Another wave of worrisome news about the economy Thursday heightened interest in how the Federal Reserve, the Bush administration and Congress might respond in coming weeks.

Merrill Lynch & Co. today said it wrote down $14.1 billion in investments tied to securities backed by subprime mortgages and other debts, contributing to its largest quarterly loss in company history — $9.8 billion.

Merrill Lynch’s report on fourth-quarter earnings came on the heels of news a similar loss at Citigroup Inc. and smaller but substantial write-downs at JP Morgan Chase and Wells Fargo.

In another report out today, the U.S. Census Bureau and Department of Housing and Urban Development said housing starts fell to their lowest level since 1991 (see Inman News story).

Investors were also startled by a survey released today by the Federal Reserve Bank of Philadelphia showing activity in the region’s manufacturing sector was the weakest since October 2001. That report suggested that the mortgage lending crisis and slowdown in housing sales could be spilling over into the overall economy.

The Commerce Department reported Tuesday that retail sales fell 0.4 percent in December, another sign that the economy could be headed into a recession.

Other discouraging economic news out this week included the release of the Federal Reserve’s latest “Beige Book,” which noted further declines in residential real estate lending in all 12 Federal Reserve districts, and tighter credit standards in most districts.

Lehman Brothers announced today that 1,300 employees of its Aurora Loan Services subsidiary would lose their jobs as it discontinues wholesale and correspondent lending and closes regional operational centers in Lake Forest, Calif.; Sunrise, Fla.; and Florham Park, N.J.

Shares of private mortgage and bond insurers plummeted after Ambac Financial Group said it is reassessing a plan to raise $1 billion in capital in light of an announcement by Moody’s Investment Service that it may downgrade the company’s Aaa financial strength.

Shares in Ambac Financial were down nearly 60 percent in afternoon trading, to less than $6, dragging down competitors with it.

Shares of Ambac, MGIC Investment Corp., MBIA Inc., PMI Group, Radian Group and Triad Guarantee have all lost more than three quarters of their value in recent months.

A Labor Department report released Wednesday showing a modest 0.3 percent rise in the Consumer Price Index in December has raised expectations that the Federal Reserve will make a dramatic cut in short-term interest rates at the end of the month. But Fed Chairman Ben Bernanke had little new to say on the subject today in testimony before the House Budget Committee.

The Federal Open Market Committee cut its target for the federal funds overnight rate by 50 basis points at its September meeting and by 25 basis points in October and December. The committee, which begins a two-day meeting on Jan. 29, “stand(s) ready to take substantive additional action as needed to support growth,” Bernanke told lawmakers, but warned that any additional fiscal initiatives such as tax cuts must be implemented quickly and be temporary.

A White House spokesman said President Bush — who is scheduled to make his State of the Union address Jan. 29 — supports short-term measures to boost the economy but provided no details.

House leaders of both parties said they plan to introduce economic stimulus legislation, and Bush was scheduled to consult with Congressional leaders today, the Associated Press reported.

In reporting results for the fourth quarter and year, Merrill Lynch said that its liquidity position remains strong, with excess liquidity of $80 billion at year-end. The company has lined up about $12.8 billion in additional capital by making more than 250 million shares available to investors.

That figure includes a plan to raise $6.6 billion in an offering of 136 million shares of common stock to Korea Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank. Those private placements are expected to close in the next three weeks, Merrill Lynch said.

Fourth-quarter write-downs included $11.5 billion related to U.S. asset-backed securities (ABS) collateralized debt obligations (CDOs) and subprime residential mortgages outside of the firm’s investment portfolio. Merrill Lynch was also forced to make $2.6 billion in valuation adjustments to hedges with financial guarantors on U.S. ABS CDOs.

At the end of the fourth quarter 2007, net exposures to U.S. ABS CDOs totaled $4.8 billion, down from $15.8 billion at the end of the third quarter 2007.


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