Finance and Economic

The federal takeover of IndyMac Bank last week left many Americans wondering whether their bank was safe. It put a spotlight on a relatively obscure list published quarterly by the FDIC called the "problem list."

There were 90 banks on the problem list in the first quarter of 2008, up from 76 at the end of last year. The number has been increasing since the third quarter of 2006, when it hit a historic low of 47. Total assets at the problem institutions stand at $26.3 billion.

Problem banks have serious deficiencies in their finances, operations or management that threaten their continued viability. The Federal Deposit Insurance Corp. publishes the number of banks in this condition in its Quarterly Banking Profile report.

The agency doesn’t reveal the banks’ names, but it does give the total assets of these institutions.

Each bank in the country is examined at least every 12 to 18 months. Regulators rate the banks on a scale of 1 to 5, with 1 being the best. Factors that go into the ratings include: management controls, earnings, quality of assets, capital levels (which cushion against loan losses) and liquidity (which allows banks to meet their obligations, such as withdrawals by depositors).

Examiners are looking for problems such as an abundance of delinquent loans without sufficient reserves to cover the losses, weak risk management policies or a lack of cash to cover withdrawals.

Regulators then give the banks a report card, assigning a composite rating based on the bank’s performance in each category. Those that receive a rating of 4 or 5 are put on the list.

The bank’s executives see a lot of regulators during this time free credit report without a credit card. Bank officials are told what steps they have to take to shore up their business.

"The management of the bank has to address the problems that got them into the penalty box in the first place," said Christopher Whalen, managing director of Institutional Risk Analytics.

If the bank can’t correct the problems, it either sells itself to another institution or it is taken over by the FDIC.

Only 13% on average. So far this year, five banks have failed - a far cry from the turbulent times of the savings and loan crisis of the early 1990s, when more than a thousand institutions shut down.

Since most banks on the list don’t fail, the agency wants to prevent making things worse by scaring customers, vendors and other players in the financial system while regulators are working with a problem bank.

"Regulators can give banks frank evaluations of their condition without threatening their stability," said Chip MacDonald, partner in the capital markets group at Jones Day, a law firm.

Considering there are about 8,500 banks in the United States, 90 problem banks is not that large a number, said L. William Seidman, a former FDIC chairman. During the S&L crisis in the late 1980s and early 1990s, about 1,500 banks were on the problem list.

"Just because a bank is on the list doesn’t mean it’s going to fail," Seidman said. "If customers have deposits of under $100,000, they don’t have to worry. They will get their money." 

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Viacom has agreed to let Google strip identifying information from YouTube viewers’ data before complying with a judge’s order to hand over the records as part of a copyright infringement lawsuit.

Viacom and other parties to the litigation agreed to allow YouTube to remove user names and computer Internet protocol (IP) addresses from the data to ensure protection of users’ privacy, YouTube said in a blog posting late Monday night. YouTube is a Google subsidiary.

"We remain committed to protecting your privacy and we’ll continue to fight for your right to share and broadcast your work on YouTube," reads the posting.

Instead of providing Viacom the user names and IP addresses for everyone who has viewed a video on YouTube, Google will provide a random, anonymous code number, a spokesman for the company told CNN.

Viacom Vice President Jeremy Zweig responded to the agreement by saying, "We trust that Google will comply fully with the court’s order and promptly produce the remaining information about their own activities."

The two companies have been negotiating over the potentially sensitive data since U.S payday advance low fees. District Judge Louis L. Stanton earlier this month ordered Google to give Viacom the YouTube viewing data.

Viacom filed the lawsuit in March 2007, seeking $1 billion for alleged copyright infringement.

In the lawsuit, Viacom said that "almost 160,000 unauthorized clips of Viacom’s programming have been available on YouTube and that these clips had been viewed more than 1.5 billion times."

In addition to seeking damages, Viacom said it wants an injunction prohibiting Google (GOOG, Fortune 500) and YouTube from further copyright infringement.

Viacom (VIA), which was spun off from what is now CBS Corp. (CBS, Fortune 500) in December 2005, includes film studios, such as Paramount Pictures and DreamWorks; television networks, such as Comedy Central, BET and MTV; and other companies. 

