Tuesday, April 15, 2008

A Taxing Economy

A Taxing Economy

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Today is the deadline for Americans to file their tax returns. This past year has been tough on U.S. taxpayers, with their hard-earned money going toward the Bush administration's misplaced priorities: a personal chef for an ineffective Housing and Urban Development Secretary and new contracts for an exploding defense contracting industry. Even the Internal Revenue Service is wasting $37 million in taxpayers' money by hiring expensive, ineffective private debt collectors to "pursue tax scofflaws," a task that could arguably be done more effectively by the agency itself. Most importantly, as Joseph E. Stiglitz and Linda J. Bilmes note in "The Three Trillion Dollar War," each American household is spending approximately $100 each month toward the "current operating costs" of the Iraq war (p. 138). Not surprisingly, the majority of Americans are pessimistic about the U.S. economy as the gap between the rich and the poor widens and Bush's tax cuts fail to deliver on their promises. Consumer confidence is at an all-time low, and fewer Americans now "than at any time in the past half century believe they're moving forward in life."

FALLING INTO THE GAP: In January's State of the Union address, Bush claimed, "In the long run, Americans can be confident about our economic growth." He has also repeatedly attempted to tie his tax cuts and the Iraq war to economic growth. A new Washington Post-ABC News poll released this tax day finds that seven in 10 Americans "now give negative ratings to the president's stewardship of the sinking U.S. economy." American families are facing a "perfect storm" of "[m]assive amounts of debt, falling house prices, disappearing jobs, flat wages, lower benefits, and skyrocketing costs for the most important consumer items." This devastating economic situation has been exacerbated by the Bush administration's policies. A recent study by the Center on Budget and Policy Priorities and the Economic Policy Institute (EPI) finds that the "gap between the richest and poorest families, and between the richest and middle-income families, grew significantly in most states over the past two decades." Average income fell by 2.5 percent for people in the bottom fifth of income earners and 1.3 percent for those in the middle fifth but rose nine percent for people in the top fifth. Seventy-nine percent of respondents in a new Pew Research Center poll say "it is more difficult now than five years ago for people in the middle class to maintain their standard of living."

BOOSTING LARGE CORPORATIONS: Not only has the income gap widened, but the wealthiest Americans have also seen their tax rates drop. According to EPI, between 1960 and 2004, "the average tax rate has fallen by about 14 percentage points (from 44.4% to 30.4%) for the top 1% of earners (those making more than $435,000 in 2007), while it has increased slightly (from 15.9% to 16.1%) for those in the middle 20%." Additionally, in FY 2007, the nation's largest corporations -- with $250 million or more in assets -- were audited at the "lowest level in the last 20 years." At the same time, audits of smaller corporations -- with $50 million or less in assets -- are climbing. The Bush administration has also been turning a blind eye toward federal contractors, who owe $8 billion in unpaid federal taxes. For example, KBR, which until last year was a subsidiary of Halliburton, has avoided paying more than $500 millionCheney became Halliburtion's CEO in 1995. Congress is currently considering a bill "to bar federal agencies from awarding contracts to people or companies that have failed to pay their federal taxes."

DOUBLE PENALTIES ON DOMESTIC PARTNERS: Employer-provided health coverage continues to be the backbone of health coverage for American families. Approximately 60 percent of Americans received employee health benefits in 2007, with the majority of employers also providing coverage for the employee's spouse and dependents. Only 22 percent of employers, however, cover same-sex partners of employees, and just 28 percent cover different-sex domestic partners. As a result, "married workers who get family health insurance benefits get a double benefit -- they get health insurance coverage for their spouses and children and are not taxed on the value of that coverage." Workers with an unmarried domestic partner are not so lucky and are doubly burdened. Their "employers typically do not provide coverage for domestic partners; and even when partners are covered, the partner's coverage is taxed as income to the employee." As an analysis by the Center for American Progress and the Williams Institute notes, employees with domestic partners "now pay on average $1,069 per year more in taxes than would a married employee with the same coverage."
"in federal Medicare and Social Security taxes by hiring workers through shell companies" based in the Cayman Islands. The Bush administration has aided this tax dodging. One of KBR's shell companies was set up two months after

Fourth-largest US bank resorts to emergency fundraising

Fourth-largest US bank resorts to emergency fundraising

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America's fourth-largest bank, Wachovia, is raising $7bn (£3.52bn) through emergency fundraising as the subprime mortgage crisis in the US continues to reverberate through the banking sector.

Wachovia is raising the funds through public offerings of common and convertible preference stock after incurring a surprise $350m loss in the first quarter of 2008 compared with $2.3bn in profit a year earlier.

The news came today as two of the biggest names in Wall Street - Citigroup and Merrill Lynch - were poised to report huge write-downs because of the continuing credit crisis. Analysts are bracing themselves for total write-downs of $17bn when the two banks report their quarterly results later this week.

At North Carolina-based Wachovia, the loss was caused by a rise in provisions against loans which had turned sour, particularly mortgages hit in the housing downturn. These option adjustable rate mortgages begin with a low interest rate, which is then replaced by a heftier charge.

Wachovia's chief executive, Ken Thompson, blamed the "precipitous decline in housing market conditions and unprecedented changes in consumer behaviour" for the figures. The group bought Golden West Financial Corp, a specialist in these adjustable rate mortgages, just before the home loan market plunged. It has set aside $2.8bn for credit related losses compared with $177m in the same quarter last year before the home loan crisis began.

To conserve $2bn of funds, Wachovia is cutting its quarterly dividend by 41% to 37.5 cents per share.

Other US banks have taken action to raise new funds and have tended to approach investors with deep pockets such as sovereign wealth funds.

Wachovia's decision to raise capital and cut its dividend comes at a time when speculation is mounting that banks in the UK will have to take action to bolster their balance sheets.

Mortgage lender Bradford & Bingley has denied reports that it is planning to tap its shareholders for new funds through a rights issue while analysts believe Alliance & Leicester and Royal Bank of Scotland may also be candidates for fundraising exercises.

