Finance and Economic

GMAC won Federal Reserve approval to become a bank holding company Wednesday, enabling the auto lender to tap the Treasury’s $700 billion financial bailout fund and help keep General Motors Corp. in business.

To comply with rules about who can own a bank, GMAC’s majority owner, Cerberus Capital Management LP, agreed to distribute its stake to its investors, and minority owner GM will cede all control.

The Fed order said the plan would benefit the public by strengthening GMAC’s ability to fund the purchases of vehicles manufactured by GM.

Saving GMAC may improve the chances of salvaging General Motors, which received $9.4 billion in U.S. loans this month to stave off collapse at least until January. That package didn’t include support for GMAC, which finances about 75 percent of the inventory at GM dealers. The lender also served as a major source of loans to GM car buyers until it was frozen out of credit markets after losses totaling $7.9 billion.

GMAC’s request was approved even though the Detroit-based lender didn’t satisfy the capital requirements laid out when it applied to become a bank in November payday loans.

GMAC said it needed three-quarters of investors that held $38 billion in bonds to exchange the notes as part of a plan to reduce debt. As of Dec. 17, holders of 58 percent of eligible notes had tendered and with two days until the deadline, GMAC hadn’t provided an update. GMAC has been unable to raise cash by selling bonds backed by auto loans since May as concerns mount that cash-strapped households will be unable to pay bills.

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JPMorgan Chase & Co., the largest U.S. bank by assets, will cut 9,200 Washington Mutual Inc. jobs nationwide as it acquires the Seattle-based lender, a spokesman said.

The bank will eliminate 4,000 jobs and put 5,200 employees on a transition team. Those employees will help integrate the banks, and some will remain in the positions until the end of next year, JPMorgan spokesman Thomas Kelly said in an e-mail.

JPMorgan paid $1.9 billion in September for most of Washington Mutual, including the branches and deposits, after the thrift was taken over by the Federal Deposit Insurance Corp.

New York-based JPMorgan expects to keep most of the WaMu branch employees and will shutter less than 10 percent of the combined company’s retail outlets free credit reports.

WaMu’s former Seattle headquarters will account for 3,400 of the job cuts, the Seattle Times reported. The bank is also cutting 1,600 jobs in California, mostly in back-office operations.

Washington Mutual had more than 43,000 employees at the end of June.

JPMorgan dropped $5.54, or 18 percent, to $26.12 in New York trading. The shares have fallen 40 percent this year.

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General Motors Corp is pushing ahead with talks to acquire Chrysler LLC in a deal that the automaker sees as a way to boost its cash position at a time when it has been shut out of debt markets and its own revenues are tumbling, sources said.

The negotiations involving Cerberus Capital Management, Chrysler’s private equity owner, have intensified in recent days and are moving closer toward a conclusion, according to people briefed on the talks who asked not to be identified.

The prospect of merging Chrysler and GM has been viewed as a deal of desperation by most analysts since both automakers are losing money and are saddled with a cash-draining surplus of American dealers, workers and plants.

But GM executives believes the automaker could clinch a deal that would give it a share of Chrysler’s remaining cash while allowing it to cut costs quickly, the sources said no qualifying payday advance.

Although it does not report financial information, Cerberus has said Chrysler ended June with $11.7 billion.

Chrysler has 14 assembly plants and the expectation is that many of those would be in danger of being shut if it merges.

Once the deal closes, GM is only interested in keeping Chrysler plants where the No. 3 U.S. automaker has made significant investments in retooling, the sources said.

That could include Chrysler’s truck plant in Saltillo, Mexico, the Jefferson North Jeep plant in Detroit and its Belvidere, Illinois car assembly plant, one source briefed on the talks said. The sources were not authorized to discuss the talks since the companies are saying nothing on the record. 

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The fate of the government’s $700 billion financial bailout plan was thrown into doubt Monday as the House rejected the controversial measure.

