September 25, 2023

Home Prices Gained in June, Survey Shows

Separate data released on Tuesday showed consumer confidence rebounded in August. Consumers were more upbeat about the future even though their assessment of their current standing fell.

Home prices rose 0.9 percent on a seasonally adjusted basis, according to the SP/Case Shiller composite index of 20 metropolitan areas. Economists had expected them to match May’s 1 percent gain.

The data is not likely to alter economists’ expectations that the housing recovery will continue, keeping it a sweet spot for an economy that grew just 1.7 percent in the second quarter.

But mortgage rates have climbed more than a percentage point since late May, largely on expectations that the Federal Reserve will soon start withdrawing its support for the economy by purchasing fewer bonds. Those monthly bond buys had kept long-term interest rates low.

Analysts said that suggests gains in home price gains may continue to slow in the months ahead, particularly since the sharpest rise in rates came in late June and early July, likely after many June contracts were already signed.

“We know housing prices tend to lag. You’re going to see mortgage applications fall first and then starts and permits will move. It will take time to show up in prices,” said Michael Hanson, U.S. economist at Bank of America Merrill Lynch.

Recent data has already shown a decline in mortgage applications and less demand to refinancing existing loans, while a report last week showed sales of new single-family homes fell sharply in July to their lowest level in nine months.

The SP/Case Shiller index showed prices in all 20 cities rose on a yearly basis, led by a 24.9 percent surge in Las Vegas. But only in six did they rise at a faster clip than in the previous month, down from 10 in May.

“Overall the report shows that housing prices are rising but the pace may be slowing,” David Blitzer, chairman of the index committee at SP Dow Jones Indices, said in a statement.

Without seasonal adjustment, prices rose 2.2 percent in June and on a national average were back at their spring 2004 levels. Prices remain well below their 2006 peak, which preceded a far-reaching collapse that helped plunge the U.S. economy into its deepest recession since the 1930s.

Compared to last June, prices rose a healthy 12.1 percent, just shy of the previous month’s 12.2 percent gain.

Still, U.S. consumers’ mood improved this month despite higher borrowing costs. The Conference Board, an industry group, said its index of consumer attitudes rose to 81.5 from 80.3, and the expectations outlook rose to 88.7 form 86.0. Polling ended on August 15.

Worries about building tension in Syria kept market reaction to the data subdued, with U.S. Treasury bond prices trimming gains slightly after the stronger-than-expected confidence data and the back-up in bond yields supporting the dollar. Major U.S. stock indexes were lower.

The confidence data contrasted with an earlier Thomson Reuters/University of Michigan consumer survey showing sentiment slipped in August.

“There is definitely sentiment building that the economy is going to get better, but it’s a bit puzzling to see confidence accelerate when current growth is rather weak,” said Thomas Simons, money market economist at Jefferies Co., adding growth over the past three quarters “has been just barely 1 percent.”

Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said the level of the Conference Board’s expectations index is consistent with a roughly 3 percent rate of growth in real consumer spending, “which would be a pickup from around 2 percent currently.”

Economists expect growth to be stronger in the second half, a view shared by the Federal Reserve, which has based its projected reduction of stimulus on its economic outlook.

Markets largely expect the Fed will begin scaling back its bond purchases next month and possibly end them altogether by mid-2014, though some uncertainty over this remains.

If mortgage rates continue to climb, putting more pressure on housing, the outlook could get cloudier.

Still, rates remain low by historical standards and most economists do not expect the higher costs to end the recovery altogether. In the short-term, it could also spur potential buyers to act before rates rise further.

“It probably wouldn’t be a bad thing if home prices started slowing down a bit from double-digit rates of growth, and I think rising mortgage rates will be offset by the improving economic backdrop, as reflected in the pretty decent consumer confidence number,” O’Sullivan said.

(Editing by Chizu Nomiyama)

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Wall Street Turns Upward

The stock market edged higher on Monday, although disappointing McDonald’s earnings kept the Dow Jones industrial average from making any significant gains.

Banks and health shares were the day’s best performers; financial stocks advanced for the 10th time in the last 12 sessions. Bank of America led the group, while the American-listed shares of UBS rose 60 cents, or 3.22 percent, to $19.24, after the Swiss bank’s second-quarter profit exceeded forecasts.

