Why a $1 trillion deficit is a good thing (for now)

It was already ominous enough that the U.S. budget deficit nearly tripled to $455 billion in the fiscal year that ended in September. Now, even conservative projections show that it is on course to explode into the stratosphere, exceeding the $1 trillion mark in the current fiscal year - and most likely, by a wide margin.

So, how alarmed should we be by this bleak prospect? The rational answer is that the soaring budget deficit is unavoidable and, in fact, necessary to help stabilize the economy through some extraordinarily difficult times.

Let's take a closer look at the issue - both the causes of the deficit as well as the concerns being raised by some fiscal conservatives.

The runaway deficit is the result of the convergence of three major factors:

1) The recession, which reduces tax revenues and increases certain types of spending related to higher unemployment and other welfare programs.

2) The steadily rising costs of the effort to address the financial crisis that burst onto the scene in September (takeovers of Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500), and AIG (AIG, Fortune 500), as well as capital injections into the banking system).

3) The soon-to-be announced, highly ambitious fiscal-stimulus package by the incoming Obama administration. The precise size of such a package remains unspecified, although "semi-official" hints have been given that it may be in the $600 billion to $800 billion range over several years.

All of the above forces represent an inescapable reality. Neither the recession nor the financial crisis were developments that could have been brushed aside. (The current recession is expected to continue till mid-2009, according to the consensus among economists, which would make it the longest contraction since the Great Depression.)

Although specific aspects of how the bailout funds have been used so far can be open to question, not undertaking a massive program of stabilizing the financial system in the last few months was never really an option, as it would have exposed the entire U.S. economy to a potentially catastrophic outcome.

Similarly, the Obama administration's stimulus package is not an elective development either. The need to undertake such aggressive spending is imperative, given the severely crippled state of economic activity.

The alternative, a smaller deficit based on more restrained spending, would almost certainly lead to an unthinkable outcome for the U.S economy. In a situation presenting itself so plainly, the current rumblings by some Congressional Republicans about the surging size of the deficit sound hollow and misguided, the product of rigid ideological adherence to the otherwise sound concept of fiscal discipline.

To be sure, the U.S. budget deficit is likely to approach 10% of GDP in the current fiscal year, an unprecedented rate; the previous high was 6% of GDP in fiscal year 1983 and the generally accepted rule is that a deficit should stay within 2% to 3% of the country's GDP. (By comparison, the deficits in the euro zone countries are capped at 3%, with some lenience only allowed recently as a result of the financial crisis.)

The main risks usually associated with a high deficit are:

1) The potential that the massive amount of borrowing that the government needs to undertake to finance it can squeeze the private sector out of the credit markets, therefore creating an intense competition for limited funds that can push interest rates higher.

However, such a risk is actually minimal in the current environment, where the weak economy has severely dampened the credit needs of the private sector and foreign investors seem to have, at least for now, an impressive appetite for U.S. Treasury securities that are issued to finance the deficit.

2) The risk that the deficit will cause inflation. This is true only when the Federal Reserve purchases large amounts of the newly-issued debt directly from the Treasury, a process called monetization. There is no serious evidence suggesting that the Fed is engaging in such large-scale operations and, in the past, it has consistently refrained from doing so.

The Fed has certainly not been shy about injecting massive amounts of liquidity into the banking system in the last few months, but this process is totally unrelated to the size of the budget deficit and it is meant to address a very different aspect of the current predicament for the U.S economy: unclogging the frozen credit pipelines.

3) Large budget deficits add to the national debt, causing ever-increasing interest payments and, therefore, representing a burden for future generations.

While no sane person can deny the nearly immoral aspect of that burden that is being passed on to the next generation, at the same time it's probably fair to say that the next generation would also have a keen interest in inheriting a functioning, thriving economy and not one that has been decimated by years of contraction caused by a blind adherence to the sacred principle of fiscal discipline.

Let's make no mistake: The surging budget deficits are not a pretty picture or a totally benign one either, and no argument can be made in favor of a more cavalier attitude toward fiscal discipline in normal or semi-normal times.

But these are extraordinary times and the deficits are just an unavoidable consequence - particularly considering the alternative.

Lending rates fall but challenges remain

Lending rates mostly fell Monday as banks welcomed government aid, but financial institutions remained wary as the global economy continues to struggle.

U.S. Treasury prices were lower ahead of auctions and stocks appeared headed for an upbeat opening.

The 3-month Libor rate fell to 2.24% from 2.29% Friday, according to Bloomberg.com. The overnight Libor rate edged higher to 0.35% from 0.33%.

Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend dollars in the U.K. and is a key barometer of liquidity in the credit market.

Both the 3-month and overnight rates have fallen significantly since hitting record highs during the height of the credit crisis.

The overnight Libor rate has been hovering near its all-time low of 0.32% after falling from a high of 6.87% on Sept. 30. The three-month Libor rate has come down 2.58 percentage points since its October high of 4.82%.

The declines came after the U.S. government launched a number of programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

But ongoing economic challenges appear to be tempering the effects of improved lending conditions.

In a sign of the difficulties still facing the financial services industry, giant insurer American International Group got a $150 billion deal from the federal government Monday, as policymakers made significant changes to the terms of the company's original bailout.

While inter-bank lending conditions have improved, many economists say banks remain wary of lending to businesses and consumers as the outlook for global economic growth is cloudy.

Treasurys. Prices for ultra-safe U.S. government debt fell Monday as investors appeared upbeat about the restructured AIG plan and China's $586 billion economic stimulus package.

U.S. stock futures were higher about 1 hour before the opening bell. Asian markets rallied and major indexes in Europe were about 3% higher.

The benchmark 10-year note was down 14/32 to 101-7/32 and its yield rose to 3.85% from 3.78% on Friday. Bond prices and yields move in opposite directions.

The 2-year note slid 4/32 to 100-6/32 with a yield of 1.4%, up from 1.33%.

The 30-year bond fell 19/32 to 103-5/32 and yielded 4.31%, up from 4.24%.

Meanwhile, the Treasury Department is set to auction $25 billion in 3-year notes Monday. And on Wednesday, the government will auction $20 billion in 10-year notes.

Oil blows past $70 as stocks rally

Oil prices rose above $70 a barrel Tuesday, propelled by a slipping dollar, a stronger equities market and OPEC production cuts, as Americans went to the polls.

U.S. crude for December delivery spiked $7.73 to $71.64 a barrel in electronic trading, as stocks turned higher and crude investors became less worried about market risk.

The equities market rebounded, sending the Dow up by as much as 300 points, as interbank lending loosened, allowing more cash to flow through the system.

"If we continue to see improvements in the credit markets, we could see oil stabilize or gain more ground," said Rachel Ziemba, energy analyst at economic research firm RGE Monitor.

Credit and rate cuts: The London interbank lending rate (Libor), a measurement of how much banks charge to lend money to each other, has been on the decline thanks to efforts by the world's governments and central banks.

The Federal Reserve cut its key lending rate last Wednesday to 1%, a low not seen since 2003. The Bank of Japan followed on Friday, cutting rates for the first time in 7 years.

The 3-month Libor rate had fallen to 2.71% from 2.86% on Monday. The lower the rate, the cheaper it is for banks to borrow cash, and the more dollars are available to the market.

Additionally, the Bank of England and the European Central Bank are expected to cut rates on Thursday, according to Ziemba.

Stocks: Stock markets rallied Tuesday on anticipation of rate cuts from Europe's central banks, and after several major companies reported better than expected earnings.

Credit card giant MasterCard (MA) reported stronger than expected earnings, not including a massive legal settlement with rival Discover Financial Services (DFS), which analysts discount when trying to determine the health of the company.

Meanwhile Illinois-based food producer Archer Daniels Midland Co. said its quarterly profit more than doubled as selling prices rose.

Markets have also been buoyed by the fact that, over the past several weeks, the financial markets have not seen any of the large bank blowups that have characterized the economic crisis since Bear Stearns crumbled in March.

"You're not getting that big heavy body blow to the market," said Tom Orr, head of research for investment brokerage Weeden & Co.

Potential collapses of global financial institutions such as UBS (UBS) and Barclays (BCS) have been averted by influxes of foreign cash, or by government action.

Stock market advances point out a "willingness by investors to take on more risk," said Ziemba.

However the bump may only be temporary, she added, since the global economy is still slow.

Over the past several months, worry about a stagnating global economy, and the corresponding decline in fuel demand, helped drive oil prices down from a record high of $147.27 a barrel in July.

Dollar: A slipping dollar also helped support crude prices.

The U.S. dollar fell compared to the 15-nation euro as investors sought the more lucrative returns of stocks and commodities. Investors often buy the dollar as a safe investment to avoid risk in other markets.

Oil, like most commodities, is traded in U.S. dollars. So when the value of the dollar falls, oil becomes more affordable to non-U.S. investors, and its dollar-denominated price goes up.

OPEC cuts: Also pushing oil higher were reports that members of the Organization of Petroleum Exporting Countries had begun implementing the cartel's planned production cuts.

Saudi Arabia cut exports by 900,000 barrels per day, according to media reports. Iran also said it was committed to cutting 199,000 barrels a day, according to reports.

While OPEC pledged in October to cut production by a total of 1.5 million barrels a day, there was real concern among investors about whether or not members would comply with the guideline, according to Ziemba.

The production cuts, along with strength in the equities markets have led many commodity investors to re-examine oil's supply and demand picture, according to Orr.

