Americans See 18% of Wealth Vanish <--- Poof!

The Hole in Our Wallets.

WALL ST. JOURNAL March 13, 2009.
by: S. MIRTA KALITA
photo 1: Alane Golden c. 2009.
photo 2: Fabio Stachi c. 2007. Website
photo 3: Lazy Bone c. 2006. Blog

The wealth of American families plunged nearly 18% in 2008, erasing years of sharp gains on housing and stocks and marking the biggest loss since the Federal Reserve began keeping track after World War II.

The Fed said Thursday that U.S. households' net worth tumbled by $11 trillion -- a decline in a single year that equals the combined annual output of Germany, Japan and the U.K. The data signal the end of an epoch defined by first and second homes, rising retirement funds and ever-fatter portfolios.

Past downturns have been mere blips compared with the losses Americans faced last year, which set them back to below 2004 levels. "In the postwar period, we've never had anything other than very modest declines. That life experience led many people to think that houses were a one-way bet," says Douglas Cliggott, the chief investment officer of Dover Management LLC.

The decline in Americans' net worth, which was the first in six years, follows an extraordinary boom. Not accounting for inflation, household wealth more than doubled from 1990 to 2000, and then, after a pause, rose nearly 50% before the bust of 2008.

While the value of their assets was falling, Americans' total debt remained roughly flat. Total household debt increased by half a percentage point in 2008 as families faced tighter lending standards and many started trying harder to live within their means. After years of splurging with an eye on their rising assets, that phenomenon, known as the wealth effect, now cuts the other way, spurring frugality.

Dawn Cortese, a mother of three boys, recalls the giddy days when she worked as an account executive for Pfizer Inc. and its stock price surged on sales of hit drugs such as Viagra and Lipitor.

"I'd look at my 401(k) and we'd feel comfortable, happy.... I was never very cautious," says Ms. Cortese, 40 years old, of Oakland, N.J. If her boys and their friends wanted burgers or pizza after a roller-hockey game, she obliged. A cleaning lady scrubbed her four-bedroom house and a landscaper mowed her lawn.

Eighteen months ago, Ms. Cortese quit Pfizer to start an event-planning business. She did well initially, turning a Sweet 16 party into a Hollywood set with lights and megaphones one weekend, or a country-western retirement party with a rodeo bar and mechanical bull the next. But last fall, business dried up. Her party props began to collect dust in the basement.

She has moved on to a new business: selling skin-care products through Arbonne International LLC, mostly through word of mouth and catalog sales.

Ms. Cortese's husband, Chris, says his job at a corporate-trade company is relatively stable. But the two are looking to get back on a firmer financial footing.

They've put their house, a gray McMansion in a development carved out of a mountain, on the market, for $799,999 -- $100,000 less than it was worth a year ago, Ms. Cortese says. The family's total portfolio, including stocks, retirement plans and college funds, is down 35%, the Corteses say.

"Even though my husband has a good job, I'm just looking at our portfolio and trying to do what's best," Ms. Cortese says, citing coupons and cooking at home as new survival tactics. If they can sell the house, they have their eye on a less-expensive property or would be open to renting for a few years. "My dad always said, 'Dawn, live below your means.' That's what I am trying to do."

Overall, the quarterly Fed report, known as the flow of funds report, underscores the new strain on the U.S. consumer: Mortgages and credit-card debt alone totaled $13 trillion, or 123% of after-tax income. In 1995, for instance, it was 83% of income.

Collectively, homeowners had 43% equity in their homes -- the lowest level since records have been kept. Amid foreclosures and tighter lending, the total amount of mortgage credit was down last year for the first time since the Fed started keeping track in 1945.

The recession that began in December 2007 has reversed a particularly long boom. "What's misleading about this being the biggest drop is that it was preceded by one of the biggest rises," says David Backus, an economics professor at the New York University Stern School of Business. "Even where it's come down to is not a low level compared to the last 50 years of history."

In all, the net worth of U.S. households stood at $51.48 trillion at the end of 2008, the Fed data showed. Besides being down 17.9% from a year earlier, it was down 9% just from the third quarter.