Analysts said the market would probably trend higher in the absence of any weak economic news, but it would need strong earnings and positive forecasts to post large gains.

“Most earnings have been good, maybe not great but good, and as a consequence I think investors continue to show that equities is the asset class of choice for them right now,” said Richard Meckler, president of LibertyView Capital Management.

Weaker-than-expected results from the fast-food company McDonald’s weighed on the Dow after it said its full-year results would be “challenged” by falling sales in Europe. McDonald’s shares lost $2.69, or 2.68 percent, to $97.58.

The Dow Jones industrial average gained 1.81 points, or 0.01 percent, to 15,545.55.

The Standard Poor’s 500-stock index reached another nominal closing record high, rising 3.44 points, or 0.2 percent, to 1,695.53.

The Nasdaq composite index added 12.77 points, or 0.36 percent, to 3,600.39.

The S. P. 500 has advanced nearly 19 percent so far this year.

Nearly one-third of S. P. 500 companies are expected to report earnings this week, including Apple on Tuesday. Of the 109 companies in the S. P. 500 that have reported earnings for the quarter, 64.2 percent have exceeded analysts’ expectations, while fewer than half have topped revenue estimates.

In the bond market, interest rates were stable. The price of the Treasury’s 10-year note was unchanged at 93 21/32, while its yield remained at 2.48 percent.

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Economix Blog: High Profits Signal Danger for Big Banks


Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In their latest earnings reports, the biggest banks in the United States are reporting eye-popping levels of profitability that surprise even Wall Street analysts. Goldman Sachs’s profit doubled in the second quarter of this year from the comparable quarter a year ago. JPMorgan Chase could make $25 billion for the whole year. Bank of America reported that net income rose 63 percent. Even Citigroup, so often the sick man of American megabanks, managed its best results since 2007, with $4.2 billion in net income in the quarter.

Today’s Economist

Perspectives from expert contributors.

These results create a major political problem for the big banks, a point that Tom Braithwaite has made in The Financial Times (subscription required). Executives at these companies have spent most of the last four years asserting that stronger regulation in the United States, including higher capital requirements, will result in lower profits, a reduced ability to lend and a slower economic recovery for the nation.

Yet higher capital requirements are already in place, with further steps in the works, including a tougher leverage ratio at the initiative of the Federal Deposit Insurance Corporation (so the country’s biggest banks would need to finance themselves with relatively more equity and relatively less debt). And regulation has tightened to some degree. There is also more political scrutiny – hence executive compensation is being held below the levels that were previously associated with this much profit.

In Europe, regulation remains weak, and the banks are floundering. In the United States, the rules are tightening, and the big banks are doing great. Once American politicians and regulators reflect further on exactly why the banks have become so profitable, this will only reinforce the latest push for more reform.

The banks have easy funding. The very largest banks can borrow cheaply – this is, in fact, a key part of the unconventional loose monetary policies being pursued by the Federal Reserve. To be fair, the Fed wants lower interest rates for everyone, but the biggest banks benefit the most.

As Senator Sherrod Brown, Democrat of Ohio, emphasized at a recent hearing, there is also an implicit government guarantee for these banks, a point now acknowledged by Treasury Secretary Jacob J. Lew.

Despite everything that has happened in the last half decade, the very largest banks, including JPMorgan Chase, Goldman Sachs and Citigroup, can engage in some very risky business.

This is a great deal – a government backstop for your cheap funding combined with the ability to take a lot of risk (e.g., metal warehouses, where JPMorgan Chase and Goldman Sachs are big investors, or emerging markets, where Citigroup has a great deal of exposure.)

These very large banks do not have much equity in their businesses; it is all about the leverage (meaning they fund their loans and other asset holdings mostly with debt). For example, at the end of the second quarter, JPMorgan Chase had shareholder equity of just over $200 billion and a total balance sheet of around $2.5 trillion (under the generally accepted accounting principles used in the United States ) or closer to $4 trillion (using international accounting standards, which treat derivatives exposure in a different way). So JPMorgan Chase had from 5 to 8 percent of its balance sheet, depending on which accounting measure you prefer, funded with equity and the rest with debt (read the long version of its earnings release to see this clearly).