Shares in B&B fell by 7% in early trading to 155.5p, although they recovered to close down 1.75p, or 1%, at 165.50p.

U.S. Foreclosures Jump 57% as Homeowners Walk Away

U.S. Foreclosures Jump 57% as Homeowners Walk Away

By Dan Levy

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U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.

More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.

About $460 billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are “simply walking away and deeding their properties back to the foreclosing lender'' rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.

“We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. “The foreclosure process will accelerate throughout the year.''

Rising foreclosures will add more inventory to an already glutted market, keep home prices down through at least next year and thwart efforts by Congress and President George W. Bush to help homeowners avoid default, Rosen said in an interview.

`Drag' on Prices

About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report. U.S. home price declines will probably double to a national average of 20 percent by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.

Borrowers who owe more on their mortgages than their homes are worth may be buffeted by increasing job losses in a “very substantial recession,'' Rosen said. About 8.8 million borrowers had home mortgages that exceeded the value of their property, Moody's Economy.com said last week.

“At least 2 million jobs will be lost because of this recession, so we'll get a cumulative negative spiral,'' Rosen said. “A normal recession is 10 months. We think this one may be twice as long.''

Subprime Defaults

Bank seizures climbed 129 percent from a year earlier, according to RealtyTrac, which has a database of more than 1 million properties and monitors foreclosure filings including defaults notices, auction sale notices and bank repossessions. March was the 27th consecutive month of year-on-year monthly foreclosure increases. In February, foreclosure filings rose 60 percent.

A surge in defaults among subprime borrowers, those with poor or limited credit, spurred the collapse of the U.S. home loan market and has led more than 100 mortgage companies to stop lending, close or sell themselves. As the value of securities tied to mortgages plummeted, lenders and securities firms have reported writedowns and credit losses of at least $245 billion since the beginning of 2007, according to data compiled by Bloomberg.

Nevada had the highest U.S. foreclosure rate in March at one for every 139 households, almost four times the national rate, RealtyTrac said. Filings there increased almost 62 percent from a year earlier to 7,659.

Florida, Ohio

California had the second-highest rate at one filing for every 204 households, and the most filings for the 15th consecutive month at 64,711. Foreclosure filings more than doubled from a year earlier and were up about 21 percent from February.

Florida had the third-highest rate, one filing for every 282 households, and ranked second in total filings at 30,254. Foreclosures increased 112 percent from a year earlier and decreased almost 7 percent from February, RealtyTrac said.

Ohio ranked third in filings at 11,273 and had the seventh- highest foreclosure rate, one for every 448 households. Georgia, Texas, Michigan, Arizona, Illinois, Nevada and Colorado also ranked among the top 10 states with the most filings, RealtyTrac said.

Foreclosure filings in New York rose 37 percent in March from a year ago and fell 3 percent from February. The state ranked 30th with 5,088 filings.

New Jersey's Declines

In New Jersey, foreclosure actions fell 6.2 percent from a year ago and declined 20 percent from February. There were 4,482 filings in March. Connecticut foreclosures jumped 40 percent from a year ago and fell 3.3 percent from February. It had 2,126 filings.

“The continued increase in new foreclosures implies an even larger drag on prices in 2008,'' Goldman Sachs Chief U.S. Economist Jan Hatzius wrote April 8. Home prices fell 8.9 percent in the fourth quarter, the biggest decline in 20 years as measured by the S&P/Case-Shiller home price index.

Some borrowers are “hanging on at the margins'' in the face of resets, said Mark Goldman, a loan officer at Windsor Capital Mortgage Corp. in San Diego.

Goldman said one of his clients is a self-employed contractor whose adjustable-rate mortgage rose by two percentage points two months ago. His mortgage payment has increased to $7,200 from $4,900.

“I've had people sitting in my office in tears because there are no loans available,'' said Goldman. “There are no loans for someone who's upside down on their house.''

U.S. housing collapse spreads overseas

U.S. housing collapse spreads overseas

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The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices down from the Irish countryside and the Spanish coast to Baltic seaports and even in parts of India.

This synchronized global slowdown, which has become increasingly stark in recent months, is hobbling economic growth worldwide, affecting not just homes, but also jobs.

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the past decade are falling back to earth. Experts predict that some countries, like Ireland, will face an even more wrenching adjustment than the United States, with the possibility that the downturn could turn into wholesale collapse.

To some extent, the world's problems are a result of American contagion. As home financing and credit tighten in response to the crisis that began in the U.S. subprime market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states.

Citing the far-flung reverberations from the American housing bust and credit squeeze, the International Monetary Fund cut its forecast Wednesday for global economic growth this year and warned that the malaise could extend into 2009.

"The problems in the U.S. are being transmitted to Europe," said Michael Ball, professor of urban and property economics at the University of Reading in England, who studies housing prices. "What's happening now is an awful lot more grief than we expected."

For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.

"We know we're already in negative equity," said Emma Linnane, a 31-year-old university administrator. She bought a cozy, one-bedroom apartment in the Dublin suburbs with her fiancĂ©, Paul Colgan, in May 2006, at the peak of the market. They paid €365,000, or $575,000 - at least $100,000 more than it would fetch today.

"I sometimes get shivers thinking about it," Linnane said, "but I'll let the reality hit me when I go to sell it."

That reality is spreading. Once-sizzling housing markets in Eastern Europe are cooling rapidly, as nervous West Europeans stop buying investment properties in Warsaw, Estonia and other former real estate Klondikes.

Even further east, in India and southern China, prices are no longer climbing. With stock markets down sharply after reaching heady levels, people do not have as much cash to plow into property. Sales of apartments in Hong Kong, a recently hyperactive market, have slowed, with prices for mass-market flats starting to drop.

In New Delhi and other parts of northern India, prices have fallen 20 percent over the past year. Sanjay Dutt, an executive director in the Mumbai office of Cushman & Wakefield, the real estate firm, described it as an erosion of confidence.

Much of the retrenchment can be attributed to the basic laws of gravity: What goes up must come down. With low interest rates helping to inflate housing bubbles in many countries, economists said, the confluence of falling prices was predictable, if unsettling.

