Auto Maker Bailout Nixed, World Markets PlungeThe U.S. Senate rejection of the $14 billion deal to bailout the nation's biggest automakers has plunged the world's stock markets on Friday as they react to the news. Concerns are that the failure to rescue the automakers projects the recession in the U.S. economy will be longer and deeper than economist have postulated.
Asian markets dropped more than 5 percent with Japan's Nikkei average down 484 points (5.6 percent) to 8,235 and Hong Kong's Hang Seng index dipped 5.5 percent. The British FTSE 100 was down 2.9 percent and Germany's DAX fell 3.9 percent, 185.22 points down to 4,581. France's leading stock index dropped more than 4 percent. U.S. futures show signs of a big sell off when the market opens, with the Dow expected to drop more than 250 points or 3 percent and the S& P 500 index is set to drop nearly 4 percent.
The failure to vote in the Senate came after bipartisan talks broke down over Republican demands that union workers agree to huge wage cuts by 2009 to bring their pay into alignment with what workers make at U.S. plants of foreign automakers. The union has refused to cut wages before its current contract with the automakers expires in 2011. Both GM and Chrysler say they will not have enough funding to stave off bankruptcy if they don't get help before the end of the month. Ford has said it has enough capital to operate through 2009 without government aid, but its future is also at risk.
The automakers now turn to President Bush to see if he will agree to give funds out of the $700 billion Wall Street bailout fund, or TARP, to aid the carmakers. The breakdown in the Senate leaves the auto industry and the estimated 3 million jobs entwined with it facing an uncertain future. Bank of America Cuts 35,000, JPMorgan Chase Warns of Future Losses
Two banking giants announced bad news on Thursday. Bank of America Corp. says it will cut up to 35,000 jobs over the next three years after its merger with Merrill Lynch. Finalized plans will be ready in early 2009, and will affect all business and staff units from both companies. Despite the cuts due to the merger and redundancies in the "current recessionary environment" the banks says it is still writing loans.
JPMorgan Chase CEO Jamie Dimon warned on Thursday of a terrible fourth quarter for the bank and blames it on mortgages, credit, and high yield bonds and loans.
Dimon says the bank had a terrible trading month in November and December looks to be "pretty terrible." U.S. housing prices may fall another 20 percent, he notes, adding if the country is lucky the market could begin to recover after two more quarters. Dimon's comments caused JPMorgan Chase share to drop 11 percent.
U.S. Households Cut Debt
Hit by declining home valuation and stock market losses, U.S. households cut back on debt levels for the first time on record as loans remain scarce amid what appears to be a deepening recession.
The Federal Reserve's latest quarterly report on consumer and business finances shows households reduced their debt levels by 0.8 percent at an annual rate in the July-September period, the first drop on record for more than 50 years. The drop in household debt levels shows that the credit squeeze is real. Banks are stuck with billions of dollars of losses in mortgage debt are tightening lending standards, making it tougher for people to obtain loans. In the largest decline on record, mortgage debt fell at an annual rate of 2.4 percent in the third quarter.
The report shows that average households saw their net worth fall by 4.7 percent in the same time period totaling $56.5 trillion. The drop in household net worth marks the fourth straight quarter it has decline since it hit a record high of $63.6 trillion in the third quarter of 2007.
Investment Head Arrested in Ponzi Scheme
Bernard Madoff, the former chairman of the Nasdaq Stock Market, and founder of the Madoff Securities firm was arrested by federal law enforcement on Thursday and charged with allegedly running a $50 billion "Ponzi scheme" with a hedge fund that racked up billions in fraudulent losses. If convicted, it will make Madoff's scheme one of the biggest fraud cases in history. Madoff's closely held firm was launched in 1960 has more than $700 million in capital. Madoff's investment advisory business that ran the hedge fund served between 11 and 25 customers and had about $17.1 billion in assets under management. Madoff is believed to have been operating the hedge fund Ponzi scheme since 2005, with a consistent track record of solid returns of 8 percent or higher, his hedge fund was attractive to investors.
A Ponzi scheme is a scam that offers investors unusually high returns with early investors paid off with money from subsequent investors. Madoff told FBI agents that it was all his fault, according to a criminal complaint filed by the U.S. Attorney General's office. He paid investors with money that wasn't there. Madoff says "There is no innocent explanation," in the criminal complaint. His house of cards began to crumble in the first week of December when Madoff told a senior employee he was struggling to pay back $7 billion to hedge fund clients who had requested their money back.
The 70-year-old Madoff is charged by U.S. prosecutors with a single count of securities fraud. He faces up to 20 years in prison and a fine of up to $5 million. The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it listed $63.4 billion in assets.
Madoff also faces separate civil charges that the Securities and Exchange Commission has filed against him. The complaint alleges a stunning fraud both in terms of scope and duration. The SEC says that virtually of the hedge fund's assets are missing. Madoff was released after posting a $10 million bond secured by his Manhattan apartment.