JPMorgan Chase is a very highly leveraged business, and the same is true of other megabanks. When things go well, such highly leveraged companies make high returns – measured in terms of return on equity (unadjusted for risk). For example, trading securities can sometimes help increase profits; this was the experience of Citigroup in the latest quarter and before 2007 (and also for JPMorgan Chase and Goldman Sachs).

Charles Prince, the former chief executive of Citigroup, famously remarked, “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” This was in July 2007 when, really, the music had already stopped (the subject of a commentary from Yves Smith at at the time).

The banks are lifted now by the (partial) economic recovery. But what happens when the economy weakens in the United States or somewhere else in the world? What happens also when money is lost on securities trading or on loans to emerging markets or on complex derivatives that no one in management fully understands? More highly leveraged businesses go up faster and come down further.

At the same time, a deeper political shift is under way, with a big step toward bipartisan agreement that structural change is needed in our largest banks. Specifically, Senator John McCain has joined forces with Senators Elizabeth Warren, Maria Cantwell and Angus King to push for a 21st century Glass-Steagall Act.

Speaking with Yahoo Finance this week, Senator King, an independent from Maine, made a common-sense and compelling case that the United States needs to limit reckless gambling using insured deposits – and the only way to do this is with structural change, separating out boring banking from high-risk trading activities (see also this interview with Elizabeth Warren on CNBC).

Thomas Hoenig, vice chairman of the F.D.I.C., also explains clearly that breaking up the banks along functional lines would be helpful – we should aim to separate relatively risky “broker-dealer activities from the federal safety net.” (I have also contributed to this debate in recent days, including in a column for Bloomberg News, in my baselinescenario blog and an NPR interview.)

Whenever global megabanks report huge profits, think about the risks they are not reporting and who will bear the costs. The good news is that leading senators are starting to think along exactly these lines. Regulators will take note.

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Fair Game: In Countrywide Case, Watchdogs Without Any Bark

But the case, being heard by Justice Barbara R. Kapnick, extends far beyond the impact of the settlement on Bank of America’s balance sheet. It is also laying bare an industry practice that has put investors in mortgage securities at a disadvantage and reduced their financial recoveries in the aftermath of the home loan mania.

The practice at issue involves trustee banks overseeing the vast and complex mortgage pools bought by pension funds, mutual funds and others. Trustees like Bank of New York Mellon were paid by investors to make sure that the servicers administering these mortgage deals, known as trusts, treated them properly. Trustees receive nominal fees — less than a penny on each dollar of assets — for the work.

But when mortgages soured, trustees declined to pursue available remedies for investors, such as pushing a servicer to buy back loans that did not meet quality standards promised when the securities were sold.

In other words, this case highlights a problem with trustees: they are a dog that could have barked but didn’t.

Before mortgage securities were undone by troubled loans, trustee inaction was not an issue. Trustees collected their fees at minimal effort and investors were satisfied.

But because trustees are hired by the big banks that package and sell the securities, their allegiances are divided. Sure, investors are paying the fees, but if a trustee wants to be hired by sellers of securities in the future, being combative on problematic loan pools may be unwise.

Trustee practices are under the microscope in Justice Kapnick’s courtroom because Bank of New York Mellon is the trustee overseeing all 530 Countrywide mortgage deals covered by the proposed $8.5 billion settlement. The trustee is supporting the deal between Bank of America and the 22 investors that include BlackRock, Pimco and the Federal Reserve Bank of New York. Losses by all investors in the securities are projected at $100 billion.

While lawyers for BlackRock and Pimco were negotiating this deal, other investors in the securities were not at the bargaining table. Nevertheless, they must abide by the settlement’s terms.

Some outside investors, including the American International Group, have objected, saying $8.5 billion is inadequate given the mountain of problem loans it covers. Lawyers for A.I.G. contend that Bank of New York put its interests ahead of other investors outside the settlement process. Had the trustee been more aggressive with Bank of America, the servicer administering the troubled securities, investors would have received more money in a settlement, A.I.G.’s lawyers say.

Bank of New York Mellon argues that the settlement is reasonable and that it has always acted in the best interests of all investors. 

But over the last two weeks, arguments and testimony have shed light on behind-the-scenes dealings during the settlement negotiations with Bank of America. Some of these details raise questions about the trustee’s assertiveness on behalf of all investors.