How this will affect the broader fortunes of countries differs radically. Ireland and Spain are shuddering, while growth in India this year is expected to slow only a percentage point or so from its recent pace of 9 percent. In China, the effect may be even more limited.

"If the Fed moves rates, and the People's Bank of China follows, it doesn't mean much to a peasant in China," said Thomas Mayer, the chief European economist at Deutsche Bank in London. "But it means a lot for the newly rich entrepreneur in Shanghai, who can load up on credit and buy a fancy apartment."

This is not the first housing downturn to cross borders, Mayer said, but its reverberations have been amplified by financial markets. When faulty U.S. mortgages ended up on the books of banks around the world, the problems of the United States aggravated global problems.

Consider Britain, which had one of the most robust European housing markets, with less of an oversupply than Ireland or Spain. Then last summer came the subprime crisis across the Atlantic.

By September, there was a run on a British lender, Northern Rock. A month later, mortgage approvals dropped 31 percent, compared with the number a year earlier, and by November, real estate brokers began reporting the first declines in housing prices. In March, average prices fell 2.5 percent, the largest monthly decline since 1992, according to HBOS, a mortgage lender.

"The boom in house prices was actually much bigger here than in the U.S.," said Kelvin Davidson, an economist at Capital Economics in London. "If anything, people should be more worried than in the U.S."

Britain has the most developed home-financing industry after the United States. The amount of outstanding mortgage debt, as a share of total economic output, is higher there than in the United States, according to an IMF study.

Britain "followed the U.S. into never-never land, pushing mortgages out the door, believing that prices would go up forever," said Allan Saunderson, the managing editor of Property Finance Europe.

Still, the problems in Britain pale next to those of Spain and Ireland. Residential investment accounts for 12 percent of the Irish economy and 9 percent of the Spanish economy, compared with 5 percent in Britain and 4 percent in the United States, according to the IMF.

The glut of housing has brought new construction to a standstill, driving up unemployment and dimming the prospects for two of the stellar European performers over the last decade.

"We're waking up from the property dream, and finding ourselves in a situation where prices are falling in Spain for the first time," said Fernando Encinar, a founder of idealista.com, a real estate Web site.

Spain built more than four million homes in the past decade, more than Germany, Britain and France combined. Average house prices tripled in parts of the country, as the Spanish economy attracted immigrants and north Europeans snapped up holiday homes in the Costa del Sol region of southern Spain.

Now, though, thousands of those houses stand empty. The IMF estimates that property is overvalued by more than 15 percent. With mortgages drying up and prices dropping, speculators who once viewed Spanish property as a no-lose proposition are confronting a hard reality.

In 2005, Julian Felipe Fernández bought three small apartments, as an investment, in a huge development being built outside Madrid. He paid €100,000, or $158,000, as a deposit for the units, and now he is eager to sell them to avoid having to take on a costly mortgage But with the market stalled, he is asking only what he paid for them.

"Three years ago, it looked like I would be able to flip them for a nice profit before they were finished," he said. "I just want to get them off my hands, to get rid of this headache."

If he unloads them, he will be lucky. Enric Bueno, head of marketing for Ibusa, a real estate company in Barcelona, said his company was closing six or seven sales a month, compared with 40 a year ago. Homeowners are dropping their prices, he said, but buyers cannot get mortgages.

"Things are really bad," Bueno said. "If this goes on for five years, we won't make it. If it lasts for two, we will."

Economists have been busy cutting their economic growth forecasts for Spain, with a few saying that it may stagnate this summer. BBVA, a Spanish bank, forecasts that unemployment will rise to an average of 11 percent this year, from 8.6 percent in 2007, owing mainly to job losses in construction.

Such cutbacks are well under way in Ireland, where taxi drivers complain that their ranks are being swollen by laid-off construction workers. The housing collapse has brought an abrupt end to more than a decade of pell-mell growth that earned Ireland the nickname the Celtic tiger.

Today, the mood in this country feels like that of a wake. Average house prices fell 7 percent last year, the most in Europe, according to the Royal Institute of Chartered Surveyors, a British real estate group. They are likely to fall by a similar amount this year.

After a 16-year boom that was interrupted only briefly after the Sept. 11, 2001, terrorist attacks in the United States, Ireland has the most overvalued housing market in the developed world, according to the IMF. In its recent economic outlook, the fund calculated that prices are 30 percent higher than they should be, given Ireland's economic fundamentals.

For many Irish, accepting that reality is like passing through the seven stages of grief. Some homeowners are still in denial, said brokers, asking $5 million for houses worth no more than $4 million. But developers have begun cutting prices for smaller apartments like the one owned by Linnane.

An Irish Times article Thursday about a $13 million house, with a garden and tennis court, faced an ad for a complex where the apartments were being peddled at a 15 percent discount.

"Last year was our 'wake up in the middle of the night with sweat pouring down your face' period," said David Bewley, a director at the Lisney real estate agency. "Now we've grown up."

Bankruptcies Rise in Crunch for Firms `That Should Have Failed'

Bankruptcies Rise in Crunch for Firms 'That Should Have Failed'

By Tiffany Kary and Caroline Salas

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U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.

The filing by Frontier Airlines Holdings Inc. April 11 followed those of three other airlines and companies in restaurants and retailing this year. Increased levels of distressed corporate debt signal that failures will accelerate, says Lynn LoPucki, a professor at the University of California, Los Angeles law school who studies bankruptcies.

The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007, according to a Merrill Lynch & Co. index of bonds yielding at least 10 percentage points more than Treasuries. The share of leveraged loans considered distressed was 16 percent at the end of March, the highest since 1997, says Standard & Poor's, based on loans trading below 80 percent of their face value.

''Money was so easy, companies that should have failed were kept alive,'' said Rick Cieri, a bankruptcy lawyer at Kirkland & Ellis in New York. He said bankruptcies will include businesses ''with severe operational problems'' and too much debt. ''Companies may well be sicker when they enter Chapter 11.''