"People are starting to look a little more rationally about where commodity prices should be," said Orr.

However concerns remain that cuts may not be enough to give oil a bottom.

"Despite the production cuts, we're still in a global recession, and that's bad for oil demand," said Ziemba.

Gas prices fall again

Gasoline prices fell again, tumbling to the lowest price in a year, according to a daily survey of credit card swipes released Sunday.

The average price of unleaded regular fell to $2.699 a gallon, down three and six-tenths of a cent, according to the Daily Fuel Gauge Report issued by motorist group AAA. Prices have fallen $1.15, or 30%, in the last 39 days.

The current national average is $1.41, or 34.3%, off the record high price of $4.11 that AAA reported July 17.

The decline comes as hurricane season winds down and oil prices drop over concerns that a prolonged economic slump would curb demand for energy.

The last time the average price for a gallon of regular unleaded gasoline was close to this price was October 18, 2007, when the price averaged $2.795.

Alaska has the most expensive gas with prices averaging $3.76. The cheapest gas is found in Oklahoma with prices averaging $2.30.

Initial unemployment claims up

The number of out-of-work Americans filing new claims for unemployment insurance rose last week, the government said Thursday, reflecting continuing weakness in the nation's economy.

The U.S. Department of Labor reported that initial filings for state jobless benefits increased by 15,000 to a seasonally adjusted 478,000 in the week ended Oct. 18. That's a 44% increase from last year, when it stood at 333,000.

The effects of Hurricane Ike in Texas added roughly 12,00 claims to the total, the department reported.

For the week prior, initial claims were revised up by 2,000 to 463,000.

Economists surveyed by Briefing.com expected the number to rise to 465,000.

The four-week average of jobless claims, which smoothes out fluctuations, fell to 480,250 from the week before. A level of more than 400,000 was present throughout the last two recessions. A year ago, the average was 327,750.

The number of American workers collecting benefits for more than one week decreased to 3.72 million in the week ended Oct. 11, the most recent week available, from the prior week. The 4-week moving average increased to 3.68 million, an increase of 44% from the 2.55 million average reported last year.

Three weeks prior, unemployment claims spiked to 499,000, the highest level recorded since the 517,000 claims filed in the wake of the Sept. 11 terrorist attacks.

This week, Yahoo said it plans to cut 1,500 jobs, drug maker Merck said it will slash 7,200 jobs and auto manufacturer Chrysler announced it would lay off 825 workers and close a plant earlier than expected.

Earlier this month, Labor Department reported net payroll nationwide declined by 159,000 in September, the ninth straight month the economy lost jobs. Nationwide, the unemployment rate stands at 6.1%.

Consumer prices flat in September

Consumer prices were flat in September as retreating costs for gasoline, clothes and new cars helped to offset rising prices for food, medical care and other things.

The new reading on the Consumer Price Index, the government's most closely watched inflation barometer, came after prices actually dipped by 0.1% in August, the Labor Department reported Thursday.

Those two months, however, had offered Americans a rare reprieve. Consumer prices have marched upward most of the year, spiking by an eye popping 1.1% in June.

The toll of galloping prices for much of this year is eating into paychecks, further straining consumers who are pulling back sharply. Recent readings on retail sales were grim. The prospects that consumers will retrench further would spell more trouble for the already ailing economy.

Other economic reports showed that filings for unemployment benefits remained elevated and big industry production plunged by the most since late 1974, largely reflecting fallout from hurricanes Gustav and Ike.

On Wall Street, the Dow Jones industrial fell more than 100 points.

In the inflation report, when energy and food products are stripped out, "core" prices inched up by just 0.1% in September, an improvement from a 0.2% advance in August.

The latest showing on inflation was better than economists expected. They were forecasting a 0.1% increase in overall prices and a 0.2% rise minus energy and food.

Paychecks continued to shrink.

Weekly wages dropped by 2.5% in September compared to a year ago, the 12th straight month in which wages have been down.
Labor market

Another Labor Department report showed the number of new people signing up for unemployment benefits last week dropped. Even with the decline, new claims totaled 461,000 - a figure associated with deep troubles in employment conditions.

Indeed, the four-week moving average of jobless claims is at a seven-year high. And, the number of people continuing to collect jobless benefits rose to 3.7 million, the highest since late June 2003, when the labor market was still struggling to get back on its feet after the 2001 recession.

Vanishing jobs, dwindling nest eggs and shrinking paychecks are straining millions of ordinary Americans. Economic anxiety is the voters overarching concern as they get ready to head to the polls in just a few weeks to select the country's next president.

Whether that's Democrat Barack Obama or Republican rival John McCain, the next leader will be confronted by a troubled economy.
Industrial production

A report from the Federal Reserve said that production at the nation's factories, mines and utilities plunged 2.8% last month, on top of a 1% drop in August.

The Fed estimated that disruptions related to the hurricanes accounted for about 2.25 percentage points of the total drop in industrial production in September. In addition, a strike affecting the commercial aircraft industry also was a factor in the poor showing, accounting for around a half percentage point of the overall decline, the Fed said.

Fed Chairman Ben Bernanke warned Wednesday that a quick rebound is not in the cards for the stumbling economy - even if financial turmoil were to disappear.
Inflation

With the economy in for a period of weakness that could extend well into next year, inflation should also moderate, Bernanke and other Fed officials predict. Tamer inflation would give the Fed more leeway to slice rates again or at least keep them at low levels for some time.

"The rapidly disappearing inflation threat is providing the Federal Reserve full latitude to move to an easing bias on rates to combat the recession as well as the ongoing financial crisis," said Brian Bethune, economist at Global Insight.

Many economists believe there's a strong chance the Fed will lower rates at its next regularly scheduled meeting later this month. In an unprecedented assault on the financial crisis, the Fed and other major central banks together reduced rates last week. The Fed's main rate dropped to 1.50%, from 2%.
Cheaper oil

Oil prices on Wednesday dipped below $75 a barrel for the first time in 14 months, suggesting gas prices will keep falling. Oil prices have plunged almost 50% since hitting a record high of $147.27 in mid July.

The retreat in these and other commodity price "as well as the likelihood that economic activity will fall short of potential for a time, should lead to rates of inflation more consistent with price stability," Bernanke said.

So far this year, consumer prices have risen at an annualized pace of 4.5%, faster than the 4.1% increase for all of 2007. Core prices in the first nine months of this year have increased at a pace of 2.4%, matching the rise for all of last year.

Oil climbs above $84 a barrel

Oil prices climbed above $84 a barrel on Tuesday on hopes the economic fallout from the financial crisis would be curbed by U.S. and European government pledges to pump capital into the banking sector.

Light, sweet crude for November delivery on the New York Mercantile Exchange was up $3.37 to $84.56 a barrel in electronic trading by middayn Europe. The contract rose $3.49 to settle at $81.19 on Monday.
Boost for banks

Markets have cheered signs that governments plan to inject money into major banks in an effort to recapitalize the ailing sector.

Tokyo's benchmark Nikkei 225 index jumped 14.25 percent Tuesday -- its largest ever one-day gain -- after the Dow Jones industrial average on Monday rose over 11%, its biggest daily rally since 1933.

"The bailout announcements have eased some of the deep-seated fear of a global meltdown and instilled a degree of confidence in markets," said Peter Luxton, analyst at Informa in London.

He warned, however, that oil prices are unlikely to rally much higher in coming days as doubts over global demand in the longer-term remain very much on traders' minds.

Oil fell to a 13-month low on Friday, settling at $77.70. Crude is down 44% since reaching a peak in mid-July as the credit crisis has steadily eroded the growth outlook for world economies.
Bailout plan

To counter any further trouble in the banking sector, the U.S. plans to spend an initial $250 billion of a $700 billion bailout buying stock in private banks, industry and government officials said Monday night. President Bush planned to announce the details later Tuesday.

That followed Monday's news that European governments were putting up over $2 trillion to safeguard their own banks and kick start credit markets back to life.

But analysts say the meltdown in financial markets may have already done its damage to global economic growth.

"The outlook for oil prices is still very much bearish as the risk of global recession -- or at least a global slowdown -- remains," said Luxton, who expects prices to drop to the $60 to $70 a barrel region next year.

He said prices may hover around the current levels until mid-November, when the OPEC meeting will be held. OPEC warned it intends to cut production to stop the decline in oil prices, but markets are uncertain how effective that will be.

"Demand is driving oil markets now," said Luxton.

He noted OPEC has a poor record of boosting prices with production cuts during economic downturns.

Meanwhile, other analysts are revising down forecasts. Goldman Sachs on Monday cut its year-end crude price forecast from $115 a barrel to $70.
Trading markets

In other Nymex trading, heating oil futures rose 5.28 cents to $2.39 a gallon, while gasoline prices gained 6.44 cents to $1.98 a gallon. Natural gas for November delivery rose 7.7 cents to $6.77 per 1,000 cubic feet.

In London, November Brent crude rose $2.92 to $80.38 a barrel on the ICE Futures exchange.

Goldman applies for N.Y. charter

Recently minted commercial bank Goldman Sachs Inc. has applied for a New York state banking charter, state officials said Monday.

Governor David Patterson praised the decision, calling Goldman Sachs the "bedrock" of New York's financial community and that it reflects the state's ability to "effectively regulate" banks.

"We look forward to working with [Goldman Sachs] as they transition a substantial portion of their business from an investment bank to a new regulatory scheme," Patterson said in a statement.