A crucial issue: the trustee didn’t request individual loan files from Bank of America to help determine how many mortgages had problems and, therefore, whether $8.5 billion was a reasonable recovery. A trustee has the right to request those files for investors who cannot get them on their own.

When loan files have been examined, recoveries have been far greater. Last year, for example, Deutsche Bank agreed to reimburse Assured Guaranty, a bond insurer, for 80 percent of losses on eight residential mortgage securities it had insured.

Asked about the basis for the $8.5 billion settlement, Kent Smith, a Pimco executive with experience in loan servicing, testified on June 7 that it came in part from an estimated percentage of problematic loans that was provided to the investors by Bank of America. But on cross-examination, he said the estimate was far lower than it would have been if Bank of New York Mellon had examined specific loan files.

The estimate, 36 percent, meant that just over one-third of the loans had violated underwriting representations and warranties made to investors. But a review of the loan files would have pushed the figure as high as 65 percent, he testified.

Additional testimony raised questions about fairness during the settlement talks. The 22 investors who struck the deal held at least 25 percent — a required threshold for taking action — in only 215 trusts, less than half the 530 covered by the settlement. No other investors had an advocate at the bargaining table. Asked who was representing investors outside the negotiating group, an in-house lawyer for Bank of New York Mellon said he did not know.

Then there’s an e-mail from Jason H. P. Kravitt, Bank of New York Mellon’s outside counsel, recounting how he told Bank of America that on one important point its and the trustee’s “self-interest” were aligned — neither wanted the Countrywide securities to go into default. If they did default, the trustee would have been forced to increase its oversight of Bank of America, adding to its costs. If the trustee did not sue the bank, investors could. 

Referring to a default, Mr. Kravitt said he told a Bank of America lawyer, “We don’t want it either, Chris.”

Asked about these matters, Kevin Heine, a Bank of New York Mellon spokesman, said, “We believe an $8.5 billion bird-in-the-hand settlement with significant servicing improvements is a far better result for all investors than the likely outcome following years of costly litigation.”

Trustees argue that they do not make enough money overseeing these loan pools to act on investors’ behalf. But this could be resolved if the Securities and Exchange Commission allowed or encouraged trustees to use trust assets to pay for loan reviews or litigation.

Justice Kapnick’s decision is not expected for months, and will affect only this settlement. But the revelations in her courtroom send a message to investors who might have expected trustees to protect their interests with more vigor.

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Wall Street Slips Lower

Wall Street fell sharply Wednesday, with industrial and financial sectors leading the market down more than 1 percent.

The three major benchmarks — the Standard Poor’s 500-stock index, the Dow Jones industrial average and the Nasdaq composite — were all down about 1.1 percent in afternoon trading. The Dow was just above the 15,000-point level.

A private sector jobs report released earlier showed companies picked up the pace of hiring in May, though job growth remained sluggish. The report came ahead of the crucial nonfarm payrolls report on Friday.

“The market is overlooking this disappointing number, and putting greater emphasis on the nonfarm payrolls for better clues on what the Fed is going to do,” said Andrew Wilkinson, chief economic strategist at Miller Tabak Company.

A separate report showed a gauge of United States labor-related costs fell in the first quarter by the largest amount in four years, although the reading appeared distorted by a shift in employee compensation during the prior period to avoid a tax hike.

Trading has been volatile over the last few weeks amid a slew of economic reports and comments from Fed officials that have hinted on when the Fed may start reducing its stimulus efforts, which have powered this year’s stock market rally.

The market is expected to continue to be volatile this week, with intraday swings of more than 1 percent in either direction during a single trading session.

The American International Group said on Tuesday that a proposed $8.5 billion settlement between Bank of America and investors of Countrywide Financial mortgage-backed securities was not big enough. A.I.G. shares gained 1.2 percent.

The Treasury Department said it would begin another round of sales of the General Motors stock it acquired during the government’s bailout of the auto sector. The stock was down 2.1 percent.

European shares fell on concerns that the United States might begin to taper economic stimulus measures, with the FTSE 100 index ending 2.1 percent lower.

Comments late on Tuesday from two senior Federal Reserve officials highlighted divisions over the future of the central bank’s stimulus program.

