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Bank examiners from the Federal Reserve and the Comptroller of the Currency are scrutinizing the books of U.S. mortgage finance giants Fannie Mae and Freddie Mac, according to a published report.

U.S. Treasury Secretary Henry Paulson told The New York Times Monday that the examiners began inspecting the two companies’ books after their plunging stock prices roiled the market.

Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) own or back about $5 trillion of home mortgages. Their stock has plummeted in recent weeks on concerns about the losses they face amid the housing slump.

Paulson unveiled a plan earlier this month that would give the two firms an extended line of credit with the U.S. Treasury. Under the plan, the government would also be able to buy stock in Fannie and Freddie if they aren’t able to raise enough capital on their own.

Paulson told the Times he still believes the two firms have enough cash to withstand further declines in the housing market.  

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Brazil's central bank will probably raise its interest rate for a third consecutive meeting today to slow inflation from a 2 1/2-year high.

Policy makers led by President Henrique Meirelles will increase the benchmark lending rate to 12.75 percent from 12.25 percent, according to 31 of 45 economists surveyed by Bloomberg. Fourteen others forecast the bank will increase the so-called Selic rate to 13 percent.

“The inflation scenario has worsened since the last central bank meeting in June,'' Marcelo Salomon, chief economist at Unibanco SA, said in a telephone interview. “Our main concern is the strong level of demand, which increases the probability of higher wholesale prices spilling over.''

Meirelles will miss his inflation goal this year for the first time since 2003, according to a survey of about 100 economists by the central bank. Inflation will accelerate to 6.53 percent this year, above the 2.5 percent to 6.5 percent target range, according to the survey published this week.

The central bank wants to prevent the longest streak of household spending growth since 1994 from stoking inflation in Brazil's $1.3 trillion economy, Latin America's largest.

Brazil's real rose to the highest in nine years against the U.S. dollar yesterday on speculation the central bank will raise rates, boosting the yield advantage that local assets have relative to the U.S. The real gained 0.2 percent to 1.5794 and earlier yesterday traded at 1.576.

Interest Rate Futures

The yield on the interest-rate futures contract due January 2009 rose 0.38 percentage point to 13.5 percent yesterday since the last central bank rate announcement June 4.

Brazil's economy created a record 309,442 government- registered jobs in June as higher domestic demand coupled with rising commodity prices prompted companies to add staff and increase production, a July 17 Labor Ministry report showed.

The economy grew 5.8 percent in the first quarter after expanding 6.2 percent in the fourth, the fastest in 3 1/2 years. Retail sales in May jumped 10.5 percent from a year ago, up from 8.7 percent in April, the national statistic agency said July 15. Sales climbed more than 10 percent in four of the six first months of this year.

The bank started to raise rates at the April 15-16 meeting after holding policy unchanged for six months at a record low of 11.25 percent. Policy makers have increased the rate by half a percentage point in each of the two past meetings.

Since adopting inflation targeting in 1999, policy makers missed the target three times, in 2001, 2002 and 2003.

`More Complicated'

Meirelles told senators in Brasilia on July 15 the bank will act “vigorously'' to ensure next year's inflation will be in line with the 4.5 percent midpoint of the target.

Alexandre Sant'Anna, an economist at Rio de Janeiro-based BNY Mellon ARX, is among the 14 economists polled by Bloomberg who expect a rate increase of three-quarters of a percentage point.

“It's now clearer inflation isn't limited to food and has spread to other sectors,'' said Sant'Anna. “The situation has become more complicated.''

Wholesale prices as measured by the IGP-DI index jumped 17.9 percent in the 12 months through June, the biggest gain in almost five years, led by agricultural products and raw materials.

“We'll be seeing some of this wholesale inflation contaminating retail prices in the second half of the year,'' said Sergio Vale, an economist with MB Associados in Sao Paulo.

Should oil prices remain at current levels, state-controlled oil company Petroleo Brasileiro SA may need to increase gasoline and diesel prices, which are already about 30 percent below international costs, Vale said.

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A plan emerging in Congress would require government approval of executives’ pay at Fannie Mae and Freddie Mac as part of a federal lifeline for the mortgage companies.

The idea comes as lawmakers scramble to limit the potential taxpayer costs of the rescue plan and satisfy critics of the government-sponsored companies who fear an open-ended bailout.

Rep. Barney Frank, chairman of the House Financial Services Committee, also wants to require that the companies delay issuing dividends until they reimburse the government, if the Treasury Department had to prop them up.