Goldman Sachs (GS, Fortune 500) and fellow brokerage Morgan Stanley (MS, Fortune 500) were the last remaining investment banks on Wall Street before federal officials granted the firms' requests to become bank holding companies last month.

The decision to become commercial banks came as rival brokerages Bear Stearns and Lehman Brother collapsed in the fallout of the nation's credit crisis.

As commercial banks, Goldman and Morgan have the ability to purchase other retail banks, which could give them a more steady foundation of cash. It also gives them access to loans from the Federal Reserve that were not available to brokerages.

But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.

A call to Goldman Sachs requesting comment was not immediately returned Monday.

The decision to apply for a New York state charter will not preclude Goldman from expanding its business or opening branches outside of the state, according to Bert Ely, principal of Ely & Co., a financial institutions and monetary policy consulting firm in Virginia.

"Banks can have multiple charters," Ely said. Having a New York charter "does not bar them from having other charters," he added.

FDIC limit officially raised to $250,000

The Federal Deposit Insurance Corp. (FDIC) on Friday formally approved the increased insurance limit of $250,000 per regular account that was part of the financial rescue legislation enacted last week.

The FDIC board approved the temporary increase per account in a vote at a meeting. The new limits, which extend through the end of next year, also provide for an increase in the insurance ceiling on joint deposit accounts to $200,000 per co-owner of the account from the current $100,000. The limit for retirement accounts held in banks remains at $250,000.

The FDIC board on Tuesday approved a new plan for rebuilding the deposit insurance fund that would more than double the banking industry's average premiums next year. It could be formally adopted sometime after a 30-day public comment period.

The proposed increases in bank premiums would cover only up to the previous insured $100,000 limit per regular deposit account.

Thirteen federally insured banks and savings and loans - including two major thrifts - have failed this year, and more collapses are expected. The deposit insurance fund is now at $45.2 billion - below the minimum target set by Congress and the lowest level since 2003.

The FDIC plan aims to rebuild it within five years to an even higher level than the law requires.

Big drop predicted for global auto sales

As the economic downturn continues to hit consumers' wallets, market analysis firm J.D. Power is predicting even bigger drops in U.S. and global auto sales than it had previously thought.

The company forecast that automakers will sell 10.8 million vehicles to retail customers, as distinct from fleet customers, in all of 2008. That will be about 2 million fewer retail sales than the industry had in 2007, for a drop of about 15.6%.

Overall light vehicle sales, including both fleet and retail, will drop by 16% to 13.6 million units, J.D. Power said. And sales are expected to drop even further in 2009. Light vehicle sales, or sales of vehicles other than heavy-duty trucks, that year are seen hitting 13.2 million units.

About two-thirds of the decline in retail sales can be attributed to customers putting off vehicle purchases. Drivers are keeping their vehicles an average of 4 months longer in 2008 than they were in 2007, the company said in a prepared statement.

"Any truly pronounced recovery appears to be more than 18 months away," Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates, said in a statement.

Credit concerns and the deteriorating value of potential trade-ins, have been keeping Americans out of the new car market, said Schuster.

"The additional decline in expected vehicle sales is a function of growing concerns around availability of credit and leasing, declines in vehicle equity and general economic stress," Schuster said.

Given the rate of economic change, the forecast could be off by as much as 200,000 units, the company said.

European sales are also projected to decline, but less than those in the U.S. J.D. Power sees European sales of 21.3 million units, a decline of 3.1%. An increase in sales in Eastern Europe would partly offset a 7.5% decline in Western European sales.

Developing auto markets are also expected to be hard-hit, J.D. Power said. The Chinese auto market will still see an increase, rising by 9.7%, the company said, but that's much less than the 24.1% increase seen in 2007.

Growth will also slow greatly in India, the company projects.

"While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse," said Schuster. "While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil."

Both Ford (F, Fortune 500) and General Motors (GM, Fortune 500) stocks have been under pressure, with GM stock down 20% at one point Thursday morning

Gas prices expected to fall further

If there's one bright spot in a bad economy, it's that gasoline prices have fallen, and they're expected to drop even further.

As the global economy falters, demand for oil has dropped. And since the price of oil makes up about half of the cost of a gallon of gas, analysts see more relief ahead at the pump.

"We ought to see prices drop pretty quickly," said American Automobile Association spokesman Geoff Sundstrom. "We're well on our way to $3 gas within the next week or two."

The national average price for a gallon of regular, unleaded gasoline fell 2.4 cents to $3.480 from $3.504, according to a daily survey released Tuesday by AAA. That's down 18% from an all-time high of $4.114 a gallon hit on July 17.

Gas prices rebounded last month when hurricanes Ike and Gustav passed through the Gulf Coast where the bulk of the nation's oil refineries are located.

While the damage was not as extensive as some had expected, the storms caused a short-lived spike in oil and gas prices.

On Sept. 17, after Hurricane Ike passed through the Gulf region, the national average gas price was a full 35 cents higher than Monday's price.

"But now that refineries are back online and more product is available, prices have no where to go but down," Sundstrom said.

"Demand seems to be drying up week by week," he added. And given the challenging economic environment and the strains on household budgets, Sundstrom expects American drivers to remain conservative.

Crude tumbled more than $6 on Monday to close at an 8-month low of $87.81 a barrel. That's down 40% from its July peak of $147.27 a barrel.

"Since crude makes up about 50% of the price of gas, gas prices should go down," said Ray Carbone, president of New York commodities trading firm Paramount Options.

Carbone added that gas prices have not fallen as dramatically as crude prices because refinery utilization has been low due to last month's hurricanes.

Still, hurricane season does not end until November and oil prices are notoriously volatile, notes AAA spokesman Troy Green. He cautioned that gas prices will continue to fall "only if conditions continue to improve in refinery capacity and oil continues to retreat."

Shares of GE fall to 11-year low

Shares of General Electric Co. hovered at around $20 Monday, the lowest point in more than 11 years as a sell-off pulled down broader markets.

The share price of the industrial and commercial conglomerate, a bellwether of the U.S. economy, has slid steadily since the financial crisis hit Wall Street last month. On Sept. 25, GE (GE, Fortune 500) cut its earnings forecast for the year, blaming volatile financial markets damaging the profitability of its loan and lease business that accounts for almost half its income.

Last Thursday, share prices fell nearly 10% as GE announced an offering that was priced at a discount to the stock's closing price the previous day. GE priced 547.8 million shares at $22.25 each - the same price GE extended to Warren Buffett, whose Berkshire Hathaway Inc. on Wednesday agreed to receive warrants to purchase $3 billion worth of common stock over the next five years.

The price for the $12.2 billion offering represents a 9% discount to GE's Wednesday close of $24.50.

Shares of GE lost $1.12, or 5.2%, to $20.45 in morning trading. The stock earlier fell as low as $19.69. GE last dipped below $20 on May 9, 1997 when shares traded at $19.42.

And now on to the House - again

Now get ready for Bailout Redux - the House vote.

The fate of the Bush administration's planned $700 billion financial system bailout rests in the House, which sparked a huge selloff on Wall Street on Monday with its surprise 228-to-205 rejection of the bill.

Late Wednesday night, the Senate voted 74 to 25 to approve the controversial proposal, but added sweeteners intended to attract House votes. The House - returning Thursday from a two-day recess - is likely to vote on the revised bill Friday.

The core of the Senate bill would give the Treasury Department authority to buy troubled assets from financial institutions. Those assets, mostly mortgage-related, have caused a crisis of confidence in the credit markets.

For the past two weeks, lending between banks and between banks and businesses has gotten considerably more expensive and in the case of small businesses, exceptionally difficult to get. As of midday Thursday, one key measure showed that banks were hoarding cash rather than loaning it. Meanwhile, an indicator showing how willing banks are to lend each other hit an intraday high.

The new legislation also includes a number of provisions aimed at Main Street. House leaders are cautiously optimistic they can win this time.

"We believe we'll have a better chance to pass this bill than the one that failed [Monday]," said a spokesman to the lead House Republican, Rep. John Boehner, R-Ohio.

The main House negotiator on the bailout, Rep. Barney Frank, D-Mass., said that lawmakers have seen "the reality" of the economy's problems. "It's not possible now to scoff at the predictions of doom if we don't do anything," he said.

That reality came home to House members by way of calls from small business owners, who lobbied lawmakers after Monday's vote urging them to pass the bailout on the next go-round, said Brian Gardner, the Washington analyst for investment firm KBW.

House Speaker Nancy Pelosi, D-Calif., said in a press conference Thursday afternoon that House members are reviewing the Senate bill. She said House leaders will not bring the bill to the floor for a vote unless they've got the votes. "I'm optimistic we'll take the bill to the floor," she said.

Pelosi noted that she and other House members like a number of changes the Senate made. While many lawmakers would like to offer further amendments, she said, "I don't think any changes here will do what we need to do now, which is send a message of confidence to the markets that Congress will act."

President Bush, speaking Thursday after a meeting with business executives, urged the House to pass the bill.

"The bill that's before the House ... has got the best chance of providing liquidity, providing credit, providing money so small businesses and medium-sized businesses can function," Bush said.

Here's what's in the bill
Attacking credit crisis: The core is the Treasury's proposal to let financial institutions sell to the government their troubled assets, mostly mortgage-related. And as in the House bill, the Senate would only allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.

Protecting taxpayers: The Senate bill is also similar to the original House bill in that it includes a number of provisions that supporters say would protect taxpayers. One would direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury would be allowed to take ownership stakes in participating companies.

