Morgan under siege as other banks rally

Shares of Morgan Stanley and Goldman Sachs, the last two big investment banks, plunged again Friday as fears about the fate of the banking sector remained front and center in the ongoing global financial crisis.

The two companies have been among the hardest hit stocks during this devastating market decline. But shares of several other big bank stocks rallied during a wild, tumultuous day for the broader market.

Morgan Stanley (MS, Fortune 500) plummeted as much as 46% at one point Friday on news that the rating agency Moody's was weighing a potential downgrade of the long-term debt ratings of the company and its subsidiaries. The company's stock bounced back a bit at the end of the day but still finished 22% lower.

Earlier this week, Morgan Stanley was forced to deny rumors that its proposed $9 billion stock sale to the Japanese bank Mitsubishi UFJ was in danger of falling apart.

Still, despite several reassurances from Morgan Stanley and Mitsubishi that the deal would close as scheduled next week, investors remained jittery about Morgan's fate.

"The fundamental issue with financial stocks is that fear in the market can become self-fulfilling," said Benjamin Wallace, an analyst at the Westborough, Mass.-based wealth management firm Grimes and Company Inc.

Shares of Goldman Sachs also fell Friday after Moody's issued a similar warning about the Goldman's debt. Goldman (GS, Fortune 500) stock fell 12% on the news.

Calls to both Morgan Stanley and Goldman Sachs requesting comment about the Moody's reports were not immediately returned.

But other big banks which some analysts have deemed as relatively safer than the investment banks, such as Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), bucked the trend, gaining over 6% and 13% respectively.

San Francisco-based Wells Fargo (WFC, Fortune 500), which claimed victory in its battle with Citigroup (C, Fortune 500) to buy struggling bank Wachovia (WB, Fortune 500) on Thursday, closed up nearly 4%.

The KBW Banking Index and S&P Banking Index, two key barometers of the sector that also include many regional banks, both finished more than 7% higher Friday.

Shares of regional banks SunTrust (STI, Fortune 500), KeyCorp (KEY, Fortune 500) and US Bancorp (USB, Fortune 500) all ended about 5% higher on the day.

Many worries remain
Investors were juggling a host of other concerns about banks Friday, including an auction of credit default swaps for bankrupt Lehman Brothers.

A number of big U.S. and European banks, such as Morgan Stanley, Citigroup, HSBC, BNP Paribas, Goldman Sachs and Deutsche Bank, found themselves on the hook after the auction valued the insurance against a Lehman collapse at just 8.625 cents on the dollar, according to credit derivatives processor Creditex.

But one analyst downplayed the impact that the results of the auction were having on bank stocks.

"In the context of more than [$200 billion] of payments that will be made, it's not that significant and on the bright side, this auction gives us clarity to pricing and closure to this situation and now the players can quantify fully their exposure to this particular event," Peter Boockvar, market analyst for Miller Tabak, wrote in a note to clients.

In the end, a lack of confidence remained the key driver in Friday's selloff of many banks.

World governments have unleashed numerous initiatives in recent days in the hopes of restoring some much-needed calm to markets worldwide including a coordinated cut interest rates by a number of central banks. Still, those efforts have proved ineffective as the selloff continues and credit markets remain frozen.

Starting today, finance ministers from the Group of Seven, including U.S. Treasury Secretary Henry Paulson, are scheduled to meet to discuss other coordinated efforts to help stop the global market slide.

Still, Paulson and other top domestic officials are weighing other courses of action to help prop up the U.S. banking system.

One widely speculated move would involve injecting much-needed capital into banks through the purchase of shares in bank stocks. This option was made available to the Treasury under the recently passed $700 billion rescue plan.

President Bush's chief economic adviser, Edward Lazear, told CNN Thursday that this was being considered. Many experts believe that doing so would encourage banks to lend to one another more freely.

Libor, a key rate banks use when lending to each other, has soared to record levels in recent weeks. Even as banks showed some willingness to lend on a short-term basis on Friday, longer-term Libor rates jumped to their higher level so far this year.

There is also talk that U.S. officials may take a page from the playbook of other world governments such as the U.K., which backed billions of dollars in bank debt earlier this week.