The net-worth figure encompasses all of families' assets -- housing, stocks, personal property -- minus their total debts.

Americans' assets have taken further hits in the first two months of 2009, a period not covered in the quarterly report.

Although stocks have risen for three straight days, they remain down roughly 16% since the fourth quarter, when Americans' portfolios of stocks and mutual funds were worth $8.76 trillion.

The national median home price, meanwhile, was $170,300 in January, down nearly 15% from a year earlier.

Among those hurt are small-business owners.

"Many people in the small-business sector were putting up their house" as collateral, intertwining their personal and business credit, notes Jane D'Arista, a research associate at the Political Economy Research Institute at the University of Massachusetts-Amherst. For many, "there's no channel for credit now," she adds. "The hit to the American family is so broad and so deep."

Deidre Helberg in Freeport, N.Y., once owned two homes, operating a day-care center out of one. She sold that home and business and put the profits into a business called Helberg Electrical Supply. "That money's all gone now," she says bitterly.

The past few years, while mostly profitable, were a game of juggling working capital and credit. "If you don't have capital, your credit rating is shot," she says. "And if you do have capital, you're supposed to invest it back into the business. That's part of the sacrifice, and there is not one company in America that has not gone through that sacrifice."

The process has wreaked havoc on her personal credit, as late fees accrue on mortgage payments.

Her son, a high-school senior, wanted to attend a private college but now is looking at state schools.

The last straw came late last year when Ms. Helberg was turned down for a credit line badly needed to pay a vendor. "I had $2 million in sales revenue and couldn't get $50,000," she says.

Ms. Helberg is hoping the Obama administration's stimulus package and "green" focus will help, noting that she sells solar panels, wind turbines and energy-efficient street lights.

Signs are emerging that Americans, in ways big and small, are pulling lessons from their collapsed empires. Of 46 economists responding to a recent Wall Street Journal survey, 43 predicted the new era of thrift will persist beyond the end of the recession.

That's evident in the Cortese household. The other day, Ms. Cortese says, her son asked if they could go to Abercrombie & Fitch, the retailer.

He didn't need anything in particular, "just wanted to go shopping," she recalls. She told him no.

And when her boys get their allowance weekly, it comes with a message.

Spend a little, give a dollar to church and, their mother advises, "put the rest in the piggy bank."

Write to S. Mitra Kalita at mitra.kalita@wsj.com

Printed in The Wall Street Journal, page A1

LET THE REVOLUTION BEGIN!

Thanks for all you do!
Live your values. Love your country.
And, remember: TOGETHER, We can make a DIFFERENCE!

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Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of SharesBy DAVID ENRICH and MONICA LANGLEY

Wall Street Journal, FEBRUARY 23, 2009

By: DAVID ENRICH and MONICA LANGLEY

U.S. Eyes Large Stake in Citi

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. The potential move at Citigroup would give the government its biggest ownership of a financial-services company since the September bailout of insurer American International Group Inc., which left taxpayers with an 80% stake.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn't discussing a larger ownership stake for the government. "There are no talks right now over that issue," said Bank of America spokesman Robert Stickler. "We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it."

Shareholders' Fears

Citigroup's low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake could backfire, potentially spurring investors to flee other banks, even healthier ones.

There's no universal agreement on what constitutes nationalization of a bank. In the U.K., the government already owns 43% of Lloyds Banking Group PLC, and last week moved to increase its ownership of Royal Bank of Scotland Group PLC to 70% from 58%. Those two banks have been classified as "public-sector entities," and as much as £1.5 trillion ($2.136 trillion) of their liabilities have been moved over to the country's balance sheet.

The White House has knocked down recent speculation that the government is preparing to nationalize several large U.S. banks.

The U.S.'s intentions with Citigroup remain unclear. For instance, it's not yet known whether the government would seek a stronger hand in the New York company's management or day-to-day operations.

As part of the plan, Citigroup officials hope to persuade private investors that have bought preferred shares -- such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority -- to follow the government's lead in converting some of those stakes into common stock, according to people familiar with the matter. That would further bolster an obscure but increasingly pivotal measure of banks' capital known as "tangible common equity," or TCE.

