Fed Cuts Interest Rate to 3% as U.S. Growth Falters

The Federal Reserve lowered its benchmark interest rate by half a point to 3 percent, the second cut in nine days, and indicated its willingness to do so again to prevent a U.S. recession.

Downside risks to growth remain, the Federal Open Market Committee said in a statement after meeting today in Washington. In a reference to the volatility of the past five months, the Fed added that financial markets remain under considerable stress and credit has tightened further for some businesses and households.

The dollar tumbled and two-year Treasury notes rose after the decision as traders anticipated another reduction at the Fed's March meeting, if not before. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990. The Standard & Poor's 500 Index closed 0.5 percent lower and is down 7.7 percent this year.

They're going full-bore trying to keep the economy from recession, said David Resler, chief economist at Nomura Securities International Inc. in New York. Conditions in the market place are the driving force right now.

Hours before the decision was announced, the Commerce Department reported that gross domestic product grew at an annual pace of 0.6 percent in the fourth quarter.

The Fed has gotten religion and is going do what they need to do, said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina.

Readiness to Respond

Fed officials said they will continue to assess financial markets and the economy and will act in a timely manner as needed.

Recent information indicates a deepening of the housing contraction as well as some softening in labor markets, the central bank's statement also noted.

Chairman Ben S. Bernanke and the Fed's Board of Governors also voted to cut the discount rate, the cost of direct loans from the central bank, to 3.5 percent from 4 percent.

Dallas Fed President Richard Fisher dissented from today's decision, preferring no change.

Policy makers presented revised three-year economic forecasts at this week's gathering. The Fed will release the projections along with minutes of the meeting on Feb. 20.

Today's Commerce Department figures showed the Fed's preferred inflation gauge rose at a 2.7 percent annualized rate last quarter. Fed officials in October forecast the personal consumption expenditures price index minus food and energy would rise 1.6 percent to 1.9 percent in 2010, offering a measure of their longer-term inflation objective.

Inflation

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully, the Fed said in today's statement.

Wall Street firms including Morgan Stanley, Merrill Lynch & Co., Goldman Sachs Group Inc. and Citigroup Inc. are forecasting the first recession since 2001 this year. Still, executives at firms such as Dow Chemical Co. said they don't detect a downturn yet, while risks remain.

This year will be slower than 2007, Andrew Liveris, the chairman and chief executive officer of Dow Chemical, said yesterday. It is an inconvenience, not a catastrophe.

United Parcel Service Inc., Caterpillar Inc. and General Electric Co. are relying on gains overseas to counter slower growth at home.

Evolution Since August

Fed policy makers have struggled since August to contain the economic damage sparked by the worst housing recession in a quarter-century. The world's largest banks and securities firms have recorded more than $133 billion in asset writedowns and credit losses since the beginning of 2007, which analysts blamed on weak and fragmented supervision and poor credit analysis.

The Fed's move lowers the cost of financing for Wall Street which is struggling to raise capital after being hit with writedowns not seen since the Great Depression, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Foreclosure rates rose 75 percent in 2007 as a record amount of adjustable-rate loans to borrowers with weak or limited credit histories reset to higher rates, RealtyTrac Inc. data show. Home prices in 20 U.S. metropolitan areas fell 7.7 percent in November from a year earlier, the 11th consecutive decline, the S&P/Case-Shiller home-price index showed yesterday.

We are in a historic housing bust right now, comparable to that of the Great Depression, said Robert Shiller, chief economist of MacroMarkets LLC in Madison, New Jersey, who co- founded the house-price index. The unraveling of that has unpredictable consequences.

Delay in 2007

Fed officials waited until September to cut the benchmark lending rate, even though premiums on corporate bonds and lower- rated securities began to climb in late June.

By December, Fed policy makers had cut the benchmark lending rate 1 percentage point, yet still described the policy rate as somewhat restrictive as they deliberated whether to cut again that month, minutes show.

The government's December payroll report, which showed a loss of 13,000 private sector jobs, the first decline since July 2003, began to reshape Fed officials' views about risks.

Bernanke used a Jan. 10 speech to update the public. The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced, he said, breaking with the Fed's statement a month earlier which only expressed uncertainty about the outlook. He pledged substantive additional action as needed.

Economy much weaker than expected

Gross domestic product slowed to a 0.6% growth rate in the fourth quarter, raising both recession fears and hope for another deep Fed cut.

The economy grew at a much slower pace in the last three months of the year, according to a government report Wednesday that came in well below Wall Street expectations.

The report raised fears of a recession and hopes for another significant interest rate cut by the Federal Reserve.

The gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 0.6%, adjusted for inflation, in the fourth quarter, according to the Commerce Department, down from 4.9% in the final reading of growth in the third quarter. Economists surveyed by Briefing.com had forecast GDP would slow to a 1.2%.

The report comes amid rising concern that the U.S. economy is falling into a recession, with some economists arguing the downturn started in the final month of 2007.

It also comes as the Fed concludes a two-day meeting to consider whether or not to cut interest rates once again in order to spur the economy and ward off a recession. The central bank has already lowered rates by 1.75 percentage points since September, including an emergency 0.75 percentage point cut, also known as a 75 basis point cut, a week ago.

Investors are betting that the Fed announces at least another quarter percentage point cut, or 25 basis points, when it announces its decision at 2:15 p.m. ET, with those buying fed funds futures on the Chicago Board of Trade were pricing in a 70% chance of a half-point, or 50 basis point cut, ahead of the GDP report.

But while the weakness in the report suggested that the Fed might move aggressively to cut rates, the inflation readings in the report could be a concern for the central bank. The so-called price deflator, which measures prices overall, rose at a 2.6% annual rate, up from only a 1% rise in the third quarter but in line with forecasts.

Perhaps of greater concern is that the so-called core PCE deflator - a more closely watched inflation reading that measures prices that individuals pay excluding volatile food and energy prices - rose 2.7%, up from a 2.0% reading in the third quarter and nearly double the 1.4% rise in the second quarter.

The Fed is generally seen as wanting to see that reading rise between 1% and 2%, meaning the latest reading is far from its so-called comfort zone. To top of page

Yahoo disappoints, to cut jobs

CEO Jerry Yang says company faces 'headwinds' this year. Struggling search engine plans 1,000 job cuts in February. Stock sinks on weak 2008 sales guidance.

Search engine Yahoo announced it would lay off 1,000 employees by mid-February, even as it reported fourth quarter earnings Tuesday that beat expectations.

During the company's conference call with analysts, chief executive Jerry Yang warned that the company faces headwinds this year and confirmed the upcoming layoffs, which had been rumored for the past week.

Yang said the company would make the job cuts as part of a workforce realignment.

The stock plunged more than 10% after-hours on the news.

Yahoo's sales came in at $1.8 billion, up 8% from a year ago. Excluding advertising sales that Yahoo shares with its partners, the company reported revenue of $1.4 billion, roughly in line with Wall Street's expectations of $1.41 billion, according to estimates from Thomson First Call.

The company reported net income of $206 million, or 15 cents per share, beating analysts' forecasts for 11 cents per share.

For the full year, Yahoo's revenue, excluding ad sales it shares with partners, came in at $5.11 billion, up 12% from a year ago. Total sales rose 8% to $7 billion. Full-year profit was $4.13 billion, a 10% increase from 2006.

But Yahoo also said it expects 2008 annual revenue, excluding sales shared with partners, of anywhere from $5.35 billion to $5.95 billion. Wall Street had been expecting sales of $5.9 billion before the report.

While we will continue to face headwinds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009, Yang said in a written statement.

Yahoo is the number-two search engine in the world. But it lags arch rival Google by a wide margin. Google reports its own fourth-quarter results Thursday. Yahoo also faces competition from social networking sites like Facebook and News Corp.-owned MySpace. The company's own attempt at a social network, called 360, flopped.

Yang, who replaced Terry Semel as CEO last June, promised investors a 100-day review of the company shortly after taking over. Some analysts have said that investors are growing impatient with Yahoo as it continues to lose ground to Google and others

Global Recession Risk Grows as U.S. `Damage' Spreads

The U.S. economy may already be in recession; other countries might not be far behind.

Japan, Britain, Spain and Singapore, which together represent about 12 percent of the world economy, are vulnerable as fallout from the U.S. worsens their economic weakness. Even emerging markets, including China, are likely to suffer as exports to the U.S. wane.

The result: Global growth may decelerate close to the 3 percent pace economists deem a worldwide recession, from a 4.7 percent rate in 2007. Some form of global recession is inevitable at some point, former Federal Reserve Chairman Alan Greenspan said in a speech in Vancouver last week.

The developing slump puts pressure on central bankers in Japan, the U.K. and the euro region to follow the lead of Fed Chairman Ben S. Bernanke, who last week accelerated interest- rate cuts in the U.S. with an emergency move to lower the benchmark rate by three-quarters of a percentage point. Policy makers may follow that with another cut of as much as half a point after a two-day meeting that starts tomorrow, futures trading indicates.

The odds are shifting toward a more significant global monetary easing, says Richard Berner, co-head of global economics for Morgan Stanley in New York.

Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London, says growth in the first half of 2008 may be the weakest since 2002 and maybe even 2001, during the last global downturn. The economy is slowing everywhere, he says.