At the same time, top U.S. officials are also considering removing the deposit insurance cap on all domestic bank deposits, The Wall Street Journal reported Friday. European countries including Greece, Ireland and Germany have already done so in recent days.

The thinking behind such bold measures is that they could provide a psychological boost to an industry which has been shaken to its core.

But John Douglas, a former general counsel at the Federal Deposit Insurance Corp., has warned that removing deposit caps altogether could have unintended consequences.

Lifting the deposit caps might make it tougher for regulators to identify banks in trouble since a run on deposits is typically a warning signal. And commercial depositors would be less likely to take their money out of banks if all the deposits are insured, Douglas said.

In addition, Douglas, who currently serves as a partner in charge of the bank and financial institutions group at the law firm Paul Hastings, warned that lifting the cap could require financial institutions to pay higher premiums to support the insurance fund that covers deposits of failed banks.

That could prove to be an expensive proposition for capital-hungry banks.

"[The money] has to come from somewhere," Douglas said.

Oil prices sink to 8-month low

Oil prices fell to an eight-month low below $90 a barrel Monday on speculation that the spreading financial crisis will exacerbate a global economic slowdown and cut demand for crude oil.

Significant gains by the U.S. dollar against the euro also contributed to slumping oil prices. By midday in Europe, light, sweet crude for November delivery was down $4.03 to $89.85 a barrel in electronic trading on the New York Mercantile Exchange.

Earlier in the session, the price fell as low as $89.07 a barrel before recovering slightly. On Friday, the November contract lost 9 cents to close at $93.88 a barrel. In London, November Brent crude fell $3.64 to $86.61 a barrel on the ICE Futures exchange.

Oil prices have tumbled nearly 40% since peaking in July. The Nymex front-month contract last traded this low in early February.

The drop came as world stock markets plunged amid growing investor anxiety that the U.S. bad debt crisis is enveloping Europe. Germany announced Sunday a bailout package totaling 50 billion euros ($69 billion) for Hypo Real Estate, the country's second-biggest commercial property lender, part of a scramble by European governments to save failing banks.

"What happened over the weekend was further evidence of the spread of this financial crisis to Europe," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "This deepens the sentiment that we're going to see a more widespread economic slowdown or even recession, and that's no good for oil demand."

Investors shrugged off Friday's approval by the U.S. House of Representatives of a $700 billion bailout package to buy bad mortgage debt, aimed at stabilizing the U.S. financial system.

Dipping demand. Oil demand in the world's richest countries had already begun to slow since May, before the worst of the financial turmoil hit the United States last month, Shum said.

"The rescue plan should keep a complete financial meltdown from occuring," Shum said. "But the demand data is not encouraging. In the developed countries it's falling, and that's why we're seeing downward pressure on prices."

In other signs the meltdown is spreading, Belgian Prime Minister Yves Leterme said Sunday that France's BNP Paribas SA had committed to taking a 75% stake in troubled European bank Fortis NV.

British treasury chief Alistair Darling said he was ready to take "pretty big steps that we wouldn't take in ordinary times" to help the country weather the credit crunch. Investors will be watching if the Organization of Petroleum Exporting Countries moves to cut output should prices fall further.

Iranian Oil Minister Gholam Hossien Nozari said Saturday that it would be "unsuitable" for both producers and consumers for oil to dip below $100 a barrel. He called on fellow OPEC members not to pump too much oil and avoid a drop in prices.

"OPEC has signaled it may defend $80," Shum said. "There's uncertainty over what OPEC may do."

Traders were also watching currency movements as investors tend to buy commodities like oil to defend against dollar weakness and a hedge against inflation, but sell crude as the U.S. currency strengthens.

The 15-nation euro fell to $1.3590 in trading Monday from 1.3774 late Friday while the dollar dropped to 103.35 yen from 105.30 on Friday.

In other Nymex trading, heating oil futures fell 12.28 cents to $2.5392 a gallon, while gasoline prices dropped 9.83 cents to $2.13 a gallon. Natural gas for November delivery fell 17.2 cents to $7.186 per 1,000 cubic feet. In London, November Brent crude fell $3.80 to $86.40 a barrel on the ICE Futures exchange.

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 - a 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.