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Record foreclosures and limited access to credit will make it harder than usual to rebound from this U.S. housing market slump, the worst at least since World War Two, according to a Harvard University study on Monday.

A two-year home price drop is eating into housing wealth, curbing consumer spending and slicing away economic growth. This is unlikely to change until potential home buyers are convinced that prices have stopped tumbling, the study found.

The downturn has room to run.

The highest home loan rates in nine months and strict lending standards are keeping buyers on the sidelines, even after aggressive Federal Reserve intervention and a 16 percent national home price slide from the 2006 peak, by some measures.

“Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability,” Nicolas P payday loan low fee. Retsinas, director of the Joint Center for Housing Studies at Harvard, said in a statement.

“It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets,” he said. “The slump in housing markets has not yet run its full course.”

Price declines and mortgage defaults are the worst on records dating back to the 1960s and 1970s, the study noted. Job losses and falling prices intensify risk of foreclosure.

The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005. 

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In the past few weeks, Money 911 has looked at investments you can buy and manage on your own.

A portfolio of high-yield common shares – issued by banks, telecommunications firms, pipelines and utilities – can provide a double-digit average annual return over a period of five to 10 years.

That’s because your income comes from three sources: Dividend yield, dividend growth and capital gains when you sell the shares.

What if you find common shares too volatile?

Preferred shares are an option for risk-averse investors. They’re a halfway house between stocks and bonds.

"Preferred shares are called ‘preferred’ because their dividend must be paid before the common stock dividend (if any) is paid," says Keith Betty, author of an online investing guide, Shakespeare’s Investment Primer, www.shakesprimer.com.

Unfortunately, preferreds can be complicated. They come with a bewildering array of features that makes selection difficult.

Author Gordon Pape includes preferred shares in a portfolio for conservative investors. But he thinks they bear close scrutiny.

"They’re attractive because they are usually (but not always) stable in price, their distributions are reasonably predictable and they are eligible for the dividend tax credit, which makes them very effective in non-registered accounts," he says in his new book, Sleep-Easy Investing (Penguin, $26).

"The problem is that they come with all kinds of small print that sometimes catches even professional money managers by surprise."

A common irritant is a redemption clause, which allows the issuer to buy back the preferred shares at specific times for predetermined prices.

So, why invest in preferred shares? I asked James Hymas of Hymas Investment Management Inc. in Toronto, who runs a fund for high-net-worth investors, publishes a newsletter about preferred shares and has a website, www.prefblog.com.

"The common share investor is taking the first loss," he says. "Common shares provide a higher expected long-term return, but it could be a bumpier flight."

He points to U.S no fax payday advances. banks, hit hard by the credit crunch. News reports indicate that up to half of them may be cutting their dividends this year.

Preferred shares have a somewhat more secure dividend than common shares. Moreover, they trade in a tight price range, generally with no big gains or losses.

Suppose you have $10,000 or more to invest in preferred shares. Hymas recommends buying at least three issues with a top-quality credit rating, such as Pfd-1 from Dominion Bond Rating Service.

"If you can afford five to six issues, you can get a Pfd-2. And with 10 different issues, I wouldn’t mind too much if one was Pfd-3."

You don’t have much choice when it comes to sectors. A large proportion of preferred shares are from banks and insurance companies.

"With Canadian preferred shares, you have to resign yourself to a high exposure to financials," he says. "You can make allowances for that in the rest of your portfolio."

Smaller investors can buy a few preferred share funds that trade on the Toronto Stock Exchange.

The Diversified Preferred Share Trust is managed by Sentry Select and trades under the symbol DPS.UN. It has a year-to-date return of 1 per cent (after getting hit hard by the credit crunch last fall).

The Claymore S&P/TSX Preferred Share ETF trades under the symbol CPD. Its net asset value is down almost 4 per cent in the past year, but it has a current yield of 4.7 per cent, paid quarterly.

Money 911 takes a break next week and comes back on June 22, when we’ll look at how to reinvest your dividends for compound growth.

