Bank of America may shed 35,000 jobs

Bank of America said Thursday it plans to slash up to 35,000 jobs over the next three years as it absorbs Merrill Lynch and contends with the deepening recession.

The Charlotte, N.C.-based bank, which will be the nation's largest financial services firm when the Merrill Lynch (MER, Fortune 500) deal closes in coming weeks, said it will announce a final job reduction plan in early 2009.

The cuts will come from both companies and will affect all lines of business. Bank of America had 247,000 employees, as of Sept. 30, while Merrill Lynch had 60,900 at the end of the third quarter.

While Bank of America had not announced any large-scale job cuts so far this year, Merrill Lynch eliminated about 3,300 employees since the fall of 2007, mainly in its global markets and investment banking division and in support areas.

"The reductions are designed to eliminate redundancies created as a result of the merger with Merrill Lynch and to reflect the current recessionary environment," Bank of America (BAC, Fortune 500) said in a statement.

Bank of America is likely to keep many of Merrill Lynch's financial advisers, who numbered 16,850 at the end of September, said Scott Rothbort, president of Lakeview Asset Management, which owns Merrill Lynch and plans to hold onto its Bank of America shares after the merger. It's one of the main reasons why the bank bought the nation's largest brokerage firm.

"Most of the brokers are going to stay," Rothbort said.

Those in the companies' capital markets divisions - the traders, analysts and sales representatives - won't be as lucky, he predicted.

The announcement comes just a week after shareholders at both companies approved the deal. The merger ends the independence of Merrill, the storied Wall Street investment bank founded in 1914.

The deal valued Merrill at $50 billion when it was announced on Sept. 14, the day before Lehman Brothers declared bankruptcy. Bank of America shares have fallen 46% since then, putting the value on the merger at just under $20 billion.

Since the merger was announced, both Bank of America and Merrill Lynch have received funds under the Treasury's Troubled Asset Relief Program (TARP) established as part of the $700 billion bailout of the financial services industry. Bank of America received $15 billion, while Merrill Lynch got $10 billion.

Responding to criticism that banks haven't used the bailout money to lend, Bank of America is running advertisements detailing their commitment. The bank says in the past three months it has funded more than $50 billion in home loans, financing more than 250,000 homes.

"The tightening mortgage market should not squeeze out qualified homebuyers," the ad reads. "That's why we're putting our capital where our mouth is."

Bank of America joins a growing list of financial services companies slashing staff amid the continuing credit crunch and downturn in consumer spending. Citigroup (C, Fortune 500) said last month it would cut more than 50,000 jobs, while Morgan Stanley (MS, Fortune 500) said it would slash 10% of its institutional securities division and 9% of its money management business. In October, American Express (AXP, Fortune 500) announced it would shed 7,000 jobs and Goldman Sachs (GS, Fortune 500) said it would cut 3,260 positions.

The financial sector overall has lost 142,000 jobs over the past year, according to the Bureau of Labor Statistics.

Congress demands answers on bailout

Key lawmakers blasted Treasury Wednesday for its handling of the $700 billion financial rescue plan, saying it lacks appropriate measures to ensure the bailout is working.

At a hearing held by the House Financial Services Committee, committee chairman Barney Frank, D-Mass., accused Treasury of failing to address its obligation to address foreclosures and enforce lending obligations on banks.

"Refusal so far to use money for that purpose [of foreclosures] undermines the intent of the bill," said Frank. "What troubled me was when Treasury was asked by the Government Accountability Office, 'What are you doing to ensure banks are lending,' they appeared to be saying, 'We're not going to try to find that out.' "

The hearing serves as a follow-up to two reports on how Treasury has conducted its bailout program, including the Congressional Oversight Panel's report on the Troubled Asset Relief Program submitted to Congress Wednesday, as well as a Government Accountability Office report delivered to lawmakers last week.

Congressmen on both sides of the aisle used the scathing reports as a launching pad, lambasting Treasury for a general lack of clarity about its strategy as well as a dearth of measures that ensure banks are using the bailout funds for their intended purposes.

Addressing Treasury's bailout point man Neel Kashkari, the committee's ranking member Spencer Bachus, R-Ala., said taxpayers have a right to know how their tax dollars are being used.