Like the House version, the Senate bill includes a stipulation that the Treasury set up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

Curbing executive pay: The bill would place curbs on executive pay for companies selling assets or buying insurance from Uncle Sam. For example, any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate.

Oversight: The bill would set up two oversight committees.

A Financial Stability Board would include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.

Tax breaks: Added to the bill are three key tax elements designed to attract House Republican votes.

It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels.

The legislation would also continue a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns.

In addition, the bill includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "income tax for the wealthy."

New accounting rules: The bill underlines the Securities and Exchange Commission's power to change accounting rules on how banks and Wall Street firms value securities, and directs the agency to study the issue.

Some observers argue that tight accounting rules are a major reason for the credit crisis in the first place. Others contend that changing the so-called mark-to-market rules will just bury problems lurking beneath the surface and could further shake investor confidence in the already battered financial sector. (More about the rules.)

Shielding bank deposits: The bill temporarily raises the FDIC insurance cap to $250,000 from $100,000. The bill allows the FDIC to borrow from the Treasury to cover any losses that might occur as a result of the higher insurance limit.

Federal bank regulators, who first floated the idea to Congress late Tuesday, said that bumping up the insurance limits would help improve liquidity at banks across the country. It may also provide a much-needed dose of confidence for consumers who may be worried about the health of their bank. (More about FDIC rules.)

The bill will also temporarily increase the level of federal insurance for credit union savings to $250,000.

Cost: The tax provisions of the bill - the bulk of which come from the addition of tax breaks from other legislation - may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the 1-year extension of AMT relief.

The Congressional Budget Office said it cannot estimate the net budget effects of the troubled asset program because of the many unknowns about that piece of the bill. However, the agency noted in a letter to lawmakers on Wednesday, it expects the program "would entail some net budget cost" but that it would be "substantially smaller than $700 billion."

Overall, the CBO said, "the bill as a whole would increase the budget deficit over the next decade."

Palin to play ball with Big Oil

Sarah Palin gets a lot of credit for standing up to Big Oil in Alaska, but if she and John McCain win the White House, don't expect some of her more populist policies to survive the move to Washington.

In her two years as Alaska's governor, Palin is credited with being tough on big oil, to the benefits of her constituents and bucking her own party.

In late 2007 Palin succeeded in raising the tax on oil companies from 22.5 to 25% of net profits. Alaska also added a clause increasing the tax for each dollar oil goes above $52 a barrel - essentially, a windfall profits tax.

Palin also killed a deal struck between Exxon Mobil, BP, and ConocoPhillips and Alaska's previous governor to build a natural gas pipeline across the state and into Canada.

Analysts said corruption tainted that deal.

Palin renegotiated a new deal with a Canadian company, TransCanada, to build the $26 billion pipeline, which analysts say - if completed - is better financially for the state.

But analysts - and the McCain campaign itself - are quick to note that Palin will toe the line on the energy policies of her potential boss, who unlike Barack Obama does not favor a windfall profits tax.

Christopher Ruppel, an energy analyst at Execution LLC, a broker and research firm for institutional investors like hedge and mutual funds is more concerned with McCain's energy policy than Palin's past spats with the oil industry. "We don't think she will represent a big change from that."

The McCain campaign, which speaks for Palin, confirmed that stance.

"'The governor supports the campaign's positions," said Doug Holtz-Eakin, a McCain senior advisor.

Palin certainly has experience in dealing with energy issues in Alaska. But despite her drill baby comments, it's hard to tell if the oil industry will see her as an ally - al la Dick Cheney who ran Haliburton, an oil services company - or whether her previous tax and pipeline decisions will label her a threat.

'It's mixed, I haven't picked up a consensus view," said Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III Institute for Public Policy.

Exxon Mobil, which currently has an $800 million lawsuit filed against the state over the revoking of a gas field permit, declined to comment on Palin. Calls to Conoco and BP were not returned. The American Petroleum Institute also declined comment.

Jaffe said Palin shouldn't get too much credit for raising the oil tax, noting that everyone from Hugo Chavez to the Canadian government hiked taxes as oil prices skyrocketed.

"Even the Bush administration raised royalty fees," she said. "She didn't do anything everyone else didn't do."

Other analysts echoed that sentiment.

"When people say 'I stuck it to the oil companies,' that is misleading," said Fadel Gheit, a senior energy analyst at Oppenheimer. "She is basically doing what is popular."

The tax may have been popular with Alaska's voters, but it was not popular within Palin's own party - many Republican state senators voted against the tax.

Holtz-Eakin, the McCain campaign spokesman, also said Palin's decision to scrap the pipeline deal highlighted her ability to clean up Washington.

"She threw out the whole thing and redid it, which made sense," he said.

As to whether Palin can bring more experience in energy issues to the White House than her rival Joe Biden can, most analysts didn't see it that way.

"Biden has extensive experience in dealing with energy and geopolitical issues due to his long record in the Senate," said Execution's Ruppel.

Credit woes: More than home loans

Mortgages aren't the only loans in line for a government bailout.

Though all eyes have been focused on faltering mortgage-backed securities, the Treasury Department last month amended its original $700 billion bailout plan to buy up a wider range of troubled assets after heavy lobbying by financial industry groups.

If the proposal passes the House on Friday, the Treasury Secretary will have the power to take depressed securities backed by credit card debt and auto loans off banks' hands.

Delinquencies are rising fast in the $2.6 trillion consumer credit market. While the sector's troubles aren't as severe as those in the $14.8 trillion mortgage arena, experts expect Americans to fall more behind in their payments as the economy continues to weaken. This will only further erode the value of securities backed by consumer credit, much as late payments and foreclosures have decimated mortgage-backed securities.

"Once you dig into it, you realize the credit crisis has spread far beyond the mortgage sector," said Martin Weiss, founder of Weiss Research "When you sum up all the debt sectors and all the potential for bad debt, you recognize that $700 billion is a drop in the bucket."

Not keeping up with credit card, car payments
Consumers are falling behind on their credit card bills. The delinquency rate jumped to 4.52% in July, up 20% from a year earlier, according to Moody's Investors Services. And banks are writing off 40% more of this debt as uncollectable as they did a year ago.

Payments on 2.38% of credit card debt were 90 days or more behind schedule, the highest level since 1991, according to the Federal Deposit Insurance Corp.

These figures are expected to rise as more people lose their jobs and file for bankruptcy, experts said. Moody's is predicting the charge-off rate, which measures uncollectable debt, to jump to 7.5%, up from 6.36% in July.

The rising delinquencies have wreaked havoc in the credit card industry and securitization market. Citigroup, for instance, said earlier this week it expects to take a $2 billion loss on securitizations in its cards division.

If they can find investors willing to buy securities backed by credit card debt, issuers are paying "significantly higher" rates, according to Moody's.

Stung by the rising delinquencies, credit card companies are clamping down on customers. They are tightening standards, reducing credit lines, increasing fees and rates and more diligently pursuing collections.

Delinquencies on auto loans, meanwhile, are projected to hit their highest rate in at least six years, according to Peter Turek, automotive vice president at TransUnion, whose records go back to 2003. He is forecasting the 60-day delinquency rate to reach 0.85% in the fourth quarter, up from 0.79% a year earlier.

As a result, lenders are pulling back on financing. This is making it harder for people to buy cars, leading to massive drops in car sales and big troubles for automakers. Not helping matters is that lenders can't turn to the securitization market for financing.

"Auto-backed securities have dried up," Turek said. "Lenders were guilty by association."

Not a repeat of the mortgage meltdown
Treasury officials said they widened the range of the troubled assets eligible for purchase to give them the flexibility of dealing with future threats to the financial system.

While it remains to be seen whether the government will actually scoop up consumer credit-backed securities, experts said the sector's problems do not pose as great a danger as mortgage delinquencies, which are blowing through previous records.

"The American financial system is not going to collapse because of bad auto loans and bad credit card debt," said Gus Faucher, director of macroeconomics at Moody's economy.com. "They are a much smaller piece of the puzzle."

Senate passes bailout

The Senate on Wednesday night passed a sweeping and controversial financial bailout similar in key ways to one rejected by the House just two days earlier.

The measure was passed by a vote of 74 to 25 after more than three hours of floor debate in the Senate. Presidential candidates Sens. Barack Obama, D-Illinois, and John McCain, R-Arizona, voted in favor.

Like the bill the House rejected, the core of the Senate bill is the Bush administration's plan to buy up to $700 billion of troubled assets from financial institutions.

Those assets, mostly mortgage-related, have caused a crisis of confidence in the credit markets. A major aim of the plan is to free up banks to start lending again once their balance sheets are cleared of toxic holdings.

But the Senate legislation also includes a number of new provisions aimed at Main Street.

The changes are intended to attract more votes in the House, in particular from House Republicans, two-thirds of whom voted against the bailout plan.

The House is expected to take up the Senate measure for a vote on Friday, according to aides to Democratic leaders.

The legislation, if passed by the House, would usher in one of the most far-reaching interventions in the economy since the Great Depression.

Advocates say the plan is crucial to government efforts to attack a credit crisis that threatens the economy and would free up banks to lend more. Opponents say it rewards bad decisions by Wall Street, puts taxpayers at risk and fails to address the real economic problems facing Americans.

