating the holidays, focusing on time spent with family and friends rather than purchasing the latest hot toy or gadget. They may even choose to craft presents by hand or swap goods gathering dust in the attic to save money.

Others have the option of buying goods at firesale prices, after long-standing U.S. chains like Circuit City and Mervyns declared bankruptcy ahead of the holiday.

EARLY BIRDS

To drum up enthusiasm, many stores started offering steep discounts on everything from clothes to electronics weeks in advance.

Several chains are launching special promotions online and staffing stores on Thanksgiving Day itself, well before the traditional roast turkey meal has had time to grow cold.

Kmart, owned by Sears Holdings, was to open its doors early on Thursday, along with movie rental chain Blockbuster, which is touting electronics gifts like Blu-ray players and game consoles this year. Toy stalwart FAO Schwarz was also due to open.

Stores from Wal-Mart to electronics retailer Best Buy to Macy's planned to open before dawn on Friday.

One silver lining could be that penny-pinching shoppers held off buying until the Thanksgiving weekend, preferring to spend what cash they have only when better deals begin to appear. That could also explain some of the sharp decline in sales for most of November leading up to Black Friday.

Nearly 45 percent of consumers plan to shop during the Black Friday weekend, according to a survey released this week by the International Council of Shopping Centers.

More than 80 percent of those shoppers expect to stop at a discount store, while 78 percent said they would head to a department store.

Stocks Are Higher in Europe and Asia

PARIS — Stocks rose Thursday in Europe and Asia, following Wall Street’s lead and a deep cut in Chinese interest rates.

Indian stock markets were closed after a terrorist attack Wednesday in Mumbai left more than 100 people dead, and it was not immediately known when trading would resume.

In morning trading, the Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 2.4 percent, while the FTSE 100 index in London gained 2.1 percent. The CAC 40 in Paris was up 2.6 percent, and the DAX in Frankfurt rose 2.5 percent.

“There is fresh risk-taking, but not enough to sustain a rally,” Adrian Pankiw, a strategist at Henderson Global Investors in London, said. “Everyone’s just waiting to close the books and getting ready for next year.”

“They’re doing everything they can to avoid deflation,” he said, referring to the trillions of dollars in financial bailouts and economic stimulus measures governments have announced in the last few months. “We’ve seen from the case of Japan that the cost of deflation is much higher than the cost of the measures they’re taking now. Japan is still paying for it.”

UBS rose 4.1 percent. Peter Kurer, the UBS chairman, told shareholders Thursday that 2009 would be a profitable year for the Swiss bank.

Trading in Woolworths was suspended in London. The 99-year-old British retailer appointed administrators to seek a buyer for its more than 900 stores. October data from the United States underlined the dismal economic picture. Consumer spending dropped a full percentage point, the biggest decline since 2001, while durable goods orders fell 6.2 percent, and sales of new homes declined 5.3 percent.

U.S. markets were closed Thursday for the Thanksgiving Day holiday, but futures traded on the Standard & Poor’s 500 index fell about 0.2 percent. On Wednesday, the index rose 3.5 percent in New York. Despite the rally, bond yields plunged to record lows, as prices were lifted by the Federal Reserve’s plan to buy mortgage securities.

The benchmark U.S. 10-year note closed Wednesday trading at a yield of 2.978 percent. Mr. Pankiw noted that, with the exception of Germany, most European government bonds were also trading near record lows. Part of the story, he said, is that after years of consumer “dissaving,” savings rates are beginning to rise, even as net pay falls.

The Chinese central bank’s move Wednesday to cut its main interest rate by 1.08 percentage point gave Asian stock markets a lift, with the Shanghai Stock Exchange composite index gaining 1.1 percent. Malcolm Wood, Head of Asia Pacific Strategy at Morgan Stanley in Hong Kong, said the move was an “extraordinarily aggressive policy action in the face of extraordinarily bad news,” but that this — and a flurry of measures around the world in the past two months — was grounds for optimism in the global effort to shore up the real economy.

The Tokyo benchmark Nikkei 225 stock average gained nearly 2 percent, while the Hang Seng index in Hong Kong rose 1.4 percent. The S&P/ASX 200 index in Sydney rose 1.4 percent.

U.S. crude oil futures for January delivery fell $1.68 to $52.76 a barrel in electronic trading on the New York Mercantile Exchange.

The dollar declined against other major currencies. The euro rose to $1.2915 from $1.2880 late Wednesday in New York, while the British pound rose to $1.5388 from $1.5326. The dollar slipped to 95.08 yen from 95.67 and fell to 1.1982 Swiss francs from 1.2037 francs.

Nokia to Cease Sales In Japan

Nokia, the world's biggest cellphone maker, said on Thursday it will stop selling mobile phones in Japan except for its luxury Vertu brand after struggling to expand its presence.

Finnish Nokia has previously said it will cut costs 'decisively', expecting global mobile phone sales to shrink next year amid an economic downturn.

Japan is the world's fourth largest mobile phone market after the United States, China and India. But it makes up only a tiny part of sales at Nokia, whose products have failed to lure customers away from more sophisticated Japanese ones.

Mobile phone companies also see limited scope for growth in Japan, where 109 million subscribers, or some 85 percent of the population, already own a mobile phone. In addition, a new sales model based on higher handset prices is expected to slash annual mobile phone sales in Japan by some 20 percent.

"In the current global economic climate, we have concluded that the continuation of our investment in Japan-specific localized products is no longer sustainable," Nokia executive vice president Timo Ihamuotila said in a statement.

He added that Nokia's Japanese business would concentrate on research, development and sourcing for the global market as well as specific projects such as the Vertu brand.

The quirks of Japan's mobile phone market have prevented foreign companies, including Nokia's rivals such as Samsung Electronics and LG, from successfully targeting Japanese consumers.

Most of the mobile phones used in Japan are part of third-generation networks and boast features such as TV broadcasting and electronic payment functions.

This makes it tough for foreign manufacturers to compete with domestic handsets.

Foreign companies, excluding Sony Ericsson, only occupy around 5 percent of Japan's cellphone market, according to IDC Japan, a research firm. Japanese manufacturers, in turn, have only a small presence outside their home market.

"Nokia is facing global earnings problems and many other issues, and this shows Japan was a low-priority market at a time when they are shoring up global operations, even though it may still be attractive," IDC Japan analyst Michito Kimura said.