Richard Fisher, president of the Federal Reserve Bank of Dallas, and Esther George, president of the Federal Reserve Bank of Kansas City — both long-term critics of the bond-buying program — reiterated their concerns over the risks of waiting too long to cut it back.

“The markets are hanging on every word of the central bankers in Europe and the U.S.,” said Richard Griffiths, a Berkeley Futures associate director.

Japan’s Nikkei share average sagged to a two-month low on Wednesday, as Prime Minister Shinzo Abe pledged to bolster incomes and attract foreign businesses, but did not mention a proposal to encourage Japan’s public funds to seek higher returns by investing more in riskier assets like equities.

“Investor expectations were for more specific growth policies and the disappointment has only exacerbated a trend for a correction in Japan’s stock market,” said Lee Hardman, currency analyst for Bank of Tokyo-Mitsubishi UFJ.

Since the Nikkei index rose to a five-and-a-half-year high on May 23, up more than 50 percent this year, doubts about the effectiveness of Mr. Abe’s economic reforms and the Bank of Japan’s stimulus efforts have led to a steady erosion of the gains.

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Existing-Home Sales Hit a 3-Year High

The National Association of Realtors said on Wednesday that existing-home sales had advanced 0.6 percent to an annual rate of 4.97 million units, the highest level since November 2009. The data underscored the housing market’s improving fortunes as it starts to regain its footing. Resales were 9.7 percent higher than in the same period last year.

“It’s quite supportive of the overall economy,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. “It’s a cushion against some of the other concerns in the economy.”

Tight supplies in some parts of the country have constrained the pace of home sales, but sellers are starting to wade back into the market, attracted by rising prices.

In April, the median home sales price increased 11 percent from a year ago to $192,800, the highest level since August 2008. It was the fifth consecutive month of double-digit gains.

With prices rising, more sellers put their properties on the market. The inventory of homes on the market rose 11.9 percent from March to 2.16 million.

Adding to signs that the housing recovery was becoming firmly established, distressed properties, which can weigh on prices because they typically sell at deep discounts, accounted for only 18 percent of sales last month.

That was the lowest since the real estate association started monitoring them in October 2008. Those properties — foreclosures and short sales — made up 21 percent of sales in March.

In another bright sign, properties were selling more quickly. The median time on the market for homes was 46 days in April, down from 62 days the previous month.

About 44 percent of all homes sold in April had been on the market for less than a month, while only 8 percent had been on the market for a year or longer.

Sales were up in three of the four regions, falling 3.4 percent in the Midwest.

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TV Networks Face Falling Ratings and New Rivals

Prime-time ratings for the Big Four broadcasters — ABC, CBS, NBC and Fox — together are dropping more precipitously than ever. Even their biggest hits, like “American Idol” and “Dancing With the Stars,” are fading fast. Advertisers are moving more cash to cable, cutting into the networks’ quarterly profits. New technologies are making it easier to skip those ads, anyway.

That’s not all: there are more outlets for programming cropping up all the time, with Netflix and Amazon and dozens of cable channels competing for actors, producers and, most important, viewers. Government regulators want to take back some of the spectrum allotted to local television stations. And start-ups like Aereo are threatening to deprive the stations of subscription revenue, causing some broadcasters to talk of options that were unthinkable a few short years ago. Some have warned they might go off the air entirely.

The many pressures bearing down on the industry are casting a shadow over this week’s upfronts, an annual tradition in New York in which the new sitcoms, dramas and reality shows are previewed at splashy, open-bar events and the networks try to capture their portion of an estimated $9 billion in advertising commitments.

“The networks are getting picked at from every direction,” said Jessica Reif Cohen, the senior media analyst at Bank of America Merrill Lynch. “This year was the tipping point,” she said, “when the television ratings really fell apart.”

The broadcast networks have managed declining viewership for years, but executives by and large said they believed that they had escaped the punishing losses that digital media exacted on the music industry and newspapers.

Now, though, they say they are not sure; even the industry’s biggest boosters concede that the business is under assault, though they express confidence that the networks will adapt. While the challenges before them are numerous, said Gary Carr, who oversees ad-buying at TargetCast, “the networks are far from dead.”