"If we do not act responsibly today, we risk a crisis in which senior citizens across America will lose their retirement savings, small businesses won't make payroll ... and families won't be able to obtain mortgages for their homes or cars," said Senate Majority Leader Harry Reid, D-Nev., moments before the vote.

In a press briefing after the vote, Senate Minority Leader Mitch McConnell. R-Ky., said, "This is a measure for Main Street, not Wall Street. [It will help] to unfreeze our credit markets and get the American economy working again."

Because of Senate add-ons, the bill's initial price tag will be higher than the $700 billion that the Treasury would use to buy troubled assets. But over time, supporters say, taxpayers are likely to make back much if not all of the money the Treasury uses because it will be investing in assets with underlying value.

How the Senate bill differs
The package adds provisions to the House version - including temporarily raising the FDIC insurance cap to $250,000 from $100,000. It says the FDIC may not charge member banks more to cover the increase in coverage. But that doesn't prevent the agency from raising premiums to cover existing concerns with the insurance fund, according to Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm.

Instead, the bill allows the FDIC to borrow from the Treasury to cover any losses that might occur as a result of the higher insurance limit.

The bill also adds in three key elements designed to attract House Republican votes - particularly popular tax measures that have garnered bipartisan support.

It would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels.

The Senate bill would also continue a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns.

In addition, the bill includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "income tax for the wealthy."

The debate over extending AMT relief is an annual political ritual. It enjoys bipartisan support but deficit hawks on both sides of the aisle contend the cost of providing that relief should be paid for. Others argue it shouldn't be paid for because the AMT was never intended to hit the people the relief provisions would protect. Nevertheless, lawmakers pass the measure every year or two.

How Senate bill mimics House version
For all the sweeteners added to the Senate bill, however, it is similar to the House bill in many key ways.

The core is the Treasury's proposal to let financial institutions sell to the government their troubled assets, mostly mortgage-related. And as in the House bill, the Senate would only allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.

The Senate bill is also similar in that it includes a number of provisions that supporters say would protect taxpayers. One would direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury would be allowed to take ownership stakes in participating companies.

Like the House version, the Senate bill includes a stipulation that the Treasury set up an insurance program - to be funded with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

And it would place curbs on executive pay for companies selling assets or buying insurance from Uncle Sam. One provision: Any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate.

Lastly, the Senate version would set up two oversight committees. A Financial Stability Board would include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.

Differing views
Despite the Senate bill's sweeteners, the bill did not garner unanimous support because those who oppose the Treasury plan felt passionately it was the wrong approach.

Sen. Maria Cantwell, D-Wash., a champion of the energy tax breaks in the bill, said on Wednesday afternoon she nevertheless would vote against the bill because she opposes "giving the keys to the Treasury over to the private sector."

Opponents of the bill have said they resented being given a "my way or the highway" choice to address what they acknowledge is a very serious economic threat.

During the Senate debate on Wednesday, Sen. David Vitter, R-La., characterized the administration's request to lawmakers 12 days ago as "crying 'Fire!' in a crowded theater, then claiming the only [way out] is to tear down the walls when there are many exit doors."

Sen. Richard Shelby, R-Ala., said the Senate will have "failed the American people" by acting hastily. "I agree we need to do something. ... [But] we haven't spent any time figuring out whether we've picked the best choice."

Supporters of the bill say they hate the position they are in and are angry, too, but say it's better to do something now than to let the credit crunch persist.

"There's no doubt that there may be other plans out there that, had we had two or three or six months to develop ... might serve our purposes better," said Obama during the floor debate. "But we don't have that kind of time. And we can't afford to take a risk that the economy of the United States of America and, as a consequence, the worldwide economy could be plunged into a very, very deep hole."

Potential costs
The tax provisions of the Senate bill - the bulk of which come from the addition of tax breaks from other legislation - may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the 1-year extension of AMT relief.

The Congressional Budget Office said it cannot estimate the net budget effects of the troubled asset program because of the many unknowns about that piece of the bill.

However, the agency noted in a letter to lawmakers on Wednesday, it expects the program "would entail some net budget cost" but that it would be "substantially smaller than $700 billion."

Overall, the CBO said, "the bill as a whole would increase the budget deficit over the next decade."

All eyes on House
Now the fate of the bailout rests with the House.

"The reality has hit some members," said House Financial Services Chairman Barney Frank, D-Mass., late Wednesday on CNN. "The main change is reality - it's not possible now to scoff at the predictions of doom if we don't do anything."

The lead House Republican, Rep. John Boehner, R-Ohio, was consulted on the Senate's plans and gave his "green light," spokesman Kevin Smith said. "We believe we'll have a better chance to pass this bill than the one that failed [Monday]," he added.

The plan could attract House Republicans while simultaneously alienating bailout supporters among the Democrats because the tax cuts in the revenue bill aren't offset by spending cuts or increased revenues.

President Bush, following the Senate vote, said the bill was central to the "financial security" of the nation. "The American people expect - and our economy demands - that the House pass this good bill this week and send it to my desk."

Bailout: Senate to vote Wednesday

The Senate plans to vote on the $700 billion bank rescue plan Wednesday evening - two days after the House failed to pass it.

The bill adds new provisions - including raising the FDIC insurance cap to $250,000 from $100,000 - and will be attached to an existing tax bill that the House also rejected Monday, according to several Democratic leadership aides.

The vote is scheduled for after sundown, in observance of Rosh Hashanah. Republican presidential nominee John McCain, R-Ariz., and Democratic nominee Barack Obama, D-Ill., and his running mate Joe Biden, D-Del., confirmed that they would be present for the vote.

Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., announced the plan Tuesday night.

"Senate Democrats and Republicans believe it is essential that we work quickly on this important legislation to restore confidence to our financial system and strengthen the economy," Reid said in a statement.

White House spokesman Tony Fratto said the administration welcomes the "modified bill" and the scheduled vote.

Democratic sources told CNN that they expect bipartisan support in the Senate.

Tuesday afternoon, Federal Deposit Insurance Corp. Chairman Sheila Bair asked Congress to allow her agency to increase the $100,000 limit per account that has been in place since 1980. To do so would help restore confidence in the markets, she said. Bair did not say what she thinks the new limit should be.

The revised bill contains provisions that the Senate hopes will appeal to House Republicans, who voted two-to-one against the original legislation. The sweeteners include renewable energy tax incentives - for individuals and businesses alike - that have been on the table for several months and had a chance of passing at some point anyway.

The bill also includes relief from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called "wealth tax."

The debate over extending AMT relief is an annual political ritual. It enjoys bipartisan support but deficit hawks on both sides of the aisle contend the cost of providing that relief should be paid for. Others argue it shouldn't be paid for because the AMT was never intended to hit the people the relief provisions would protect. Nevertheless, lawmakers pass the measure every year or two.

The revised bailout bill also includes a "Mental Health Parity" provision, which would require health insurance companies to cover mental illness at parity with physical illness.

House Speaker Nancy Pelosi, D-Calif., said that House leaders are discussing ideas offered by other lawmakers about how to modify the bill defeated on Monday. "House Democrats remain strongly committed to a comprehensive bill that stabilizes the financial markets, restores confidence, and protects taxpayers," she said.

House Minority Leader John Boehner, R-Ohio, was consulted on the Senate's plans and gave his "green light," Boehner spokesman Kevin Smith said.

"We believe we'll have a better chance to pass this bill than the one that failed [Monday]," Smith added.

However, one aide in the GOP Senate leadership said swaying House Democrats to get on board with the sweetened bill will be "a fairly substantial problem."

The plan could attract Republicans in the House while simultaneously alienating bailout supporters among the Democrats because the tax cuts in the revenue bill aren't offset by spending cuts or increased revenues.

"I am talking with my House colleagues about the Senate action and how to best proceed taking that into consideration in determining what action in the House will be most successful," said House Majority Leader Steny Hoyer, D-Maryland.

Round 1 failed
The bailout package, a collaboration of Treasury Secretary Henry Paulson and leaders from both parties, was rejected by the House in a 228-205 vote Monday. Two-thirds of Republicans and about one-third of Democrats voted against the bill.

Following the defeat, the Dow Jones industrial average dropped 777 points, its biggest one-day point decline ever. The decline of nearly 7% was the largest one-day percentage decline since Sept. 17, 2001, the first day the markets reopened after the Sept. 11 attacks. (See correction.)

But stocks rallied Tuesday, with the Dow jumping 485 points on bets that Congress will pass a version of the government's $700 billion package.

The bill, if approved, would allow the federal government to buy troubled mortgage-related investments from financial institutions, freeing them up for lending in a bid to pull the economy out of its credit freeze.

Proponents of the bill believe it would prevent the United States from sliding into a serious financial crisis, but opponents saw it as an unbearable burden to taxpayers and a rescue for Wall Street.

The Bush administration and key lawmakers had regrouped on Tuesday and vowed to push ahead. "Unfortunately, the measure was defeated by a narrow margin," President Bush said in a brief televised address at the White House. "I'm disappointed by the outcome, but I assure our citizens, and citizens around the world, that this is not the end of the legislative process."

The House is adjourned and not scheduled to return to session until Thursday at noon.

Bush pushed hard for lawmakers to act. "Our economy is depending on decisive action from the government," he said. "The sooner we address the problem, the sooner we can get back on the path of growth and job creation. This is what elected leaders owe the American people, and I am confident that we'll deliver."

On Tuesday, Bush also spoke to Obama and McCain about the financial crisis, according to Fratto. The presidential candidates "offered ideas and reaffirmed what they have said publicly - that this is a critical issue that needs to be addressed," Fratto said.