"I'm not very surprised by the decision."

The move was still rather abrupt as NTT DoCoMo Inc, Japan's biggest mobile phone operator, said just this month that it would sell a new Nokia smartphone as part of its product line-up for the winter shopping season.

Third-ranked Japanese operator Softbank Corp also sells Nokia phones.

Nokia, which has a nearly 40 percent global market share, had originally said it aimed to increase its market share in Japan to a double-digit figure. It took only around 0.3 percent of the Japanese market last business year, according to the Nikkei newspaper.

Instead of a broad expansion, it will now focus on Vertu, its luxury unit.

The Yomiuri newspaper reported on Saturday that Nokia plans to launch mobile phone services for Vertu customers in Japan, using DoCoMo's network.

Vertu, founded in 1998, sells gem-encrusted, hand-built mobile phones with prices ranging from 3,500 euros to over 100,000 euros.

(Additional reporting by Tarmo Virki in Helsinki; Editing by Sophie Hardach)

HK Index Rises on China's Rate Cut

Hong Kong's benchmark stock index advanced for a third straight session Thursday, boosted by China's biggest interest rate cut in 11 years to spur economic growth.

The blue chip Hang Seng index rose 182.61 points, or 1.4 percent, to 13,552.06.

The gains came after China slashed a key interest rate by 1.08 percentage point -- its biggest cut since 1997 and the fourth in three months -- after markets closed on Wednesday.

Analysts said China's aggressive move helped improve sentiment, but investors still remained cautious about the global economic outlook.

''Although it looks like sentiments are better, there are still concerns about negative news or any asset liquidation of financial institutions,'' said Castor Pang, an analyst at Sun Hung Kai Financial.

Mainland Chinese property stocks soared on the country's rate cut. Guangzhou R&F Properties Co., Ltd. jumped 12.2 percent to 4.14 Hong Kong dollars. China Overseas Land and Investment also gained 7.6 percent to HK$9.79 and China Res Land was 5.3 percent higher at HK$9.30.

Chinese financial stocks also moved higher with China Construction Bank adding 2.4 percent to HK$4.20. Major Chinese lender ICBC also rose 1.6 percent to HK$3.82.

Index heavyweight HSBC was 0.8 percent higher at HK$81.65.

World Stocks Hit 2 - Week Highs

Global stocks rose to their highest level in nearly two weeks on Thursday with European equities buoyed by sharp gains in Asia and the United States, dampening demand for safer assetssuch as government debt.

Renewed expectations that Washington will bail out the U.S. motor industry and China's aggressive interest rate cut on Wednesday helped to lift some of the gloom surrounding the global economy.

But a string of dismal U.S. economic reports this week left the dollar on a shaky footing while political risk emerged after attacks in India's financial capital.

At least 101 people have been killed with hundreds more trapped by Islamist gunmen in Mumbai after attacks on luxury hotels, hospitals and a tourist cafe.

Still, with U.S. financial markets closed on Thursday for the Thanksgiving holiday, analysts expect trading in Europe to be lackluster. While stocks were eking out gains, analysts said the outlook was still bleak.

"It's going to be a bit of a nothing day, as we wait for Black Friday in the United States -- the day where all retailers go from red to black," said Justin Urquhart Stewart, investment director at Seven Investment Management. "If it goes like the UK, it could be a black Friday in the wrong sense."

The day after Thanksgiving, known as black Friday, is traditionally the busiest time for U.S. retailers and investors would undoubtedly be on the lookout for retail sales figures.

MSCI world equity index climbed 1.1 percent to 218.20, having earlier reached a peak of 218.33 -- a level last seen in November 14.

The FTSEurofirst 300 index of top European shares gained 2.4 percent, Britain's FTSE 100 index put on 2 percent and Germany's DAX climbed 2.6 percent.

Bank stocks were among the best performers, with Standard Chartered rising 11 percent and Societe Generale gaining more than 5 percent. Earlier, Japan's Nikkei rose 2 percent, while MSCI's measure of other Asian stock markets climbed 2.2 percent.

Meanwhile, the dollar eased against a basket of major currencies with the dollar index slipping 0.3 percent.

"The greenback for long the beneficiary of safe haven flows has over the past couple of days been forced on the defensive as poor economic news weighed on the market," said Mitul Kotecha Head of Global Foreign Exchange Strategy at Calyon.

"Yesterday's data releases added to these woes, showing a huge drop in durable goods orders, a decline in personal spending, a weak Chicago PMI and another big increase in initial jobless claims. The latter points to a USD unfriendly non-farm payroll report next Friday."

BOND YIELDS UP

European government bond yields crept up as stocks gained ground, snapping recent declines that mirrored steep falls in U.S. Treasury yields.

On Wednesday, the U.S. benchmark 10-year yield hit a 50-year low below 3.0 percent after a flood of bleak U.S. economic reports spurred demand for safer government debt.

The 10-year euro zone government bond yield rose 1.7 basis points to 3.296 percent, off a near three-year low of 3.272 percent set on Wednesday.

Meanwhile, U.S. crude oil fell more than $1 toward $53 a barrel, reversing some of the 7 percent gains a day earlier as investors fretted about falling demand.

Recent data showed U.S. crude stocks rose sharply last week and U.S. September demand fell to its lowest level for any month in more than a decade.

Gold traded at $812.45 an ounce, near a six-week high of $830.10 set on Tuesday.

(Additional reporting by Sitaraman Shankar; editing by David Stamp)

Thai Economy Braces for Blow Amid Airport Shutdown

Thailand's already faltering economy is bracing for a fresh blow as the shutdown of the country's main airport by protesters entered its third day, stranding thousands during the tourist high season, disrupting exports and spooking investors.

Tourism losses alone in the remainder of this year could run to 150 billion baht ($4.2 billion), equal to 1.5 percent of gross domestic product, with ''devastating repercussions'' for the economy, CIMB economist Kasem Prunratanamala said Thursday.

Other vital pillars of the economy are also being hit, with exports of fresh produce and electronic components hurt as dozens of airlines cancel flights, and foreign investors pulling funds from a stock market already stricken by the global financial turmoil.

''If this crisis goes further, we will lose much more,'' said Thai Chamber of Commerce President Pramon Sutheewong.

''The confidence in Thai exporters is deteriorating, foreign importers are in doubt about our ability in deliver products on time and there is a high tendency that they will divert their orders to some place else,'' Pramon said. ''That's what we are concerned about the most.''