They are certainly smaller, though. Historically the broadcasters have had outsize cultural and civic importance in the country; their owners pledged long ago to uphold the public interest and provide news programming in exchange for valuable access to the airwaves.

No matter how optimistic the Big Four networks may feel about their new seasons — TV executives are masters at forgetting last year’s failures and staying on message about the future — the stress factors are enough to make them long for the days of “I Love Lucy,” when 50 million Americans would watch the same show at the same time.

Now NBC and ABC are lucky to get five million to tune in. Goldman Sachs found last month that broadcast ratings in the 18-to-49-year-old demographic, the one most coveted by advertisers, fell by 17 percent in the winter months compared with last winter. Goldman Sachs called it “the sharpest pace on record.”

While broadcast networks were setting record lows, cable channels were setting record highs; AMC’s “The Walking Dead” and the History mini-series “The Bible” regularly beat almost all the shows on network television while they were on.

At ABC, the lowest-rated of the four broadcasters, first-quarter profit fell 40 percent compared with the same quarter last year, but the network still made $138 million. NBC, on the other hand, lost $35 million in the quarter, because of lower advertising revenues. NBC’s parent, Comcast, said the network would have fared better if its biggest hit, “The Voice,” had been on in the quarter.

Ad revenue slipped at Fox too, partly because “Idol” has lost nearly a quarter of its viewers this season, on top of a 50 percent decline over the previous five years.

“We’re clearly disappointed” with the season’s ratings, said Chase Carey, president of Fox’s parent, News Corporation, to Wall Street analysts last week before delivering bullish words about the coming season’s slate. Fox eked out 15 percent profit growth, to $196 million, by spending less on programming and persuading distributors to pay higher subscriber fees — a strategy pioneered by the cable channels that the broadcasters also own.

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Ruling Clears Way for $7 Billion A.I.G. Suit Against Bank of America

The ruling, issued late Monday, is a setback for Bank of America, which has been trying to rid itself of numerous legal claims from investors who bought mortgage securities issued by the bank’s Countrywide Financial and Merrill Lynch units. In the California case, in which A.I.G., the giant insurance company, sued Bank of America over fraudulent mortgage securities, the bank had argued that A.I.G. had no standing to sue because it had transferred that right when it sold the instruments to the Federal Reserve Bank of New York in the fall of 2008.  

Mariana R. Pfaelzer, a federal judge in the central district of California, disagreed. She sided with A.I.G. in a ruling that also raised questions about the role of the Federal Reserve Bank of New York in the wake of its efforts to contain the huge damage from the financial crisis that erupted when Lehman Brothers was forced into bankruptcy in September 2008.

A.I.G. said in a statement, “As a result of the court’s decision, A.I.G. is able to pursue its full damages claim against Bank of America.”

Asked to comment on the judge’s decision, Lawrence Grayson, a spokesman for Bank of America, said the court ruling allowed it to “pursue additional discovery before the matter is fully decided.” He added that the bank believed it has strong defenses to A.I.G.’s accusations.

New York Fed officials, testifying earlier on behalf of Bank of America, maintained that they had intended to receive the rights to bring fraud claims related to the mortgage securities purchased by Maiden Lane II, the investment vehicle set up to complete the A.I.G. bailout.

But in depositions in March, Fed officials could produce no evidence that the fraud claims had been specifically transferred under the deal, as required under New York law. Judge Pfaelzer wrote: “To the extent that the Federal Reserve Bank of New York intended for Maiden Lane II to acquire these claims, its intentions were not expressed to A.I.G.”

The Fed’s view on who held the legal claims for fraudulent mortgages in Maiden Lane II has shifted over time. In October 2011, Thomas C. Baxter Jr., the general counsel at the New York Fed, said in a letter to A.I.G. that he and his colleagues “agree that A.I.G. has the right to seek damages” under securities laws for the instruments it sold to Maiden Lane II.

But after A.I.G. sued Bank of America, that opinion changed. Last December, James M. Mahoney, a vice president at the New York Fed who said he had principal responsibility for the Maiden Lane II transaction, testified that the New York Fed intended to receive litigation claims associated with the troubled mortgage securities. Bank of America filed Mr. Mahoney’s testimony in support of its position that A.I.G. had no standing to sue.