Ellen Roseman’s column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at eroseman@thestar.ca by email.

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If you think you’re getting gouged at the pump - think again.

Like many other motorists, Daris Garnes thought she may be getting ripped off by her gas station when she filled up her Honda Accord in Brooklyn, N.Y., on Wednesday, a day that gasoline prices hit a new record.

"When I pull up, I don’t even want to look at it sometimes," said Garnes, a speech therapist, as she paid $3.59 for a gallon of unleaded. That’s more than the nationwide gas average, but it was the cheapest choice she had.

Garnes said she figured the gas stations’s take was about $1.25 per gallon. Another motorist, construction worker Thomas Anthony, guessed 65 cents. But several other drivers estimated the station’s take was less than a dime, and it turned out they were right.

Abby Razaque, manager of the BP station where Garnes filled up, said the owner’s take was 8 cents per gallon, and that the lion’s share of the proceeds go to BP.

"I get a lot of complaints," said Razaque. "I tell them I have nothing to do with the price. The [oil companies] are taking all the money that I am putting in my pocket."

For every gallon of gas, about 72% of the price goes to the producers of the crude oil from which it’s made, according to the U.S. Energy Information Administration - producers like Chevron (CVX, Fortune 500), ConocoPhillips (COP, Fortune 500) and BP (BP). Exxon Mobil (XOM, Fortune 500) recently made history by reporting the highest annual profit ever for a U.S. company when it reported 2007 results.

Of the remaining price of a gallon of gas 13% goes to taxes, 8% goes to the refiners, and another 8% goes to distribution and marketing, which includes gas stations.

"They’re not getting gouged by the gas stations," said Peter Beutel, energy analyst for Cameron Hanover. Beutel said that 90% of all pumps are privately owned, and those owners make anywhere from 7 to 15 cents per gallon, so that a relatively petty expense, like a pump-and-run theft, can throw off their earnings for a whole day.

"Just because you’re seeing the street prices go up, doesn’t mean our profit has gone up," said Tom McSweeney, a co-owner of a Shell station in Jericho, Long Island creditreports. He said his former profit margin of 12 to 14 cents has dwindled to nothing.

"I bet the average person would say we were making 40 to 50 cents a gallon," said McSweeney, adding, "I wish that were the case."

Energy experts said that price gouging at the pump is a rare occurrence, largely because there is so much competitive pressure to keep the prices low.

"I don’t think it’s occurring at all," said Sara Banaszak, senior economist at the American Petroleum Institute. "The biggest factor in the price of gasoline is the price of crude oil."

Where gas stations make their money is off retail goods like candy bars, tires and frozen burritos, as well as services, like oil changes and auto repairs.

"A lot of times, the gas stations are making more on the coffee and donuts than on the gasoline they’re selling," said Robert Sinclair, Jr., spokesman for AAA. "Sometimes the profit on a gallon of gas for the retailer is less than a penny a gallon."

Fadel Gheit, senior energy analyst for Oppenheimer, said retailers face even lower profit margins, as rising oil prices outpace gasoline. "It doesn’t matter how high prices are at the pump," said Gheit. "If oil prices rise faster, you get margin squeeze."

Under the government’s economic stimulus plan, 130 million people will receive tax rebate checks for $300 and up, starting April 28. What do you plan to do with your check? How do you think the stimulus plan will affect the economy? Send us your photos and videos, or email us and tell us what you think. 

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Bank of America Corp. said Tuesday it will tighten its mortgage lending standards after it completes its acquisition of Countrywide Financial Corp. later this year, and it will stop making one type of loan widely blamed for foreclosures.

The Charlotte, N.C.-based bank’s plans came as part of testimony before the Federal Reserve Bank of Chicago, which held a meeting about the company’s $4 billion deal to acquire the California lender.

Bank of America (BAC, Fortune 500) said it will discontinue so-called option adjustable-rate mortgages, or loans that allow customers to make payments for less than the monthly interest due. Critics say such loans carry higher rates and can cause borrowers’ balances to increase.

The bank said it will also greatly reduce offerings of other nontraditional loans, such as those that allow for little documentation.