Beyond deterring tourists, the airport shutdown also halts exports of perishable produce such as fruit and vegetables and shipments of electronics components to places like Japan, said Federation of Thai Industries Chairman Santi Vilassakdanont.

''After one, two or three days there will be a production problem for electronics makers because their stockpiles of unsent goods will become too high,'' he said.

Losses on outbound shipments of car parts, fresh fruit and vegetables, live fish and orchids could run 2 billion to 3 billion baht a day ($57 million to $85 million), said Tanit Sorat, the federation's vice chairman.

All flights in and out of Bangkok's Suvarnabhumi were canceled after protesters took over terminals Tuesday in an attempt to unseat Prime Minister Somchai Wongsawat's government, which they claim is a puppet for ousted premier Thaksin Shinawatra. It was the latest escalation in a sometimes violent four-month campaign by protesters to bring down the government.

On Wednesday night, protesters overran a second smaller airport that mainly serves domestic routes, cutting off all commercial flights to the capital of Southeast Asia's second-biggest economy -- an important manufacturing hub for automakers like Toyota Motor Corp. and General Motors Corp.

Thailand's economy is already in a fragile state, growing at 4 percent in the third quarter -- the slowest pace in more than three years -- because of the political unrest and the global financial crisis. Some economists say growth next year will slump to about 2.5 percent from the 4.5 percent expected for this year -- a forecast that doesn't factor in the latest woes.

Tourism, a vital industry that makes up 6 percent of the economy, will take the main hit from the airport shutdown.

CIMB's Kasem Prunratanamala said about half of 4 million tourists expected between now and the end of the year could cancel their trips, with spillover affects outside tourism such as lower spending at shopping malls and other retailers. The effects will linger into 2009, he said.

Up to 20 percent of the 1 million employed directly and indirectly by tourism could lose their jobs, said Tourism Council of Thailand boss Kongkrit Hiranyakit.

Tourism Minister Weerasak Kowsurat said airport closures not only drain the coffers of airports and airlines but deprive the country of 80,000 free-spending tourist each day and, most troubling, tarnish the country's image as safe place to travel.

''If we can't solve this problem soon enough, the memory of people in general about traveling in Thailand will be heavily damaged,'' Weerasak said.

Neighboring countries have voiced concern that Thailand may not be able to host the annual ASEAN summit for 10 southeast Asian nations, scheduled to take place Dec. 15-18 in the northern city of Chiang Mai. Thailand insisted Thursday that the meeting will go ahead as planned.

Jittery foreign investors pulled a net 1.5 billion baht from the market on Wednesday, the second highest selling by foreigners this month, adding to the 150 billion baht that they have withdrawn from the market this year. On Thursday, Thailand's benchmark stock index sank 1.4 percent -- even as most other Asian markets advanced.

''It's a nightmare scenario. I can't tell clients to buy Thai shares if they can't even get into the country,'' said Andrew Yates, vice president of foreign institutional sales at Asia Plus Securities in Bangkok. ''It seems like it's easier to get into North Korea than it is to Thailand.''

China Downturn Deepens

China warned on Thursday its economic downturn was deepening with the spread of the global financial crisis and a senior European policymaker said woes could extend beyond 2009.

In India, emerging Asia's other economic titan, financial markets were closed after Islamist militants killed more than 100 people in the commercial capital Mumbai.

Violence in India and political unrest in Thailand highlighted political risk as an extra potential threat to emerging markets battered by the global crisis.

"These awful events are reinforcing the nervousness about emerging markets, which have been weak any way for some time after the U.S. slowdown and the domino effect," said Justin Urquhart Stewart, investment director at Seven Investment Management in London.

The economic warnings from China's top planner came a day after its central bank cut interest rates by the biggest margin in 11 years in response to the worst global downturn in decades.

A crisis that began last year with the collapse of the U.S. housing market has spread around the world, bringing several financial institutions to their knees and pushing the United States, Japan and Europe into recession or to the brink of it.

China's State Information Centre, a government think-tank, forecast annual growth would slow to 8 percent this quarter from 9 percent in the third quarter, a rapid cooling from double-digit rates recorded in the past five years.

"The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November," Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.

With factories closing by the thousands, Chinese officials have grown increasingly concerned in recent weeks that slowing growth may threaten the stability that the ruling Communist party craves for its 1.3 billion people.

Slowing demand for Chinese exports in the West is curbing growth and there is no relief in sight.

The euro zone is likely to be in recession next year, European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said, reversing a forecast of slight growth made earlier this month.

Almunia would not give a specific forecast for 2009, but said next year may not mark the end of the euro zone's troubles. "The crisis may not end in 2009," he said.

Emphasizing the bleak outlook, the euro zone's business climate indicator fell to its lowest in more than 15 years in November, European Commission data showed.

BANKING WOES

Aggressive interest rate cuts and trillions of dollars in financial sector bailouts and stimulus packages have been the order of the day since the collapse of Lehman Brothers in September, followed by a lending freeze and the spread of financial pain to consumers and businesses.

The world's banking system is still not strong enough to support the economy and avoid a recession, the head of Britain's financial regulator told an Italian newspaper in an interview.

Adair Turner, chairman of Britain's Financial Services Authority, added that the two key issues were bank capital strength and liquidity.

Japan's Norinchukin Bank said it would raise more than $10.5 billion to shore up its capital, the largest fundraising by a Japanese financial firm since the start of the global credit crisis.

Norinchukin, the unlisted central bank for Japan's agricultural and fishery cooperatives, said it plans to raise more than 1 trillion yen ($10.5 billion) through its associated cooperatives by the end of March.

COMPANIES SUFFER

Battered global stocks rose to their highest level in nearly two weeks with European equities buoyed by sharp gains in Asia and the United States, dampening demand for safer assets such as government debt.

European government bond yields crept up as stocks gained ground, ending recent declines that mirrored steep falls in U.S. Treasury yields.

On Wednesday, the U.S. benchmark 10-year yield hit a 50-year low below 3.0 percent after a flood of bleak U.S. economic reports spurred demand for government debt. U.S. markets were closed on Thursday for the Thanksgiving Day holiday.

Despite the share price rises, there was little good news from companies.

Top global miner BHP Billiton cited a drop in China's demand for iron ore when it painted a gloomy outlook for its business and defended its decision to drop a $66 billion bid for rival Rio Tinto.