Frank, D-Mass., said Thursday the House plans to count any rescue effort under the overall $9.8 trillion statutory limit on the national debt. That approach is intended to answer charges that the aid amounts to a blank check.

"The fact that any expenditure under this bill would be subject to the debt limit is a cap, in effect, on the amount that you could put here. That invalidates these claims," Frank said.

"I’m optimistic that we will be able to send [the Bush administration] something that they will be able to accept," Frank said after meeting with the chairman of the Senate Banking, Housing and Urban Affairs Committee, Sen. Christopher Dodd, D-Conn.

Treasury Secretary Henry M. Paulson has lobbied Congress for quick approval of his plan that temporarily would empower the government to extend unlimited lines of credit to Fannie Mae and Freddie Mac and buy their stock. The Federal Reserve has offered to let the companies draw emergency loans.

The companies’ shares have plummeted because of fears about their financial stability. Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) are private. But they were created by Congress to encourage homeownership by buying mortgages from banks. The two hold or guarantee more than $5 trillion in home loans - almost half of the nation’s total.

The House plans a vote next Wednesday on a housing bill expected to include the help for Fannie Mae and Freddie Mac. President Bush has threatened a veto unless there are changes, but now is pressing to add the mortgage rescue as part of a broad compromise.

House Speaker Nancy Pelosi said she did not believe Bush would follow through on the veto even though Democrats plan to attach $3.9 billion in grants he opposes to buy and fix up foreclosed properties in areas hit hardest by the housing crisis.

"Let me get this straight. The president is asking us to do something quite significant to address this housing crisis, which has long been neglected by his administration, and he is going to resent the ability of state and local governments to buy up these properties?" Pelosi said. "I don’t think the president is going to veto this bill. I don’t think so."

Paulson says he does not expect to use the new federal authority to prop up Fannie and Freddie. By granting it, however, Congress would boost market confidence in the companies and thus avert a collapse that could ultimately require the government to step in with huge sums of money, he says.

He has refused to specify an upper limit on the rescue power, saying that doing so would wreak market havoc.

But congressional analysts have to issue a cost estimate for all legislation before lawmakers vote on it. Frank and Dodd are working to find ways to lower the projections.

Paulson has asked lawmakers not to subject the rescue authority to the debt limit, which Congress sets. By rejecting that request, lawmakers essentially would cap how much the government could spend to prop up the mortgage giants without further approval from Congress.

They are casting about for "what things we can do here that will give members and the taxpayers some assurance that this thing isn’t a runaway horse," Dodd said.

The housing measure already tightens controls on Fannie Mae and Freddie Mac, creating a strong regulator to oversee their operations. But given the GOP backlash over the proposed rescue plan, "we’re going to make it explicit" that the regulator would have to approve executives’ pay, Frank said.

He also has floated the idea of giving Treasury a preferred class of stock that would enable the government to be reimbursed before other shareholders in the event of any collapse. Dodd has questioned the idea, saying it could discourage private investors from buying the companies’ shares. 

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Peter Futo, a Hungarian candy salesman turned real estate millionaire, is betting 850 million euros ($1.3 billion) he can transform a Budapest slum into prime real estate in the European Union's slowest economy.

Futo, who owns property developer Futureal Zrt. with his son Gabor, is building Corvin Promenade, Hungary's biggest development since communism fell, on the site of demolished homes near what used to be Budapest's red light district. Affluent people will live there because it's on the boulevard that borders downtown, offers easy airport access and is near the Danube, the Futos said.

“The key to success is to be able to acquire and develop a big enough piece of land that you can have impact,'' said the younger Futo. “If you are able to grab the whole thing, take it as one, and have a city vision for that, then you can really make a change.''

The father-and-son team is investing in Hungary at a time when other developers aren't. The country's economic growth was 1.3 percent in 2007, the slowest in 14 years. Hungary issued 8,956 residential building permits in the first quarter of 2008, the fewest since 2001, according to government statistics.

At the same time, the Futos have scaled back their plans in neighboring Romania, where the economy grew 6 percent last year, because they're concerned real estate prices have risen too fast and are about to tumble.

Old Homes Destroyed

Corvin Promenade was conceived by members of the local government in Budapest's Jozsefvaros district who wanted to replace the slum dwellings, the Futos said in an April 23 interview in Peter Futo's office in downtown Budapest. The council invited bids, persuaded residents to move into new homes, and knocked down the old ones, they said.