A company bankruptcy isn't just a sign of a weakening economy, LoPucki says. There is an economic effect.

''It is a disruption of the use of resources, and the costs of redeploying them are huge,'' said LoPucki, who keeps a Web site and wrote the 2005 book, ''Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts.'' ''People need to look for new jobs. Someone needs to take physical assets and recycle them. All the organizational work that went into the construction of the enterprise is lost.''

Subprime Fallout

The wave of defaults on subprime mortgages, loans made to the least creditworthy home buyers, is spilling into the lower tiers of corporate credit, said Anders Maxwell, managing director of New York-based investment bank Peter J. Solomon Co., speaking at a Feb. 28 conference on distressed investing in New York.

“Subprime was just a paradigm for the credit markets overall,'' Maxwell said. “Now in the corporate market, the shoe is just beginning to fall, and we're poised for a major correction that has been coming for at least a decade.''

Bankruptcy filings have just begun to increase. According to court records compiled by Jupiter eSources LLC, Chapter 11 business bankruptcies, including small, nonpublic companies, increased 16 percent in the first quarter of 2008. Under Chapter 11 of U.S. bankruptcy law, a company seeks court protection from creditor lawsuits while working out a reorganization.

“I think this is the beginning,'' said Brett Barragate, a bankruptcy lawyer at Jones Day in New York. “You have rising defaults into a market where it's virtually impossible to get refinanced.''

Housing and Airlines

Some of the early bankruptcy filers this year reflect the decline in the housing industry, including homebuilder Tousa Inc. of Hollywood, Florida, and moving company Sirva Inc., of Westmont, Illinois. Now following them are small airlines fighting rising fuel costs and competition from bigger carriers.

“They have no way to avoid default,'' said George Godlin, an analyst at Moody's Investors Service in New York, speaking of Frontier. “They will continue to lose money in this environment, and the only way they can cease to lose money is by stopping operating.''

Virgin America Inc., the startup airline partly owned by U.K. billionaire Richard Branson, may be among the next airlines to fail, analysts at JPMorgan Chase & Co. and Avondale Partners LLC wrote in April 7 reports. The private airline lost $34.8 million in its first quarter of operation, which ended Sept. 30.

Las Vegas Casinos

Some issuers of bonds that are currently distressed, or considered at risk of default, are affected by cutbacks in spending by consumers. They include Claire's Stores Inc. of Pembroke Pines, Florida; Michael's Stores Inc. of Irving, Texas; and Herbst Gaming Inc., Tropicana Entertainment LLC and Station Casinos Inc., all of Las Vegas.

Linens 'n Things Inc., the Clifton, New Jersey-based housewares retailer, hired a restructuring company to explore options including a bankruptcy filing. Buyout firm Apollo Management Group led investors who bought Linens 'n Things in 2006 for $1.3 billion.

Another company with a restructuring specialist is Hawaiian Telcom Communications Inc. of Honolulu, which hired Stephen Cooper of Kroll Zolfo Cooper LLC in Roseland, New Jersey.

Hawaiian Telcom is the biggest loser in the high-yield bond market this year, according to an April 10 report by JPMorgan. The company was formed in 2005 when Carlyle Group of Washington, another buyout firm, bought Verizon Communications Inc.'s Hawaiian operations.

20 Cents on Dollar

Its $150 million of 12.5 percent notes due 2015 have fallen more than 83 cents to 20 cents on the dollar. The debt yields about 63 percent, 60 percentage points more than similar- maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, the main brokerage watchdog.

More than 170 companies have bonds that are now considered distressed, according to data compiled by Bloomberg.

Martin Fridson, chief executive officer of FridsonVision LLC in New York, a high-yield research firm, predicted that a recession as deep as the eight-month contraction that started in 1990 could push defaults to 16 percent.

Last Recession

The highest default rate for speculative bonds and loans since 1983 was 9.98 percent in 2001, during the last U.S. recession. The average annual default rate over the same period was 4.48 percent, Moody's says.

Default rates may not rise along with a company's financial distress this time as they have in the past because some companies got so-called “covenant lite'' loans, without restrictions that can trigger defaults, said Kenneth Emery, Moody's director of corporate default research, in an interview. The covenants are usually financial ratios that measure ability to service debts, such as a quarterly limit on total debt related to cash flow.

“Even if a company's operating performance is sub-par, the bank issuers can't force them into bankruptcy because there are no covenants,'' Emery said. As a result, if a company does eventually file for bankruptcy, it will have even more debt, and less value.

The growth of leveraged loans, which include packages of high-risk bank loans called collateralized loan obligations, has grown to $558 billion from $14 billion in 1996, according to S&P. A secondary market that lets investors trade in and out of the loans may change their behavior.

`Out of My Hands'

“Will this loan last long enough to get it out of my hands and into those of another individual,'' said Timothy Coleman, senior managing director of the Blackstone Group, the New York- based hedge fund, describing traders' attitude during a recent conference at Cardozo Law School in New York on “challenges and opportunities created by the credit market crisis.''

The new wave of filings may be affected by debt from the era of easy credit. Some lenders have second and even third liens on a company's assets. That puts them behind the creditor first in line to recover.

The tightening of loan standards means some companies may have difficulty obtaining so-called “debtor-in-possession loans'' that fund operations as a company restructures. Others have had trouble getting financing needed to exit bankruptcy.

Exit Financing

Solutia Inc., the bankrupt nylon and plastics maker based in St. Louis, sued its lenders to force them to fund a $2 billion exit loan. The emergence from bankruptcy by Delphi Corp., the Troy, Michigan-based auto parts maker, was delayed April 4 when hedge fund Appaloosa Management LP pulled out of a $2.55 billion loan agreement, citing a failure to meet conditions.

“It is apparent now that some companies may be postponing Chapter 11 filings because it's not even clear they can fund themselves in bankruptcy,'' Kirkland & Ellis's Cieri said.

For some investors looking to buy distressed assets, the boom has already begun.