ArcelorMittal, the world's largest steelmaker, said it was likely to start short-time working and cut production at its German steel plants in December.

Two of Britain's most high profile retailers DSG and Kingfisher underlined the severity of the economic slowdown with downbeat results and gloomy outlooks, while variety story group Woolworths went into administration.

Britain's retailers face a brutal downturn in consumer spending, amid sliding house prices and rising unemployment.

China Shares Slightly Higher, Rate-Cut Rally Fades

China shares surrendered most of an early rally to close slightly higher Thursday as continued worries about the slowing economy overshadowed the country's biggest interest rate cut in 11 years.

The benchmark Shanghai Composite Index closed up 1.1 percent, or 19.98 points, at 1917.86 after rising as much as 6.6 percent. The Shenzhen Composite Index for China's smaller second market rose 1.7 percent to close at 544.1.

Elsewhere in Asia, markets rose on China's rate cut late Wednesday. Japan's benchmark Nikkei 225 jumped 2 percent, Hong Kong's Hang Seng Index was up 1.2 percent and Korea's KOSPI Composite Index added 3.3 percent.

China slashed the interest on a one-year bank loan by 1.08 percentage points to spur private borrowing and support a multibillion-dollar government package to boost slowing economic growth. Investors had been expecting a cut and markets fell Monday when it failed to materialize over the weekend.

''The interest rate cut already was factored into investors' expectations, although the cut was bigger than expected,'' said Zhang Gang, an analyst for Central China Securities.

More rate cuts and other stimulus moves are expected because ''the worst time for the economy has not arrived yet,'' Zhang said.

Real estate, construction and steel stocks gained on expectations that the rate cut might boost housing sales.

China Vanke Ltd., the country's biggest developer, jumped 3.1 percent to 7.01 yuan and Cofco Property Group added 3.5 percent to 6.17 yuan.

Baoshan Iron & Steel Ltd., the country's biggest steel producer, posted a 2.2 percent gain to 5.13 yuan, and Xinjiang Ba Yi Iron & Steel Ltd., surged by the daily limit of 10 percent to 6.29 yuan.

Tangshan Jidong Cement Ltd. soared by the daily limit to 9.65 yuan, Fujian Cement Inc. rose 5.5 percent to 4.41 yuan and Hebei Taihang Cement Ltd. added 2.2 percent to 6 yuan.

Major banks were flat on expectations that the rate cut might squeeze their profits.

China Southern Airlines and China Eastern Airlines were suspended from trading while they announced financing moves. Southern Airlines said it will get 3 billion yuan ($440 million) from the government to help the carrier through a financial crisis. China Eastern said it was seeking similar help.

In currency dealings, China's yuan was traded at 6.8289 to the U.S.dollar in over-the-counter trading around 0800 GMT, down slightly from the close of 6.8282 in the previous session.

Food Prices Expected to Keep Going Up

For more than a year, food manufacturers have been shaving package sizes and raising prices, declaring that they had little choice because of unprecedented increases in the cost of raw ingredients like corn, soybeans and wheat.

Now, with the price of grains and other commodities plunging, it may seem logical that grocery prices will follow. But while prices for some items like milk and fresh produce are dropping, those of most packaged items and meat are holding firm or even increasing. Experts warn that consumers should not expect lower prices anytime soon on most items at the grocery store or in restaurants.

Government and industry economists project that the overall cost of food will continue to climb in 2009, led by increases for meat and poultry. A big reason, they say, is that food companies still have not caught up with the prolonged run-up in commodity prices, which remain above historical averages despite coming down from their highs early this year.

The Agriculture Department is forecasting that food prices will increase 3.5 to 4.5 percent in 2009, compared with an estimated 5 to 6 percent increase by the end of this year.

Some economists project even steeper increases next year. For instance, Bill Lapp, principal at Advanced Economic Solutions in Omaha, said he expected food prices to jump 7 to 9 percent next year.

“For the last 21 months, food manufacturers, restaurants and livestock producers have been absorbing significant costs that in my view are likely to be passed on to consumers in 2009 and beyond,” said Mr. Lapp, a former chief economist at ConAgra Foods.

While predicting future food prices is an inexact science, data released by the Labor Department last week suggested the forecasters might be right.

Overall consumer prices recorded the biggest drop in the history of the Consumer Price Index, but food prices continued to inch upward, albeit at a slower pace than in previous months. The C.P.I. showed that grocery prices rose 0.1 percent in October.

Some of the more visible items on grocery shelves, including produce and dairy products, dropped sharply in recent weeks, but not enough to offset the general trend of rising prices. Restaurant prices rose 0.5 percent in October.

Commodity prices began climbing rapidly in the fall of 2007, and food companies were hit hard by the increases. They tried to slow eroding profit margins by cutting operating costs, making packages smaller and raising prices.

Some companies, like Kellogg and Heinz, have managed to offset the higher ingredient costs and post robust profits by using shrewd commodity hedges and by raising prices without losing many customers. They also benefited from a trend of consumers eating out less and buying more groceries.

But other food companies have struggled. Hershey, for instance, locked in high cocoa prices this year only to see prices drop this fall, analysts say. And meat and poultry companies have been hit by higher feed costs and a limited ability to charge higher prices, at least in the short term.

Now, even though costs for ingredients like corn and wheat have dropped, meat and poultry providers say they still have not raised prices enough to cover their increased costs. And packaged food manufacturers are unlikely to lower prices because commodity costs remain relatively high and they are still trying to rebuild eroded margins.

Michael Mitchell, a spokesman for Kraft Foods, said that the company’s food ingredient costs this year were running $2 billion higher than in 2007, a 13 percent increase, but that the company had raised its overall prices by only 7 percent.

William P. Roenigk, senior vice president and chief economist for the National Chicken Council, said his industry had been losing money for more than a year. Chicken producers are now trying to recover those costs by reducing production, which will eventually alter the balance between supply and demand. “The time is coming when we’re going to see a very significant increase in the retail price of chicken,” he said.

The restaurant industry, which has been battered by a sharp drop in customers, also says it has not been able to raise prices enough to keep pace with the cost of ingredients.