The average apartment size was 23 square meters (250 square feet), and most residents had their toilet outside the apartment, at the end of the corridor, said Peter Futo.

“The only reason why such a project is possible at all is there was a slum,'' his son said. “There was a population problem, a social problem. But that's not a location problem.''

Futureal took over the project in 2004 when it paid an undisclosed amount to acquire Corvin Rt., the developer that won the bid. The Futos hired architects including British landscape designer Robert Townshend to redesign the development and center it around retail and office space.

Mall Rights Sold

They sold the right to build Corvin Promenade's 35,000- square-meter shopping center to Klepierre SA, the French mall owner controlled by BNP Paribas SA, last year. The mall will cost an estimated 229 million euros ($313 million).

The development will include a park, restaurants, and penthouse apartments that overlook the Buda hills on the west side of the Danube. The complex has its own underground parking garage, and its website notes that with such amenities, “common downsides of city life will be avoided.''

All 820 of the still-unbuilt apartments in the first phase of the project have already been sold at an average 2,150 euros per square meter, 32-year-old Gabor Futo said. That's more than double the average price for residences in Jozsefvaros, according to a database kept by online real-estate broker Ingatlan.com.

Corvin Promenade's first phase will finish next year. The second phase will add 2,000 more apartments by 2012.

Futureal is financing each phase of the project separately, using banks including Intesa Sanpaolo SpA, UniCredit SpA, and Erste Bank AG, Gabor Futo said. The banks finance 80 percent to 90 percent of certain projects, with Futureal funding the rest from its own equity, he said. He declined to give further details.

Contrast

The contrast between the sleek lines and glass-walled balconies promised by Corvin Promenade may clash with the rundown tenements and their crumbling neoclassic facades next door, said city architect Ivan Bojar.

“It cuts into the city fabric,'' he said. “I'm keeping my fingers crossed for it, because this idea of clearing buildings for a new development has no precedent'' in Budapest.

Balazs Bazsalya, a researcher at Budapest polling company Marketing Centrum, said the new development will raise the value of the apartment he bought near the site two years ago.

There are also fewer poor neighbors than before, he said.

“There haven't been any major complaints'' about the forced relocation, Bazsalya said. “It's probably because these aren't the kind of people who have the organizational skills to mount opposition.''

Mathematician and Candymaker

Peter Futo, 62, never planned to be a developer. In the 1970s, he worked both as a mathematician and at his grandfather's candy factory, which Hungary's communist government seized in 1948, he said.

After communism collapsed in 1990, Futo founded his own confectionery company, Fundy Kft., selling gumdrop bears, frogs and dinosaurs, as well as chocolate and wafer snacks. Annual profit exceeded 2 million euros by the end of the decade, he said.

Futo sold Fundy to Van Melle NV, the Dutch maker of Mentos mints, for an undisclosed sum in 1999. He used the proceeds to create Futureal because, he said, real estate was an investment opportunity that wasn't dominated by multinational companies.

The Futos are focusing on Hungary, in spite of the country's slow economic growth, because land values in Romania are inflated and competition is “getting out of control,'' Gabor Futo said.

“It's just incredibly, incomparably and irrationally high,'' he said. “We went there to do five shopping centers. We are doing one only, because we have decided not to take the risk.''

Residential land prices in Bucharest, the Romanian capital, have tripled to as much as 3,000 euros per square meter since 2004, according to a survey by Colliers International. Futureal is selling its 118 apartments in Bucharest's Nightingale Park and “cautiously'' considering new projects, Futo said.

Even with the slower growth in Hungary, Corvin Promenade may serve as a model for further developments in the country, whose mayors have been reluctant to bring in private capital, said Miklos Nemeth, head of the Hungarian Association of Real Estate Management in a May 14 interview.

“Municipalities will realize that you need to attract private capital, and the nice things you can do with it,'' he said.

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In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bancorp Inc. was taken over by federal regulators on Friday.

The operations of the Pasadena, Calif.-based thrift - once one of the nation’s largest home lenders - were shut down at 3 p.m. PDT by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

About 95% of the $19 billion in deposits in the bank are insured, but that leaves $1 billion that was not covered by FDIC guarantees. According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

"This will certainly be a costly failure. Whether it’s the costliest, we just don’t know at this point," FDIC Chairman Sheila Bair said on a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.