Yet in a deposition three months later, Mr. Mahoney was asked if he could recall discussing the assignment of fraud claims from A.I.G. to the Fed. He answered: “No, I do not.”

The New York Fed never filed any claims against banks relating to the A.I.G. rescue that might have benefited taxpayers. New York Fed officials agreed to testify on behalf of Bank of America as part of a confidential settlement with the bank that came to light in February. Under the terms of the deal, the New York Fed released Bank of America from all fraud claims on mortgage securities the Fed had bought.

A spokesman for the New York Fed declined to comment on the ruling. Previously, the New York Fed said it had agreed to testify in the case because doing so helped it obtain the best possible settlement for Maiden Lane II.

While Judge Pfaelzer’s ruling added to the legal claims faced by Bank of America, it emerged after the bank successfully disposed of several others. On Monday, in the latest such effort, the bank agreed to pay $1.7 billion to settle a long-running dispute with MBIA, a mortgage bond insurer.

The bank could erase another claim on May 30 if a judge in New York State court allows an $8.5 billion settlement struck between Countrywide and a group of big investors in 2011 to be completed. Investors objecting to the deal say the amount of the settlement is insufficient.

The California judge’s finding that A.I.G. has standing to sue Bank of America may also be bad news for other banks that sold troubled mortgage securities to the insurer. A.I.G. has not yet sued other institutions related to the securities that went into Maiden Lane II; at least $11 billion in losses involve other banks.

“We are eager to start discovery,” said Michael Carlinsky, a partner at Quinn Emanuel Urquhart Sullivan who led the arguments for A.I.G., “and get the case before a jury.”

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Markets Edge Higher

Stocks slowly drifted higher on Monday, appearing to resume a rally that pushed major indexes to record highs last week on improving earnings and reassuring signs about the economy.

In afternoon trading the Standard Poor’s 500-stock index was 0.3 percent higher, the Dow Jones industrial average rose 0.1 percent, and the Nasdaq composite rose 0.5 percent.

Apple shares were among the top gainers, up 2.3 percent and bolstering the Nasdaq composite index and benchmark S.P.

Market watchers said there is more room for stocks to rise as investors use weakness in the market as an opportunity to add to positions.

“There were some negative sentiment heading into earnings and concerns about the spring slowdown or ‘sell in May and go away,’ ” said Todd Salamone, director of research at Schaeffer’s Investment Research in Cincinnati. “Also economic numbers were weak. We don’t see that now. We’ve hit this sweet spot in economic data where numbers are better-than-expected. But on an absolute basis, they won’t make the Fed unwind their support for stimulus.”

Although weak economic data from the euro zone and China has caused concerns over the global growth outlook, Friday’s surprisingly strong jobs data fueled gains that took the indexes to record levels.

Many analysts say they expect a correction by stocks, which markets have largely avoided this year because traders use any weakness as an opportunity to add to positions.

A number of bellwether names rallied on Monday, with Bank of America up 3.9 percent. Humana jumped 2.9 percent as the S.P.’s biggest percentage gainer. JPMorgan upgraded the stock to “overweight.”

But Johnson Johnson shares were down more than 1 percent, weighing on the blue-chip Dow average.

BMC Software agreed to be acquired by a private equity group led by Bain Capital and Golden Gate Capital Corp for about $6.9 billion. Shares were flat.

Tyson Foods reported a steep drop in its second-quarter earnings, hurt as customers switched to chicken from beef to save money. The stock dropped 4.4 percent.

Overseas, European shares closed down about 0.1 percent as investors took profits following a rally in the previous week. Volumes were light as London and Tokyo markets closed for a holiday.


The dollar was up 0.3 percent at 99.88 yen, extending Friday’s 1 percent gain. The yen has fallen steadily since the Bank of Japan announced a massive plan last month to boost the Japanese economy.


On Friday the S.P. closed above 1,600 points and the Dow briefly traded above 15,000 for the first time ever, with a number of bellwether companies hitting 52-week highs. For the week, the Dow rose 1.8 percent, the S.P. gained 2 percent and the Nasdaq rose 3 percent in its biggest weekly climb since the first week of the year.