People in the restaurant business said they did not like raising prices during an economic downturn. “If anything in this environment, one would be looking at the ability to offer much greater emphasis on value pricing in restaurant menus,” said Hudson Riehle, chief economist of the National Restaurant Association. “In contrast, exactly the opposite is happening. Our operators are being forced to raise menu prices at the highest rate since 1990.”
Predictions about food prices are subject to change because commodity prices are unpredictable. Ephraim Leibtag, an economist for the Agriculture Department, said food inflation would slow by the middle of next year if commodity prices remained low. “Right now the forecast is about 4 percent, but that would be lowered if we do not see any surge in commodity costs over the next few months,” he said.

A reason that overall food prices are expected to continue increasing is the lag between price increases for basic commodities and for finished food products in the grocery store, particularly for meat and processed foods. Consider the price of corn, an ingredient in things like cereal and breaded shrimp. It was not too long ago that corn hovered around $2 or $3 a bushel.

But corn prices began climbing last fall and peaked around $8 a bushel in June. They have since dropped to about $3.50 a bushel, still above the historical norm. Some food manufacturers locked in prices for corn and other commodities in the spring and summer, fearing that prices could go even higher. But prices fell instead, and they are now stuck with the higher prices until their contracts expire.

When costs go up for livestock producers, they are often unable to immediately raise prices because those prices are set on the open market, which is dictated by supply and demand. Instead, they begin reducing the size of their herds or flocks, which eventually leads to less meat on the market and higher prices. But reducing livestock production can take months to years, and in the interim it can actually suppress prices as breeding animals are slaughtered to reduce production.

The prospect of more food inflation is inflaming a debate over its causes. Many food manufacturers and economists maintain that one culprit is government policies promoting the use of ethanol fuel made from corn.

About a third of the corn crop is used for ethanol, putting ethanol producers in competition with livestock farmers and food manufacturers. The result, they contend, is that prices for corn are now higher and more volatile.

“The connection of oil prices to agricultural commodities is new as of 2007, and it’s a major game changer for those in the food production business,” said Thomas E. Elam, president of FarmEcon, a consulting firm.

But ethanol advocates counter that the food industry’s arguments have been proved false, saying that corn prices have declined as ethanol production is increasing. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol industry group, said food companies were “very quick to tell the American public that they had to raise food prices because corn was so expensive, and that the reason corn was so expensive was corn-based ethanol.”

Mr. Hartwig added: “Now, clearly, we know that relationship doesn’t exist. If ethanol isn’t the reason, what is the real reason for food prices going up?”

Bank jitters hit Wall Street

Stocks slipped Friday afternoon as the debate about the proposed $700 billion bank rescue plan wore on, and JPMorgan Chase bought Washington Mutual after it was seized by federal regulators in the biggest bank failure in U.S. history.

Credit markets remain stressed, with short-term borrowing costs rising as banks hoarded cash. Oil prices fell and gold prices rose. The dollar was mixed versus other major currencies.

The Dow Jones industrial average (INDU) lost 0.6% around 3 hours into the session, with a bounce in select bank shares after the recent battering helping to offset the broader weakness.

The Standard & Poor's 500 (SPX) index lost 1.3% and the Nasdaq composite (COMP) lost 1.6%.

Stocks rallied Thursday after lawmakers said they had essentially agreed on terms of the $700 billion bank bailout plan following days of heated debate.

But talks broke down along party lines at a White House meeting later in the day, and a late-night meeting of Treasury Secretary Henry Paulson and members of Congress proved unsuccessful.

Talks resumed Friday morning. President Bush spoke briefly after the markets opened, acknowledging the gridlock and also saying that Congress will move quickly on the plan. (Full story)

If the debate spills into next week, that's not a disaster for the markets, but the sooner something is established, the better, said Kenny Landgraf, principal and founder at Kenjol Capital Management.

"The quicker you get something done, the quicker the confidence is restored and the market needs it," Landgraf said.

President Bush, Paulson and Federal Reserve Chairman Ben Bernanke all have said that the struggling economy will be dealt an even bigger blow if a plan is not enacted.

The bank rescue plan would mark the biggest government intervention in the financial system since the Great Depression. It calls for the Treasury Department to buy, hold and eventually sell bad mortgage assets from banks in an effort to get them to lend again and loosen up the credit markets.

The plan also provides help to taxpayers, limits executive pay at participating firms and includes more government oversight. Democrats and House Republicans are reportedly at odds on how to fund the bailout, with some House Republicans arguing that Wall Street should fund the recovery through private capital. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has threatened to stall the broader financial system.

Washington Mutual: The savings and loan giant is the latest company to collapse amid the housing market collapse and subprime mortgage crisis.

Federal regulators seized WaMu (WM, Fortune 500) Thursday night and sold its banking assets to JP Morgan Chase (JPM, Fortune 500) in a $1.9 billion deal. The deal also includes JP Morgan raising $10 billion in stock, $2 billion more than initially announced. (Full story)

The collapse was the biggest bank failure in history and marks the second storied Wall Street firm bought by JP Morgan this year, following Bear Stearns in March. The government also negotiated that deal.

Also Friday, the Federal Reserve expanded deal with the European Central Bank and the Swiss National Bank to make an additional $13 billion in funds available to banks overseas. (Full story).

GDP: At the same time as the bank crisis, reports continue to show that economic growth is slowing. The government revised second-quarter GDP growth lower, to an increase of 2.8% from an initial reading of 3.3% a month ago. However, second-quarter growth was still better than the previous two quarters. (Full story)

Bonds: Long-term treasury prices rose Friday, lowering the yield on the benchmark 10-year note to 3.81% from 3.85% late Thursday. Treasury prices and yields move in opposite directions.

The three-month Treasury bill, seen as the safest place to park money in the short term, rose to 0.87% from 0.75% late Thursday. Last week, the three-month bill fell to a 68-year low around 0% as panic gripped financial markets.

And the TED spread, a measure of financial market jitters, dipped to 2.90% after touching a 22-year high on Thursday of 3.37%. The TED spread is the difference between what the Treasury pays to borrow for three months and what banks charge each other. If banks are charging each other a big premium, that's a sign of fear.

Treasury prices have been rallying recently and yields tumbling as nervous stock market investors have looked for safer areas to move their cash.

(For a look at how tighter credit conditions have been impacting individuals, click here.)

Oil and gold: U.S. light crude oil for November delivery fell $3.12 to $104.90 a barrel on on the New York Mercantile Exchange.