Stocks Fall

Stocks retreated in Europe and Asia today, led by commodity producers and banks, on growing concern the global economy is slowing and companies may report more losses linked to subprime mortgages. U.S. index futures dropped and Treasury notes rose for a second day.

A worldwide recession doesn't require a global contraction in output, which rarely happens; economists at the International Monetary Fund say it would take a slowdown in global growth to 3 percent or less. By that measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.

The contagion from the U.S., which according to the IMF represents about 21 percent of the global economy, is spreading via multiple channels. Less spending by American consumers and companies reduces demand for imported goods. The meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Tumbling U.S. stock prices are dragging down markets elsewhere.

`Collateral Damage'

We'll see more collateral damage, says Allen Sinai, chief economist at Decision Economics in New York. The risk of a global recession is rising.

Such a catastrophe, while increasingly possible, isn't yet probable, economists say. Sinai puts the odds at 20 percent. Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, reckons it's about 30 percent.

The global implications of a U.S. recession dominated discussions last week at the World Economic Forum in Davos, Switzerland. In Washington, the IMF postponed publication of its latest world economic forecast, originally due Jan. 25, to take into account recent market turbulence.

Japan's economy is particularly at risk. Its housing market is slumping as stricter building-permit rules drag home starts to a four-decade low.

Tokyo Steel

A drop in construction demand led Tokyo Steel Manufacturing Co., the nation's biggest maker of steel girders, to lower its profit forecast Jan. 22.

It's highly likely Japan is already in a recession or will enter one this quarter, Tetsufumi Yamakawa, chief Japan economist at Goldman in Tokyo, wrote in a report published today.

The yen's 13 percent rise versus the dollar in the last six months is also taking a toll. The Japanese currency reached a 2 1/2-year high of 104.97 to the dollar last week. That is near the break-even point for Japan's exporters, who say they can remain profitable as long as the currency is weaker than 106.6, according to a government survey.

Kozo Yamamoto, head of the ruling Liberal Democratic Party's monetary policy panel, urged the Bank of Japan to cut its benchmark interest rate, already the lowest in the industrialized world at 0.5 percent.

Concerns over a recession are emerging not only in the U.S., but in Japan as well, Yamamoto said in a Jan. 23 interview. The BOJ should cut rates back to zero immediately.

Credit Crunch

Singapore may already be in a recession. Its economy contracted for the first time in 4 1/2 years in the fourth quarter as factory output slowed and electronics exports dropped. The cooling local real estate market worsened the slowdown for financial services firms.

Housing is also slumping in the U.K., where loans for home purchases dropped to a two-year low last month. The credit crunch moved into its fourth month in December, Michael Coogan, director general of the Council of Mortgage Lenders in London, said Jan. 21. Lending volumes are likely to remain weak for the next few months.

Retail sales fell in December by the most in 11 months. ScS Upholstery Plc, owner of 96 sofa stores in the U.K., said Jan. 14 that earnings will suffer after disappointing December and January business.

The U.K.'s biggest nightclub owner, Luminar Group Holdings Plc, said Jan. 18 that sales growth slowed as Britons spent less on nights out.

`Gloomy Picture'

It's a gloomy picture for the consumer, says James Knightley, an economist at ING Financial Markets in London. The prospect of recession is becoming more realistic.

Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.76 trillion) of debt. Economists surveyed by Bloomberg predict the Bank of England will lower its main rate a quarter percentage point, to 5.25 percent, on Feb. 7.

Spain is also grappling with a housing boom gone bust. Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2 lender, predicts property prices will fall this year and building permits will drop 25 percent.

With more than 18 percent of gross domestic product coming from construction, Spain's economy is particularly susceptible to weakness in real estate.

Spanish Construction

The main problem lies in construction but it has already spread to other sectors, says Gilles Moec, senior economist at Bank of America in London.

With other European countries, including Germany, showing signs of slowing, European Central Bank President Jean-Claude Trichet faces pressure to abandon his tough anti-inflation stance and cut interest rates. We'll see rate cuts in the European Union and in the U.K. this year, Barclays Plc President Bob Diamond said Jan. 24 in Davos.

Hopes that China's fast-growing economy can take up the slack from a U.S.-led slowdown seem misplaced.

If there is weakness in the world economy, the impact on the Chinese economy will be very serious, says Yu Yongding, director of the Chinese Academy of Social Sciences and a former adviser to the central bank.

China's growth slowed to a year-over-year pace of 11.2 percent in the fourth quarter, from 11.5 percent and 11.9 percent in the third and second quarters, respectively.

In Davos, Klaus Kleinfeld, chief operating officer of Alcoa Inc., the world's third-largest aluminum producer, said he foresees a difficult year. I don't think the world can decouple itself from what's happening in the U.S.

U.S. Stocks Drop on Credit Concern; JPMorgan, Citigroup Retreat

U.S. stocks dropped for the first time in three days, led by financial companies, on concern banks will be saddled with more credit-market losses and the Federal Reserve won't cut interest rates enough to stimulate growth.

JPMorgan Chase & Co. and Citigroup Inc. led banks lower after an analyst said Fortis, Belgium's biggest financial services company, faces additional writedowns from mortgage- backed securities. Speculation that subprime-infected investment losses are worsening helped erase a morning rally fueled by better-than-expected earnings at Microsoft Corp. and Caterpillar Inc.

The Standard & Poor's 500 Index and Dow Jones Industrial Average still posted their first weekly gains of 2008 as a government stimulus plan and the Fed's surprise 0.75 percentage- point rate cut helped the market rebound from its worst-ever start to a year. The S&P 500 decreased 21.46, or 1.6 percent, to 1,330.61. The Dow Jones Industrial Average lost 171.44, or 1.4 percent, to 12,207.17. The Nasdaq Composite Index slumped 34.72, or 1.5 percent, to 2,326.2.

There's going to be more issues with regard to writedowns, said Peter Sorrentino, who helps oversee $12 billion as senior portfolio manager at Huntington Asset Management in Cincinnati. We've got more classes of debt securities that are going to become questionable as this consumer malaise drags on for a while.

Today's declines capped a week in which the market's benchmark gauge of volatility reached a five-year high and the Dow posted its biggest intraday swing since 2002. The S&P 500 added 0.4 percent this week, trimming its 2008 loss to 9.4 percent. The Dow gained 0.9 percent in the week and is down 8 percent this year.

'Blowing Up'

Financial companies in the S&P 500 lost 2.5 percent as a group today for the biggest drop among 10 industries. Yesterday's announcement of a $7.2 billion loss by Societe General SA on unauthorized trades spurred speculation that institutions face more losses after banks wrote down $133 billion stemming from last year's collapse of the U.S. subprime mortgage industry.

I've heard like three different rumors about a hedge fund blowing up, said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees $53 billion in Santa Fe, New Mexico. We also have the Fed meeting on Tuesday and nobody really knows what they're going to do.

Fed Watch

Futures contracts show a 78 percent chance that the Federal Reserve will cut its benchmark interest rate by 0.5 percentage point to 3 percent when policy makers hold their next scheduled meeting on Jan. 30-31. The rest of the bets are for a quarter- point reduction.

JPMorgan, the third-biggest U.S. bank by assets, slipped $1.32 to $43.64. Citigroup, the largest, declined 69 cents to $26.64. Fortis should revise its outlook to take into account writedowns on its super senior subprime collateralized debt obligations, Jaap Meijer, a London-based analyst at Dresdner Kleinwort, wrote in a research note.

Freddie Mac slipped $2.42, or 7.6 percent, to $29.58. Fannie Mae tumbled $2.39, or 7 percent, to $31.80. Senate Banking Committee Chairman Christopher Dodd pledged to speed legislation creating a tougher regulator for the two biggest providers of money for home loans. The declines were the two steepest in the S&P 500.

Financial companies are expected to drag S&P 500 members to their worst earnings season since 2001. Analysts estimate the index's average profit fell 18 percent in the fourth quarter from a year ago, according to projections compiled by Bloomberg today. Financial earnings are forecast to fall 100 percent.

The Fed lowered its target for the overnight lending rate between banks by 0.75 percentage point on Jan. 22 after an unscheduled meeting, its first emergency action since 2001 and the biggest single reduction since it began using the rate as the principal tool of monetary policy in 1990.

'Sell Strength'

A big part of the market wants to sell strength until we get more Fed ease and some stimulus, said Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman & Co. in New York. The firm oversees $44 billion in client assets.

European banks have tumbled this week on concern they may report more writedowns linked to U.S. subprime mortgages. In addition to Societe Generale's loss from bets placed secretly by a trader, the French bank also took 2.05 billion euros in writedowns related to credit markets. Citigroup today downgraded the shares to sell' from buy.

WestLB AG, Germany's third-biggest state-owned lender, and Bayerische Landesbank, the second-largest, also announced plans to assign lower values to their investments this week.

Schering-Plough Corp. and Merck & Co. dropped today after the U.S. Food and Drug Administration said it will take about six months to review new information about their cholesterol medications. Schering-Plough fell $1.15, or 5.7 percent, to $19.02. Merck lost $1.77, or 3.6 percent, to $47.79.

Microsoft, Caterpillar

Microsoft fell 31 cents to $32.94 after rising as much as 5.3 percent. The world's biggest software company said profit in the year ending June 30 will be $1.85 to $1.88 a share, on sales of $59.9 billion to $60.5 billion. Analysts on average estimated earnings of $1.81 and sales of $59.4 billion. Microsoft boosted its profit projections for the fiscal year ending June 30.

