More Billions for Bailouts

A billion here, a billion there: pretty soon it adds up to real money, such as the $800 billion the Federal Reserve has committed to unclog the credit markets for homebuyers, small businesses and consumers. It’s a new multi-part initiative involving the purchase of about $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae, and $100 billion of debt issued by those entities as well as the Federal Home Loan Banks. The Fed is also setting up a $200 billion facility to support consumer finance, with the goal of making student, auto and Small Business Administration loans easier to get. The market seems to like the idea of the Fed bailout this morning, with the Dow Jones index going up for a time. But then major tech stocks declined, taking the average with them. By the end of the day, however, the Dow had managed to advance slightly, by 36.08 points, or 0.43 percent. The S&P 500 was also up a bit–0.66 percent–but the tech-oriented Nasdaq was down 0.5 percent by the closing bell. It turns out that the economy was weaker this summer than initially believed, according to the U.S. Department of Commerce, which has revised its tally of the U.S. gross domestic product to a 0.5 percent contraction for the July-September quarter. Previously, the government had estimated a 0.3 percent contraction. In any case, the third quarter 2008 was the worst quarter since the third quarter of 2001, when GDP contracted 1.4 percent. The S&P/Case-Shiller home price index covering house prices in 20 U.S. metro areas, published this morning, dropped 17.4 percent in September from the same month last year. In August, the decline was 16.6 percent from the previous year. Foreclosed houses added to an already bloated housing stock are driving prices downward. According to RealtyTrac Inc., foreclosures were up 25 percent in October from a year ago. The FDIC has compiled its quarterly “problem list,” or banks that it thinks are at risk of failing. On average, about 13 percent of those on the list ultimately fail. As of the end of 3Q08, the list includes 171 banks, up from 117 at the end of June. The number has been increasing since 3Q06, when the total was 47–a historic low. One hundred and seventy seems high by that comparison, but it’s low compared with the total number of U.S. banks (about 8,400), and compared with the early 1990s, when roughly 1,500 banks were on the list. The FDIC doesn’t disclose the names of the individual banks on the list to discourage bank runs. Such bad numbers are bound to have a trickle-down impact on the homebuilding business, and sure enough D.R. Horton has reported its sixth quarterly loss: $799.9 million, or $2.53 a share. “Market conditions in the homebuilding industry deteriorated,” company chairman Donald Horton said in a statement, which was also an understatement.