"The taxpayer has the right to expect that you use the same standard of care as when you were working for Goldman Sachs and answering to your shareholders and investors," Bachus said. "The detailed explanations we've received from the GAO stand in stark contrast to the lack of information we've received from Treasury or financial institutions that received funds from TARP."

Rep. Maxine Waters, D-Calif., said she has "seen nothing" from Treasury that that gives her confidence in their ability to manage the bailout. Rep. Carolyn Maloney, D-N.Y., called the program "a dismal failure."

In testimony, Rep. Bill Pascrell Jr., D-N.J, said, "TARP funds have been greatly mismanaged to date and they have not been made to help consumers purchase the goods that they need."

The committee is also hearing testimony from Kashkari, Acting Comptroller General Gene Dodaro and two members of a congressional oversight panel: Harvard law professor Elizabeth Warren and Rep. Jeb Hensarling, R-Texas.

The oversight panel report said that the Treasury Department must do more to rescue struggling homeowners and ensure that the money it's using to bail out banks is working, according to a draft report by a congressional oversight panel released Wednesday.

The GAO report said Treasury has yet to address "critical" oversight issues to ensure the plan is working, including the need for more staff, better management, an improved transition effort and facilities to ensure banks are using bailout funds effectively.

On Monday, the Senate confirmed a former federal prosecutor, Neil Barofsky, whose job it will be to ensure that the program is not tainted by corruption.
First batch of funds running dry

With just $15 billion of the first $350 billion of TARP funds left unallocated, some political analysts expect Paulson to ask for the second half of the $700 billion bailout.

But to get the remaining balance, Paulson will have to convince Congress the financial sector needs it -- and that the Treasury will use the funds appropriately. That may be difficult with the increasing criticism the Treasury has faced from lawmakers.

After the Emergency Economic Stabilization Act was signed into law Oct. 3, Paulson immediately received $250 billion with which to work. The next $100 billion came on Oct. 14, when President Bush asked Congress for the next batch of funding.

Thus far, the bulk of the first $350 billion has been allocated for capital investments in banks. Of the $250 billion allocated, the Treasury has sent out more than $161 billion in checks to 52 banks in exchange for preferred shares and a high dividend.

Treasury has also sent $40 billion to American International Group (AIG, Fortune 500) as part of the insurer's $152 billion bailout, allocated $20 billion for an additional capital investment in Citigroup (C, Fortune 500) and set aside $20 billion to backstop losses from a separate Federal Reserve plan to buy up debt backed by consumer loans.

Stocks slammed on jobs report

Stocks tumbled Friday morning after the government reported the economy lost 533,000 jobs in November - the biggest monthly decline in 34 years.

The Dow Jones industrial average (INDU) lost 200 points or 2.3% over an hour into the session. The Standard & Poor's 500 (SPX) index lost 2.5% and the Nasdaq composite (COMP) lost 2.6%.

Stocks tumbled Thursday after AT&T (T, Fortune 500) and other corporations announced over 20,000 job cuts, adding to worries ahead of the jobs report.

Jobs: Employers cut 533,000 jobs from their payrolls in November, the biggest monthly decline since 1974, and far above the 325,000 cuts that Wall Street economists were expecting.

September and October's job losses were revised up, bringing the 3-month decline to 1.3 million, the largest 3-month job loss total since World War II. So far this year, 1.9 million jobs have been lost, topping the 1.6 million lost in the 2001 recession.

Although the United States has been in a recession since December 2007, the credit crisis has intensified this fall, causing a series of bank failures and government bailouts as the financial markets were thrown into turmoil.

The unemployment rate, generated by a separate survey, rose to 6.7% in November from 6.5% in the previous month. It was short of the 6.8% economists were expecting, but still brought the unemployment rate up to the highest level in 15 years. (Full story)

The report is maybe one of the worst the Bureau of Labor Statistics has ever produced in its 124-year history, BLS Commissioner Keith Hall told lawmakers Friday at a Joint Economic Committee.

Company news: Executives from Detroit's Big Three automakers are back on Capitol Hill Friday, asking a House panel for a massive loan package to rescue their struggling businesses.