“My philosophy is there are a lot of bargains now,'' said Gary Hindes, manager of a $100 million distressed portfolio at Deltec Asset Management in New York, in an interview. “But that doesn't mean I won't be guilty of premature accumulation -- or trying to catch a falling knife.''

Sanctity of Contracts: Mortgages and Credit Cards

Sanctity of Contracts: Mortgages and Credit Cards

By Dean Baker

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Momentum is building in Washington for a large-scale housing bailout. It is virtually certain something will happen. The big questions are how large will the package be and will it be designed to help homeowners or to bailout out the banks?

The latter question will be determined primarily by whether the government steps in to try to prop up bubble-inflated housing markets in places like California, Florida and the East Coast cities. While the government may be able to play a useful role in stabilizing house prices in depressed markets like Detroit, Cleveland and Atlanta, the main effect of bailouts in the bubble markets will be to reduce the banks' losses on their mortgages.

In these markets, prices must still fall 20 percent to 40 percent to get back in line with fundamentals. If the government were to guarantee new mortgages at near the current market prices, it will just be allowing the lenders to cut their losses.

Since prices will continue to fall, homeowners will not accumulate any equity and the taxpayers are likely to have to make good on the mortgage guarantees. Furthermore, homeowners will be paying far more than necessary for housing costs each year that they live in their house, draining money away from health care, child care and other necessary expenses.

There is a simple and costless alternative policy that could be applied to these bubble areas. We can temporarily change the foreclosure laws to allow moderate-income homeowners facing foreclosure the option to stay in their homes as renters paying the fair market rent.

This would guarantee homeowners some security, since they could not just be thrown out on the street. If they like the house, the neighborhood, the school for their kids, they would have the option to stay. More importantly, since the banks will not want to become landlords, this policy will give banks a real incentive to negotiate terms that allow homeowners to stay in their house as owners. It is likely this would be the more common outcome from this policy.

I have been pushing this "own to rent" plan for more than half a year. Many people from across the political spectrum have embraced the proposal as the most realistic way to help homeowners facing the loss of their home. However, there has been one widely voiced objection that seems to carry considerable weight in policy circles. This plan would interfere with the sanctity of contract since it would be changing the rules for enforcing payment on mortgages and could cause lenders to involuntarily end up as landlords.

This objection is interesting because there seemed no concern whatsoever for the sanctity of contract when Congress went in the opposite direction with the bankruptcy law reform passed in 2005. In that case, Congress established much stricter rules for bankruptcy, which made it far more difficult to use bankruptcy to discharge debt.

What makes the bankruptcy reform analogous to the own to rent proposal is Congress applied the new bankruptcy rules retroactively. In other words, people who had accumulated credit card or other debt under the old set of bankruptcy rules were suddenly subject to a new set of bankruptcy rules.

Presumably, both the banks and credit cardholders understood the bankruptcy rules that were in place when loans were issued prior to the bankruptcy reform. Banks would have charged an additional premium because debt was harder to collect under the old bankruptcy laws.

However, Congress had no qualms whatsoever about just ignoring these contracts when it decided to tighten the rules to make it easier for the banks to collect. Congress could have written the law to just apply to debts incurred after the passage of the new bankruptcy bill, but apparently this route was never even considered.

Given this recent history, it seems strange there is such great concern now about the sanctity of contract. The only obvious difference is this legislative change would benefit borrowers, while bankruptcy reform benefited lenders. Does anyone smell a double standard?


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

Swaps Tied to Losses Became `Frankenstein's Monster'

Swaps Tied to Losses Became

'Frankenstein's Monster'

By Neil Unmack and Sarah Mulholland

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The credit-default swap market has become a lesson in being careful what you wish for now that Wall Street has taken $245 billion of losses partly tied to such exotica.

Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality.

Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ....Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around. Fearing a repeat of losses, banks are refusing to support new indexes that would allow investors to wager on everything from auto loans to European mortgages, reining in a market that's about doubled in size every year for the past decade.

....The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that's ceased to exist,'' Jacques Aigrain, chief executive officer of Zurich-based Swiss Reinsurance Co., said at a March 18 insurance conference in Dubai.

Lack of Support

Markit Group Ltd., the London-based index provider, said banks last month shelved plans for indexes intended to allow investors to speculate on the $200 billion market for bonds backed by U.S. auto loans because of a lack of dealer support. Indexes on European mortgages and U.S. Alt-A loans, or mortgages made to borrowers a step above subprime, were also postponed.

....The last thing the securitization market needs is another no-cash-upfront instrument that people can use to knock the markets about with,'' said Andrew Dennis, the London-based head of the asset-backed debt syndication group for UBS AG of Zurich.

Wachovia, based in Charlotte, North Carolina, wrote down $600 million of commercial mortgages in January because of declines in prices indicated by CMBX indexes, which measure the derivatives tied to bonds backed by loans on everything from offices to shopping malls. New York-based Citigroup Inc., the largest U.S. bank by assets, wrote down its subprime holdings by $18.1 billion after using ABX credit-default swap indexes that track securities derived from the loans to help value the assets.

..Vicious Cycle'

Accounting rules require companies to estimate a value for some assets that are seldom traded and to record any change as an unrealized gain or loss. Where quoted prices aren't available, companies are required to use other measures, such as indexes of credit-default swaps.

....The dealers got caught in a vicious cycle,'' said Schultz, head of asset-backed bond research at Wachovia. ....They did a great job of selling the indexes. At the end of the day, they had to mark their own books to the prices on the indexes. They fell victim to their own sales job.''

Investors, traders and bankers start gathering today in Vienna for the International Swaps and Derivatives Association conference's annual meeting.

The damage on Wall Street has been exacerbated by the ABX indexes, which are based on a sample of 20 bonds from the thousands backed by home loans to Americans with poor credit. The ABX is the main benchmark that prompted banks and securities firms to write down the value of collateral provided by mortgage companies in exchange for financing.

..Totally Uncorrelated'

The latest version for AAA rated subprime mortgage bonds slumped by 43 percent since it began trading in August, according to Markit, as rising U.S. home loan delinquencies triggered a surge in the cost of credit-default swaps. That implies a 53 percent loss on the underlying mortgages, according to Schultz, almost four times the 13.75 percent rate predicted by Wachovia.

