JPMorgan now cutting up to 14,000 jobs

JPMorgan Chase & Co (JPM.N) said it is cutting up to 14,000 jobs, more than previously disclosed, as it tries to reduce costs in the face of a slumping economy and higher credit losses.

The second-largest U.S. bank on Thursday said it now expects to shed as many 12,000 jobs from integrating the former Washington Mutual Inc (WAMUQ.PK), up from 9,200 announced in December. It also expects to cut up to 2,000 investment banking jobs.

JPMorgan announced the cuts in an all-day presentation to investors. The reductions are intended to help the New York-based lender weather the current economic turmoil, as its customers struggle with falling house prices, tight credit and increasing mortgage and credit card defaults.

Financial companies have announced close to 350,000 job cuts since August 2007, outplacement firm Challenger, Gray & Christmas has said.

JPMorgan expects $2.75 billion of savings from Washington Mutual, offset by $750 million of new investments. Retail banking chief Charlie Scharf expects most of the savings by the end of 2009, sooner than originally thought.

The bank in September paid $1.9 billion for the banking units of Washington Mutual, the largest U.S. bank or thrift ever to fail. It is shutting several hundred branches, but plans to open 120 new branches this year. It has more than 5,000 branches, up from 539 as recently as 2003.

Meanwhile, JPMorgan's investment bank expects to reduce its 28,000-person staff to between 26,000 and 27,000 by year-end, with cutbacks focused in technology and infrastructure, the unit's co-chief executive, Steve Black, said. Staffing could fall further if market conditions worsen, though it is "hard to imagine" a worse year for the unit than 2008, he said.

On Monday, JPMorgan unexpectedly cut its dividend 87 percent to help save $5 billion a year and achieve Chief Executive Jamie Dimon's goal of a "fortress" balance sheet. The bank got $25 billion last fall from the government's Troubled Asset Relief Program.

In afternoon trading, JPMorgan shares were up $1.82, or 8.4 percent, at $23.55 on the New York Stock Exchange. The KBW Bank Index .BKX of large U.S. lenders was up 6.3 percent.

HOME EQUITY, CREDIT CARDS UNDER PRESSURE

JPMorgan told investors that excluding Washington Mutual, it expects losses of $1 billion to $1.4 billion in each quarter this year from home equity loans to more creditworthy borrowers.

It said as many as 41 percent these borrowers will owe more than their homes are worth by the end of 2010, up from 27 percent at the end of 2008.

Scharf said California's housing market is showing signs of a bottom in home price deterioration, but Florida's is not. He also said that "we know New York is going to deteriorate.

He said losses on loans made as the housing boom was cresting "seem to be leveling out, at very high rates.... There will be an end in sight, just figuring out where it is not the easiest thing as we sit here today."

Housing problems and rising unemployment are also driving higher losses in JPMorgan's credit card business and may result in lower sales volume. Executives expect card losses to increase "materially" and are preparing for a 9 percent U.S. unemployment rate by year-end.

"The American consumer feels much poorer than in previous recessions," credit card chief Gordon Smith said.

JPMorgan maintained its first-quarter outlook for a 7 percent net charge-off rate in card services.

New home sales plunge 10.2% to record low Supply of unsold homes rises to record-high 13.3 months

Sales were down 48.2% compared with a year earlier, the government reported, an indication that the downturn in the housing market was still accelerating as the recession headed into its second year.

Sales were weaker than expected. Economists surveyed by MarketWatch were looking for a sales pace of about 320,000. See Economic Calendar.

Builders cut their median sales prices by a record 9.9% in January compared with December in a bid to move unsold homes. Median sales prices are down 13.5% in the past year, the largest year-over-year decline in 38 years. The average sales price has fallen a record 17.6% in the past year.

Builders are faced with intense competition from foreclosures and distressed sales of older homes. Buyers are faced with declining wealth and an uncertain labor market, offsetting lower mortgage rates that are improving affordability.

Inventories of unsold homes fell by 3.1% to 342,000, the 13th consecutive decline. However, sales are falling even faster. The inventory at the end of January represented a record-high 13.3 month supply at the January sales pace. Nearly half the homes for sale have been completed.

The builders' overstock "will keep prices falling for the rest of this year at least," wrote Ian Shepherdson, chief domestic economist for High Frequency Economics.

On Wednesday, the National Association of Realtors said sales of existing homes fell to a 12-year low in January. See full story.

Government statisticians have low confidence in the monthly report, which is subject to large revisions and large sampling and other statistical errors. In most months, the government isn't sure whether sales rose or fell. The standard error in January, for instance, was plus or minus 15.4%. Read the full government report.

The government says it can take up to five months to establish a new trend in sales. Over the past five months, sales have been on a 374,000 annual pace, 42% slower than a year earlier.

In all of 2008, 483,000 homes were sold down, from 776,000 in 2007 and 1.05 million in 2006.

The release was the third economic report of the day that was weaker than expected. "It's getting uglier by the day," said Harm Bandholz, an economist for UniCredit Markets.