Executives from GM (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler testified before the Senate Thursday. The Big Three are seeking $34 billion in aid to rescue their struggling industry, up from an initial request of $25 billion last month.

Separately, GM on Friday said it will lay off about 2,000 workers in the first quarter of next year.

Bonds: Treasury prices fell, raising the yield on the benchmark 10-year note to 2.61% from 2.56% late Thursday. The 10-year yield dipped below 3% last week for the first time since the note was first issued in 1962. Treasury prices and yields move in opposite directions.

The yield on the 3-month Treasury bill slipped to 0.01% from 0.015% Thursday, near the 68-year low of zero hit last month. The short-term bill is seen as the safest place to put cash in the short term. The low yield means investors would rather preserve cash despite little or no interest than risk the stock market.

Lending rates showed little improvement. The 3-month Libor rate held steady at 2.19% unchanged from Thursday, according to Bloomberg. Overnight Libor fell to 0.28% from 0.52% Thursday. Libor is a key bank lending rate.

Other markets: In global trading, European markets tumbled, one day after the European Central Bank, the Bank of England and Sweden's Riksbank all lowered interest rates. Asian markets mostly ended lower although Hong Kong's Hang Seng managed to rise, gaining 2.5%.

The dollar gained versus the euro and fell against the yen.

U.S. light crude oil for January delivery fell 89 cents to $42.78 a barrel on the New York Mercantile Exchange, after ending the previous session at a nearly 4-year low.

COMEX gold for February delivery lost $14.50 to $751 an ounce.

Gasoline continued its fall to nearly four-year lows, with prices down 1.6 cents to a national average of $1.773 a gallon, according to a survey of credit-card swipes released Friday by motorist group AAA. Prices have been sliding for 2-1/2 months and have dropped more than $2 a gallon, or 54%.

Taxing our gas guzzling relapse

Gas prices have plummeted 44% since peaking at over $4 a gallon this summer, and are now averaging around $2.30.

There's some evidence suggesting Americans are using the savings not to buy groceries or make home payments, but instead to drive more. That may, in turn, drive up demand and push prices right back up.

So while gas prices are still well below $3 a gallon, is now the time to pass a gas tax in an effort to keep demand down?

And will a President Obama, who wants to cut greenhouse gas emissions, have the political firepower to call for a tax that most politicians are unwilling to discuss - even though many economists say it would be the most efficient way to reduce global warming?

"There's no question, it will be successful as a way to cut consumption," said Gary Becker, a Nobel Laureate economist at the University of Chicago. "It's certainly a better time to enact it, than when gas was at $4 a gallon."

To those who support a gas tax, cutting consumption has many benefits.

First, it reduces greenhouse gas emissions. It also helps alleviate congestion and eases the burden on the country's aging roads and bridges.

While it is likely to raise prices immediately, the tax would also simultaneously act to reduce consumption, so the market price for gas would likely fall. That would mean less money for OPEC or Exxon Mobil.

If the government raised the gas tax by $1, that's about $140 billion dollars a year that could be used for schools, roads, or whatever the feds wanted to spend the money on.

"If we can cut gas consumption, we can cut oil imports and we cut how much (money) we send to overseas nations," said Becker.

As gas prices passed $4 a gallon this summer, there was ample evidence that Americans were driving less.

Sales of big cars and trucks plummeted. As fall approached, it was clear Americans were changing their driving habits.

Numbers complied by MasterCard's SpendingPulse market report showed gas consumption falling by as much as 9% in early October, a deeper decline than the 4% or 5% seen throughout the summer. Government figures for October showed a drop of over 4%, also outpacing earlier government estimates.
Americans love to drive

Gas prices have fallen sharply since the summer and Americans once again are getting behind the wheel.

The latest MasterCard report shows a drop of only 4%, while government figures show a decline of 2.5%, despite an economy that only appears to be getting worse.

Sales of trucks are improving. J.D. Power and Associates say that the most recent figures show that of people buying new vehicles, a greater number are buying trucks compared to previous months.

While the renewed interest in truck sales is partly due to bigger incentives and pent-up demand, falling gas prices most certainly played a part.
There's got to be another way

A gas tax is of course just one way of cutting consumption, and some feel it's too crude a tool.

