Friday, November 7, 2008

Obama to inherit red ink

WASHINGTON — One day after Barack Obama was elected the next U.S. president, the outgoing Bush administration detailed its plans to borrow a record $550 billion through the end of the year to back the financial bailout.

The Federal Reserve, meanwhile, said it would boost interest payments to banks as authorities battle the worst financial crisis in decades.

The Treasury Department said Wednesday that it would sell $55 billion in bonds next week, part of a massive borrowing effort to cover the $700 billion bailout and a budget deficit that's expected to hit a record of nearly $1 trillion next year.

The government's surging financing needs are a stark reminder of the challenges awaiting Obama even as the current administration moves to implement its rescue program and the Fed fine-tunes its approach to the crisis.

The financial turmoil flared anew Wednesday with the Dow Jones industrial average plunging 486.01 points, or more than 5 percent, as investors absorbed more bad economic news.

Treasury Secretary Henry Paulson has pledged to work with Obama to ensure a smooth transition. Paulson has set up desks and phone lines at the department where Obama's incoming Treasury team can work between now and the inauguration on Jan. 20.

Treasury gave Congress its first report on the operation of the bailout fund, detailing the $125 billion
the government spent last week to buy stakes in nine of the country's biggest banks. Bailout legislation requires Treasury to issue reports each time its spending passes a $50 billion marker.

Fed raises banks' return

The Fed said it would slightly boost the interest rates it pays banks on their required reserves and the excess reserves they choose to deposit with the Fed. Policymakers hope the move will further bolster the banks' reserves.

In another gloomy sign, the Institute for Supply Management, a trade group of purchasing executives, said its service sector index suffered a sharper-than-expected drop to 44.4 in October from 50.2 in September as hotels, construction firms and retailers saw business shrink. A reading below 50 signals contraction.

A manufacturing report issued Monday by ISM showed the worst reading since 1982, when the country was near the end of a 16-month recession.

The government said last week that the overall economy, as measured by the gross domestic product, fell at an annual rate of 0.3 percent in the July-September quarter, reflecting the biggest drop in consumer spending in 28 years. Analysts are forecasting that GDP will fall by an even larger amount of around
2 percent in the current quarter. That would meet the classic definition of a recession as two consecutive quarters of declining GDP.

U.S. to borrow a bundle

Major bond trading firms are projecting that the government will need to borrow a record $1.4 trillion during the current budget year, which began Oct. 1.

But Mark Zandi, chief economist at Moody's, said he ex pects the borrowing costs to be closer to $2 trillion. He noted the size of the rescue program that needs to be financed and the likelihood that Obama and a Congress with larger Democratic majorities will pass a second economic stimulus program of between $150 billion and $300 billion.

Regional banks to sell maximum stock amount
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