Bank of America plans to continue to offer traditional mortgages that fit government-sponsored enterprise guidelines, including FHA and VA loans. It also will offer interest-only fixed-rate and adjustable-rate mortgages that have long reset periods to lessen the likelihood of short-term payment spikes.

It will not originate subprime mortgages, a practice Bank of America dropped in 2001 when Ken Lewis took over as chief executive. The bank called it a business that had "become unattractive from a risk-reward standpoint."

Countrywide (CFC, Fortune 500) is among the dozens of mortgage lenders that have faced an increase in mortgage defaults and foreclosures, especially in subprime loans - those made to borrowers with weak credit faxless online payday advances. Its lending practices have been questioned, and the company faces numerous investigations and lawsuits related to them.

The acquisition is expected to close in the third quarter.

"We think it’s important to clearly explain the changes in mortgage lending practices once we operate as a combined company," Bruce Hammonds, Bank of America’s consumer credit executive, said in a statement. "We recognize this tightening, by definition, restricts the availability of credit to some borrowers."

Like many of the nation’s leading financial institutions, Bank of America has been hit hard by the widespread slump in the nation’s housing market and ongoing credit crunch.

The move will help keep the banking giant - which is set to become the nation’s biggest mortgage lender and loan servicer - away from loans that helped fuel the housing bubble.

Earlier this month, Bank of America’s crosstown rival Wachovia Corp. (WB, Fortune 500) revised the underwriting policies in its mortgage loan business. Among its changes, Wachovia said it will base loan decisions on a new system of rating home markets and will require borrowers to have a minimum qualifying FICO score, a credit rating system used by the vast majority of the nation’s banks to guide their loan decisions. 

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Venezuela moved Tuesday to take a greater cut of windfall oil profits, approving a 50% tax on foreign oil companies when crude tops $70 a barrel.

The tax rate would rise to 60% when the average monthly price for benchmark Brent crude exceeds $100, according to the bill approved by Venezuela’s National Assembly. The legislation will take effect as soon as it is published in the official gazette.

Revenues from the tax could reach $9 billion annually, Oil Minister Rafael Ramirez said after meeting with lawmakers.

"That’s why, for the executive branch, it is urgent to create this law," Ramirez said.

The new legislation will let President Hugo Chavez further extend state control over foreign oil companies operating in Venezuela - home to the largest petroleum deposits in the Western Hemisphere - as he steers the nation toward what he calls "21st-century socialism."

Analyst Juan Carlos Sosa, editor of the Venezuelan oil industry magazine PetroleoYV, said the measure "is going to force foreign companies to think twice about making new investments" in Venezuela, "because their opportunities to turn a profit are diminishing."

Sosa also said the government’s estimates on revenue from the tax are exaggerated. Officials "shouldn’t be thinking that oil prices are going to remain above $100 a barrel forever," he said.

Light crude for May delivery jumped as high as $114 a barrel shortly after regular trading ended on the New York Mercantile Exchange on Tuesday easy payday loans. Venezuela’s heavy, sulfur-laden crude generally sells for less than light Brent oil from the North Sea.

Chavez nationalized all the heavy oil projects operating in Venezuela last year, but allowed foreign firms to stay on as minority partners in oil fields they once managed under contract.

In 2005, Chavez raised royalty rates to 30% from 16.6% on foreign firms operating heavy oil projects in the Orinoco region.

Foreign companies operating in Venezuela include Chevron Corp. (CVX, Fortune 500) of San Ramon, Calif., France’s Total, Britain’s BP PLC and others.

Chevron spokesman Kurt Glaubitz said the company would not have any comment for the time being, and representatives of Total and BP in Caracas could not be immediately reached late Tuesday.

Chavez says proceeds from the measure passed Tuesday will be used to fund community development projects designed by neighborhood-based assemblies. 

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Millions of Americans may be facing the prospect of losing their homes, but a handful of fund managers have become the best paid in their industry — taking home 10-figure paychecks last year — by betting against mortgages.

John Paulson, who ran a medium-sized fund until last year, zoomed to the top of the industry’s earnings table when he took home an estimated $3 billion in 2007, double what the top earner made in 2006, according to data released by magazine Trader Monthly on Monday.

