Financial Market Update-Bair, Paulson Quarrel in Burning House

Federal Deposit Insurance Corp. Chairman Sheila Bair is on the warpath for more aggressive government intervention in the foreclosure crisis, saying today before the House Financial Services Committee that the government is “clearly falling behind the curve” on the issue. Last week, Bair suggested using $24 billion to guarantee millions of modified mortgages, but the Bush administration rebuffed the idea. This week, she brought up the idea again while testifying before the committee. Various key members of Congress also piped up in favor of some form of the idea, such as Rep. Barney Frank (D.-Mass.), chairman of the committee. U.S. Treasury Secretary Henry Paulson says no, no, no. “The rescue package was not intended to be an economic stimulus or an economic recovery package,” he said before Barney Frank’s committee today. The fact that Treasury shifted the focus of TARP just last week, however, citing changed circumstances, might make members of the House a little skeptical of that assertion. Fed Chairman Ben Bernanke, who doesn’t get to retire in a few months like Paulson, also testified before the House Financial Services Committee today. Among other things, he talked up the new focus of TARP: “We have identified other priorities that I believe the government will need to address through the TARP and other existing authorities,” he said. “In particular, by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.” This seems like good news: the U.S. producer price index declined 2.8 percent in October, the most on record, according to the U.S. Department of Labor. The drop was led by energy prices, which fell 12.8 percent during the month, on top of a 2.9 drop percent in September. Even the cost of food is down, albeit slightly: 0.2 percent for the month, after rising five months in a row. This may be good for beleaguered American consumers, but it also raises the spectre of deflation–inflation’s evil opposite, according to economists, and the mark of a really serious downturn. This also seems like good news: Sales of existing single-family homes in Florida actually rose in the third quarter of 2008, according to the Florida Association of Realtors, 5 percent more than in 3Q07. The Florida housing bubble has deflated considerably in recent quarters, driving down the statewide median price of a house from $233,200 a year ago to $185,400 now (which isn’t historically low–in 3Q03, the median price was $163,700). It seems that those who can get financing to buy a house in Florida–tough, but not impossible–are now doing so to take advantage of lower prices. British bank Barclays Plc has become the latest financial institution to cancel top executive bonuses, following Goldman Sachs Group in the U.S. and USB AG in Switzerland. Barclays has otherwise been in the news lately for asking for bailout money not from the British government, but from sovereign wealth funds in Abu Dhabi and Qatar, which has caused grumbling among shareholders that such a move will dilute their stakes. Last year, Barclay’s highest-paid director, investment banking chief Robert Diamond, received a £6.5 million bonus ($9.75 million). No word yet on whether the likes of Citigroup, which is laying off 52,000 workers in the near future–the second-largest corporate layoff ever–will follow suit, though New York Attorney General Andrew Cuomo is publicly trying to shame the bank into such a move. Citigroup, in a statement on Monday, said that its board of directors won’t decide compensation questions until after the first of the year. In other bank news, the relatively healthy JP Morgan has inked a deal to buy land from London-based Canary Wharf Group (CWG) in the Canary Wharf district of that city. The bank plans to develop as much as 1.9 million square feet on the site to use as its London regional headquarters, which CWG will develop for it. All together, JP Morgan paid about £237 million ($354 million) for the site. Canary Wharf, which began redevelopment back in the late 1980s, now rivals the City of London as a location for financial businesses in London, partly because rents are cheaper there, but also because expansion and reconfiguration of space is easier.It was almost a classic rollercoaster day on Wall Street, as the Dow Jones index jumped up in the morning and then fell in the afternoon, only to spike again toward the end of the trading day. When it was all over, the Dow was up 151.71 points, or 1.83 percent. The S&P 500 and the Nasdaq also saw modest upticks of 0.98 percent and 0.08 percent, respectively.