Caterpillar advanced 68 cents to $65.93. The company said sales in Europe and Asia lifted earnings, offsetting a U.S. slowdown in construction and mining demand. Profit increased to $975 million, or $1.50 a share, from $1.32 a year earlier, and exceeded the average analyst estimate by 1 cent.

Honeywell

Honeywell International Inc. added $2.05 to $58.25. The biggest maker of aircraft controls said fourth-quarter earnings rose 18 percent on demand for airplane parts, thermostats and security systems. Net income climbed to $689 million from $585 million, the company said last night.

More than two stocks dropped for every one that rose on the New York Stock Exchange. Some 1.9 billion shares changed hands, 17 percent more than the three-month daily average.

The Russell 2000 Index, a benchmark for companies with a median market value of $521.3 million, dropped 0.6 percent to 688.6. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.4 percent to 13,423.62. Based on its decline, the value of stocks decreased by $231 billion.

U.S. stocks yesterday posted their biggest two-day rally since November after Xerox Corp. and Lockheed Martin Corp. reported profit that topped analysts' estimates and lawmakers agreed on a plan to pay tax rebates to families.

Bank of America, Wachovia Profits Slump on Mortgage Writedowns

Bank of America Corp. and Wachovia Corp., the second- and fourth-largest U.S. banks, said earnings plummeted after more than a combined $6.9 billion of market writedowns.

Bank of America's fourth-quarter profit dropped 95 percent to $268 million, while net income at Wachovia was almost wiped out, plunging 98 percent to $51 million. Bank of America declined 5.5 percent in early New York trading to $34 and Wachovia fell 4.4 percent to $29.46.

Kenneth Lewis, Bank of America's chief executive officer, and Kennedy Thompson, his counterpart at Wachovia, said in separate statements today that the companies were battered by the fixed-income markets. Lewis said he expects economic growth to be anemic at best in the first half.

Bank of America and Wachovia, both based in Charlotte, North Carolina, reported the lowest quarterly profits in at least six years during the country's worst housing slump in more than two decades. The world's biggest banks and brokerages have disclosed more than $120 billion of writedowns and credit losses since June, mostly caused by the collapse of the subprime mortgage market.

Bank of America earned 5 cents a share in the fourth quarter, excluding merger and restructuring costs and a gain from the sale of Marsico Capital Management LLC, falling short of the 21-cent average estimate from 21 analysts surveyed by Bloomberg. Wachovia's profit of 8 cents a share, excluding takeover-related costs, also missed analysts' estimates.

`Slowing Economy'

Our fourth-quarter results were severely impacted by ongoing dislocations in capital markets and the slowing economy, Lewis said in today's statement. He added that the company is cautiously optimistic about 2008.

Bank of America increased its bet on the faltering U.S. economy earlier this month by agreeing to acquire Countrywide Financial Corp., the largest U.S. mortgage lender, for about $4 billion in stock. Countrywide has dropped 36 percent in New York trading since the takeover was announced as investors speculate that Bank of America may seek better terms or abandon the deal.

Countrywide would give Bank of America a 25 percent share of U.S. mortgage originations, Lehman Brothers Holdings Inc. analyst Jason Goldberg wrote in a Jan. 11 report to clients. Almost two-thirds of Countrywide's loan originations in 2007 came from mortgage brokers and other third parties, a practice that Lewis has said Bank of America expects to curtail.

The corporate and investment bank lost $2.76 billion, compared with a profit of $1.4 billion a year earlier, and earnings at the consumer and small-business banking unit declined 28 percent to $1.87 billion. Lewis has scaled back investment banking by cutting 1,150 jobs since October and putting the hedge-fund brokerage unit up for sale.

First Drop Since 2001

Investment banking isn't Ken Lewis's core competency and he doesn't need it, says Bruce Foerster, a former Lehman Brothers managing director who's now president of the South Beach Capital Markets advisory firm in Miami.

Bank of America's total fourth-quarter revenue fell 31 percent to $12.7 billion, while non-interest costs rose 15 percent to $10.1 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 11.1 percent for the year from 16.3 percent in 2006.

Full-year earnings dropped for the first time in Lewis's tenure since the 60-year-old CEO succeeded Hugh McColl Jr. in 2001, with net income sliding 29 percent to $15 billion.

Wachovia's fourth-quarter earnings were the lowest since 2001 after $1.7 billion of writedowns, including $1 billion for subprime mortgage-related holdings. The company's corporate and investment bank had a loss of $596 million after the costs.

Golden West

The continued turmoil in the capital markets and the dramatic change in the credit environment diminished our fourth- quarter results substantially, Thompson said in the statement.

Fourth-quarter revenue fell 17 percent to $7.2 billion. Return on equity was 0.28 percent, down from 13.1 percent a year earlier. The net interest margin, the difference between what Wachovia pays for deposits and what it charges on loans, narrowed to 2.88 percent from 2.92 percent on Sept. 30.

Wachovia has dropped almost 45 percent in New York trading since the company acquired Golden West Financial Corp. for $24.6 billion in October 2006 just before the housing market peaked. Since then, U.S. home sales slumped 21 percent to the lowest in 26 years.

They've got a tiger by the tail in Golden West and I don't think they know what to do, said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who has a hold rating on Wachovia.

Fed Cuts Rate 0.75 Percentage Point in Emergency Move

The Federal Reserve lowered its benchmark interest rate in an emergency move for the first time since 2001 after stock markets tumbled from Hong Kong to London and the U.S. economy showed increasing signs that it's headed into a recession.

The central bank cut the target overnight lending rate to 3.5 percent from 4.25 percent, the Federal Open Market Committee said in a statement in Washington. Policy makers weren't scheduled to gather until next week. It's the biggest single reduction since the Fed began using the rate as the principal tool of monetary policy around 1990.

Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households, the Fed said in a statement in Washington. The FOMC took the action in view of a weakening of the economic outlook and increasing downside risks to growth.

Policy makers set aside concerns about inflation to lower borrowing costs for the fourth time since September after the unemployment rate hit a two-year high and stocks slumped. Chairman Ben S. Bernanke shifted the Fed's stance to a more- aggressive approach in remarks this month citing a need for decisive and timely action.

The dollar fell and Treasury securities rallied after the announcement. Stocks slumped as some investors questioned whether the Fed would be able to avert a recession. The Standard & Poor's 500 Index fell 3.5 percent to 1,278.28 at 9:34 a.m. in New York.

Bear Market

Yesterday, almost half of the world's biggest stock indexes fell into a bear market as mounting concern about a U.S. recession dragged down banking and retail shares across Asia, Europe and Latin America.

The bottom line was that financial conditions were tightening sharply and affecting the economic outlook, said former Fed economist Brian Sack, who is now with Macroeconomic Advisers LLC in Washington. The view so far has been that they're somewhat behind the curve and needed to adopt a somewhat more aggressive approach.

The Bank of Canada, in a scheduled meeting, lowered its main interest rate by a quarter point today to 4 percent and signaled it will act again to shield Canada from the U.S. slowdown.

The Fed Board of Governors, in a related move, lowered the so-called discount rate on direct loans to commercial banks by a 0.75 percentage point to 4 percent.

`Downside Risks'

Appreciable downside risks to growth remain, the Fed statement said. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Traders had anticipated 75 basis points of rate cuts this month, according to futures prices on the Chicago Board of Trade.

The FOMC vote was 8-1, with St. Louis Fed President William Poole preferring to wait until the regularly scheduled meeting. Fed Governor Frederic Mishkin was absent and not voting.

Fed officials met by video conference at about 6 p.m. yesterday, spokeswoman Michelle Smith said. Mishkin was traveling and unable to participate, she said. The voting members were the same as in 2007 because the presidents don't rotate in until the first regular meeting, Smith said.

First Since 2001

Today's so-called inter-meeting rate cut is the first since Sept. 17, 2001, when the Fed lowered borrowing costs in the aftermath of the terrorist attacks six days before. That was the third emergency reduction in a year which saw the last U.S. recession.

Bernanke warned in a Jan. 10 speech and again in testimony to Congress Jan. 17 that the 2008 economic outlook had worsened and the downside risks to growth have become more pronounced. Still, he said the Fed wasn't forecasting a recession this year.

Retail sales fell last month, unemployment rose, and housing markets are mired in the worst slump in 16 years. Homebuilders broke ground on the fewest homes since 1991 last month, Commerce Department figures showed Jan. 17. Building permits, a sign of future construction, declined by the most in 12 years, suggesting the housing slump will deepen.

Bernanke told legislators at the House Budget Committee that banks were trying to protect asset quality and funding, and tightening credit conditions for the rest of the economy as a result. Banks have also evidently become more restrictive in their lending to firms and households, he said.

Impact of Housing

Fed policy makers have warned that housing will continue to be a damper on growth. Richmond Fed President Jeffrey Lacker said Jan. 18 that didn't expect homebuilding to bottom out in 2008. Bernanke said the day before that housing markets may continue to be a drag on growth for a good part of this year.

In his Jan. 17 congressional testimony, Bernanke also endorsed the idea of a fiscal-stimulus package of as much as $150 billion to help revive economic growth, assuming the spending is quick and temporary. The next day, the Bush administration proposed a growth package of as much as $150 billion, without offering specifics.