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Factory Output Rises; So Do Forecasts for Growth

The latest evidence came on Friday with a better-than-expected report on industrial production, led by a jump in the automobile sector. It follows bullish indicators earlier in the week, including a drop in new unemployment claims and strong retail sales.

The data has surprised economists like Ethan Harris of Bank of America Merrill Lynch, who on Friday revised upward the company’s prediction for growth in the first quarter to 3 percent from an earlier estimate of 2 percent.

Many experts had been looking for more of a drag from the restoration of full Social Security taxes in January and the automatic, across-the-board cuts in federal spending that began March 1, a process known as sequestration.

“It feels like the economy has some momentum and is in a little bit better shape to handle the sequester,” Mr. Harris said. While higher taxes and lower federal spending are a “speed bump,” he said, “the economy has better shock absorbers.”

Industrial production jumped 0.7 percent in February, the biggest gain in three months, the Federal Reserve said. Economists had been expecting a 0.4 percent rise.

Factory production and hiring are being bolstered in part by a rebound in China, which is driving output and exports among many major corporations, said Ian Shepherdson, chief economist for Pantheon Macroeconomic Advisors.

The Chinese economy, the world’s second-largest, slowed last summer and fall but regained momentum in recent months. To be sure, there are still reasons to be cautious, particularly in spring and early summer, when the combined force of Washington’s fiscal restraint is expected to have its biggest impact.

Gasoline prices have also been rising. Higher gas prices helped lift consumer prices by 0.7 percent in February, although the less volatile core reading that is closely followed by the Fed was up just 0.2 percent, according to other data released Friday by the Labor Department.

The jump in payroll taxes and gas prices is squeezing lower-income consumers in particular, said Steve Blitz, chief economist at ITG.

Big-ticket items like homes and cars continue to sell well, but otherwise-strong retail sales data out earlier this week showed that spending at restaurants declined for the second month in a row.

“People who can’t afford it aren’t going out as much to eat,” Mr. Blitz said.

Consumer confidence is also shaky. The preliminary Thomson Reuters/University of Michigan reading for March showed an unexpected drop Friday, dropping to 71.8, from 77.6 in February, its lowest level since December 2011. But so far consumers have not markedly changed their spending habits; retail sales data on Wednesday was better than had been expected.

The improved retail spending over all was the “clincher” in Mr. Harris’s decision to raise his forecast for growth.

Nigel Gault, chief United States economist at IHS Global Insight, said that the wariness of consumers in the new survey “may simply be a vote of no confidence in the government and the problems in Washington. It may not be represented in what consumers do.”

According to Mr. Gault, the most important factor underlying the economy’s recent strength is an improving housing sector — a trend that may be further confirmed next week when Februrary statistics are released on housing starts and home sales.

Not only do consumers feel more confident about spending when home values are rising, Mr. Gault said, but growth in the housing sector also results in greater demand for goods like furniture, carpeting and other furnishings.

There are suggestions of that kind of trickle-down in other recent economic reports. Of the 236,000 jobs the government reported as being created in February, 48,000 were in the construction sector. Similarly, building supplies were among the strongest components in the most recent report on retail sales.

“Housing helps everything,” said Mr. Gault, who also lifted his estimates for growth in the first quarter.

Like Mr. Harris and several other economic forecasters, he also foresees a temporary slowdown in the second quarter when the worst fallout from the sequester and the higher taxes is expected to show up in the economy’s Geiger counters.

Despite the more robust indicators in recent weeks, the Fed is expected to maintain its efforts to keep interest rates ultralow and pump tens of billions of dollars into the economy each month, a policy known as quantitative easing. The majority of Fed officials have said they would not consider a shift in policy as long as unemployment was above 6.5 percent. Fed policy makers are to meet Tuesday and Wednesday.

While unemployment has come down slowly from its recent high of 10 percent, economists say the Fed’s easy money policy has been integral to keeping the economy moving, as well as lifting the stock market to new highs. The Fed is pumping $85 billion into the financial system each month — about what the sequester will drain from the economy between now and Sept. 30, said Maury Harris, chief United States economist at UBS.

The money created by the Fed’s policies is slowly filtering its way through the economy as banks ease lending standards and increase some lines of credit.

“It’s not as quick as everyone hoped, but the money is being deployed,” said Mr. Harris. “It has a lot of knock-on effects.”

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