By standing conventional wisdom on its head and deciding that housing prices could decline on a national level, and that investment-grade mortgage bonds would be subject to default in record numbers, Paulson, 52, set a new record for payouts on Wall Street, industry analysts said.

Paulson’s $3 billion payout is equivalent to $26 for every U.S. household (114.4 million in 2006).

This year seems to be no worse for Paulson as his Advantage Plus fund was up roughly 8 percent through the middle of March. Many other hedge funds, however, are suffering heavy losses, with industry analysts estimating the average fund lost 5 percent in the first quarter paydayloans. Hedge funds often promise to make money in all markets by using tools, such as shorting, that are off limits to other money managers.

Following behind is Phil Falcone, 45, whose shrewd housing market bets at Harbinger Capital Partners netted him a $1.5 billion payout. Falcone, a former Harvard hockey star, also made headlines by demanding changes at the New York Times Co (NYT.N: Quote, Profile, Research).

As a group, the 100-best paid hedge fund managers earned $30.3 billion last year, 26 percent more than they took home in 2006, the magazine reported.

Both Paulson and Falcone squeezed past Jim Simons of Renaissance Technologies and Steve Cohen of SAC Capital Advisors, perennial top earners who each took home between $1 billion and $2 billion in 2007. 

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Investors seeking riches in Hollywood are finding out why the movie capital is called Tinsel Town — all that glitters is not gold.

After pouring $15 billion into recent film deals, some investors have taken losses and many are demanding that film studios change how they structure the projects. Roiling credit markets have scared many away from untraditional investments, while some investors say studios treated them shabbily.

In recent years, hedge funds flush with cash were drawn to Hollywood deals amid projected double digit returns. But both Hollywood and banking executives say several of the deals over the past few years wound up costing investors hundreds of millions of dollars in losses.

“A lot of hedge fund money has come into Hollywood in the last two years and some deals haven’t panned out,” said Eileen Burke, a managing director at investment firm D.B. Zwirn & Co.

The funds, partnered with big investment banks, often backed studios in transactions known as movie slate financing deals, taking on some risks formerly absorbed by studios in return for a share of profits from films in the slate.

By 2006, many studios such as Sony Corp 6758.T, Viacom Inc’s <VIAb.N Paramount, Time Warner Inc’s (TWX.N: Quote, Profile, Research) Warner had lined up these deals.

“In 2004, slate financing really began in earnest and has met with a variety of results no fax payday loans. With every kind of transaction, there are lessons learned. It’s an evolving model,” said Laura Fazio, managing director at Deutsche Bank.

But after some films flopped, investors complained that studios were tilting terms to favor themselves over the funds and putting less than certain projects in the slates, while keeping sure hits to themselves. 

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Exploiting opportunities created by wild market movements, rather than loading up on leverage, will be the key to hedge fund returns this year.

While prime brokers tighten credit lines as the credit crisis unfolds, hedge funds see excellent opportunities arising from panic selling, particularly of credit, by nervous investors — sometimes even by other hedge funds in trouble.

“We may be able to make our 10 percent plus return by having greater disparities in front of us but less gearing,” said Tim Haywood, chief executive and chief investment officer of Augustus Asset Managers.

“I think maybe that’s where we’re going to spend the rest of the summer.”

According to a survey by Britain’s Financial Services Authority, leverage fell from more than seven times to less than three times in fixed income arbitrage strategies — the most leveraged type — between October 2006 and October 2007.

“Part of this is due to prime brokers cutting back exposure to hedge funds but another part has been hedge funds cutting back themselves because of the uncertainty in financial markets,” said Odi Lahav, head of Moody’s European Alternative Investment Group.

The lower leverage and volatile markets have affected returns in a $2.5 trillion industry that has the ability to make money in all market conditions.

August and November last year saw falls of 1.53 percent and 1.21 percent respectively, according to Credit Suisse/Tremont online payday advance. In the first two months of 2008 funds are up just 0.10 percent, with fixed income arbitrage down 0.38 percent. 

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