Told of the decision after a speech in Washington, Treasury Secretary Henry Paulson called the Fed's move very constructive and a confidence builder. He said it was a sign to the rest of the world that the U.S. central bank is nimble.

Paulson said in the speech to the U.S. Chamber of Commerce in Washington that a stimulus package must be enacted quickly and that it must have an immediate impact.

Dollar Poised for Weekly Decline Against Yen on Slowing Economy

The dollar headed for a weekly loss against the yen before a private report that economists say will show U.S. consumer confidence fell to the lowest in more than two years.

The U.S. currency may decline for a fourth week against the Swiss franc after Federal Reserve Chairman Ben S. Bernanke said yesterday the bank is ready to take substantive additional action to help the economy, fueling speculation he will cut the benchmark interest rate at least a half percentage point this month. The yen has gained versus the 16 most-active currencies this week as a slump in global stocks caused investors to pull back from higher-yielding assets.

Dollar-yen is falling in the weak U.S. dollar environment and rising risk aversion, said Besa Deda, senior markets economist at St. George Bank Ltd. in Sydney. Bernanke's comments reinforce that the Fed is likely to cut by 50 basis points. There's a good chance of a U.S. recession.

The dollar traded at 106.81 yen at 10:38 a.m. in Tokyo, compared with 106.54 yesterday in late New York and 108.84 yen on Jan. 11. It touched 105.92 yen two days ago, the lowest since May 2005. The dollar was at $1.4626 per euro from $1.4642 yesterday and $1.4776 last week. It was at 1.1016 versus the franc from 1.1010 yesterday and 1.1014 last week.

The euro touched 155.70 yen, a four-month low, before trading at 156.16 yen from 155.99 yesterday and 160.79 on Jan. 11.

The dollar may decline to 106 yen today, Deda said.

Yen Gains

Japan's currency gained the most against the South African rand this week as concern that the U.S. economic slowdown will spill over to the rest of the world prompted investors to exit so-called carry trades financed with borrowed yen. The rand, which has been a destination for carry trades, was at 15.06 yen from 14.99 yesterday and 16.1 a week ago. It touched 14.95 yesterday, the weakest since Aug. 17.

Japan's 0.5 percent target rate is the lowest among the developed nations. South Africa's benchmark is 11 percent. The Standard & Poor's 500 Index lost 2.9 percent. With a 9.2 percent drop since Dec. 31, the index is off to its worst start to a year ever.

Carry trades are completely out of favor, said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney, in an interview with Bloomberg Television. `At the moment we're seeing a rise in risk aversion. The yen is benefiting.

The Reuters/University of Michigan preliminary index of consumer sentiment probably dropped to 74.5 in January from 75.5 in December, which was the lowest since October 2005, according to the median estimate of economists surveyed by Bloomberg News.

Outlook has Worsened

Bernanke reiterated that the outlook for growth in 2008 has worsened and the downside risks to growth have become more pronounced. In his testimony to the House Budget Committee in Washington, he also said a temporary fiscal stimulus of as much as $150 billion would help revive economic growth.

U.S. President George W. Bush will today lay out the general principles he favors for a short-term stimulus, Deputy Press Secretary Tony Fratto said yesterday.

Interest-rate futures on the Chicago Board of Trade showed a 100 percent likelihood the Fed will lower the target for the overnight lending rate between banks by at least a half- percentage point to 3.75 percent on Jan. 30. The chance of a cut to 3.5 percent this month was 44 percent.

The yen may pare its 3 percent gain versus the euro this week as technical charts which traders often use to judge price movements show the Japanese currency's advance to be excessive.

The euro's 14-day stochastic oscillator chart reached 6.3 today, according to data compiled by Bloomberg. A level below 20 suggests the euro has fallen too fast against the yen.

The yen has been overbought, said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. The market is pretty long the yen. There's a bit of yen-selling.

Stochastic oscillator charts measure the closing price of a security relative to its highs and lows during a particular period to try to predict a rise or fall.

Merrill Posts Record Loss on $16.7 Billion Writedown

Merrill Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of writedowns on assets infected by subprime mortgages.

The fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with earnings of $2.35 billion, or $2.41, a year earlier, the New York-based firm said today in a statement. Merrill fell 8 percent in New York trading, the biggest decline since the 2001 terrorist attacks, as the loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989.

We hope it's all written down and they've thrown in the kitchen sink, said Jeffrey Davis, chief investment officer at Boston-based Lee Munder Capital Group, which manages $4.8 billion and holds Merrill shares. Their core businesses have been impaired.

Chief Executive Officer John Thain called the results unacceptable and said on a conference call that Merrill should stop taking risks that have the potential to wipe out profit. Thain joined Merrill last month, replacing Stan O'Neal, whose gamble on building the subprime mortgage business backfired as U.S. homeowner defaults surged to a 20-year high.

Merrill follows Morgan Stanley and Bear Stearns Cos. in reporting a loss, capping Wall Street's worst quarter ever. The five biggest U.S. securities firms, which also include Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., reported a net total of $10.2 billion in losses. Thain, Goldman's former president, has replaced senior executives and taken steps to replenish capital during the past month by raising $12 billion from outside investors.

Shares Fall

Merrill, down 5.5 percent this year, fell $4.38 to $50.71 in composite trading on the New York Stock Exchange at 1:12 p.m.

The writedown included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less-reliable counterparty.

The firm wrote down the value of other mortgages by $949 million, leveraged loans by $126 million and commercial real estate by $230 million. Its commercial bank units took an $869 million charge for their investments in mortgages and related securities.

Thain is repositioning the firm to start fresh with a strong balance sheet, once these couple of bad quarters get out of the way, said Matthew Albrecht, an analyst at Standard & Poor's in New York who rates Merrill shares hold.

Citigroup Match

The fourth-quarter loss was the same reported earlier this week by Citigroup Inc., which took an $18 billion writedown related to its subprime-mortgage holdings and slashed its dividend 41 percent.

Merrill's fourth-quarter revenue was negative $8.19 billion, as losses in the fixed-income division wiped out all revenue at the firm's investment bank and retail brokerage. At the brokerage, the world's biggest with a network of more than 16,000 financial advisers, revenue climbed 10 percent to $3.31 billion.

Fixed-income trading revenue was negative $15.2 billion and equity trading revenue was $2.17 billion, up from $1.76 billion a year earlier. Debt underwriting generated $217 million in revenue, down 59 percent, while stock underwriting revenue dropped 21 percent to $375 million.

2007 Loss

The company's full-year loss was $7.78 billion compared with record net income of $11.6 billion at Goldman, the biggest U.S. securities firm by market value, and earnings of $3.2 billion posted by Morgan Stanley, the industry's No. 2 firm. Morgan Stanley and Bear Stearns, like Merrill, reported their biggest losses in the fourth quarter. Goldman and Lehman had profits. All the firms are based in New York.

Merrill said compensation costs fell 6 percent to $15.9 billion for the year compared with 2006. Thain has reduced 2007 bonuses in some divisions and cut jobs in the fixed-income unit, where the writedowns originated.

Several executives tied to O'Neal have departed, including former U.S. brokerage chief McIntyre Mac Gardner. Thain also has recruited executives from his most-recent employer, NYSE Euronext, hiring Nelson Chai to replace Jeff Edwards as chief financial officer.

Merrill, the third-biggest U.S. securities firm, fell 42 percent last year in NYSE trading, the third-worst performance among the 12 stocks tracked by the Amex Securities Broker/Dealer Index. Goldman, which profited by betting on a decline in prices for mortgage securities, gained 7.9 percent in the same period.

Goldman Sachs

Merrill, whose market value was greater than Goldman as recently as 2006, is now worth half as much. Thain, 52, worked at Goldman from 1979 to 2004, when he left to become CEO of NYSE Euronext.

The writedowns by Merrill add to more than $100 billion of subprime-related losses reported since May by the world's largest banks and securities firms.

With its capital depleted, Merrill said Jan. 15 that it sold $6.6 billion of preferred stock to a group of investors including the Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank. The transaction followed the sale in December of as much as $6.2 billion in stock. Thain has freed up at least $2.1 billion in additional capital by selling assets, including Merrill Lynch Life Insurance Co. and Merrill Lynch Capital, a financer of medium-size companies.

Bloomberg Stake

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News. Thain said on the conference call that its 20 percent stake isn't for sale, as analysts including Michael Hecht at Bank of America Corp. had speculated. Thain also called the firm's investment in BlackRock Inc., the biggest publicly traded asset manager in the U.S., a core strategic asset.

Before his ouster in October, O'Neal acknowledged that Merrill held onto many of the mortgage securities it created rather than selling them to customers, as it had before the housing market started to slow. O'Neal also bought subprime lender First Franklin Financial Corp. for $1.3 billion at the end of 2006 just as the market for housing-linked securities was beginning to wither.

Thain said today on a conference call with reporters that Merrill eliminated about 1,000 jobs in the fourth quarter, most of them at San Jose, California-based First Franklin.

Merrill held $8.8 billion of subprime mortgages by June and $32.1 billion of collateralized debt obligations, or CDOs, securities packaged from mortgage bonds, loans and other debt.

Rating Downgrade

Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.