Congress sets stage for solar boom

After months of failed attempts in Congress to extend crucial renewable energy tax credits, the end game came with lightening speed Friday afternoon: The House of Representatives passed the green incentives attached to the financial bailout package approved by the Senate Wednesday night and President Bush promptly signed the legislation into law.

There were goodies for wind, geothermal and alternative fuels, but the big winner by far was the solar industry.

“It feels like we should be popping the champagne,” said a Silicon Valley solar exec Green Wombat met for lunch minutes after Bush put pen to paper.

That it took a the biggest financial crisis since the Great Depression to save billions of dollars of renewable projects in the pipeline for the sake of political expediency does not bode well for a national alternative energy policy. But the bottom line is that the legislation passed Friday sets the stage for a potential solar boom.

The 30% solar investment tax credit has been extended to 2016, giving solar startups, utilities and financiers the certainty they need for the years’ long slog it takes to get large-scale power plants and other projects online. The extension is particularly important to those Big Solar projects that need to arrange project financing in the next year or so.
The $2,000 tax credit limit for residential solar systems has been lifted, meaning that homeowners can get a 30% tax credit on the solar panels they install after Dec. 31. That will save a bundle - especially for those who live in states with generous state rebates - and goose demand for solar panels makers and installers like SunPower (SPWRA) and First Solar (FSLR). (If you buy a a $24,000 3-kilowatt solar array in California - big enough to power the average home - you can claim a $7,200 federal tax credit. Add in the state solar rebate and the cost of the system is cut in half.)
Utilities like PG&E (PCG), Southern California Edison (EIX) and FPL (FPL) can now themselves claim the 30% investment tax credit for large-scale solar power projects. That should encourage those well-capitalized utilities to build their own solar power plants rather than just sign power purchase agreements with startups like Ausra and BrightSource Energy.
“The brakes are off,” says Danny Kennedy, co-founder of Sungevity, a Berkeley, Calif., solar installer that uses imaging technology to remotely size and design solar arrays. “In just six months since our launch we’ve sold about a hundred systems. With an uncapped tax credit for homeowners going solar, we expect business to boom.”

While elated sound bytes from solar executives have been flooding the inbox all afternoon - along with invites to celebratory after-work drinks - solar stocks took a drubbing (along with the rest of the still-spooked market) after initially soaring on the news.

SunPower ended the trading day down 5% while First Solar shares dropped 8%. The bright spot was China’s Suntech (STP), which on Thursday announced a joint venture with financier MMA Renewable Ventures to build solar power plants as well as the acquisition of California-based solar panel installer EI Solutions.

Congress didn’t treat the wind energy so generously. The production tax credit for generating renewable energy was extended by just one year, guaranteeing the industry’s will continue to live year by year (at least through 2009). But given that 30% of all new power generation built in the United States in 2007 was wind, and that the amount of wind power installed by the end of 2008 is expected to rise 60% over the record set last year, the wind biz should do just fine.

But Congress did give a break to those who buy small-scale wind turbines. Systems under 100 kilowatts qualify for a 30% tax credit up to $4,000. Homeowners get a $1,000 tax credit for each kilowatt of wind they install.

“This is a huge break through for small wind,” says Scott Weinbrandt, president of Helix Wind, a San Diego-based manufacturer of 2-and-4-kilowatt turbines.

Illegal immigration drops

Illegal immigration, which has sparked political and social turmoil in communities across the nation, is on the wane, according to an independent report released Thursday.

The number of illegal immigrants entering the United States has slowed significantly the past few years, falling below the number of those entering the country legally, according to the report by the Pew Hispanic Center, a Washington think tank.

The report estimates there were 11.9 million illegal immigrants in the United States as of March. That would be a decline of 500,000 from the center's estimate a year ago. However, the change was not statistically significant because of the large margins of error.

The Pew study does not address why the decrease occurred, but other researchers cite the nation's struggling economy and stepped up enforcement of immigration laws.

"The decline in job prospects in construction, service and other low-skilled jobs are communicated through extended networks of would-be movers from Mexico and Latin America," said William Frey, a demographer at the Brookings Institution, another Washington think tank. "It also may propel more return migration."

Census data released last month showed that overall immigration slowed dramatically in 2007, though the Census Bureau does not distinguish between legal and illegal immigrants.

Illegal immigrants are notoriously difficult to count. Many researchers, including the federal government, estimate there are about 12 million illegal immigrants in the United States.