Oil prices had plummeted over $55 after peaking at $147.27 a barrel on July 11, as investors bet that sluggish global growth will diminish oil demand. But prices have soared in the last few weeks as the financial crisis has intensified and investors sought to put their money into hard assets.

COMEX gold for December delivery rose $10.50 to $892.50 an ounce. Like oil, gold prices had also rallied during the biggest periods of unrest over the last few weeks

Other markets: In currency trading, the dollar rose against the euro and fell versus the yen.

Gas prices fell for the eighth day in a row, according to a nationwide survey of credit card activity.

In global trade, European and Asian markets both ended lower.

Stocks slump on bank woes

Stocks slumped Friday morning as bank bailout talks hit gridlock and JP Morgan bought Washington Mutual after it was seized by federal regulators in the biggest bank failure in history.

Credit markets remained jammed, with short-term borrowing costs rising as banks clung to cash amid the ongoing uncertainty.

The Dow Jones industrial average (INDU) lost about 140 points, or 1.3% in the early going. The Standard & Poor's 500 (SPX) index fell 1.7% and the Nasdaq composite (COMP) lost 2.2%.

This follows a strong Thursday session, as investors showed their enthusiasm over reports that Congressional leaders had reached a deal on a proposed $700 billion cash injection to buy bad mortgage-related investments from the failing finance sector.

But late Thursday, opposition to the deal by some Republicans emerged, and negotiations broke down. House Republicans have created a competing plan that would ease tax laws and allow the injection of more private capital, rather than taxpayer money, to bail out the finance industry. Bailout talks were set to resume Friday.

Financial services power JPMorgan Chase (JPM, Fortune 500) said late Thursday it would buy the failed bank WaMu after it was seized by the Federal Deposit Insurance Corp. JPMorgan said it would acquire all of WaMu's banking operations, including $307 billion in assets and $188 billion in deposits. The buyer said it would pay $1.9 billion to the FDIC and raise another $8 billion through the sale of stock.

In other financial news, the Federal Reserve Bank announced a plan to stabilize global markets by boosting its currency swap agreements with the European Central Bank and the Swiss National Bank by $13 billion.

In yet another sign of a sluggish economy, the Commerce Department said the economy grew at a 2.8% annual rate in the second quarter, which was lower than the previously reported 3.3% and the 3.4% that was expected by economists surveyed by Briefing.com.

Markets: European markets were down and Asian stocks ended lower. The dollar slipped against the euro, the British pound and the yen. As yet another sign of a stuttering economy, oil prices dropped $2.21 a barrel to $105.81.

Lending freeze at all-time high

Just when it looked like relief was on its way, lending seized up again Friday.

With the Treasury's $700 billion financial industry bailout proposal in jeopardy, and with Thursday night's collapse of an agreement and subsequent JPMorgan Chase takeover of Washington Mutual - the largest bank failure in the nation's history - credit markets have again stalled.

"Things have frozen over again," said Steve Van Order, chief fixed income strategist with Calvert Funds. "Banks are nervous about lending to each other, and the commercial paper market has come to a standstill."

Market gauges of lending showed higher prices for loans between banks. When lending tightens in this way, businesses and consumers have to pay more for loans, like mortgages, or can't get them at all.

For instance, one gauge that banks use to determine lending rates rose to an all-time high. The difference between the London interbank offered rate, or Libor, and the Overnight Index Swaps rose to an unprecedented 2.08%. The Libor-OIS "spread," or difference between the two rates, measures how much cash is available for lending between banks. The higher the spread, the lower availability of cash for lending.

Another lending measure rose to a 26-year high. The "TED spread" - the difference between three-month Libor, what banks pay to borrow money for three months, and the three-month Treasury borrowing rates - rose to 2.92% after hitting 3.1% earlier in the day, the widest margin for that measure since 1982. Just a month ago, the TED spread was at 1.11%.

With loads of troubled assets on their balance sheets, banks are hesitant to take on more loans if the risk of default is high. Furthermore, when banks need to write down those assets, they have less cash on hand to issue loans. That stops the financial system's gears from turning, in turn hurting customers who need a loan to finance a home, a car or tuition.

"The interbank lending markets are clogged up, because there is a freeze-up in the pipes that normally carry funding from central banks to banks to customers," Van Order explained.

How WaMu makes it worse: The announcement that JPMorgan Chase (JPM, Fortune 500) acquired the banking assets of Washington Mutual (WM, Fortune 500) late Thursday after the beleaguered thrift was seized by federal regulators sent yet another shock to already skittish lenders.

"JPMorgan is going to have to take a writedown and ultimately raise capital," Van Order said. "The bank's lines of credit are being drawn on...and the acquisition puts another strain on lending."

As JPMorgan tries to finance its purchase, it priced $10 billion in new capital Friday morning, building on the $8 billion that was included in the deal. But other banks without the access to capital that JPMorgan has are finding loans hard to come by.

"More financial corporations are finding it tight in the commercial paper market," Van Order noted. "Some corporations are using lines of credit with banks, and as those get tapped it uses up marginal capacity to make new loans."

The bailout's impact: With the credit markets all but stopped, the Bush administration hopes that the removal of risky assets from the financial institutions will restore the flow of credit. But as partisan politics put the enactment of a bill in doubt, banks worry that the wrench in the gears may not be removed anytime soon.

"If banks don't have the market to sell off illiquid assets, we're just going to be stuck in the same situation a year from now," Van Order said. "There's just no market for whole classes of asset- backed securities, and the government is the only one that is large enough to create a market."

With the government the only potential buyer debating whether or not to make the deal, financial institutions continued to invest in less risky assets like government bonds.

Treasurys: The unprecedented events of the past two weeks have had investors moving into and out of Treasurys quickly. U.S. government bonds are considered one of the safest places to keep assets and as anxiety in the marketplace increases, so does demand for Treasurys.

"The holdup of the rescue plan and of course the failure of WaMu is once again flocking investors toward safety," said Peter Cardillo, chief market economist at Avalon Partners.

The benchmark 10-year note rose 20/32 to 101-24/32 and its yield fell to 3.79% from 3.84% late Thursday. Treasury prices and yields move in opposite directions.

The 30-year bond jumped 1-2/32 to 102-17/32 and its yield dipped to 4.35% from 4.39%.

The 2-year note rose 9/32 to 99-30/32, while its yield fell to 2.03% from 2.16%.