The closure of IndyMac capped a dramatic day that offered a stark reminder that the credit crisis is not abating. An investor panic sent shares of mortgage finance giants Fannie (FNM, Fortune 500) Mae and Freddie (FRE, Fortune 500) Mac on a wild ride and fueled speculation of a government rescue.

IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying.

While home prices climbed, Alt-A loans posed few problems for IndyMac. If a buyer wasn’t able to afford his payments, the bank got title to a home worth more than the amount owed. The bank was also able to find investors eager to buy pools of those mortgages that had been pulled together into securities backed by the future payments.

But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.

Most of IndyMac’s employees and executives will be asked to stay on, although the problems at IndyMac had caused it to cut 3,800 jobs, or more than half of its work force, earlier in the week in an attempt to stay in business.

One executive who will not stay is CEO Michael Perry, who was replaced on an interim basis by a top official of the FDIC.

Bair said that the FDIC will try to sell IndyMac as a complete entity within 90 days.

IndyMac, with assets of $32 billion and deposits of $19 billion, is the fifth bank to fail this year. Between 2005 and 2007, only three banks failed. And in the past 15 years, the FDIC has taken over 127 banks with combined assets of $22 billion, according to FDIC records.

"There will be increased failures, but it will be within range of what we can handle," Bair said. "People should not worry."

IndyMac marks the largest collapse of an FDIC-insured institution since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records. The two most expensive banking failures were in 1988, during the nation’s savings and loan crisis: American Savings and Loan Association in California ($5.4 billion) and First Republic Bank in Texas ($4 billion).

The IndyMac failure brought finger pointing along with the federal action.

The OTS, which oversaw IndyMac, criticized Sen. Charles Schumer, D-N.Y. The OTS claimed that a June 26 letter Schumer wrote to regulators questioning IndyMac’s viability prompted a run on the bank in which customers withdrew more than $1.3 billion prompting a liquidity crisis.

"Although this institution was already in distress, I am troubled by any interference in the regulatory process," said OTS Director John Reich in a statement Friday.

Schumer shot back. He said that lax enforcement by OTS was a primary cause of the problems at IndyMac, as well as those of the nation’s housing market and economy.

"IndyMac’s troubles … were caused by practices that began and persisted over the last several years, not by anything that happened in the last few days," Schumer said. "If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today. Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."

When a bank shuts down, traditional bank accounts are insured to at least $100,000. Some accounts such as annuities and mutual funds are not insured at all. Individual Retirement Account funds are insured to $250,000.

If you had $100,000 at one bank and $100,000 at another, both would be insured, according to Allan Roth, a Colorado Springs, Colo. financial planner.

However, individuals with multiple accounts in the same name at the same bank are limited to the $100,000 cap, says Roth. But if an individual has a $100,000 savings account in her name and a $100,000 joint account with her husband, both accounts would be covered.

"The difference is not in the number of accounts [that each individual has at an FDIC-insured bank]," said Roth. "The difference is in the titling [or name] on the account."

IndyMac customers with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells the bank, said Bair.

Customers’ funds will be transferred to a new entity - IndyMac Federal FSB - controlled by the FDIC. They will have uninterrupted customer service and access to their funds by ATM, debit cards and checks.

However, customers will have no access to online and phone banking services this weekend, according to the FDIC. Service will resume on Monday. Loan customers were advised to continue making loan payments as usual.

IndyMac’s problems came into sharp focus earlier in the week.

The bank, which lost $184.2 million in the first quarter, announced on Monday that it was expecting a wider loss for the second quarter. It lost $614 million last year stemming from its focus on the Alt-A mortgage sector.

Then on Tuesday, IndyMac disclosed that regulators no longer considered it "well capitalized." As a result, the bank was unable to accept brokered deposits, or short-term investments in large dollar amounts from brokers seeking the highest return on certificates of deposit.

Over the past two years, IndyMac dropped over 95% in stock price, or about $3.5 billion in market capitalization. By Friday, shares were down to 28 cents.

Ousted CEO Perry had long argued that it was being unfairly punished given its relatively paltry exposure to sub-prime mortgages.

But rising Alt-A and prime mortgage delinquencies likely were enough indication for investors that the housing crisis had moved beyond the weakest borrowers.

Even worse, with the securitization markets in collapse, IndyMac had no way to get new loans off its books. What loans the bank had made recently were to borrowers with well-documented assets and income, but those are sharply less profitable with respect to fees and interest income.

