Dow Dips Below 7,000; Feds Inject $200 Billion Into Consumer LendingAfter closing under 7,000 for the first time since 1997 on Monday, the Dow Jones industrial average was poised for a bounceback on Tuesday morning, with stock futures higher before the opening. The markets opened, and the Dow and S&P 500 both were up 1 percent shortly after the opening bell.
Monday's plunge came after news of AIG's largest quarterly loss in its history and the added money it will receive from the government to prop up the insurance giant.
To keep AIG from collapse, the government committed another $30 billion to the firm in exchange for cumulative preferred stock. AIG's loss for the fourth quarter was compounded by ongoing problems in the credit markets, and its loss for the year totaled $99 billion. The government has invested a total of $180 billion in the insurance giant. The added $30 billion will be drawn from the second half of the $700 billion bank bailout.
The Dow average dropped below 7,000 for the first time since 1997 after Warren Buffett said the economy was in shambles. The global recession, another government handout to Citigroup and dividends slashed at companies including General Electric and JP Morgan Chase have pulled the S&P 500 to three weeks of consecutive declines. The index is down 22 percent in 2009.
Feds Inject $200 Billion Into Consumer Lending
The Treasury and the Federal Reserve Board announced the first part of their plan to generate up to $1 trillion of lending for businesses and households today as part of the Financial Stability Plan. The Department of the Treasury and the Federal Reserve Board announced the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI).
The TALF is designed to spark lending by the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS). Historically these markets have been a critical part of the country's lending, but were basically shut down after the financial crisis worsened in October.
By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy. The credit crunch is the worst since the 1930s, say industry observers. Credit has dried up for most consumer loans, auto lending, and student loans.
To begin, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans and SBA-guaranteed small business loans. Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009. On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.
The program will have monthly injections through the end of the year or longer if the Fed sees it is needed. Additional details of the TALF and the CBLI can be found at www.FinancialStability.gov.
January Consumer Spending, Incomes Rebound
U.S. consumer spending rebounded in January, snapping six months of declines, and incomes rose unexpectedly, boosted by salary increases for government employees, a government report showed on Monday.
But the gains in January are likely to be temporary, as wages and salaries continue to fall amid a deepening recession.
The Commerce Department reports spending rose 0.6 percent, the largest increase since May, after falling an unrevised 1 percent in December, and beating economists' expectations for a 0.4 percent advance.
Incomes advanced 0.4 percent, also posting the biggest increase since May, after December's 0.2 percent decrease, and above market expectations for the 0.2 percent decline.
Commerce says the rise in incomes owes to pay raises for federal civilian and military employees, as well as cost-of-living adjustments to several government transfer payments programs. It said excluding these factors, incomes increased by 0.2 percent in January.
Data last week showed the U.S. economy shrank at a 6.2 percent annual rate in the fourth quarter, the deepest contraction since early 1982, when it was in the throes of recession that lasted 16 months.
Consumer spending, which accounts for more than two-thirds of economic activity, declined at 4.3 percent rate in the fourth quarter of 2008, the biggest drop since the second quarter of 1980.