In other reports, the Labor Department said initial jobless claims rose to a 27-year high of 667,000 while a record 5.1 million were collecting state unemployment checks. See full story.

Also, the Commerce Department said orders for durable goods dropped 5.2% in January, a record sixth decline in a row as U.S. factories suffer from falling demand from consumers, businesses, and foreign markets. See full story.

Details

Sales fell in three of four regions, led by a 28% decline in the West to a record low 59,000. Sales fell 6.5% in the South and fell 5.6% in the Midwest. Sales rose 12.5% in the Northeast, plus or minus 93%.

Inventories fell 3.1% overall. Inventories of completed homes dropped 4%, inventories of homes under construction fell 5%, and inventories of homes yet to be started were flat. Completed homes represented 49% of all homes for sale, up from 40% a year ago.

Shares of student lenders fall on Obama proposal

Shares of SLM Corp. and other student lenders plunged Thursday after President Barack Obama proposed cutting the role of private industry from the federal government's college loan program.

There are currently two parallel systems for college loans - students can borrow directly from the government, or take out loans from banks and other private lenders that are subsidized by the government. In his budget proposal for 2010, Obama asks Congress to shift the entire system to direct government loans and eliminate subsidies to banks. The move would save more than $4 billion a year, according to the Obama administration.

The current system has "needlessly cost taxpayers billions of dollars" and has subjected students to "uncertainty because of turmoil in the financial markets," the proposal said.

Shares of SLM Corp. (nyse: SLM - news - people ), better known as Sallie Mae, sank $3.16, or 38 percent, to $5.23 in afternoon trading.

Student Loan Corp. (nyse: STU - news - people )'s stock dropped $12.63, or 24 percent, to $40.51. Nelnet Inc. shares slid 51 percent, or $5.44, to $5.30.

In a statement issued Thursday, SLM noted it worked closely with the federal government last year to ensure students access to federal loans with no increase in cost to taxpayers.

"As more details emerge in the weeks and months ahead, we will continue to work with the administration and Congress to implement the best solution for students, schools and taxpayers," the Reston, Va.-based company said in the statement.

Representatives from Nelnet and Student Loan Corp., a unit of Citigroup Inc. (nyse: C - news - people ), were not immediately available for comment.

Even if Obama's proposal doesn't become law, it suggests Sallie Mae and other student lenders will face continuous threats under the administration, FBR Capital Market analyst Matt Snowling wrote in a note to clients.

Snowling lowered his price target on SLM shares to $13, down from $20, to reflect the possibility that Sallie Mae could turn into a servicer and debt collector for the government. He kept an "Outperform" rating on the stock, which indicates he thinks it will perform better than shares of its peers in the next 12 to 18 months and that investors should buy the shares at its current price.

About $60 billion - nearly half of all public and private student aid money - comes via the federal student loan program.

Last year, Congress made substantial cuts to student lender subsidies, but did not eliminate them.

The debate already has shifted in some ways. Experts point out that during the recent credit crisis, the government stepped in to prop up the subsidized lending program, so in practice the two programs already are merging.

Obama's first federal budget totals $3.6 trillion and lays out a far-reaching agenda. The proposal is already drawing fierce political opposition, but Democrats control both the House and Senate.

In addition to the changes in the college loan program, the budget includes ambitious initiatives concerning energy, health care and climate change.

India Has Acted ‘Aggressively’ to Protect Economy, Bansal Says

The Reserve Bank of India has acted aggressively to protect the economy from the adverse impact of the global economic meltdown, junior finance minister Pawan Kumar Bansal said today.

The central bank slashed its overnight lending rate, or repurchase rate four times since mid-October, to a record low of 5.5 percent. It also reduced the reverse-repurchase rate twice to 4 percent. Industrial output shrank 2 percent in December from a year earlier, the most in almost 16 years. The statistics office said this month the economy may expand 7.1 percent in the year ending March 31, the slowest pace since 2003.

India’s central bank has “acted aggressively and pre- emptively on monetary policy accommodation,” Bansal said in a written reply to a question in parliament in New Delhi today.

The Reserve Bank of India also reduced the cash reserve ratio, or the amount of money lenders need to set aside to cover deposits, four times since mid-October to 5 percent, from 9 percent, freeing up cash at banks.

Since October, the government’s stimulus packages and interest-rate cuts by the central bank have added $75 billion, or 7 percent of GDP, to the economy, according to the central bank.

“The endeavor of the Reserve Bank of India has been to provide ample rupee liquidity, ensure comfortable dollar liquidity and maintain a monetary policy environment conducive for the continued flow of credit to productive sectors at reasonable cost,” Bansal said.

Stimulus, Deficit

The government on Feb. 24 lowered the excise duty to 8 percent from 10 percent, and reduced the service tax to 10 percent from 12 percent, to help revive demand and arrest the slide in factory output. The 4 percentage-point cut in central value added tax in December was extended beyond March 31.

India said on Feb. 16 that its budget deficit may widen to 6 percent of gross domestic product in the fiscal year ending March 31, more than double its target, or 3.26 trillion rupees ($65 billion).