IndyMac on Monday said it would focus on its reverse mortgage business, retail branch network and mortgage servicing operations. But the growth restrictions placed on IndyMac by regulators and the banks and brokerages it did business with, as well as the sharply higher borrowing costs, placed the profitability of even its non-mortgage-related banking efforts in doubt.

Editor’s Note: The FDIC has set up a special toll-free hotline for IndyMac customers: 1-866-806-5919. It will operate daily from 8 a.m. to 8 p.m. PDT (8 a.m. to 6 p.m. on July 13). Customers can also turn to the FDIC Web site: http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information. 

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By pressing developing countries to do more to combat global warming, the Group of Eight has set the stage for a broader showdown pitting most of the world's biggest economies against poorer-but-faster-growing ones.

The G-8 yesterday conditioned a promise to reduce greenhouse gas pollution at least 50 percent by 2050 on China, India and other emerging economies taking part in a “global response.'' The two sides will square off today in Toyako, on Japan's northern island of Hokkaido, to air their differences.

“Responsibility shouldn't fall on developing countries for what is an unavoidable responsibility of developed nations,'' said Mexican President Felipe Calderon, who met with counterparts from Brazil, China, India and South Africa on the island before heading to Toyako.

Dubbed the G-5, those countries said the G-8's climate- change demands, inspired by U.S. President George W. Bush, reflected rich-world policies that would shackle their economies.

Climate change is one of several G-8 summit agenda items that divide the two sides. The G-8 leaders also said some poorer states are profiting from unfairly undervalued currencies, hoarding food surpluses and subsidizing energy prices.

Meeting in Sapporo, a three-hour drive from the G-8 site, the G-5 leaders signaled their desire to become a competing power bloc by issuing their first-ever joint declaration.

Vague Goals

That statement said it was “essential that developed countries take the lead in achieving ambitious and absolute greenhouse gas emissions reduction.'' They pressed for cuts of 25 percent to 40 percent by 2020 instead of the G-8's vaguely worded “mid-term goals.''

Marthinus van Schalkwyk, South Africa's environment minister, called the G-8's road map “an empty slogan without substance.''

The five nations first met informally before last year's G- 8 summit in Germany. They announced plans yesterday to gather two months before next year's G-8 session in Italy.

The G-5 accounts for 42 percent of the world's population and 11 percent of the global economy, measured by real exchange rates, according to a June 2007 estimate by the University of Toronto's G8 Research Group.

The Group of Eight industrialized nations — the U.S., Japan, Germany, Italy, Britain, France, Canada and Russia — makes up about 13 percent of the world's population and 62 percent of its economy.

`The Main Culprit'

The wealthy economies also generate 62 percent of the world's greenhouse gases, making them “the main culprit of climate change and the biggest part of the problem,'' said Kim Carstensen, director of the World Wide Fund For Nature's climate initiative.

Industrial world criticism extended to moves by developing nations to halt the export of some foods, stockpiling domestic supplies in the face of soaring prices for basic commodities. India, with an economy that expanded 9 percent in the year ended March 31, banned corn exports last week as it moved to cool the fastest inflation in 13 years. India already had curbed exports of rice, wheat and cooking oil.

The G-8's criticism of food policies drew a rebuke from President Hu Jintao of China, the world's fastest-growing major economy, with an expansion of 10.6 percent in the first quarter from a year earlier. China now ranks behind the U.S., Japan and Germany in economic size.

“Big developing countries'' aren't responsible for food price increases, Hu said in Sapporo. “This is not a responsible attitude.''

Backtracking

Meanwhile, the European Union backtracked on a day-old promise to donate 1 billion euros ($1.6 billion) over two years to promote food production in developing countries when German Chancellor Angela Merkel said the funds have not yet been budgeted.

“The last word on this has not yet been spoken,'' Merkel said.

China was the main target of G-8 criticism of trade imbalances, facing accusations that it is keeping its currency at an artificially low level to gain a competitive advantage.

In language French President Nicolas Sarkozy said was aimed at China, the G-8 called for a “necessary adjustment'' in exchange rates “in some emerging economies with large and growing current-account surpluses.''

The surplus in China's current account, the widest measure of trade, increased 49 percent in 2007 to $371.8 billion.

While the U.S. has benefited from the Chinese yuan's 20.7 percent advance against the dollar since it was freed to float in July 2005, Europe has lost out. The yuan has cheapened 7.2 percent against the euro during that time.

As a result, Sarkozy said, China's exchange rate doesn't “correspond to economic reality.''

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