The cost to protect $10 million of AAA commercial mortgage securities jumped 10-fold during one six-month period to $100,000 a year, based on the first CMBX index from Markit. That implies about 13 percent losses on the underlying loans, more than four times the 2.8 percent forecast in the event of a recession by JPMorgan Chase & Co. analyst Alan Todd in New York.

....ABX, CMBX, any kind of X you like, are totally uncorrelated to any kind of underlying market,'' Swiss Re's Aigrain said at the Dubai conference.

..Greater Transparency'

The market for credit-default swaps was created in 1994 by banks led by JPMorgan to protect against the risk of lenders and companies defaulting. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements, or provide compensation if asset-backed debt fails to make scheduled payments.

Markit, which is partly owned by 16 banks from Citigroup to UBS, said its indexes should be used as a tool to gauge the direction of credit markets, not necessarily to value the underlying assets.

....The ABX index has brought greater transparency to the market,'' said Kevin Gould, head of data products and analytics at Markit in New York. ....Without it there would have been a number of market participants that would not have been aware of the levels of distress some of their assets were under.''

Markit doesn't have data on the amount of trading based on its indexes because the transactions happen outside of exchanges, or over-the-counter, the company said in an e-mailed statement.

..Enhanced Resilience'

Greenspan told a banking conference sponsored by the Chicago Fed in Washington on May 8, 2003, that ....the use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries.''

A decade after its creation the market shows little resemblance to its beginnings as investors and traders use credit derivatives as an alternative to buying bonds. While ISDA estimates that there are contracts tied to $45 trillion of debt, Lehman Brothers Holdings Inc. estimates that there is only about $43 trillion of debt outstanding.

Banks grouped hundreds of corporate bond issuers in indexes, and in 2006 began to create benchmarks on everything from subprime mortgages to leveraged, or high-yield, high-risk, loans. Some contracts were packaged into securities known as collateralized debt obligations.

The Commercial Mortgage Securities Association, an industry body whose more than 470 members include banks, pension funds and real-estate owners, wrote an open letter to Markit this month asking for details on the amount of trading on the CMBX to help gauge how useful its prices are for valuing mortgage securities.

....In a volatile market, this mark-to-market process becomes a self-fulfilling prophecy, driving prices down based on index trading activity rather than asset fundamentals,'' wrote Dottie Cunningham, chief executive officer of the New York-based CMSA.

Recession takes hold in US

Recession takes hold in US

By Barry Grey

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The US stock market plunged Friday on news that General Electric’s first-quarter 2008 profits fell far below the company’s projections. Long considered among the most gilt-edged of stocks, GE shares fell 13 percent, their sharpest one-day drop since the stock market collapse of October 1987.

The announcement that GE’s first-quarter earnings were down 5.8 percent stunned Wall Street, which was confident the company would meet its earlier projections since it had reaffirmed those predictions only weeks before, on March 13. GE Chairman Jeffrey R. Immelt attributed the profit decline, mainly the result of large write-downs of assets in its financial business, to the intensification of the credit crunch in the wake of the collapse of Bear Stearns on March 14.

“The last two weeks in March were a different world in financial services,” GE Chairman Jeffrey R. Immelt said in a conference call to investors.

However, the company also saw profits fall in its healthcare and industrial branches. GE cut its forecast for all of 2008. The one-day stock decline wiped out $44 billion in share values.

GE’s results shook the financial markets because they indicated that the impact of the housing and credit crisis was spreading beyond the housing and banking sectors to broader parts of the US economy. GE’s report came at the beginning of the first-quarter earnings report season, and seemed to confirm the worst fears on Wall Street that profits will drop sharply nearly across the board.

These fears were compounded by the earnings report earlier in the week by the aluminum giant Alcoa, which said high energy costs had helped push its profits down 54 percent in the first quarter. Also last week, United Parcel Service said its quarterly results would be as much as 12 percent below expectations because of rising fuel costs and falling package shipments.

The Dow Jones Industrial Average fell 257 points, or 2 percent, on Friday. The Standard & Poor’s 500 Index also fell 2 percent, and the Nasdaq Composite Index plunged by 2.6 percent.

Also on Friday, a report issued by the University of Michigan on US consumer confidence augured a rapid slowdown in the American economy. The index, measuring consumer sentiment this month, fell by 6.3 points to 63.2 points, the lowest level since March of 1982, when the country was in the grips of the most severe downturn since the Great Depression.

Underscoring the growing pessimism and economic distress within the US population, a Pew Research Center report found that the percentage of Americans saying they are better off than they were five years ago is at its lowest level in 44 years of polling.

On Monday, the Commerce Department reported a mere 0.2 percent increase in retail sales in March, underscoring the slump in consumer spending, which accounts for more than two-thirds of the US economy. Americans actually spent less on furniture, clothing and appliances in March, and overall sales registered a slight increase only because of soaring prices for gasoline and food.

These developments coincide with the release of the International Monetary Fund’s World Economic Outlook report, which projects a sharp decline in both US and global economic growth.

This week, major US banks and finance houses publish their quarterly earnings reports, and they are expected to show continuing huge losses from mortgage-backed securities and other speculative investments that have gone bad. Analysts expect JPMorgan Chase to report a near-halving of its profits.

Far worse is anticipated in the reports from Citigroup, the largest US bank, and investment bank Merrill Lynch. The former is expected to report more than $10 billion in additional write-downs and the latter more than $7 billion in new losses. These markdowns come up top of billions already reported since the eruption of the credit crisis last summer.

At Citigroup, analysts anticipate a net loss for the first quarter of $5.7 billion, after a $9.8 billion net loss in the final quarter of 2007. Merrill Lynch is also expected to report its second consecutive quarter in the red, with an estimated first quarter loss of $520 million.