CNN's Jessica Yellin, Deirdre Walsh and Ted Barrett contributed to this story.

Correction: An earlier version of this story incorrectly stated the 7% drop in the Dow on Monday was the second biggest one-day decline since Black Monday in 1987, when the Dow dropped 22%.

Credit still crunched; Treasurys bounce

Credit markets were still choked Wednesday - and as investors waited to see whether the Senate would pass a $700 billion bailout bill, uncertainty gave most Treasurys a boost.

The fiercely debated bailout bill, which the House of Representatives rejected Monday, could work to break the jam that has been hindering the flow of cash between banks and to consumers. With nobody lending cash, the economy is in jeopardy.

The Senate plans to vote on the rescue plan - with new provisions - Wednesday evening.

The bailout plan would allow the government to take severely devalued mortgage assets off the hands of beleaguered financial institutions, freeing them to resume lending activity. However, strong opposition to the plan claimed taxpayers should not be bearing the brunt of Wall Street's blunders.

Market gauges: What little lending is happening is expensive for the borrower. When banks charge each other a higher premium to borrow, that cost trickles down the consumer who might be looking for an auto loan, a mortgage or a school tuition loan.

One indicator of how willing banks were to lend to other banks, called the "TED spread," showed high prices of loans between banks. The TED spread measures the difference between three-month Libor and the 3-month Treasury borrowing rates and is a key indicator of risk. The higher the spread, the bigger the aversion to risk.

On Wednesday, the spread retreated to 3.24%, after surging as high as 3.53% Tuesday, its highest level in more than 25 years, according to Bloomberg.com. On Sept. 5, the TED spread was only 1.04%.

Furthermore, the difference between the 3-month Libor and the Overnight Index Swaps dipped to 2.44%, just lower than a record high 2.46% spread Tuesday, according to data reported by Bloomberg.com.

The Libor-OIS "spread" measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.

The Libor, or the London interbank offered rate, is a daily average of what banks charge other banks to lend money in London.

The 3-month Libor rate, at 4.15% Wednesday, has been trending higher for some time as the European economy has been facing credit shortages and bank failures of its own.

The overnight Libor rate dropped sharply to 3.79% Wednesday, according to data reported by Bloomberg.com. It hit an all-time high of 6.88% Tuesday, according to the British Banking Association, which has been keeping records since 1984.

Treasurys: Investors use government bonds as a safe-haven to park their assets. As the next chapter of the bailout saga drags on Wednesday, bond prices rallied.

The benchmark 10-year note rose 15/32 to 10- 29/32 and its yield fell to 3.77% from 3.85% late Tuesday. Bond prices and yields move in opposite directions.

The 30-year bond jumped 1-4/32 to 104-7/32 and its yield fell to 4.25% from 4.36.

The 2-year note edged up 1/32 to 100-3/32 and its yield dipped to 1.96%.

The yield on the 3-month bill rose to 0.90% from 0.85% as prices ticked lower. The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

Wall Street ping-pongs: Stocks have zigzagged in the prior two sessions. On Monday, the Dow Jones industrial average plummeted a record 778 points after the House vote. But, on Tuesday, the Dow ended 485 points higher as rhetoric from Washington convinced investors that sooner or later, the government would pass some version of a rescue plan.

FDIC steps in: With investors jittery and confidence in the banking system breaking down, the Federal Deposit Insurance Corporation announced Tuesday that it would increase the amount that the agency would insure. The FDIC is the agency that insures depositors in case of a bank failure.

Chairwoman Shelia Bair issued a statement asking that Congress allow her agency to increase the $100,000 limit per account, which was set in 1980. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," she said

Mortgage applications plunge

In yet another sign of the economic crisis, the Mortgage Bankers Association said Wednesday that mortgage applications plunged 23% last week.

The MBA said its seasonally adjusted index of mortgage application activity dropped to 455.4 in the week ended Sept. 26, down from 591.4 the prior week.

Turmoil in the banking and finance industries has resulted in a credit freeze, making it difficult for prospective homeowners to take out loans. The market is also experiencing a glut of foreclosures.

In an unprecedented move, the U.S. government in September took over the mortgage giants Fannie Mae and Freddie Mac, with a rescue plan that could inject $100 billion into each of them just to keep them afloat.

The association also reported steep declines in other weekly indexes tracking housing finance.

The refinance index plummeted 34.7% to 1333.9 from the prior week. The seasonally adjusted purchase index fell 10.9% to 304.8.

The average interest rate for 30-year fixed-rate mortgages slipped to 6.07% from 6.08%, the association said.

Consumer confidence up slightly

A key indicator of consumer confidence rose surprisingly in September, the highest reading since April, but the index was measured before all of last week's developments in the credit crisis.

The Conference Board said Tuesday that its Consumer Confidence Index rose to 59.8 from an upwardly revised 58.5 in August.

A survey of economists had expected the index to fall to 55, according to Briefing.com.

Despite the gain, the index was well below year-earlier levels as consumers grapple with a weak job market, falling home values and a volatile economy. Last September, the index stood at 99.5.

"These results did not capture all of the tumultuous events in the financial sector this month, and until the dust settles a bit more, we will not know the full impact on consumers' expectations," said Lynn Franco, director of the Conference Board Consumer Research Center.

Franco added that shocks tend to have a temporary adverse impact on consumer confidence for up to four months, unless the volatility results in significant job losses that extend that period.

This month, Wall Street and Main Street were rocked by the bankruptcy of Lehman Brothers, the rescue of American International Group, a series of bank failures and mergers and the debate over the $700 billion bailout package.

The turbulent stock market and the weak labor market will likely weigh on consumer confidence for months to come, according to Adam York, an economist at Wachovia. He noted that lower gas prices may be one reason why consumer confidence made slight gains this month.

"But this is not a sign that we're out of the woods. Confidence will remain under pressure for some time to come, certainly into next year," York said.

York said that the expected declins in personal consumption, a predicted loss of 150,000 jobs this month and an expected hike in the unemployment rate will continue to negatively impact consumer confidence.

Consumer outlook
The survey showed that consumers have an increasingly negative outlook for their circumstances in the short term, but expect their future to improve.

The Present Situation Index decreased to 58.8 from 65 in August, and from 65.8 in July. The Expectations Index rose to 60.5 from 54.1 in August and from 42.7 in July.

Consumers surveyed were increasingly negative regarding the state of the economy. Those who rated business conditions as "bad" increased to 34.2% from 32.7%, while those claiming business conditions are "good" declined to 12.5% from 13.7% last month. Last month, out-of-work Americans filed for jobless benefits at the highest rate in seven years.

Consumers' assessment of the labor market continued to worsen as well. Those saying jobs are "hard to get" rose to 32.8% from 31.7% in august, while those claiming jobs are "plentiful" decreased to 12.2% from 13.5%

However, the outlook for the job market slightly improved. The percentage of consumers anticipating fewer jobs in the months ahead declined to 26.8% from 30%, while those anticipating more jobs increased to 11.8% from 10.7%.

Prospects for better incomes decreased slightly, with 14.2% of consumers expecting to earn more, down slightly from 15.4%.

The index was based on a survey of 5,000 U.S. households conducted by TNS for the New York-based Conference Board, a business research organization. The index uses 1985 as its benchmark, setting the index at 100.

In a separate report Tuesday, home prices fell by the sharpest rate ever in July, 16.3%, according to Standard & Poor's/Case-Shiller's 20-city housing index. That's the largest drop since 2000

Mortgage Insurance Applications Down In August

New applications for mortgage insurance dropped to the lowest level in over a year, while new mortgage defaults and cures of existing defaults also increased during the month, according to a mortgage insurance association.

Mortgage insurance applications are typically required for home buyers who make less than a 20% down payment on a home purchase. In August, the number of new applications dropped to the lowest level in more than a year, at 65,546 applications, down from 86,734 applications in July, and 206,457 applications in August 2007. Newly issued policies also fell, to 53,476 new policies with a total value of $10.2 billion from 70,588 written for a total of $12.3 billion in July, mirroring steadily declining home sales in the U.S. The group wrote no bulk policies on pools of mortgages in August.

Borrower action on overdue mortgages stepped up in August, with increases in both the number of insured home mortgages that went into default as well as an increase in the number of defaulted mortgages that cured, or were brought current.

In August, 41,783 defaulted mortgages were brought into compliance, up from 39,229 brought into compliance in July.

Defaults also rose, to 72,818, from 68,831 in July.

The figures for the month of August were released Tuesday by the Mortgage Insurance Companies of America, which represents the largest private mortgage insurers and reports on delinquencies of mortgages they cover.

Primary insurance in force was only slightly changed for the month, at $801.7 billion, from $801.6 billion in July.

Insurers represented by the figures are AIG United Guaranty, a unit of American International Group (AIG), Genworth Mortgage Insurance Corp., a unit of Genworth Financial (GNW), Mortgage Guaranty Insurance Corp. (MTG), PMI Mortgage Insurance Co. (PMI) and Republic Mortgage Insurance Co., a unit of Old Republic International Corp. (ORI).

Consumer spending loses steam

Personal spending stagnated in August as the slowing economy continued to weigh on consumers, according to a government report released Monday.

The Commerce Department reported Monday that personal spending was virtually unchanged in August. Economists had forecast a 0.2% increase in personal spending.

Spending has not been this weak since February, when it was also flat.