The next steps were unclear. The abrupt defeat left the Bush administration and congressional leaders scrambling to figure out whether to renegotiate the bill and introduce it again as soon as Thursday or to try other options.

Stock markets reacted violently. Investors who had been counting on the rescue plan’s passage sent the Dow Jones industrial average down well over 700 points. The stock gauge closed 778 points lower - nearly 7%. (Full coverage)

The measure, which is designed to get battered lending markets working normally again, needed 218 votes for passage. But it came up 13 votes short of that target, with a final vote of 228 to 205 against. Two-thirds of Democrats and one-third of Republicans voted for the measure.

President Bush, who earlier in the day said he was confident the bill would pass, said he was "very disappointed" by the House vote. Treasury Secretary Henry Paulson, speaking at the White House, said he will continue to "use all the tools available to protect" the economy.

Republican leaders, who had pushed their reluctant members to vote for the bill, pointed the finger for the failure at a speech given Monday by Speaker Nancy Pelosi, D-Calif.

Pelosi, speaking on the House floor, had blamed the nation’s economic problems on "failed Bush economic policies."

House minority leader John Boehner, R-Ohio, said after the vote that passage would have been possible if it had not been for Pelosi’s "partisan speech."

Rep. Barney Frank, D-Mass., one of the main congressional negotiators, dismissed the GOP claim that Pelosi’s speech was responsible for Republicans voting against the bill. "Because somebody hurt their feelings, they decided to hurt the country," Frank said. "That’s not plausible."

The four-hour debate that preceded Monday’s vote included impassioned pleas for and against the measure from Democrats and Republicans alike. Party leaders told members that the only way to protect the economy from a spreading credit crunch was to vote for the difficult-to-swallow measure.

"Our time has run out," said Rep. Spencer Bachus, R-Ala., the ranking Republican on the House Financial Services Committee. "We’re going make a decision. There are no other choices, no other alternatives."

Added Frank: "Today is the decision day. If we defeat this bill today, it will be a very bad day for the financial sector of the American economy."

Boehner told his members, many of whom objected to the measure, that they had to accept something he and many of them found distasteful.

"If I didn’t think we were on the brink of an economic disaster, it would be the easiest thing to say no to this," Boehner said. But he said lawmakers needed to do what was in the best interest of the country.

One lawmaker who voted against the bill, Rep. John Culberson, R-Texas, said the measure would leave a huge burden on taxpayers. "This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions," he said. Culberson voted against the bill.

Other conservative Republicans who voted "no" argued the bill would be a blow against economic freedom.

Thaddeus McCotter, R-Mich., said the bill posed a choice between the loss of prosperity in the short term or economic freedom in the long term payday loans. He said once the federal government enters the financial marketplace, it will not leave. "The choice is stark," he said.

Some Democrats voted against the bill for not doing enough to help taxpayers facing foreclosure or unemployment and accused proponents of moving too fast.

"Like the Iraq war and Patriot Act, this bill is fueled by fear and haste," said Lloyd Doggett, D-Texas.

The debate followed a weekend of marathon negotiations between lawmakers and administration officials to hammer out legislation.

Leading House Republicans signed on to the proposal on Sunday after expressing earlier reservations.

The core of the bill is based on Paulson’s request for the authority to purchase troubled assets from financial institutions, so banks can resume lending and the credit markets, now virtually frozen, can begin to operate more normally.

Democrats and Republicans - concerned about the potential cost - added several conditions and restrictions to protect taxpayers on the downside and give them a chance at some of the potential upside if the companies benefit from the plan.

The turmoil in Washington comes amid great upheaval in the nation’s financial system.

Banks and Wall Street firms, worried about both their own needs for cash and the condition of other institutions, essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans and other consumer borrowing.

The crisis stems from problems in mortgage-backed securities, which saw their value plunge as home prices have gone into their worst slide since the Great Depression and foreclosures have soared to record levels.

In turn, the market for trillion of dollars worth of those securities held by major firms evaporated, sending them down to fire-sale prices and raising the risk of widespread failures among the nation’s major financial firms.