Last week, Washington Mutual, the biggest US savings and loan company, obtained a $7 billion cash infusion to ward off possible collapse by selling shares of its stock to investors at a steep discount. On Monday, Wachovia, the fourth largest US bank, announced a first-quarter loss of $393 million, confounding analysts who had predicted a profit. The bank also announced a 41 percent cut in its dividend and said it would raise $7 billion in capital by selling its stock at a discount.

Tens of thousands of jobs in the financial services industry have already been eliminated over the past eight months, but the carnage has only begun. Wall Street firms are estimated to have cut over 34,000 jobs, but according to one financial research company a total of 200,000 jobs just in the commercial banking sector could be cut over the next 12 to 18 months.

Analysts at Celent LLC issued a report last Tuesday saying they expected US commercial banks to eliminate 200,000, or ten percent, of their 2 million jobs. This does not count tens of thousands of job cuts likely to be carried out by investment banks and other financial companies.

Citigroup alone is drawing up a cost-cutting plan that could involve the elimination of over 25,000 of its 370,000 employees. Merrill Lynch is expected to slash more than 2,000 jobs.

And the job-cutting is spreading to other sectors of the economy. Last week, the Silicon Valley chip-maker Advanced Micro Devices announced it would cut 1,650 workers, about 10 percent of its work force. Google said it would eliminate 300 jobs from the US operations of DoubleClick, an advertising technology company it recently acquired.

The downward spiral in economic activity is being fueled by the banking crisis, which has resulted in a sharp contraction in lending. Stocks and corporate profits boomed following the 2000-2001 recession on the basis of cheap and plentiful credit, which was itself largely based on vastly inflated housing values and financial speculation.

Now, the credit crunch is hitting growing sections of the economy, slowing capital investment, driving down profits and leading to higher unemployment, a wave of home foreclosures and economic desperation for millions of working class families. The slump in consumer spending and fall in home values, in turn, deepen the financial crisis of the banking system.

The consulting firm Greenwich Associates reported that of 293 large companies surveyed world-wide, most are suffering from tightened credit conditions. Among US companies, 63 percent said they were paying more for bonds and revolving credit, and 62 percent were paying more for loans.

This downward spiral has battered hopes on Wall Street that the economic turmoil could be limited to a few economic sectors and that stock prices, which have fallen 13 percent since their October, 2007 high, could revive.

According to an article in the Los Angeles Times, estimated first quarter profit growth for the tech sector of the S&P Index has fallen from 14 percent on January 1 to 7 percent now. The industrial sector is expected to post growth of just 1 percent, down from an estimated 8 percent on January 1.

For the S&P 500 as a whole, first quarter earnings are expected to be down 14 percent from a year earlier, largely because of continuing losses at financial companies.

But the results posted by GE and Alcoa suggest that profits could take an even bigger hit.

Another stark indicator of the downward trajectory in both the US and other countries was provided Friday by the International Energy Agency, which made its biggest reduction in world oil demand growth estimates in seven years. It cut its projection of world oil demand growth by 35 percent from its January estimate.

Copayments Soar for Drugs With High Prices

Copayments Soar for Drugs With High Prices

By Gina Kolata

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Health insurance companies are rapidly adopting a new pricing system for very expensive drugs, asking patients to pay hundreds and even thousands of dollars for prescriptions for medications that may save their lives or slow the progress of serious diseases.

With the new pricing system, insurers abandoned the traditional arrangement that has patients pay a fixed amount, like $10, $20 or $30 for a prescription, no matter what the drug's actual cost. Instead, they are charging patients a percentage of the cost of certain high-priced drugs, usually 20 to 33 percent, which can amount to thousands of dollars a month.

The system means that the burden of expensive health care can now affect insured people, too.

No one knows how many patients are affected, but hundreds of drugs are priced this new way. They are used to treat diseases that may be fairly common, including multiple sclerosis, rheumatoid arthritis, hemophilia, hepatitis C and some cancers. There are no cheaper equivalents for these drugs, so patients are forced to pay the price or do without.

Insurers say the new system keeps everyone's premiums down at a time when some of the most innovative and promising new treatments for conditions like cancer and rheumatoid arthritis and multiple sclerosis can cost $100,000 and more a year.

But the result is that patients may have to spend more for a drug than they pay for their mortgages, more, in some cases, than their monthly incomes.

The system, often called Tier 4, began in earnest with Medicare drug plans and spread rapidly. It is now incorporated into 86 percent of those plans. Some have even higher co-payments for certain drugs, a Tier 5.

Now Tier 4 is also showing up in insurance that people buy on their own or acquire through employers, said Dan Mendelson of Avalere Health, a research organization in Washington. It is the fastest-growing segment in private insurance, Mr. Mendelson said. Five years ago it was virtually nonexistent in private plans, he said. Now 10 percent of them have Tier 4 drug categories.

Private insurers began offering Tier 4 plans in response to employers who were looking for ways to keep costs down, said Karen Ignagni, president of America's Health Insurance Plans, which represents most of the nation's health insurers. When people who need Tier 4 drugs pay more for them, other subscribers in the plan pay less for their coverage.

But the new system sticks seriously ill people with huge bills, said James Robinson, a health economist at the University of California, Berkeley. "It is very unfortunate social policy," Dr. Robinson said. "The more the sick person pays, the less the healthy person pays."

Traditionally, the idea of insurance was to spread the costs of paying for the sick.

"This is an erosion of the traditional concept of insurance," Mr. Mendelson said. "Those beneficiaries who bear the burden of illness are also bearing the burden of cost."

And often, patients say, they had no idea that they would be faced with such a situation.

It happened to Robin Steinwand, 53, who has multiple sclerosis.

In January, shortly after Ms. Steinwand renewed her insurance policy with Kaiser Permanente, she went to refill her prescription for Copaxone. She had been insured with Kaiser for 17 years through her husband, a federal employee, and had had no complaints about the coverage.

She had been taking Copaxone since multiple sclerosis was diagnosed in 2000, buying 30 days' worth of the pills at a time. And even though the drug costs $1,900 a month, Kaiser required only a $20 co-payment.

Not this time. When Ms. Steinwand went to pick up her prescription at a pharmacy near her home in Silver Spring, Md., the pharmacist handed her a bill for $325.