Personal income, meanwhile, increased by 0.5% in August after a revised 0.6% decline in July. Economists surveyed by Briefing.com were expecting income to have grown by 0.2% last month.

After adjusting for taxes and certain price changes, however, real disposable income contracted 0.9%, according to the report.

"With the labor market remaining very weak, slow to negative growth in disposable income will most likely plague the consumer for at least the next six months," said Adam York, an economist at Wachovia Economics Group.

Consumer spending increased in May and June thanks to billions of dollars in payments sent to Americans as part of the Economic Stimulus Act of 2008.

The stimulus package was aimed at boosting consumer spending, which makes up the bulk of economic activity. But that spending waned as the stimulus program wound down.

The government said Friday that gross domestic product, the broadest measure of the nation's economic health, expanded at an annual rate of 2.8% in the April-June quarter, down from the 3.3% growth rate previously estimated.

With consumer spending accounting for two-thirds of the nation's GDP, "it's pretty clear now that were looking at a negative GDP number this quarter," said Bob Brusca, an economist at Fact and Opinion Economics.

Brusca noted that energy prices were subdued in August and that contributed to the income growth registered in the month. But he warned that "with weakness creeping into the economy, the outlook for income growth is not very good."

Monday's report comes as Congress prepares to vote on a controversial $700 billion bailout of the financial system.

The plan would use tax dollars to buy up bad mortgage-related assets from Wall Street companies in a effort to stabilize the financial markets and prevent further damage to the economy.

FDIC chief : Hopes of home loan bailout

As Congress moves on the financial bailout plan, restructuring of troubled mortgages should be part of the final package, the head of the Federal Deposit Insurance Corp. said Tuesday.

FDIC Chairman Sheila Bair said she hoped that changes on home loans "will be a feature of that."

Under the $700 billion proposed bailout plan, the government could acquire troubled mortgage assets or provide a guaranty for delinquent loans, buying them and removing them from the overall pool of mortgages, Bair suggested.

Mortgage finance giants Fannie Mae and Freddie Mac, taken over earlier this month by the government which is operating them under a conservatorship, bought mortgages from banks and other lenders and guaranteed them in exchange for fees.

"We're highly supportive of Treasury's initiative," Bair said, stressing the need for a restructuring of distressed home loans in a comprehensive, streamlined manner.

Bair was speaking at a Brookings Institution conference on housing. She also reaffirmed that she believes it unlikely that the FDIC would have to use its "wide flexibility" to borrow from the Treasury if needed.

IndyMac failure sets back fund
The failure in July of Pasadena, Calif.-based IndyMac Bank tipped the federal deposit insurance fund - now at around $45.2 billion - below the target minimum level set by Congress, but Bair has said the agency's plan to raise the premiums charged U.S. banks and thrifts to replenish the fund likely will be sufficient.

"I think actually the banking sector is holding up pretty well," Bair said. The recent collapse of major investment banks and the cataclysm on Wall Street has shown that "there is some virtue to regulation. There is some virtue to leverage constraints," she said.

Investment banks have had more lenient guidelines in how highly leveraged they could become, with a much higher ratio of debt to their capital than commercial banks regulated by the FDIC that have access to the deposit safety net.

Referring to Treasury Secretary Henry Paulson and the current tumultuous events, Bair said, "Hank's got a whole lot of other people knocking on his door. I don't want to add to people knocking on his door."

Lennar sales tumble 53%

Lennar Corp., one of the nation's largest homebuilders, said Tuesday its third-quarter loss narrowed as it cut costs, but revenue fell by more than half amid a prolonged housing slump.

The Miami-based company's loss for the quarter ended Aug. 31 was $89 million, or 56 cents per share, compared with a loss of $513.9 million, or $3.25 per share, a year ago.

Revenue fell 53% to $1.11 billion from $2.34 billion.

Analysts surveyed by Thomson Reuters, on average, predicted a loss of 52 cents per share on revenue of $1.07 billion.

Deliveries of homes fell 49% in the quarter and the average sale price of homes fell 9%.

Lennar: More government help needed
"While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards," Chief Executive Stuart Miller said in a statement.

Miller said that the landmark housing stimulus bill enacted in July, which included a temporary, $7,500 tax credit for first-time homebuyers, has failed to stabilize the skid in U.S. home prices. He said more government intervention is needed.

Lennar (LEN, Fortune 500) has homebuilding operations in 14 states, including California and Florida, the hardest-hit housing markets in the nation.

Like other builders, the company's business has been hurting due to the combination of weakened demand for new homes, tightening mortgage lending standards and buyer uncertainty over how long home values will continue to drop. The business is also facing mounting competition from deeply discounted, foreclosed properties and other preowned homes on the market.

Builder cutting construction costs, jobs
To cope, Lennar has cut prices and is "aggressively" reducing construction costs, cutting jobs and consolidating divisions in an effort to improve results.

The builder ended the third quarter with $857 million in cash - an increasingly important indicator as the slide in home sales continues - and no outstanding borrowings under its credit facility.

During the quarter, Lennar delivered 3,791 homes, down from 7,636 in the same period last year. The sharpest drop occurred in Western markets.

The average sale price of homes delivered fell to $270,000 as the builder cut prices or offered incentives, such as discounts matching the $7,500 tax credit for first-time buyers.

In all, Lennar offered sales incentives amounting to $45,900 per home delivered during the quarter. That compares with incentives valued at $46,000 per home delivered in the same period last year.

New orders totaled 3,387 homes, down 42% from 5,804 last year.

Fewer buyers back out of home contracts
The cancellation rate from buyers backing out on home contracts was 27%, improving from 32% in the same quarter last year.

Lennar's backlog, or homes under contract yet to be delivered, fell during the quarter. As of Aug. 31, the figure stood at 3,554, compared with 6,367 units at the close of the same quarter last year.

The value of homes in backlog plunged by 53% from a year ago to about $1.05 billion.

Loss on land sales totaled $28.8 million in the third quarter, including $21.4 million of valuation adjustments and $10.9 million of write-offs of deposits and pre-acquisition costs related to about 900 home sites under option that Lennar does not intend to buy.

For the first nine months of Lennar's fiscal year, the company's net loss narrowed to $298.1 million, or $1.88 per share. That compares with a loss of $689.4 million, or $4.37 per share, in the same period last year.

Revenue fell to $3.3 billion, compared with $8.01 billion in the same period last year.

On the Internet, everybody knows your dog's name

If you suspected there were some security holes in all your password-protected online accounts - banking, e-mail, etc. - you would be right. And Sarah Palin, the Republican vice-presidential candidate who just had her Yahoo e-mail hacked, would agree.

But as the Palin episode shows, the weak link isn't the passwords themselves but those security questions you have to answer in case you forget the passwords. You know the drill. You set up an online checking account and answer questions about your high school mascot, the street you grew up on, and the name of your dog, which supposedly only you can answer. It's all safe as long as crooks don't have the answers, which now - thanks to blogs, Facebook, Twitter, and every other public forum people use to put every last detail of their lives online - they do.

Herbert Thompson says all he needs to break into a bank account is a person's name and place of employment - and about an hour, give or take. Thompson, of New York City consulting firm People Security, certainly knows more about hacking than your average Joe, but says that he - or an actual crook - doesn't need any special tricks, just patience and a facility with Google (GOOG, Fortune 500).

"Having the answer to biographical questions has quickly become the keys to the online kingdom," Thompson says. That is how the bad guys got into Palin's e-mail. Further proof of the value of this information, he points out, is that the black-market price of a set of answers to typical security questions for an individual is eight to ten times the price of a password. Passwords can change; basic facts of your identity generally don't.

If you have ever had someone successfully "phish" your bank account, you know what the cost is personally. But for the banks and merchants who are usually left holding the bag when an account is stolen, the loss is compounded.

Companies don't divulge what they spend on preventing such fraud, but the market for "identity-proofing" services is "safely in the billions," says Avivah Litan, a security analyst with research firm Gartner. "So you can imagine what is at stake, and these kinds of attacks are getting more widespread and increasingly sophisticated."

Is there a way to plug the security hole? Quite possibly. In Palo Alto, another security expert, Markus Jakobsson, is preparing to launch a new kind of security-question system. Dubbed Blue Moon Authentication, the application relies on preferences rather than discreet factual - and thus extremely Google-able - tidbits about you. With Jakobsson's approach, users are asked to answer whether they like or dislike, say, Chinese food, heavy-metal music, garage sales, tattoos, or cats.

"It's easy for you to remember whether you like Chinese food and dislike tattoos, because it's part of who you are," says Jakobsson, a principal scientist at the Palo Alto Research Center. "But it would be very hard for a random person to guess enough of the answers correctly to gain access to a password reset."

If a bank were to adopt a Blue Moon security system, customers would have to submit to a battery of questions about their tastes and preferences. (It's a pain- but presumably less painful than being robbed.) Anyone trying to get into an account without a password would have to answer a series of questions about preference. Getting 11 out 16 correct, Jakobsson says, proves with 99.5% accuracy that people are who they say they are.

Whether that claim proves true should be known soon. Jakobsson is trying to license the technology to companies that will build and ultimately manage the security system. He's in the throes of hammering out a contract with an "Internet company that practically everyone online in the country has an account with," he says. He won't give the company's name, but sources say it's probably eBay. Neither Jakobsson nor eBay (EBAY, Fortune 500) would comment, but word is that by March or April, eBay users and, perhaps more specifically, eBay's PayPal customers, will have the choice of using Blue Moon as the mode to identify themselves and protect their passwords.