"It wouldn't be the most efficient way to decrease energy demand," said Chris Lafakis, an economist at Moody's Economy.com, an economic consultancy.

Lafakis feels gas demand is too inelastic to be reduced with a tax - that is, people live too far from work and have to drive no matter how high the price.

A better way to reduce oil consumption, he says, would be for the government to promote different fuels - like natural gas, biofuels, or electricity.

With at least $25 billion promised to U.S. automakers, he feels that the feds have ample leverage to get them to build cars that use less gas.

There are also those that downplay the dangers of global warming and say what the country needs is more energy at a cheaper price.

"You do not get more energy by taxing energy," said David Kreutzer, an energy economist at the Heritage Foundation, a conservative think tank. "The damage to the economy is fairly significant, while the case for catastrophic global warming just doesn't hold water."

There's also the criticism that a gas tax is regressive - it hits poor people more than rich ones. Now would be a terrible time for a new tax, with people losing jobs and the economy on the skids.

But proponents say a gas tax need not be a new tax, just a shift in taxes.

Andrew Samwick, an economic professor at Dartmouth, suggested lowering the payroll tax - which evaluated from an economists' standpoint discourages people from working, and replacing it with a gas tax, which would discourage people from driving.

"Is there anybody who would actively promote the reverse," asked Samwick.
Gas tax? Don't bet the farm

As to whether Obama or the new Congress would attempt such a thing, no one spoken to, for this story, thought it was likely in the short term.

A spokesman for Obama said they were too busy dealing with the transition right now to comment on policy matters.

Politicians have long resisted a gas tax, simply because they fear voters will kick them out of office for passing such a blatant tax.

Obama would be better off dealing with a more politically popular problem, like health care, said Samwick, in order to get some momentum rolling in his administration.

As for Congress putting their neck on the line and picking up with a gas tax, "you would have to invent a negative number for probability," he said.

Key consumer measure at all-time low

A key measure of consumer confidence fell to an all-time low in October as the financial crisis weighed on American household budgets.

The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index plummeted to 38 in October from an upwardly revised reading of 61.4 in September.

Last month's decline brings the index to its lowest level since its inception in 1967.

Economists were expecting the index to have declined to 52, according to a survey by Briefing.com.

"The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers' confidence," said Lynn Franco, director of the Conference Board Consumer Research Center, in a statement.

The nation's financial system has been under considerable strain in October as the credit crunch has hampered businesses ability to fund essential activities.

Stock prices have plunged as investors fear the global economy is on the verge of recession. The Dow Jones industrial average has fallen more than 27% in October.

While gas prices have come down significantly, which puts more cash in consumers' pockets, Americans appear more focused on the deteriorating job market.

So far this year, the economy has lost 760,000 jobs, according to the Labor Department's September payrolls report.

A case in point: Whirlpool Corp., the nation's largest home appliance maker, said Tuesday it will cut about 5,000 jobs by the end of 2009 to cope with the credit crisis and weak demand.

"In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter," Franco said.

Fed begins business lending program

The Federal Reserve started buying so-called commercial paper on Monday to jumpstart a critical but faltering lending market used by banks and big businesses.

To boost the $1.45 trillion pool of money - which was about $2 trillion a year ago - the Fed has begun buying high-quality commercial paper with a maturation period of three months. The program, known as the Commercial Paper Funding Facility (CPFF), will continue through the end of April 2009.

"This will be a vital facility until corporations can find an alternative," said Bill Larkin, portfolio manager at Cabot Money Management. "Companies can't operate without access to the commercial paper markets."

Several dozen companies registered for the Fed's program, including General Electric Co. (GE, Fortune 500), which is reportedly the largest issuer of commercial paper. Morgan Stanley (MS, Fortune 500) topped the name of Wall Street firms that registered. Car and home financer GMAC (GMA) said it was approved to make use of the facility, and American Express (AXP, Fortune 500) said it intends to use the facility as early as this week, but it did not yet sell paper to the Fed.

"American Express is always interested in broadening its sources of funding, and the CPFF provides us with access to a reliable source of short-term funding beyond 30 days," said company spokeswoman Jo Lambert.

The Fed could buy about $250 billion of paper to restore the market to its pre-credit-crisis levels, according to Lyle Gramley, a former Fed governor and current Stanford Group economist. And the number of participating companies - and the amount of paper that the Fed will buy up - could grow in coming weeks and months.