That's a big increase from the start of the decade, when the Pew Hispanic Center estimated there were about 8.5 million.

From 2000 to 2004, about 800,000 illegal immigrants a year entered the United States, the Pew report estimates. Since then, the average has dropped to about 500,000 a year.

A decade ago, the number of newly arrived illegal immigrants began to outnumber those legally entering the country, said the report, written by the Pew Hispanic Center's senior demographer, Jeffrey Passel, and senior writer, D'Vera Cohn.

"The reverse now appears to be true," the report said.

Illegal immigrants make up about 30% of all immigrants, according to the report. About four in five come from Latin America, with most coming from Mexico.

Congress has passed several measures designed to increase border enforcement, and the Bush administration has stepped up raids on businesses. Some local communities have also passed ordinances to address the issue.

Congress, however, has failed to pass a comprehensive package addressing illegal immigration, despite several attempts.

Illegal immigration has not been a big issue in this year's presidential election in part because both of the major parties' nominees, Republican John McCain and Democrat Barack Obama, support comprehensive immigration packages that include increased enforcement and an eventual path to citizenship for many illegal immigrants.

Record 16% drop in July home prices

A closely watched index released Tuesday showed home prices tumbling by the sharpest annual rate ever in July, but the rate of monthly declines is slowing.

The Standard & Poor's/Case-Shiller 20-city housing index fell a record 16.3% in July from a year earlier, the largest drop since its inception in 2000. The 10-city index plunged 17.5%, the biggest decline in its 21-year history.

No price gains
Prices in the 20-city index have plummeted nearly 20% since peaking in July 2006. The 10-city index has fallen more than 21% since its peak in June 2006.

No city in the Case-Shiller 20-city index saw annual price gains in July, the fourth straight month that has happened.

However, the pace of monthly declines is slowing, a possible silver lining. Between May and July, for example, home prices fell at a cumulative rate of 2.2% - less than half the cumulative rate experienced between February and April.

But there's "no evidence of a bottom," said David M. Blitzer, chairman of the index committee at S&P.

Trouble in Vegas
Las Vegas prices plunged the most at nearly 30%, with Phoenix diving 29% and Miami 28%. Prices in the seven cities in the Sunbelt all fell between 20% and 30% from a year ago.

Only seven cities showed positive or flat returns from June to July, down from nine that showed month-over-month gains in June. Atlanta, Boston, Dallas, Denver and Minneapolis all posted positive returns for three months or more

Bush: Congress must act

President Bush said Tuesday he was "disappointed" by the House's rejection of the $700 billion bailout plan and urged Congress to take action to save the economy.

"Unfortunately, the measure was defeated by a narrow margin," 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."

Bush said he expects lawmakers to move forward with legislation. The House is adjourned for the Jewish holiday Rosh Hashanah and is not scheduled to return to session until Thursday at noon. The Senate is in session on Tuesday.

Senate Majority Leader Harry Reid, D-Nev., said that he would meet with some key Democratic senators - including Senate Banking Committee Chairman Christopher Dodd, D-Conn. - working on a bailout plan.

For his part, Bush said the nation is facing "the real prospect of economic hardship."

"Our economy is depending on decisive action from the government," Bush 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."

Bush is meeting with his team Tuesday morning to review options, a senior Bush administration official told CNN. On Monday night, White House staffers were in contact with Republican congressional leaders and Democratic staffers, the official said.

The official said that even Republicans who oppose the plan understand the seriousness of the situation and "want to get this done."

The Senate's lead Republican, Sen. Mitch McConnell, R-Ky., said Tuesday that lawmakers will pass a bill. "I want to reassure the American people that we intend to pass this legislation this week," he said.

On Tuesday, Bush spoke to Sens. Barack Obama and John McCain about the financial crisis, according White House spokesman Tony 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.

Stock market reaction
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 percentage decline since the Black Monday crash of 1987.

The bill, if approved, would have allowed the federal government to buy troubled mortgage-related investments from finance companies, freeing them up for lending, 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.

"That, no question, is a large amount of money," said Bush, referring to the $700 billion. "We're also dealing with a large problem. But to put that in perspective, the drop in the stock market yesterday represented more than a trillion dollars in losses."