The fiscal deficit including the liability on account of bonds issued to oil companies and fertilizer makers will be at 4.22 trillion rupees, Bansal said in response to a separate question.

“The perception of lack of credit availability may be attributed to reduced flow of funds from non-bank sources, notably the capital market and external commercial borrowings,” he said.

India’s Economy Probably Expanded at Slowest Pace Since 2004

India’s economy probably grew at the slowest pace since 2004 last quarter as the global recession saw exports decline for the first time in seven years.

Asia’s third-largest economy expanded 6.1 percent in the three months to Dec. 31 from a year earlier after a 7.6 percent gain in the previous quarter, according to the median forecast of 21 economists in a Bloomberg News survey. The statistics agency’s numbers are due today at 11 a.m. in New Delhi.

Policy makers across Asia are slashing interest rates and spending more as the worst financial crisis since World War II hits the region’s overseas sales and saps consumer demand. Reserve Bank of India Governor Duvvuri Subbarao, who has reduced the central bank’s key policy rates to a record low since October, says there’s “certainly room” for further cuts.

“India’s growth momentum is easing and policy makers must act to support the economy,” said Sherman Chan, a Sydney-based economist at Moody’s Economy.com. “The central bank needs to ensure ample liquidity and low interest rates.”

The Reserve Bank of India has responded to the deepening global slump by reducing its repurchase rate by 3.5 percentage points to 5.5 percent and the reverse repurchase rate to 4 percent from 6 percent. It also cut the cash reserve ratio, or the proportion of deposit lenders must set aside as cash, to 5 percent from 9 percent.

Fiscal Stimulus

To provide fiscal support to the economy, Prime Minister Manmohan Singh’s government has cut taxes and increased spending on roads, ports and other infrastructure. Acting Finance Minister Pranab Mukherjee this week slashed excise duty across the board to 8 percent from 10 percent and the service tax to 10 percent from 12 percent, besides extending a 4 percentage point cut in the central value-added tax announced in December beyond March 31.

The combined stimulus from interest-rate cuts, increased government outlays and lower taxes totals almost $80 billion, or 7 percent of India’s gross domestic product, according to the central bank.

Still, the fiscal spending is straining the budget deficit, which the finance ministry forecasts will widen to 6 percent of GDP in the year ending March 31 from a target of 2.5 percent.

The government expects borrowings next year to increase to a record 3.62 trillion rupees ($72 billion). Indian government debt accounts for 80 percent of the nation’s GDP.

The yield on benchmark government bonds due in 2018 has gained 131 basis points to 6.55 percent this year as additional debt sales sapped demand for the securities.

Credit Rating

Standard & Poor’s said Feb. 24 that the nation’s credit rating will be cut to junk as government debt is reaching a level that’s “not sustainable.” S&P reduced India’s rating outlook to negative from stable.

Mukherjee said the rating company’s move was “not unexpected,” adding that the global downturn “requires extraordinary steps from the government.”

The government, whose five-year term comes to an end in May, wants to prop up growth and reduce unemployment as it prepares to face general elections. Already, companies have cut about half a million jobs in the three months ended December, according to the labor ministry.

Apollo Tyres Ltd., the Indian tire maker partly owned by Michelin & Cie, said this month it plans to cut its workforce by 15 percent, or 1,500 employees. A survey of 50 textile companies by the Apparel Export Promotion Council of India released this month found they slashed 14 percent of their workers in November.

Slowing Growth

The government expects economic growth to slow to 7.1 percent in the year to March 31, the weakest since 2003. Even though that pace makes India the second-fastest after China among the world’s largest economies, it’s not enough to generate jobs in a country where the number of people looking for employment increases by more than 10 million each year.

Growth of 7 percent “ain’t good enough,” said Duncan Campbell, director of the International Labour Organization’s economic analysis department. Campbell forecasts India needs at least 10 percent growth a year for a one percent increase in employment.

Still, “India has such a strong democratic system that there may not be a threat of social upheaval like in China,” said Campbell. “There’s an election coming up, and the people can express their disapproval by tossing out the government.”

India’s GDP Forecasts

-------------------------------------------
GDP YoY%
Company Oct-Dec
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Median 6.1%
Average 6.0%
High 6.9%
Low 5.2%
Number of Estimates 21
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Action Economics 6.5%
Anand Rathi Securities 5.7%
Axis Bank Ltd. 5.4%
CARE Ratings 6.3%
CRISIL Ltd. 6.0%
DBS Group 6.2%
Dun & Bradstreet Info. 6.1%
HSBC Singapore 6.6%
ICICI Bank 6.0%
ICICI Securities 6.9%
IDBI Gilts Ltd. 5.7%
Inst. of Economic Growth 6.8%
JPMorgan Chase Bank 5.7%
Kotak Mahindra Bank 6.2%
Kotak Securities Ltd. 5.7%
Macquarie Capital Securities 5.5%
Moody’s Economy.com Inc. 6.1%
Nomura International (HK) 6.2%
Reuters IFR 5.2%
Standard Chartered Bank 5.3%
UBS 6.5%