On Monday, the Federal Deposit Insurance Corp., which insures deposits at failed banks, arranged for the sale of the banking assets of Wachovia (WB, Fortune 500), the nation’s No. 4 bank holding company, to Citigroup (C, Fortune 500) for $2.2 billion in stock.

That follows three weeks of other shocks: the Treasury Department’s seizure of mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500); Wall Street firm Lehman Brothers’ bankruptcy filing; rival Merrill Lynch (MER, Fortune 500) purchase by Bank of America (BAC, Fortune 500).

In addition, the Fed bailed out insurance giant American International Group (AIG, Fortune 500), loaning it $85 billion in return for a nearly 80% stake. Washington Mutual (WM, Fortune 500), the nation’s largest savings and loan, became the largest bank failure in history.

After months of attempts by regulators to fix the problems, the bailout was seen by many as the most comprehensive effort yet. Proponents vowed late Monday to keep trying.

Sen. Judd Gregg, R-N.H., a lead negotiator in the bailout bill negotiations said, "If we don’t act promptly and effectively, then many people are going to lose their jobs." 

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The European Central Bank must ensure cash-strapped financial institutions don't take advantage of its money-market auctions, council member Axel Weber said.

“We are monitoring banks' use of the collateral framework very closely,'' Weber, who heads Germany's Bundesbank, said in an interview in Frankfurt yesterday. “We must ensure that our framework is not abused.''

The ECB will soon announce changes to the rules governing its auctions, council member Yves Mersch said in an Aug. 23 interview. The growing concern of officials is that banks struggling to sell securities damaged by the credit-market turmoil will dump them on the ECB and become overly reliant on central-bank funds.

“The collateral that we take must also be traded in the market because only then is it priced accurately,'' Weber said. “We aim at taking final decisions in autumn which will be communicated immediately.''

The ECB's Governing Council next meets on Sept. 4.

Banks with operations in the 15 countries sharing the euro can raise funding from the ECB by pledging certain types of collateral including asset-backed securities. Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show.

The ECB lends to banks mostly through the main refinancing operations maturing in one week. Longer-term auctions provide financing to banks during three- and six-month periods.

Governing council member Michael Bonello said in an interview with Reuters published today that he didn't expect “major fundamental change.''

`Funding Opportunities'

Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe. The ECB lent Spanish banks a record 49.4 billion euros ($73.1 billion) in July no fax payday advance.

The ECB's money-market system is also attracting demand from outside the euro region. The Frankfurt-based central bank said in June it will accept asset-backed bonds sold by Macquarie Group Ltd., Australia's biggest securities firm, and backed by Australian consumer loans as collateral. U.K. mortgage lender Nationwide Building Society said Aug. 18 it's planning to expand into Ireland, a member of the euro region, to take advantage of “funding opportunities.''

`React Quickly'

Weber defended the ECB's approach to date, saying the fact it had the widest collateral framework among major central banks “helped us to react quickly when the financial crisis broke out.'' The task is now to carry out the central bank's routine two-year review of its collateral framework, he said.

Former Bank of England policy maker Willem H. Buiter says the ECB may be assigning unrealistically high prices to the debt it accepts as collateral for bank borrowing, which risks delaying the recovery of the mortgage-backed bond market.

“There is almost certainly an overpricing of the bonds,'' Buiter, now a professor at the London School of Economics, said in a telephone interview yesterday. “By artificially supporting the market the ECB may be crowding out private purchasers.''

Mersch said last week that there will be no “broad-based revolution'' and that changes to the collateral framework would be unveiled within weeks.

“At the margins there can still be cases where you see dangers of gaming the system,'' Mersch said in Jackson Hole, Wyoming. “The Governing Council has been discussing the whole issue'' and has agreed on a “certain amount'' of refinement to the existing rules, he said.

“We certainly won't tolerate the creation of collateral for central banks only without the intention of trading them,'' Weber said.