The yield on the 3-month note fell to 0.70% from 0.74% as prices ticked higher. Yields on 3-month Treasurys have remained at very low levels as demand for the notes has increased amid the uncertainty in the financial markets.

The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

On Thursday, bond prices were mixed as key lawmakers announced they had reached an agreement for the proposed $700 billion bailout of the financial system, which has been battered by the collapse of the housing market. Investors started tip-toeing out of the safe haven of government bonds; stocks rallied, sending the Dow Jones industrial average up 197 points.

But the bank failure and the breakdown in the bailout agreement sent investors running right back to the safe haven of Treasurys.

Looking for a lifeline: After days of negotiations in Congress, lawmakers said Thursday they were taking a revised bailout proposal to Treasury Secretary Henry Paulson.

But a meeting at the White House later on Thursday between President Bush, Congressional leaders and the presidential candidates failed to provide a conclusion, sending fresh anxiety to Wall Street that maybe the much-needed relief was not imminent.

"The financial markets are burning and the politicians are playing politics," said Cardillo. As the uncertainty mounts as to what form a bailout would eventually take, investors are returning to the perceived safety of government bonds, sending the prices of Treasurys higher.

As the situation in the financial sector continues to deteriorate, "people are trying to protect their assets and they are running into Treasurys," said Cardillo.

In order to pay for a costly rescue plan, the government would need to sell a lot more debt. On Thursday, the government auctioned $24 billion worth of 5-year notes. The Treasury received bids totaling nearly $46 billion, with a median yield of 3%.

UPDATE: KB Home 3Q Loss Widens As Orders, Deliveries Slump

KB Home (KBH) reported a larger-than-expected quarterly loss early Friday, as it held firm on pricing, fueling a stunning order decline and rise in cancellations as potential buyers walked away.

The third-quarter results are the latest in a recent string of grim statistics that show the sector's worst downward spiral in decades - one that has forced dozens of builders out of business - drags on.

Chief Executive Jeffrey Mezger was bleak: "Market fundamentals appear unlikely to improve significantly in the near-term" amid competition from increased foreclosures, bloated inventory and tighter requirements for mortgage rates, even for potential buyers with good credit.

"It's pretty clear that the home building market has undergone another leg down," said Morningstar analyst Eric Landry.

Shares of Los Angeles-based KB Home slipped about 3%, slightly below the Dow Jones US Home Construction Index's 3.13% fall.

For the quarter ended Aug. 31, the company, one of the nation's largest builders, reported a net loss of $144.7 million, or $1.87 a share, compared with a prior-year net loss of $35.6 million, or 46 cents. Analysts polled by Thomson Reuters expected a loss of $1.22 a share on $734.7 million in revenue.

Revenue actually dropped 55% to $681.6 million, while orders plummeted 66% - well above the 40% JP Morgan expected. New home deliveries slid 51%. "The contraction in KBH's operating metrics are staggering in our view," noted Wachovia's Carl Reichardt. "Q3 unit backlog is 79% lower than in Q305 while orders this quarter were 85% lower than those generated in Q305."

The cancellation rate - typically unit cancellations divided by gross orders - jumped to 51%, up from 27% in the second quarter. Until recently, some builders have seen cancellation rates improve slightly.

Mezger said the dramatic order decline "reflects the broader dynamics of the housing market" and its strategic response: cutting the amount of developments underway - its active community count was sliced by 38% - and changing offerings. It is at work on "new, value-engineered product with smaller, more affordable standard features" and a lower base price.

In California's Inland Empire, one of the nation's worst housing markets, KB Home has cut the size and prices of houses - by more than half - to make them competitive with resales and foreclosures, often bargain-priced to sell quickly. The change is working, Mezger said during the earnings conference call.

The company also reduced its use of sales incentives and price discounts as it reviews pricing strategies. Since the downturn began, builders have tried everything - free gourmet kitchens, paid closing costs and even six-figure discounts - to move inventory. KB Home has even offered price protection guarantees to reassure buyers afraid of buying a house only to see it fall in value.

Analysts were divided over the decision to hold prices.

"KB Home is in an enviable position where they can afford to do that," Landry said. "The liquidity is such, where they can say 'We don't need to fire sale homes anymore.'"

KB Home executives echoed that sentiment during the earnings conference call.

But there isn't a lot of differentiation in what public builders construct - with the exception of Toll Brothers Inc.' (TOL) luxury product - so buyers could easily score price discounts from nearby competitors.

Holding firm on prices kept charges down this quarter, but JP Morgan's Michael Rehaut thinks there's more pain to come.

"While we believe this was enough to prevent material impairment charges this quarter, given the highly negative commentary, we believe that KBH will be forced to reduce its prices over the next 2-3 quarters, which should trigger further material impairments," he noted.

Builders also face the loss of seller-funded down payment assistance, or DPA, which has been a key driver of recent sales. As part of this summer's housing bill, DPA ends at the end of the month. After that, as much as 15% of the buying base could be erased.

Some investors and analysts have pinned their hopes that the effects of a proposed $700 billion government bailout of the financial industry can stem home builders' pain. But industry watchers, including the National Association of Home Builders, point out it doesn't immediately address some of the builders' biggest problems: The difficulty for first-time buyers to come up with a down payment and the downward pressure foreclosure sales are putting on house and land values.

Friday, KB Home's Mezger said "difficult conditions have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets," while noting "it is too early to assess" whether conditions will improve following government intervention.

KB Home is the second builder to report a loss this week. Lennar Corp. (LEN), the nation's second-largest builder, reported a narrower loss of 56 cents a share, compared with a prior-year net loss of $3.25 a share. Orders dropped 42%, while deliveries fell 49%.

Chief Executive Stuart Miller's comments mirrored the same issues KB Home reported: "While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards."

Meanwhile, August's new-home sales fell 11.5%, sliding to their lowest level in 17 years, the government said Thursday. The rate tumbled 35% in a year. And existing sales, a much bigger slice of the market, also slipped in August.

WaMu Seized by U.S., Assets Sold to JPMorgan in Record Failure

Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

WaMu customers withdrew $16.7 billion since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said yesterday. Branches are open today and depositors have full access to their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said.

The failure of WaMu, which has $188 billion in deposits, ratchets up pressure on lawmakers trying to piece together a rescue package for the nation's financial system. The government's inability yesterday to reach agreement on a bailout and the seizure of the biggest savings and loan sparked a sell- off of bank stocks, led by a 25 percent tumble in Wachovia Corp.