Merrill's 1989 net loss of $213 million, under then-CEO William Schreyer, was the first since the firm went public in 1971. That loss works out to about $350 million in 2007 dollars.

Founder Charles Merrill, who burnished his reputation by telling customers to sell stocks just before the 1929 stock- market crash, would be appalled at the firm's bubble mentality of recent years, said Edwin Perkins, author of the 1999 biography of Merrill, Wall Street to Main Street.

Things just get out of control, and once you're involved in it, there's no way to get out of it gracefully, said Perkins, now a professor emeritus of business history at the University of Southern California in Los Angeles.

Sun Microsystems to buy MySQL for $1B

Sun Microsystems Inc. has agreed to buy open-source software maker MySQL AB for $1 billion, beefing up the server maker's database offerings with a company whose technology is used by some of the world's biggest Web sites.

Santa Clara-based Sun, in separate announcements before the market opened, said its second quarter revenue would narrowly exceed Wall Street estimates. It also said profit would fall at the high end of analysts' expectations. The company revealed its preliminary results ahead of schedule.

Sun is paying $800 million in cash and assuming $200 million in options to acquire MySQL. The Swedish company makes open-source database software used by companies such as online search leader Google Inc., popular Internet hangout Facebook Inc. and Finnish phone maker Nokia Corp.

Sun said the deal will help spread MySQL's software to large corporations, which have been the biggest customers of Sun's servers and software, and boost its distribution through Sun's relationships with other server makers such as IBM Corp. and Dell Inc.

The acquisition, expected to close in the third or fourth quarter, takes pressure off Sun to spend some of the cash it's been accumulating. It also bolsters its software offerings with a well-known name in Internet data retrieval.

Sun also said it expects net income of between $230 million to $265 million, or 28 cents to 32 cents per share. Analysts surveyed by Thomson Financial were expecting profit of between 22 and 38 cents.

Sun said it expects to notch about $3.6 billion in sales during the second quarter. Analysts were expecting, on average, $3.58 billion in sales.

JPMorgan Fourth-Quarter Earnings Fall, Miss Estimates

JPMorgan Chase & Co., the third- biggest U.S. bank, said profit dropped 34 percent on subprime- mortgage writedowns and higher provisions for future loan defaults.

Fourth-quarter net income declined to $2.97 billion, or 86 cents a share, from $4.53 billion, or $1.26, a year earlier, the New York-based bank said today in a statement. JPMorgan rose as much as 6.8 percent in New York trading as the $1.3 billion writedown was smaller than analysts estimated.

The profit decline, the first since Jamie Dimon became chief executive officer in 2005, came as trading revenue fell and JPMorgan prepared for what it said may be a substantial weakening in the U.S. economy. The company added $2.3 billion to credit reserves, bringing the total to $10 billion. Citigroup Inc., the biggest U.S. bank, said yesterday it added $5.2 billion to cover U.S. loan losses and took an $18.1 billion writedown.

We remain extremely cautious as we enter 2008, Dimon, 51, said in the statement. If the economy weakens substantially from here -- for which, as a company, we need to be prepared --it will negatively affect business volumes and drive credit costs higher.

JPMorgan gained $1.68, or 4.3 percent, to $40.85 in composite trading on the New York Stock Exchange at 10:28 a.m.

Their diversified business model really continues to separate JPMorgan from a lot of their peers, said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1.7 billion including JPMorgan shares.

Revenue Increase

Revenue climbed 7 percent to $17.4 billion, compared with the average estimate of $17.2 billion in the Bloomberg survey. Profit fell short of the 92-cent average estimate of 17 analysts surveyed by Bloomberg. Last year's fourth-quarter earnings included a one-time gain of $622 million.

Net income at the investment-banking division tumbled 88 percent to $124 million in the fourth quarter, as credit-market turmoil reduced revenue from debt underwriting 39 percent, to $467 million. Fixed-income revenue tumbled 70 percent because of the writedown, to $615 million, and weaker trading results contributed to a 40 percent drop in equity market revenue, which fell to $578 million.

The retail bank's profit climbed 5 percent to $752 million, driven by increases in mortgage banking. Those gains were tempered by declines in the home-equity and auto-loan businesses. Charge-offs on home-equity loans totaled $248 million. Profit from auto loans was $49 million, a 25 percent drop from a year earlier.

Credit Costs

Dimon said on a conference call with analysts that he isn't predicting a U.S. recession, though credit costs will increase as the economy weakens.

JPMorgan earned 15 percent less from its card services business, as its provision for future losses rose 40 percent to $1.79 billion.

Return on equity from continuing operations, a gauge of how effectively the company reinvests earnings, was 10 percent, compared with 14 percent a year earlier.

JPMorgan lost 18 percent of its market value in the past 12 months, compared with 50 percent at New York-based Citigroup and 29 percent at Charlotte, North Carolina-based Bank of America Corp.

JPMorgan's Tier 1 capital ratio, which regulators monitor to assess banks' ability to withstand loan losses, remained unchanged from the third quarter at 8.4 percent.

Rating Downgrade

Deutsche Bank AG analyst Michael Mayo reduced his rating on JPMorgan to hold from buy yesterday due to accelerating problems in U.S. consumer banking. Losses from credit cards and mortgages are increasing as the global economy slows. Citigroup said yesterday its record $9.83 billion loss was due in part to an increase in provisions for losses on auto and credit-card loans.

We feel that JPMorgan cannot escape tougher external conditions, Mayo wrote in his research note.

Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida, said JPMorgan may capitalize on its relative success in protecting its capital by purchasing another bank. Bove pointed to Seattle-based Washington Mutual Inc., the biggest savings and loan, as one possibility.

Dimon said on the conference call that he's open-minded about the possibility of acquiring other banks, and the current market environment makes such a takeover more likely.

Leveraged Buyouts

JPMorgan arranged $170 billion of loans used to finance leveraged buyouts in the U.S. last year, more than any bank and representing 16 percent of the market, according to data compiled by Bloomberg. The company was also the largest underwriter of U.S. high-yield corporate debt, with $20 billion in 2007.

The fourth quarter may be the worst earnings period for the financial industry since the Great Depression. Analysts estimate Merrill Lynch & Co., the biggest U.S. brokerage, will report a record loss tomorrow of more than $3 billion after writing down the value of mortgage-related securities. Bank of America, the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.

Oracle Wins Over BEA, Agrees to $8.5 Billion Purchase

Oracle Corp., the world's third- biggest software maker, agreed to buy BEA Systems Inc. for $8.5 billion in cash after a three-month fight, capitulating to the board's demands for a higher price.

BEA investors will receive $19.38 a share, 24 percent more than yesterday's close, Oracle said today in a statement. BEA, the maker of software that lets programs share information, rejected an unsolicited bid of $17 from the company in October and asked for $21, which Oracle called impossibly high.

The purchase, Oracle's largest in three years, brings Chief Executive Officer Larry Ellison's acquisitions to more than $33 billion and marks a reversal from last month, when Oracle said a friendly deal couldn't be done with the current board. Ellison is counting on BEA will help him maintain the pace of sales amid slowing growth in technology spending.

It is a lot more than what they initially offered, said Edward Lewis, a partner at Atlantic Equities LLP in London, in an interview. BEA managing to flush out a higher offer from Oracle is obviously proof that their strategy worked.

The deal is a victory for billionaire investor activist Carl Icahn, who pressed BEA's board to agree to a takeover. Icahn, the company's biggest shareholder with about a 13 percent stake, had sued in Delaware demanding that shareholders gain the right to vote in a sale.

Icahn supports Redwood City, California-based Oracle's offer, according to a statement released today. He didn't immediately return a call seeking further comment.

Oracle fell 4 cents to $21.27 at 10:54 a.m. New York time in trading on the Nasdaq Stock Market. BEA, based in San Jose, California, rose $2.97, or 19 percent, to $18.55.

Earnings Boost

Buying BEA, led by co-founder Alfred Chuang, will help Oracle challenge International Business Machines Corp. for the market lead in middleware, which helps different types of programs share information. Ellison said in October the company aims to beat IBM in middleware sales.

Middleware requires a highly specialized, technically sophisticated sales force, Ellison said today in a conference call. It's difficult to obtain that kind of talent.

The transaction should add as much as 2 cents to per-share profit, excluding some items, in the first full year after its completion, Oracle said. The company expects to finish the purchase by mid-year. Goldman Sachs Group Inc. advised BEA on the deal.

In November, BEA corrected 10 years of results to account for backdated options grants and severance contracts. The restatements allowed the company to file its first full quarterly report since August 2006. BEA earlier said investors would see it was worth more than the Oracle offer once the full report came out.

Other Purchases

Oracle's last major acquisition, the $3.3 billion takeover of Hyperion Solutions Corp., was almost a year ago, so its sales growth was at a risk of slowing, Atlantic's Lewis said.

This purchase allows them to make the next couple of quarters and to fuel their growth on BEA's very strong installed-customer-base maintenance revenues, said Richard Williams, an analyst at Cross Research in Livingston, New Jersey.

Researcher Gartner Inc. predicted in October that global technology spending will climb 5.5 percent this year, compared with a projected 8 percent increase for 2007, as companies tighten budgets to cope with slowing economic growth.