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Times are tough, and understanding your credit score is crucial to financial survival. But knowing your score and getting access to it isn’t so easy.

Credit scores affect everything from rates on mortgages and car loans, to credit card terms and even whether you get a job. Lenders use them as an indication of how likely you are to repay a loan. The most widely used credit score is known as FICO, which ranges from 300 to 850. Credit scores change over time, depending on your credit history, which is explained in your credit report.

In recent years consumers have had the ability to access one free credit report a year. But getting an accurate reading of your credit score remains problematic and costly.

With loan delinquencies and foreclosures more common, lenders are tightening their standards and that means that a low score can prevent you from getting access to credit, and you’ll need an even higher score to qualify for the best interest rates.

Last week, the House Subcommittee on Oversight and Investigations took up the discussion in a hearing to examine credit scoring and whether consumers are granted fair access to their own three-digit numbers.

Thanks to the Fair and Accurate Credit Transactions Act, or FACT Act, enacted by Congress in 2003, consumers can get one free credit report a year from the three major agencies - Equifax, Experian and TransUnion. But that doesn’t include scores, which come at an added cost of around $6 to $16. That’s the "fair and reasonable" fee credit rating agencies can charge consumers under the legislation.

Some consumer advocates argue that scores should be free too, and included in the free annual credit report consumers are entitled to.

But the credit rating agencies argue that it costs them money to compile and maintain those scores, and lawmakers should not interfere with their ability to sell credit reports and credit scores at a profit.

If legislation were proposed that mandated giving consumers a score along with their annual free credit report, that would be "legislating revenue right out of my pocket," said Steve Ely, president of Equifax.

According to Ely, Equifax makes $154 million a year from selling credit reports, credit scores and credit monitoring products to consumers.

Evan Hendricks, editor of Privacy Times and author of "Credit Scores and Credit Reports: How the System Really Works, What You Can Do," argues the credit rating agencies could still maintain a profitable business, just as they did after the FACT Act mandated that they give annual reports away for free.

Originally, Hendricks said, the credit rating agencies fought the free credit report legislation but now "they’re selling more reports than they are giving away for free." The credit rating agencies argue that is not the case.

"I would dispute that considerably," said Ely.

"We do give away significantly more free credit report disclosures than the reports that we charge for," confirmed Steven Katz, a spokesman for TransUnion.

Hendricks also argues that consumers pay $5.95 to $15.95 to see their credit score while lenders buy those scores from the credit bureaus for less than a dollar payday loan online. Ely counters that business-to-business customers buy in large volumes, and therefore get a discount.

Another issue up for debate is the number of different kind of credit scores out there, often confusing or misleading consumers. FICO, the scoring system devised by Fair Isaac Corp., is the one most commonly used by lenders in determining consumer credit worthiness.

But some credit rating agencies sell "educational scores," sometimes referred to as "FAKOs," (as in a fake FICO score) that are similar to FICO scores, but can differ by up to 20 points or more.

So consumers who purchase scores directly from one of the three credit agencies might not be seeing the same score that lenders are using.

While Equifax sells FICO scores, Experian offers their own proprietary PLUS Score and TransUnion sells a "Vantage Score," another variation on the FICO scoring system created by the three credit bureaus. Vantage Scores range between 501 and 990 and includes a letter grade, which can help consumers gauge how they rank compared to others.

"Accordingly, Congress needs to act to bring the appropriate level of transparency and fairness to credit scoring," Hendricks said in his testimony before the subcommittee.

"People don’t realize that the credit score they are buying isn’t the score used by lenders," Hendricks said. "At a minimum, fundamental fairness dictates that sellers of knock-off scores clearly and conspicuously disclose that their scores are not used by lenders and may differ significantly from the ones that are."

Stuart Pratt, president and CEO of the Consumer Data Industry Association, the credit reporting agencies’ trade association, said that consumers can’t get a free credit score with their annual report precisely because there is no single universal score.