The TCE measurement, one of several gauges of a bank's financial strength, gives weight to common shares -- thus the interest in converting preferred shares to common stock.

Details of the rescue remain in flux. Key questions, such as the price at which the government will convert its preferred stock into common shares, haven't been resolved.

And it's possible that other options will emerge to stabilize the company. For example, the Obama administration could decide to sit tight until the results of several new "stress tests" on major banks -- broad examinations of financial health now being mandated -- are known in a couple months, one official said.

If the deal gets nailed down, it will be Washington's third effort to aid Citigroup since last fall. In October, the Treasury Department put a total of $125 billion into eight giant financial institutions, including $25 billion to Citigroup, in exchange for preferred shares and warrants to buy stock.

Then, shortly before Thanksgiving, the government agreed to infuse another $20 billion into Citigroup as its stock tumbled. It also agreed to protect the banking company against most losses on a $301 billion pool of assets.

Among the question marks looming over the current discussions is the future of Citigroup Chief Executive Vikram Pandit and the company's board.

Pandit's Future

In November, as part of the sweeping rescue, federal officials privately discussed the possibility of replacing Mr. Pandit, who became CEO in December 2007. But the government decided not to remove him, in large part due to a dearth of qualified replacements. Still, top government officials warned Mr. Pandit that a third trip to the taxpayer trough would probably cost him his job.

However, since the latest talks don't involve the possibility of Citigroup receiving additional government capital, it isn't clear whether Mr. Pandit's job is on the line. A Citigroup spokeswoman declined to comment.

Federal officials have been pushing Citigroup executives and the board's lead independent director, Richard Parsons, to shake up the 15-member board. Already, three directors, including former Treasury Secretary Robert Rubin, have announced plans to step down this spring.

There are at least two catalysts for the recent talks with the government.

First, Citigroup's shares have fallen to historic lows. That doesn't pose a direct threat to the company's stability. But if it spooks customers into pulling their business, that could push the bank toward a dangerous downward spiral.

Second, bank regulators this week will start performing their battery of stress tests at the nation's largest banks as part of the Obama administration's industry-bailout plan. As part of those tests, the Federal Reserve is expected to dwell on the TCE measurement as a gauge of bank health, according to people familiar with the matter.

The crisis is triggering a deep re-examination of the way bank health is measured in the U.S. financial system. This complex exercise boils down to calculating various ratios of capital to a bank's total assets.

Until recently, TCE -- essentially a gauge of what common shareholders would get if an institution were dissolved -- has been one of the less prominent ways to measure a bank's vigor. TCE is also among the most conservative measures of financial health.

Bankers and regulators generally prefer to use what is known as "Tier 1" ratio of a bank's capital adequacy. It takes into account equity other than common stock. By Tier 1 measurements, most big banks, including Citigroup, appear healthy. Citigroup's Tier 1 ratio is 11.8%, well above the level needed to be classified as well-capitalized.

By contrast, most banks' TCE ratios indicate severe weakness. Citigroup's TCE ratio stood at about 1.5% of assets at Dec. 31, well below the 3% level that investors regard as safe.

The regulators' new focus on TCE represents an important shift. The government's recent injections into hundreds of institutions were predicated on the idea that Tier 1 was key. Because the investments weren't in the form of common stock, they didn't affect the companies' TCE ratios.

—Dan Fitzpatrick, Deborah Solomon and Damian Paletta contributed to this article.

Write to David Enrich at david.enrich@wsj.com and Monica Langley at monica.langley@wsj.com

LET THE REVOLUTION BEGIN!

Thanks for all you do!
Live your values. Love your country.
And, remember: TOGETHER, We can make a DIFFERENCE!

FAIR USE NOTICE: This blog may contain copyrighted material. Such material is made available for educational purposes, to advance understanding of human rights, democracy, scientific, moral, ethical, and social justice issues, etc. This constitutes a ‘fair use’ of any such copyrighted material as provided for in Title 17 U.S.C. section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.