Oracle, traditionally a provider of database software before its expansion spree, trails Microsoft Corp. and IBM in worldwide software sales. Its acquisitions, starting with the $10.3 billion hostile takeover of PeopleSoft Inc. in January 2005, helped Ellison offer applications in new markets and more programs for organizing documents and analyzing data.

U.S. Stocks Decline on Citigroup's Loss, Drop in Retail Sales

The U.S. stock market resumed its January swoon after Citigroup Inc. reported a record loss, retail sales unexpectedly dropped and falling oil prices dragged down energy shares.

Citigroup, the largest U.S. bank, declined the most since November in New York Stock Exchange trading after cutting its dividend by 41 percent because of rising home-loan defaults. Exxon Mobil Corp., the biggest U.S. oil company, posted its steepest drop in seven weeks. Wal-Mart Stores Inc., the world's largest retailer, tumbled on a report showing sales at chain stores slumped in December for the first time since June.

The Dow Jones Industrial Average, which had its biggest gain for the year yesterday, slid 182.25, or 1.4 percent, to 12,595.9 at 10:30 a.m. in New York. The Standard & Poor's 500 Index lost 25.06, or 1.8 percent, to 1,391.19, bringing its 2008 decline to 5.3 percent. The Nasdaq Composite Index decreased 44.7, or 1.8 percent, to 2,433.6. More than 10 stocks retreated for every one that rose on the NYSE.

There's probably going to be more pain in the financial stocks, said Bartley Barnett, head of listed trading at Memphis-based Morgan Keegan Inc., which manages $120 billion in client assets. The weak consumer is the thing permeating this entire market. We've had a lot of companies have to adjust numbers down due to a weak consumer.

Cash Infusions

The declines added to three weeks of losses that wiped out more than $800 billion in value from U.S. shares. Merrill Lynch & Co. and Citigroup were forced to turn to outside investors for a second time in two months to replenish capital. Wall Street banks have received $59 billion from investors, mostly in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from mortgage-related losses.

Financial companies in the S&P 500 are projected to report a 69 percent average drop in profits in the fourth quarter, dragging earnings for the overall index down 10 percent, according to a Bloomberg survey of analysts.

The dollar approached a record low versus the euro, making U.S. exports more attractive to foreign buyers, after the drop in retail sales bolstered speculation the economy is headed for recession. Prices paid to U.S. producers unexpectedly fell in December, pushed down by a decline in energy prices.

Citigroup decreased $1.63, or 5.6 percent, to $27.43. The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier. Citigroup also cut its dividend by 41 percent, announced 4,200 job cuts and said it will receive $14.5 billion from outside investors to shore up depleted capital.

'No End of Bad News'

There seems to be no end of bad news, Laszlo Birinyi, president of Birinyi Associates Inc., said in an interview with Bloomberg Television. Trying to bottom-fish may work when you're out there angling, but I'm not sure it works with financial markets,

Exxon lost $1.74, or 1.9 percent, to $89.09 after the retail sales report sent crude oil down 2.6 percent to $91.78 a barrel in New York, its lowest level in more than three weeks.

Merrill tumbled $1.62 to $54.35 after the third-biggest U.S. brokerage sold $6.6 billion in preferred shares. Merrill's convertible securities will pay a 9 percent annual dividend until they automatically turn into shares in 2 3/4 years. The investment group will get fewer shares if Merrill's stock price climbs above $61.31 and more if it drops below $52.40, according to the company's statement.

Wal-Mart slipped 48 cents to $47.19. The Commerce Department said sales at U.S. retailers fell 0.4 percent in December, capping the weakest year since 2002. Sales declined for the first time since June, following a revised 1 percent gain in November, the Commerce Department said. Purchases excluding automobiles also decreased 0.4 percent.

State Street

State Street Corp. dropped $3.11 to $81.75. The world's largest money manager for institutions said fourth-quarter earnings fell 28 percent after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages. The company said 2008 growth will be at the lower end of its target ranges.

Williams-Sonoma Inc. dropped $2.20, or 9.9 percent, to $20. The seller of gourmet cookware reported a decline in holiday sales and lowered its fourth-quarter profit forecast amid the worst housing slump in 27 years. Sales at stores open more than a year fell 0.4 percent for the nine weeks through Dec. 30, the company said.

Genentech Inc. decreased $2 to $68.64. The world's second- biggest biotechnology company said sales of its top product, the cancer drug Avastin, fell short of analysts' expectations.

Traders held steady in their bets for an interest-rate cut. Fed fund futures show a 44 percent probability the Federal Reserve will lower its benchmark interest rate by 0.75 percentage point this month. Before Jan. 11, traders saw no chance of a three-quarter point cut to 3.5 percent. The balance of the odds are for a half-point cut.

Citigroup Posts Record Loss on $18 Billion Writedown

Citigroup Inc. posted the biggest loss in the U.S. bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier, the largest U.S. bank said today in a statement. New York-based Citigroup also reduced its dividend by 41 percent, cut 4,200 jobs and obtained $14.5 billion from outside investors to shore up depleted capital.

The results are unacceptable, Chief Executive Officer Vikram Pandit, who was installed in December after Charles Chuck Prince stepped down amid mounting subprime losses, said on a conference call with analysts and investors. We need to do better, and we will.

Citigroup fell as much as 3.7 percent in New York trading as the writedown for subprime home loans and related securities was almost double what the company forecast in November and the loss exceeded analysts' estimates. The bank also set aside $5.2 billion to cover lending losses, including credit-card and auto loans where delinquencies increased.

The markdown on subprime securities is the biggest so far, exceeding the $14 billion reported by Zurich-based UBS AG, Europe's biggest bank. Former CEO Sanford I. Weill and Saudi Prince Alwaleed bin Talal, who is already Citigroup's largest individual shareholder, were among the investors contributing new capital to the bank.

`Deep, Desperate Hole'

They've got themselves in a deep, desperate hole and it's going to take them all of 2008 to work their way out of it, Jon Fisher, who helps manage $22 billion at Minneapolis-based Fifth Third Asset Management, said in an interview on Bloomberg TV. Fifth Third owns shares of Citigroup. There are probably issues on their balance sheet that the management team, who's only really been running the company for about a month, doesn't even know about.

The net loss exceeded analysts' estimates of 97 cents a share, according to a survey by Bloomberg. Citigroup has slumped 47 percent in New York Stock Exchange composite trading during the past year. The shares fell 92 cents, or 3.2 percent, to $28.14 in composite trading at 9:52 a.m.

Standard & Poor's lowered its long-term rating on Citigroup to AA- from AA after the earnings announcement, reflecting the severe losses and the likelihood that the bank's 2008 performance could be rocky.

Dividend Reduced

Citigroup, founded in 1812 as the City Bank of New York, cut the quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the merger of Citicorp and Travelers Group Inc. in 1998, will help save the company about $4.4 billion annually. The company said as recently as November that it had no plans to lower the payout to shareholders.

Citigroup also had to turn to outside investors for fresh capital for the second time in two months, bringing to $22 billion the total amount raised. The bank said it generated $6.88 billion by selling convertible preferred shares to an investment fund controlled by the government of Singapore. Similar shares were sold to Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, Prince Alwaleed and Weill.

In November, the bank got a $7.5 billion injection from the ruling family of the Middle Eastern emirate Abu Dhabi. Alwaleed, the 52-year-old billionaire, already owns 4 percent of the company. He has been Citigroup's biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of funds.

Weill's Strategy

Weill, 74, spent 17 years building Citigroup through a series of bank, brokerage and insurance-company mergers before retiring as CEO in 2003 and naming Chuck Prince his successor.

Without a capital infusion, Citigroup's so-called Tier 1 capital ratio, which regulators monitor to assess a bank's ability to withstand loan losses, would fall below the company's target to about 7 percent, Goldman Sachs Group Inc. analyst William Tanona estimated last month.

The decision to cut about 1.1 percent of the company's 375,000 employees as of the end of 2007 follows Pandit's pledge in December to conduct a front-to-back expense review of the company. The workforce had swelled from 327,000 at the end of 2006, even as Prince and former Chief Operating Officer Robert Druskin eliminated about 17,000 jobs.

Pandit, 51, said on the conference call that the review isn't over, and today's job announcement was only a downpayment.

Investment Banking

Pandit aims to complete his cost review by April and may announce then whether to sell or spin off businesses within Citigroup, which spans 100 countries, according to two people familiar with the situation. Some analysts, including Deutsche Bank AG's Mike Mayo, have called for a breakup, saying the company is too unwieldy to manage.

The latest job cuts, scheduled to take place this month, are mostly in the company's trading and investment-banking division, which posted a fourth-quarter loss of $11 billion after earning $1.75 billion a year earlier.

Citigroup's overall revenue in the fourth quarter fell 70 percent from a year earlier to $7.22 billion, while operating expenses climbed 18 percent to $16.5 billion. The company's consumer-banking unit had net income of $756 million, down 71 percent from the prior year, and earnings at the global wealth management division, which includes the Smith Barney brokerage, rose 27 percent to $523 million.

For the full year, Citigroup had a $3.62 billion profit, down 83 percent from 2006.

Losses `Skyrocketing'

Consumer loss rates are skyrocketing at this company, Meredith Whitney, a analyst at CIBC World Markets, said in a Bloomberg TV interview. I think there are further charges in the company's future. Whitney estimated additional charges or loan losses of between $5 billion and $10 billion.