Further complicating matters, some lenders devise their own scoring systems in addition to using the ones provided by the credit agencies.

In written testimony before the subcommittee, Jack Forestell, vice president of marketing and analytics at Capital One Financial Corp. said "Capital One uses a blend of internally derived and externally available consumer data to develop its own credit scoring models."

Steven Katz, a spokesman for TransUnion warns consumers not to key in on the specific number and instead look at all the information that is provided in the report.

So what should consumers seeking credit be doing? Ultimately, focusing on a single score, whether it will one day be free with your credit report or remain available for a price, is only one aspect of your credit worthiness. The credit report shows what you can do to improve and protect your overall financial health. So viewing both the score and the report is the best way to determine your level of risk as a borrower.

For a free copy of your credit report, visit http://www.annualcreditreport.com/ or call 877-322-8228. 

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Business activity in the service sector contracted for the second straight month in July, although at a slower rate than in June, according to a key survey of industry executives released Tuesday.

The Institute for Supply Management’s (ISM) non-manufacturing index rose to 49.5 from 48.2 in June. Economists were expecting a reading of 48.7, according to a consensus compiled by Briefing.com.

A reading above 50 indicates growth in the sector, and a reading below 50 means that the sector is contracting.

Still in contraction. Despite the rise, one analyst cautioned that the reading is still an indication of contraction in services.

"It is higher, no doubt about that, but the problem is that it is still below 50 and any measure below 50 is still in contraction," said Christian Menegatti, lead analyst with of RGE Monitor, an online economic research company.

"Saying things are better because the non-manufacturing index is at 49.5 rather than 48.2 is a little big far-fetched - it is a wrong interpretation of this economy right now," he said.

The service sector includes real estate, construction, mining, fishing, agriculture, health care, finance, insurance and administration.

"Members’ comments in July indicate concern about inflationary pressures and the effect on the economy," said Anthony Nieves, chair of the ISM Non-Manufacturing survey committee in a written report.

The employment component increased to 47.1 from 43.8 in June, indicating contraction in the sector, but at a slower rate fastcash.

Menegatti said that even though the reading ticked up, it was still not a strong labor market reading.

The employment index "is improved but it is far from 50," he said. "I would be careful in seeing this as a significant improvement."

The reading on business activity for July decreased to 49.6 from 49.9 in June, a signal of slightly faster contraction.

The survey showed that demand for new orders also contracted faster in July, with the component slipping to 47.9 from 48.6 in June.

Prices increases for 62nd month in a row. Of particular concern for business owners, prices paid for materials and services by businesses increased in July for the 62nd consecutive month.

But the measure slipped to 80.8 from 84.5 in June.

The percentage of survey respondents reporting higher prices was 66%, while 30% indicated no change in prices. Only 4% of respondents reported lower prices.

Higher energy and commodity prices are hitting the service sector, but business owners are having a hard time passing on the higher costs to consumers, according to Menegatti.

"There is no way that businesses are not feeling the heat from high energy prices, especially since they are having a very hard time passing on these high costs to the consumer," he said. The consumer "is completely shopped out."  

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Lufthansa said Wednesday it canceled its first international long-haul flights as a strike by ground and cabin crew at Germany’s biggest airline entered its third day.

Deutsche Lufthansa AG said it canceled four flights to the U.S., India and Canada. The rest of the 78 flights canceled Wednesday were for destinations in Germany and Europe.

Spokeswoman Amelie Lorenz said the canceled flights accounted for about 4% of the airline’s total flight capacity. She said that affected passengers were being put on flights operated by other airlines.

The ver.di union, which represents about 50,000 ground service personnel and a small number of cabin staff, started an open-ended strike for more pay Monday faxless payday loans.

The union is seeking a 9.8% pay rise for a year, while the airline has offered 7.7% for 21 months including a one-time bonus payment.

The first day of strikes had little effect on the Cologne-based airline’s flights, but approximately 70 flights were canceled Tuesday. 

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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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