There must be a mistake, Ms. Steinwand said. So the pharmacist checked with her supervisor. The new price was correct. Kaiser's policy had changed. Now Kaiser was charging 25 percent of the cost of the drug up to a maximum of $325 per prescription. Her annual cost would be $3,900 and unless her insurance changed or the drug dropped in price, it would go on for the rest of her life.

"I charged it, then got into my car and burst into tears," Ms. Steinwand said.

She needed the drug, she said, because it can slow the course of her disease. And she knew she would just have to pay for it, but it would not be easy.

"It's a tough economic time for everyone," she said. "My son will start college in a year and a half. We are asking ourselves, can we afford a vacation? Can we continue to save for retirement and college?"

Although Kaiser advised patients of the new plan in its brochure that it sent out in the open enrollment period late last year, Ms. Steinwand did not notice it. And private insurers, Mr. Mendelson said, can legally change their coverage to one in which some drugs are Tier 4 with no advance notice.

Medicare drug plans have to notify patients but, Mr. Mendelson said, "that doesn't mean the person will hear about it." He added, "You don't read all your mail."

Some patients said they had no idea whether their plan changed or whether it always had a Tier 4. The new system came as a surprise when they found out that they needed an expensive drug.

That's what happened to Robert W. Banning of Arlington, Va., when his doctor prescribed Sprycel for his chronic myelogenous leukemia. The drug can block the growth of cancer cells, extending lives. It is a tablet to be taken twice a day - no need for chemotherapy infusions.

Mr. Banning, 81, a retired owner of car dealerships, thought he had good insurance through AARP. But Sprycel, which he will have to take for the rest of his life, costs more than $13,500 for a 90-day supply, and Mr. Banning soon discovered that the AARP plan required him to pay more than $4,000.

Mr. Banning and his son, Robert Banning Jr., have accepted the situation. "We're not trying to make anybody the heavy," the father said.

So far, they have not purchased the drug. But if they do, they know that the expense would go on and on, his son said. "Somehow or other, myself and my family will do whatever it takes. You don't put your parent on a scale."

But Ms. Steinwand was not so sanguine. She immediately asked Kaiser why it had changed its plan.

The answer came in a letter from the federal Office of Personnel Management, which negotiates with health insurers in the plan her husband has as a federal employee. Kaiser classifies drugs like Copaxone as specialty drugs. They, the letter said, "are high-cost drugs used to treat relatively few people suffering from complex conditions like anemia, cancer, hemophilia, multiple sclerosis, rheumatoid arthritis and human growth hormone deficiency."

And Kaiser, the agency added, had made a convincing argument that charging a percentage of the cost of these drugs "helped lower the rates for federal employees."

Ms. Steinwand can change plans at the end of the year, choosing one that allows her to pay $20 for the Copaxone, but she worries about whether that will help. "I am a little nervous," she said. "Will the next company follow suit next year?"

But it turns out that she won't have to worry, at least for the rest of this year.

A Kaiser spokeswoman, Sandra R. Gregg, said on Friday that Kaiser had decided to suspend the change for the program involving federal employees in the mid-Atlantic region while it reviewed the new policy. The suspension will last for the rest of the year, she said. Ms. Steinwand and others who paid the new price for their drugs will be repaid the difference between the new price and the old co-payment.

Ms. Gregg explained that Kaiser had been discussing the new pricing plan with the Office of Personnel Management over the previous few days because patients had been raising questions about it. That led to the decision to suspend the changed pricing system.

"Letters will go out next week," Ms. Gregg said.

But some with the new plans say they have no way out.

Julie Bass, who lives near Orlando, Fla., has metastatic breast cancer, lives on Social Security disability payments, and because she is disabled, is covered by insurance through a Medicare H.M.O. Ms. Bass, 52, said she had no alternatives to her H.M.O. She said she could not afford a regular Medicare plan, which has co-payments of 20 percent for such things as emergency care, outpatient surgery and scans. That left her with a choice of two Medicare H.M.O's that operate in her region. But of the two H.M.O's, her doctors accept only Wellcare.

Now, she said, one drug her doctor may prescribe to control her cancer is Tykerb. But her insurer, Wellcare, classifies it as Tier 4, and she knows she cannot afford it.

Wellcare declined to say what Tykerb might cost, but its list price according to a standard source, Red Book, is $3,480 for 150 tablets, which may last a patient 21 days. Wellcare requires patients to pay a third of the cost of its Tier 4 drugs.

"For everybody in my position with metastatic breast cancer, there are times when you are stable and can go off treatment," Ms. Bass said. "But if we are progressing, we have to be on treatment, or we will die."

"People's eyes need to be opened," she said. "They need to understand that these drugs are very costly, and there are a lot of people out there who are struggling with these costs."

Wal-Mart to film gun sales in bid to fight crime

Wal-Mart to film gun sales in bid to fight crime

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NEW YORK - Wal-Mart Stores Inc, the world's largest retailer, unveiled plans on Monday to film its gun sales in the United States and create a computerized log of purchases in a bid to stop guns falling into the wrong hands.

Wal-Mart, which is the largest seller of firearms in the United States, agreed a 10-point code, which also includes rigid inventory controls, with a bipartisan coalition of Mayors Against Illegal Guns led by New York's Michael Bloomberg.

The retailer said it will develop a first-of-its-kind computerized crime gun trace log that will flag purchases by customers who have previously bought guns later recovered in crimes.

"Wal-Mart currently uses a strong point of sale system," said J.P. Suarez, senior vice president and chief compliance officer of Wal-Mart. "This code is a way for us to fine-tune the things we're already doing and further strengthen our standards. We hope other retailers will join us."

The Responsible Firearms Retailer Partnership is designed to strengthen the points in the gun purchasing system that criminals have exploited in the past, Wal-Mart and the Mayors Against Illegal Guns said.

According to the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, 46 percent of its criminal gun trafficking investigations involved cases in which someone who is not legally allowed to purchase a firearm does so through the use of a proxy, known as a straw buyer.