The fourth quarter may be the worst earnings period for the financial industry since the Great Depression. Analysts estimate Merrill Lynch & Co., the biggest U.S. brokerage, will report a record loss of more than $3 billion after writing down the value of mortgage-related securities, and Bank of America Corp., the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.

Bank of America may report an 80 percent drop in fourth- quarter net income next week, and JPMorgan Chase & Co., the third-biggest U.S. bank, may post a 31 percent decline in earnings tomorrow.

Merrill's Infusion

Merrill, the biggest U.S. brokerage, said earlier today it raised $6.6 billion by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

Two days after becoming CEO on Dec. 11, Pandit bailed out seven so-called structured investment vehicles, shifting $49 billion of assets onto Citigroup's balance sheet and obliging the company to increase its capital cushion. The decision increased the chances that Pandit would have to cut the dividend, according to CIBC's Whitney. The payouts to shareholders cost Citigroup about $2.7 billion a quarter.

Foreign investors ride in to rescue Citi

An investment of even 1 percent from Saudi Prince Alwaleed could signal confidence in the struggling bank, says The Wall Street Journal.

Saudi billionaire-Prince Alwaleed bin Talal and a team of Chinese investors may ride to embattled Citigroup's rescue, according to a report from The Wall Street Journal.

Chinese investors, including China Development Bank, will reportedly contribute around $2 billion. It was not known how much would be invested by Prince Alwaleed, but the Journal calculated that his stake in the bank would likely remain under 5 percent, but that even a 1 percent stake would be a vote of confidence.

An earlier report said that Citigroup is trying to raise an additional $10 billion, most of which would come from overseas funds. In November, Alwaleed sold a 4.9 percent stake in Citigroup for $7.5 billion to the Abu Dhabi Investment Authority.

Citigroup will reportedly reveal the investments when it reports its fourth-quarter earnings on Tuesday.

China Plans to Align Policies, Cut Trade Surplus

China plans to better coordinate fiscal and monetary policies in 2008 to reduce its trade surplus and mop up excessive liquidity, Vice Finance Minister Li Yong said today.

This year's fiscal policy will focus on structural adjustments and help essentially solve the problem of excess liquidity, Li said at a conference in Beijing. Monetary policies should focus on quantitative controls to win more time for structural reforms. China also needs to use administrative measures to tackle these issues, he said, without being specific.

China's money supply grew at the slowest pace in seven months in December, the central bank said yesterday, after it took measures to cool inflation and prevent the economy from overheating. China may face pressure from Europe and the U.S. to allow faster gains by its currency after the nation's trade surplus surged 48 percent to a record $262.2 billion last year.

Fiscal policy can play a bigger role, said San Feng, an economist at the State Information Center in Beijing. The government this year needs to cut its fiscal deficit and debt issuance for long-term construction projects, and it should lower taxes on sectors affected most by price controls.

The government will adjust resource prices this year to rectify a distorted energy-pricing system and boost domestic spending as its top priority, Li said. Weakness in the U.S. dollar will limit China's ability to raise interest rates and reserve ratios further, he added.

Inflation Target

China's central bank has pledged a tight monetary policy this year, after six interest-rate increases in 2007, to curb lending and prevent escalating asset prices.

We will decisively fight against inflation and implement tight monetary policies, said Yi Gang, vice governor of the People's Bank of China, at the same conference today. But we will do it prudently to ensure economic stability.

Consumer prices jumped to an 11-year high of 6.9 percent in November, prompting Premier Wen Jiabao to announce on Jan. 9 a freeze on energy and utility price gains in the near term.

The government needs to avoid high inflation expectations, said Xu Lin, head of the fiscal and financial department of the National Development and Reform Commission, at today's conference. If price increases slow down, the temporary measures to curb prices can be eased.

China has set a preliminary target for the full-year inflation rate at 4.6 percent in 2008 and that for annual economic growth at 8 percent, Xu said. Both targets need to be officially set at the sessions of the National People's Congress, or the country's parliament, which are scheduled to be convened in March, he added.

Yuan Appreciation

The yuan rose for a fifth week, reaching the strongest level since China scrapped a fixed exchange rate to the dollar in 2005, on speculation China is seeking faster gains to cool the economy. The U.S. and Europe say the yuan, even after recent advances, is still at a level that gives local companies an unfair advantage in overseas markets.

The December trade surplus shrank to $22.7 billion from $26.2 billion in November, as exports grew at the slowest pace in two years, indicating recent yuan gains, the cooling global expansion and cuts to export-tax rebates on polluting industries are beginning to bite.

The banking regulator last quarter banned Agricultural Bank of China and six other banks from making new loans, according to the official Shanghai Securities News.

China's economy probably expanded 11.5 percent in 2007, the fastest pace in 13 years, according to government forecasts.

Countrywide On Clearance

Countrywide Financial may have found a white knight in Bank of America, but the mortgage lender was forced to put itself on the auction block for a steep discount.

On Friday, Bank of America confirmed that it will buy Countrywide Financial for $4.1 billion, delivering a much-needed lifeline to the embattled mortgage lender. But the deal, which values Countrywide's shares at $7.07 a share, well below Thursday's closing price of $7.76, simultaneously exposes the dire state of the nation's largest mortgage lender and the industry as a whole.

In early afternoon trading, shares of Countrywide plunged 16.3%, or $1.26, to $6.49, while Bank of America edged down 1.2%, or 47 cents, to $38.83. This deal comes together because no one wanted to see Countrywide fail; it is a win-win for everyone involved, but doesn't indicate that the mortgage problems are behind us, Stifel Nicolaus analyst Christopher Brendler told Forbes.com.

Under the deal, Countrywide shareholders will get 0.1822 of a Bank of America share for each share that they own.

The fact that Countrywide was willing to take a deal that valued it shares 8.3% below trading levels reveals just how desperate the firm was. It was certainly good news for Countrywide, Brendler said. Countrywide was going to have funding issues, liquidity had dried up for the sector, bankruptcy was a real risk.

This is not the first time Bank of America has stepped in to stabilize Countrywide. Back in August, Bank of America pumped $2 billion into Countrywide, buying up 111 million shares at $18 a share. According to Brendler, Bank of America was likely interested in buying Countrywide then, but Countrywide was hoping to go it alone. Since August, the credit and housing markets have worsened considerably, forcing many firms to take big write-downs or close their mortgage business alltogether. The rapid deterioration has pummeled Countrywide Financial, and, with Chapter 11 rumored to be at its heels, the firm likely had no choice but to accept a lowball deal.

This week, Countrywide reminded the markets that foreclosures were on the rise and said it funded just $23.5 billion in loans in December (roughly half the volume of a year ago).

Although Bank of America's stock may react negatively to the bailout news, the takeover of one of the most high-profile mortgage franchises at a bargain-basement price will be accretive in the long run. The acquisition, which will likely pass regulatory approval and close by the third quarter, will automatically turn Bank of America into the country's largest mortgage lender. As a major Wall Street player, with a huge balance sheet, Bank of America can easily absorb Countrywide's troubled portfolio. While the mortgage mess is far from over, Bank of America predicts that the takeover will be neutral to earnings in 2008 and positive by 2009.

Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers, Bank of America Chief Executive Officer Ken Lewis said on Friday.

Of course, Countrywide is no sure bet. The company still has a dicey portfolio, with $80 billion in high-risk mortgage loans. Several months ago, many of these loans were not considered high risk, but the deterioration of the markets now makes them so, Stifel Nicolaus's Brendler said. Bank of America also acknowledged the possible risk associated with Countrywide in Friday's statement: We are aware of the issues within the housing and mortgage industries....The transaction reflects those challenges.

The Countrywide deal may also be a sign that the mortgage market will continue to worsen before it improves. This is more of a negative indicator; you have a company that has tried very hard to stabilize but has clearly failed to do so, and is selling for a very depressed price, Brendler remarked.

Others may follow. The next takeover target could be Washington Mutual, which ticked up 6.1%, or 87 cents, to $15.03 in premarket trading. However, Washington Mutual is a much larger pill to swallow, with $250 billion in mortgage loans on its books and a $12.3 billion market capitalization. Despite an attractive retail deposit business, there would be a limited pool of suitors. The top candidate would likely be JPMorgan Chase, Brendler observed.

Recession a big worry but not likely: Moody's

U.S. government bond ratings should remain stable thanks to modest federal debt levels, the credit rating agency says.

Despite the subprime mortgage crisis and the rising risk of a recession, a recession isn't likely under current conditions, credit ratings agency Moody's said in a report Friday.

The diversity of the U.S. economy and the global role of the dollar continue to support U.S. government bond and foreign currency ratings, according to the rating agency's annual U.S. credit analysis.

The dollar is expected to contribute positively to economic growth in 2008 as its declining value increases the value of U.S. assets abroad. But in 2007, due to a temporary slowing of the economy in the first quarter and an expected slowdown in the fourth, annual GDP growth is now estimated at 2 percent, down from 3.3 percent in 2006, Moody's reported.

And the 2008 outlook is far from rosy.

Slower employment growth, housing sector problems and subprime worries will continue to subdue overall growth, with housing having the biggest impact. In 2008, the risk of an outright recession appears to be increasing, although this is not yet the mainstream scenario. Moody's said. If home prices, consumer confidence and spending do continue to sink, the economy could see negative growth in the first half of 2008.
Recession may already be here

Construction is slowing and home prices are falling. This means that not only will residential construction be falling, directly affecting GDP growth, but the wealth effect of lower house prices is likely to lead to a drop in consumption growth.