``All eyes are now on Wachovia,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York.

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.

JPMorgan became the biggest U.S. bank by deposits with the deal, acquiring WaMu's branch network for $1.9 billion.

``This is a fabulous franchise,'' JPMorgan Chief Executive Officer Jamie Dimon, 52, said in an interview. ``We think we got this at a price that protects us, where if we were wrong, it still protects us.''

Lehman, Merrill

WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was also absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan that the savings and loan valued at $4 a share.

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 16 cents on the New York Stock Exchange.

David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''

Share Sale

New York-based JPMorgan said today it sold $10 billion of shares at $40.50 apiece. The bank rose 33 cents, or 0.8 percent, to $43.79 in composite trading at 10 a.m.

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

``This is one of the reasons I own JPMorgan: They're going to win from all this,'' Schutz said. ``They're taking on credit risk, but they're not taking on any debt obligations.''

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

JPMorgan had 75 people involved in the transaction and ``bid to win'' because it wanted WaMu's assets, Dimon said on a conference call yesterday. JPMorgan used its own investment bank to value the mortgages, he said.

Bailout Support

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal. The plan was jeopardized yesterday as congressional Republicans failed to agree on its details.

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

Earnings Forecast

The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

WaMu had about 2,300 branches at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

`Commendable Stewardship'

``It is important to acknowledge that the largest U.S. thrift just failed and did so seamlessly with the commendable stewardship of the FDIC,'' Oppenheimer & Co. analyst Meredith Whitney wrote in a research note. ``Things could have played out much worse for all the deposit-taking parties involved.''

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

``There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,'' FDIC's Bair said.

Rise of WaMu

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

``There's a lot of sadness and a lot of people are hurt,'' Lee Lannoye, 71, who was chief credit officer at WaMu from 1988 to 1998, said yesterday. ``Having worked with Kerry Killinger for 10 years, I still absolutely cannot fathom where or why he went wrong, and what caused him to lead the company into taking the kinds of risks that they did.''

Fortis Says Financial Position `Solid' as Shares Fall (Update3)

Fortis, seeking to stem a sell-off that drove its stock down 35 percent this week, said the bank's financial position is ``solid.''

Chief Executive Officer Herman Verwilst told reporters at a press briefing in Brussels today that he's ``flabbergasted'' by the share decline and said the bank's market value doesn't reflect its worth. The efforts failed to bolster the stock, which fell a record 20 percent to 5.20 euros in Brussels trading, while the cost of protecting Fortis bonds from default surged.

Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it's seeking to bolster capital, and might even need more funds as financial markets deteriorate. Verwilst repeated today that the firm may sell more assets than anticipated as it becomes harder to raise money by other means.

``Investors are concerned Fortis may have to sell assets at knock-down prices,'' said Jaap Meijer, a London-based analyst at Dresdner Kleinwort who has a ``hold'' rating on the stock.

Fortis has fallen 71 percent this year, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros. Today's decline was the biggest since the company was created in a 1990 merger.

WaMu Failure

The collapse of New York-based Lehman Brothers Holdings Inc. on Sept. 15 and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc., the largest U.S. savings and loan, was seized by regulators yesterday in the biggest U.S. bank failure in history.

Financial shares across Europe also fell as U.S. Treasury Secretary Henry Paulson's proposed $700 billion rescue of the nation's financial system stumbled in Congress. The Bloomberg European banks index dropped 1.9 percent.

Fortis, based in Brussels and Amsterdam, needs to raise capital after agreeing to buy the Dutch consumer banking and asset management units of ABN Amro Holding NV last year for 24.2 billion euros.

The firm said today it earmarked for sale banking and insurance businesses that may be worth as much as 10 billion euros. In each case, ``concrete interest of potential buyers is indicated,'' the company said, without elaborating.

Fortis said it won't sell assets at fire-sale prices, and doesn't have an urgent need for funds.

``The future need for additional capital will actually only be in 12 to 18 months as we start to fold in the largest part'' of ABN Amro's business, the company said today in a statement distributed by Hugin.

Ping An Deal

Fortis agreed in March to sell half of its asset-management unit to Ping An Insurance (Group) Co., China's second-biggest insurer, for 2.15 billion euros. Verwilst said in an interview with Bloomberg Television today he still expects the companies to get regulatory approval before the end of the year.

Fortis said on June 26 it would sell so-called non-core assets, notes and asset-backed debt to raise money. It planned to sell 2 billion euros of assets this and next year. The lender also scrapped a 1.4 billion-euro dividend and sold 1.5 billion euros of shares to investors including Ping An.

The Chinese insurer said today it may make further provisions in the third quarter for losses arising from its 4.99 percent stake in Fortis. Ping An booked a 10.5 billion yuan ($1.5 billion) loss in the first half from its holding. Its shares tumbled 9.7 percent in Hong Kong trading.

`Confidence' in Fortis

Fortis repeated today that a share sale isn't being considered. Filip Dierckx, head of the company's banking unit, told reporters in Brussels that Fortis has no shortage of liquidity. Customer moves at its Benelux banking business have remained limited to less than 3 percent of assets since the start of the year, Fortis said.

Fortis started offering Belgian customers opening online savings accounts 4 percent interest on deposits of as much as 250,000 euros in July, in a bid to hang onto customers after ING Groep NV, Dexia SA and KBC Group NV raised interest rates on savings accounts.

``I still have confidence in Fortis,'' said Dominique Achourt, a client for more than 35 years, when leaving the Fortis Bank branch at the head office in Brussels. ``Clients should see that Fortis is just being caught up in the global financial crisis and that its banking activities are not affected by the share price falling.''

Deposit Guarantees

Belgian Prime Minister Yves Leterme and Finance Minister Didier Reynders reiterated that the government guarantees deposits, in a bid to calm Fortis clients, local newswire Belga reported today. They also said that the Belgian financial regulator will probe any false information or rumor about Fortis, according to Belga.

Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.

As of Sept. 24, short interest in Fortis amounted to 2.45 percent of its market value, according to London-based Data Explorers Ltd.

Credit-default swaps on Fortis by assets jumped 311 basis points to 583, according to CMA Datavision prices at 4:45 p.m. in London. Credit-default swaps on the lender's subordinated debt rose 416 basis points to 854, CMA prices show.

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.