"Will the bad guys adapt to the stuff that Jakobsson is proposing?" asks Herbert Thompson, who's a Blue Moon fan. "They will try, and they have huge resources to throw at it. But when it's compared to finding out the name of a dog, it would be a huge step forward from where we are now."

Oil drops below $100

Oil prices tumbled Monday as concerns about global economic weakness outweighed signs that lawmakers are close to passing a $700 billion bailout of the U.S. financial system.

Light, sweet crude for November delivery was down $8.19 to $98.70 a barrel in morning trade on the New York Mercantile Exchange.

The price of oil spiked last week, marking its largest one-day gain ever, as traders scrambled to buy futures before the expiration of the October contract.

But that rally was "technical in nature" and did not result in any "bullish follow through," said Stephen Schork, oil industry analyst and publisher of the Schork Report.

The market is "focusing on the real demand destruction in place right now," Schork said.

Economic weakness worldwide, combined with a seasonal downturn in demand for petroleum products, could drive the price of oil to $75 a barrel, according to Schork.

Bailout. Monday's decline in the price of oil comes as Congress appears set to vote on a massive intervention in the financial system.

The controversial plan would use up to $700 billion in tax dollars to buy tainted mortgage-backed securities from Wall Street companies.

The plan seeks to make banks less reluctant to lend by removing the threat of future losses on the bad mortgage-related assets. That, according to proponents of the plan, will help get the economy back on solid ground.

Dollar. Oil prices were also pressured Monday by a stronger dollar.

The 15-nation euro fell to buy $1.4402 in morning trade from $1.4618 late Friday. The U.S. currency also gained ground against the British pound and held steady against the Japanese yen.

The dollar's strength comes as the crisis on Wall Street appears to be spreading to the European financial system.

In Germany, government regulators and several banks tossed a multibillion euro line of credit to Hypo Real Estate Holding AG in move aimed at shielding the country's second largest commercial property lender from going under.

Over the weekend, Dutch-Belgian banking giant Fortis NV was partially nationalized with a $16.4 billion rescue from the governments of Belgium, the Netherlands and Luxembourg, after investor confidence in the bank evaporated last week.

Gasoline. The national average price for a gallon of gas fell one cent overnight.

Regular gasoline fell to $3.643 a gallon Monday from $3.655 the day before, according to the American Automobile Association's daily survey.

Diesel prices also came down. The national average price for a gallon of diesel fell overnight to $4.084 from $4.095.

Gas shortages: get ready for more

While Congress and Bush administration officials have been working to complete a bailout plan and stem the financial contagion on Wall Street, a different kind of economic crisis emerged across the South this week: A severe, hurricane-related gasoline shortage has curtailed trucking from Atlanta to Asheville, N.C., and created a wave of panic buying among motorists.

The return of gas lines has largely flown under the radar of politicians who are usually keenly attuned, because their constituents are, to what's going on at the pump. But more of the Capitol gang should be paying attention to this.

That's because nationwide our gasoline inventory is shockingly low. Liquidity must be restored soon to this market, or we could be facing a crippling run on the gasoline bank. And if you think Americans are outraged about Wall Street, wait until their Main Street grocery store doesn't get the bread and milk delivery for a week or two.

Back to the '70s
The scenes over the past several days in places like Nashville, Tenn., Anniston, Ala., and western North Carolina looked like file footage from 1979 - with bags over empty gas pumps and quarter-mile long lines of cars waiting to fill up at stations that hadn't run out. AAA reported that drivers were so desperate that they were following tankers to gas stations to ensure a fill-up.

In Georgia, Gov. Sonny Perdue got a waiver from the Environmental Protection Agency to temporarily allow stations to sell high-sulfur gasoline. (Correction: An earlier version of this story said Louisiana received the waiver and incorrectly named Perdue as that state's governor.) In Alabama, Gov. Bob Riley ordered a state of emergency to prevent price gouging by station owners that do have gas.

What's going on? The immediate answer is that the double whammy of Hurricanes Gustav and Ike, which swept through the Gulf of Mexico earlier this month, caused much of the Gulf's oil drilling and refinery production to be shut down. In particular Ike, which hit refinery-rich Southeastern Texas on Sept. 13, caused massive power outages in the Galveston and Houston areas.

As of this week, more than a dozen refineries around Texas City and Port Arthur were not operating at full capacity and, according to the Department of Energy, six refineries, with a combined capacity of 1.6 million barrels a day, were still not running at all.

A bigger problem
But while the current shortages can be traced directly to the two hurricanes, the severity of the problem points out a bigger issue: The U.S. has been operating for a while with razor-thin spare gasoline capacity.

In its most recent Weekly Oil Data Review, Barclays Capital pointed out that the U.S. gasoline inventory has reached its lowest level since August 1967, when demand was a little more than half its current level of 9.3 million barrels a day. At 178.7 million barrels, inventories are 21.6 million barrels below their five-year average.

None of this surprises industry watchers such as Matt Simmons, the chairman of Houston energy industry investment bank Simmons & Co. and chief spokesman for the Peak Oil movement. I recently wrote a profile of Simmons for Fortune ("The prophet of $500 oil") and I can report that he has been warning about the potential of gasoline shortages in the U.S. for months.

"Our system is so fragile," he told me recently. "All you need is a tiny change to go from 'Oh, we're in fine shape' to an unmitigated disaster."

Simmons points out that the gasoline weekly stock reports have been trending sharply downward since last winter (with a brief upturn in the spring), and that even before Gustav and Ike we were in "just in time" supply mode.

Getting back to a safer level of extra capacity isn't simple, either. Once the refineries get back up and running, they'll drain the already low crude oil inventories. Unless gasoline demand stays low, Simmons believes, we'll have a hard time clawing back to stability.

That's why he worries about a top-up catastrophe that could cripple the trucking industry and disrupt food deliveries.

As he told me the other day: "If we end up having gasoline shortages, the odds are about 90% that Americans will do what we always do: We'll top up our tanks. And in topping up our tanks, within three or four days we'll drain the pool dry and then within seven days we'll run out of food."

That sounds awfully dire. And it probably won't happen. But, then again, a couple of months ago hardly anybody would have predicted that AIG would collapse, Congress would be mulling a Wall Street bailout, and '70s-era gas lines would be back.

InBev shareholders OK Busch deal

InBev SA shareholders on Monday backed the company's $52 billion, or €32.8 billion, takeover of Anheuser-Busch Cos. - a deal that would form the world's largest brewer.

They also approved changing the company's name to Anheuser-Busch InBev and a capital increase and share issue that would raise up to $10 billion, or €6.9 billion, to pay for part of the deal.

Cutbacks in U.S.
InBev chief executive Carlos Brito also tried to soothe U.S. worries over possible job losses at Anheuser-Busch, saying he was sticking to his commitment not to close or make new cutbacks to its 12 "very efficient" breweries.

But he added some conditions to this promise: "provided there are no new or increased federal tax or state excise taxes or unforeseen extraordinary events that would negatively impact A-B's business."

The International Brotherhood of Teamsters, a trade union representing some 8,000 Anheuser-Busch truck drivers and other workers, warned that it would hold the company to its promises.

"Unexpected events can happen. The workers of Anheuser-Busch in the United States intend to keep the company to its word at keeping those plants open," said Timothy Beaty, the teamsters' director of global strategies.

InBev Chief Executive Carlos Brito said in a statement that the shareholders' vote of support showed they saw the strategic and financial benefits of combining with Anheuser-Busch.

"We are very pleased to complete this important milestone and we remain on track to close the transaction by the end of the year," he said in a statement. The deal still needs to be cleared by regulators and by Anheuser-Busch shareholders.

Capital increase approved
The company will also have to announce the detail of the share issue, now that it has secured shareholders' agreement for a capital increase to cover an existing equity bridge financing of $9.8 billion in place since the deal was announced in July. It also asked for an extra margin to cover any major currency fluctuations until the share issue is finalized.

More than three-quarters of InBev's shareholders voted in favor of the deal, the name change and the capital increase at a meeting at the company's Leuven, Belgium, headquarters.

They also backed the appointment of Anheuser-Busch (BUD, Fortune 500) chief executive August Busch IV as a director in the new company and changing control of Anheuser-Busch's existing $45 billion senior credit facility and the equity bridge financing of $9.8 billion.

InBev had already said its controlling shareholder - Stichting InBev, which owns a 52% stake - backed these changes with the support of at least another 11%.

Stichting InBev is controlled by three Brazilian financiers - including the investment banker and billionaire Jorge Paulo Lemann - and a group of Belgian aristocratic families.

The takeover would bring together the makers of Budweiser, Michelob, Bud Light, Stella Artois and Beck's and create the world's largest brewer, as well as the third-largest consumer product company.

InBev is currently the world's second-largest beer-maker, narrowly behind SABMiller. Swallowing Anheuser-Busch would see it capturing half of the U.S. beer market and a fifth of China and Russia's.

Foothold in emerging markets
The Belgian-Brazilian brewer said its foothold in emerging markets such as China and Brazil would boost sales of Anheuser-Busch's brands.

Anheuser-Busch agreed on July 14 to be taken over by InBev, heading off what had promised to be a long and acrimonious takeover battle for the St. Louis-based brewer. Ahead of the takeover, the company had already planned to save money by shedding 1,185 positions - mostly by offering early retirement and not filling existing vacancies.