It is expected that, despite federal government efforts to convince lenders to freeze interest rates on some mortgages where they are set to increase, home foreclosures will rise in 2008, further exacerbating the problem, the agency added.

U.S. government bond ratings should remain stable however, thanks to modest federal debt levels.

The United States reported a smaller than expected federal deficit, at $248 billion, or 1.2 percent of GDP, for the fiscal year ending Sept. 30, considerably less than the 1.9 percent of GDP previously estimated.

And despite the projected deficits for the next few years, Moody's believes that U.S. government debt levels in relationship to the size of the overall economy will remain consistent with its Aaa rating.

Gold tops $900 an ounce

Gold prices break new record as weak dollar, fears of recession fuel demand for safe-haven investments.

Gold futures rose above $900 an ounce for the first time Friday, as high oil prices, a weak dollar and fears of a U.S. recession led uneasy investors to keep buying the precious metal.

An ounce of gold for February delivery on the New York Mercantile Exchange jumped $6.50 to $900.1 in morning trading, an all-time high and a psychologically important milestone. Gold later slipped to $898.70 an ounce but remained in record territory.

It's a reflection of market sentiment: Gold is a hedge against uncertainty and right now it's the best bet, said Carlos Sanchez, a precious metals analyst at CPM Group in New York. None of the other investment options look that great and gold does.

Still, when adjusted for inflation, gold remains well below its all-time high. An ounce of gold at $875 in 1980 would be worth $2,115 to $2,200 today.

Gold has seen a meteoric rise the past year -- rising 32 percent in 2007 -- boosted by rising prices for oil and other commodities and also by the falling U.S. dollar. Those trends have increased the metal's appeal as a haven; gold is also seen as a safe investment in times of political and economic uncertainty around the world.

Fed Signals Shift as Traders Anticipate Deeper Rate Reductions

Federal Reserve officials signaled they've shifted their stance in favor of taking out greater insurance against the growing risk of recession.

Fed Governor Frederic Mishkin said today that policy makers must be ready to abandon inertia and act decisively in cases of major financial disruptions. Philadelphia Fed Bank President Charles Plosser, whom economists consider to be the toughest on inflation, said he's now most concerned about consumer spending.

The comments, following Chairman Ben S. Bernanke's speech yesterday pledging substantive additional action, spurred traders to predict a faster and deeper pace of interest-rate cuts. That strategy would be a break from the forecast-driven policy approach to date, Fed watchers said. Mishkin joined Bernanke in stating the strategy is now one of insurance.

I am delighted the Fed is moving in a very different direction, said former Fed governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. Risk-management is what they should be doing.

Mishkin, 57, a former collaborator with Bernanke on academic research, said in New York today that waiting too long to ease policy could result in further deterioration of the macroeconomy and might well increase the overall amount of easing that would eventually be needed.

Disappointing Markets

While the Fed cut the benchmark rate by a half-point, more than anticipated in September, officials have since disappointed some investors by refusing to commit to a series of reductions. When lowering borrowing costs in October and December by a quarter-point each, policy makers refrained from saying that growth was a bigger concern than inflation.

By the time they met Dec. 11, officials acknowledged that the Fed's stance appeared to be somewhat restrictive, minutes of the session showed last week.

They underestimated the magnitude of the credit shock, said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. The markets got it a lot faster than the Fed and now they are catching up.

Plosser, 59, said he's certainly open to more rate cuts, in an interview with PBS's Nightly Business Report today. By contrast, when he spoke Nov. 27 he warned that the Fed's rate cut the previous month posed a risk to inflation expectations.

The most thing we are concerned about right now is consumer spending, Plosser said today.

Boston Fed President Eric Rosengren, 50, said today in South Burlington, Vermont that declining house prices are likely to dampen consumer and business confidence in spending.

`Gasoline on the Fire'

Rosengren, Plosser and especially Mishkin arguably poured more gasoline on the fire after Bernanke's remarks, Ian Morris, chief economist at HSBC Securities USA Inc., said in a note to clients. The market is betting that the Fed may cut in an inter-meeting move, wrote Morris, who yesterday doubled his rate-cut call for this month to a half-point.

Traders anticipate at least a half-point reduction in the target rate for overnight loans between banks this month, according to contracts quoted on the Chicago Board of Trade.

Odds of 0.75 percentage point of reductions this month jumped to 34 percent, from zero yesterday, futures show. That suggests some investors see the chance of a move before the Federal Open Market Committee meets Jan. 29-30, with an additional cut when it gathers.

Bernanke's Opportunity

Bernanke, 54, will have another opportunity to send signals on rates Jan. 17, when he testifies on the economic outlook before the House Budget Committee.

This week's shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003.

We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks, the Fed chief said to the Women in Housing and Finance and Exchequer Club in Washington. The committee must remain exceptionally alert and flexible.

Asian Stocks Drop to 3-Month Low This Week on Growth Concerns

Asian stocks fell to the lowest in more than three months, led by Toyota Motor Corp. and Samsung Electronics Co., on concern the effects of a U.S. housing slump will spread and slow growth globally.

Nintendo Co. dropped 5.4 percent this week after U.S. hiring slowed in December and unemployment increased to a two- year high. Taiwan Semiconductor Manufacturing Co. had its worst week in more than three years after the New York Times reported Merrill Lynch & Co. may take a bigger-than-expected $15 billion writedown for mortgage-related losses.

The view is strengthening that a U.S. recession is on the cards, said Jason Teh, who helps manage the equivalent of about $5.3 billion at Investors Mutual in Sydney. When things slow there it spills out to the rest of the world.

The MSCI Asia Pacific Index fell 2.8 percent this week to 151.70, the biggest drop since the period ended Dec. 14 and the lowest close since Sept. 18. Japan's Nikkei 225 Stock Average lost 4 percent to 14,110.79, the lowest since November 2005. Roughly twice as many of the benchmarks around the region declined as gained.

Toyota, Japan's largest automaker, fell 2.6 percent to 5,630 yen, and was the biggest drag on the regional benchmark. Samsung, South Korea's largest exporter, retreated 4.3 percent to 516,000 won.

U.S. hiring slowed last month, capping the worst year for job creation since 2003, and unemployment increased to 5 percent, the Labor Department said. Separately, Japan's car sales dropped in 2007 to the lowest in 35 years as wages fell and the population shrank.

Merrill Writedown?

Japan's economy has a 50 percent chance of slipping into a recession, Tetsufumi Yamakawa, Goldman's chief economist in Tokyo, wrote in a note yesterday. The U.S. economy may already be in recession, which will last two to three quarters and be relatively mild by historical standards, Goldman chief U.S. economist Jan Hatzius said in a separate note on Jan. 9.

Nintendo, the world's biggest maker of handheld game players, lost 5.4 percent to 60,200 yen in Osaka. Taiwan Semiconductor, the world's biggest custom-chip maker, dropped 8.3 percent to NT$55, its worst weekly performance since the period ended April 30, 2004.

A $15 billion writedown by Merrill, the third-largest U.S. securities firm, would be twice its own projection and more than the $12 billion analysts had estimated, according to a New York Times report yesterday. The world's biggest banks and securities firms have posted $97 billion in losses and writedowns on subprime-related assets, according to Bloomberg calculations.

Any subprime losses would drive the markets, said Nicole Sze, a Singapore-based investment analyst at Bank Julius Baer & Co. which manages $350 billion in assets worldwide. More writedowns could have a negative impact on the region.

China Financials Gain

ICICI Bank Ltd., India's biggest by market value, jumped 12 percent in the week to 1,439.9 rupees. The company may list four of its units or sell stakes to investors privately, said Chanda Kochhar, joint managing director at ICICI.

Citic Securities Co., Asia's largest brokerage by market value, rose 7 percent to 94.73 yuan in China. Last year's profit probably rose more than 400 percent, boosted by surging revenue from stock trading, the company said on Jan. 7.

China Merchants Bank Co., the nation's sixth-largest lender, added 2.6 percent to HK$31.90 in Hong Kong. Net income probably more than doubled last year, the company said.

Earnings from major Chinese financial companies have beaten market expectations by as much as 10 percent, said Fan Dizhao, who helps manage about $1.8 billion at Guotai Asset Management in Shanghai. That has provided a short-term boost.

Countrywide's loan fundings edge higher

Nation's largest home lender says December loan fundings increased 1%; stock bounces after tanking in previous session on bankruptcy rumors.

Countrywide Financial Corp., the nation's largest mortgage lender, said Wednesday its December loan fundings rose 1 percent from November and were ahead of internal forecasts.

The stock, which lost nearly a third of its value on Tuesday amid rumors of bankruptcy -- which the company strongly denied -- rose 13 percent in premarket trading.

Countrywide said it funded $24 billion in loans in December, giving it a total of $69 billion for the fourth quarter. Average daily mortgage applications in the month slipped from November, but Countrywide attributed that to a typical seasonal decline.

The company's banking operations had assets of $113 billion at the end of December, up from $83 billion at the end of November.

Countrywide also said it saw a slower rate of people paying off loans early, which made its servicing business more valuable. Servicers collect payments and manage loans for their owners.