The Fed said it will not cap the total amount it lends out, but the central bank will limit purchases of companies' debt to the greatest amount of paper the company had outstanding this year. The amount of paper that the Fed bought will not be known until Thursday, when the central bank will make a weekly announcement about the facility's cost.
Crumbling market

Commercial paper is short-term debt that big businesses and financial institutions sell primarily to money-market fund managers and other institutional investors. The companies use the loans to fund day-to-day business operations, but the market has dried up as confidence on Wall Street has waned.

Since Lehman Brothers filed for bankruptcy on Sept. 15, total commercial paper has plunged by 20% - the greatest drop on record. Commercial paper outstanding is now at its lowest point since April 2005.

"The problem has grown in scope and magnitude over the past month more than anyone could have imagined," said Scott Anderson, senior economist with Wells Fargo. "Liquidity is freezing up in the short-term lending market, which can snowball very quickly into payroll cuts and other nasty developments."

Three-month paper has found the fewest buyers. Investors are worried that they'll end up holding debt for a company that won't be able to pay them back - or won't be there at all at the end of the maturation period. The vast majority of outstanding paper matures in a week or less, so companies have been forced to refinance their debt weekly - or even daily - and many have not been able to meet their credit needs. The lack of longer-term lending is worrisome for companies looking for financing for the last few months of the year.

The fourth quarter is the most critical period for lending, as financial institutions are hesitant to lend with the risk of taking a hit to their balance sheets at the end of the fiscal year. Uncertainty over the looming election has also made investors weary of doling out their funds.
Lower rates may be contagious

The central bank will charge a floating interest rate that will begin at 1.88% for unsecured debt and 3.88% for asset-backed commercial paper. Paper of lower credit quality is often backed with assets to entice borrowing, but rates are higher. The Fed's rates are competitive with current market rates and are lower than the 2.5% to 5% that borrowers were charged when the credit crisis first took hold in mid-September.

Some economists believe that the Fed's commercial paper rates will nudge other rates lower, like the 3-month Libor interbank lending rate, which currently sits at a high 3.51% level. That would be a major boost for the strangled credit market, as more than $350 trillion is assets are tied to Libor.

"The goal of the central banks is to lower Libor rates, because borrowing is so expensive for companies now," Anderson said. "There is no one magic solution, but this program will help lead to lower rates."

The Fed's actions have been criticized by some analysts who believe the facility doesn't address the sellers of lower quality paper, who have suffered the most since the credit crisis put a stranglehold on lending. Still, other economists say the Fed's efforts to buy up large amounts of commercial paper will restore confidence to the market.

GM signals more cuts

General Motors expects to meet or exceed its target for a 20% reduction in the cost of its salaried workforce, but a worsening sales outlook is likely to force additional cost and staffing reductions, a company spokesman said Thursday.

Final numbers on an early retirement program announced this summer are not yet available, said GM spokesman Tom Wilkinson, as many who signed up are still within a window during which they can change their mind. The final figure is due on Nov. 1.

GM has 32,000 U.S. salaried employees, and since it has set a 20% cost target rather than a headcount reduction goal, it has yet to say how many employees it expects will be leaving the company under the program. The company has previously announced some changes in health insurance for salaried staff that will meet some of the cost cut target.

Given the continued contraction in both North America and European sales, further moves to cut costs are likely, Wilkinson confirmed, including possible additional job reductions.

"We'll continue to assess our overall staffing needs," Wilkinson said. "Everybody in the business is looking at ways to tighten their belt."

The plans are detailed in a letter from Bill Tate, the head of human resources for GM North America, informing executives that GM (GM, Fortune 500) is taking immediate steps to reduce costs. They include suspending its matching contributions to 401(k) as of Nov. 1, and also suspending tuition reimbursement and adoption assistance as of the end of the year.

GM's U.S. sales have plunged 18% so far this year, while European sales have also fallen.

No additional cost or headcount reduction target is spelled out in the letter. There was also discussion of a potential merger between GM and Chrysler LLC. Talks of a possible combination have been widely reported, but it is not clear such a deal will be able to be completed. To top of page