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BEIJING–China unveiled a $586 billion (U.S.) stimulus package yesterday in its biggest move to inoculate the world’s fourth-largest economy against the global financial crisis.

The cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government’s website said.

Some of the money will come from the private sector. The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up.

China’s export-driven economy is starting to feel the pinch of weakening United States and European economies, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

Economic growth slowed to 9 per cent in the third quarter, the lowest level in five years and a sharp decline from last year’s 11.9 per cent.

That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

Exports have been growing at an annual rate of more than 20 per cent but analysts expect that may fall as low as zero in coming months as global demand weakens.

The International Monetary Fund has urged governments to adopt economic stimulus packages and, in some cases, to cut interest rates further, to counteract the slowdown.

China joins other major economies such as the U.S., Japan and Germany which have already introduced their own stimulus plans.

The U.S. allocated $168 billion earlier this year for tax rebates to individuals and tax breaks for businesses. Germany set aside $29 billion for tax breaks on new cars and credit assistance for companies. Japan allotted $275 billion for loans to small- and mid-sized businesses and discounts on highway tolls among other measures.

China’s statement said the cabinet, at a meeting chaired by Prime Minister Wen Jiabao, had "decided to adopt active fiscal policy and moderately easy monetary policies Faxless pay advance."

The statement said the spending would focus on 10 areas. They included picking up the pace of spending on low-cost housing as well as increased spending on rural infrastructure.

Money will also be poured into railways, roads and airports. Spending on health and education will rise, as will environmental protection and technology spending.

Efforts to rebuild disaster areas, such as Sichuan province where 70,000 people were killed and millions left homeless by a massive earthquake in May, will also be accelerated. That includes $2.93 billion planned for next year that will be moved up to the fourth quarter of this year.

The statement said rural and urban incomes would be increased.

Credit limits for commercial banks will also be removed to channel more lending to priority projects and rural development, it said.

Reform of the value-added tax will cut taxes by $17.5 billion for enterprises, the statement said.

The stimulus plan should give a lift to China’s shares, said Ben Simpfendorfer, an economist at Royal Bank of Scotland PLC in Hong Kong. The CSI 300 Index has tumbled 69 per cent this year, the biggest drop among stock benchmarks in the Asia-Pacific region.

"We view this as a positive step," the U.S. Treasury’s Undersecretary for International Affairs David McCormick said. "This stimulus should help encourage domestic consumption" in China, he said.

"The golden years have shuddered to a dramatic halt," said Stephen Green, head of China research at Standard Chartered Bank PLC in Shanghai.

- With files from the Star’s wire services

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Time Warner Inc posted a higher-than-expected third-quarter profit, helped by strong advertising sales at its cable networks including CNN, and the summer blockbuster movie “The Dark Knight.”

But the media conglomerate, which also owns HBO and the Warner Bros movie studios, on Wednesday lowered its full-year outlook due to severance charges at its Time Inc publishing unit and restructuring charges at New Line Cinema.

Shares of Time Warner have fallen around 40 percent this year, hurt by the turbulent financial markets and by concerns that the weakening global economy would cut advertising revenue for media companies.

Even though the company reduced its full-year forecasts, the new estimates roughly matched Wall Street expectations, which reassured some analysts who had feared a bigger cut.

“Their outlook was OK to leaning positive,” said David Joyce analyst at Miller Tabak.

Shares of Time Warner rose 1.6 percent to $11.00 in pre-market trading.

Third-quarter net income from continuing operations rose to $1.1 billion, or 30 cents per share, from $900 million, or 24 cents per share, a year earlier. Excluding items, profit was 31 cents per share, beating the average Wall Street forecast of 27 cents, according to Reuters Estimates.

Revenue was essentially flat at $11.7 billion, compared to analyst expectations of $11.86 billion.

Results were boosted by Time Warner’s cable networks including CNN, which has benefited from high viewership ratings for its coverage of the U pay day loan lenders.S. presidential elections. Cable advertising and subscriber revenues grew by 9 percent and 10 percent respectively, the company said.

At the Warner Bros film studios, “The Dark Knight” Batman movie was one of the highest grossing films of all time and has to date taken in nearly $1 billion in worldwide theater sales. It helped to increase the division’s income by 6 percent.

Time Warner Cable, which is 84 percent-owned by the media conglomerate, added more Internet, phone and digital video subscribers and reported a better-than-expected profit.

“Time Warner Cable was the standout for us with more cable services sold during the quarter than expected. It looks like the newer cable systems in Dallas and Los Angeles are becoming more of a factor,” said Tuna Amobi, equity analyst at Standard & Poor’s.

AOL, TIME INC WEIGH ON RESULTS

Investors have been disappointed by the performance of Time Warmer’s AOL Internet division, which has lagged far behind competitors like Google Inc and Yahoo Inc. Time Warner has been in talks to combine AOL with Yahoo, sources familiar with the situation have said.

Profit was also dragged down by weak advertising at Time Inc magazines. The unit plans to cut as many as 600 jobs, or about 6 percent of its workforce. 

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Japan and Australia's central banks pumped more than $11 billion into money markets, seeking to ease near-record borrowing costs that threaten to tip regional economies into recession.

The Bank of Japan injected 1 trillion yen ($9.8 billion) and the Reserve Bank of Australia added A$1.815 billion ($1.3 billion). The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans stayed near a nine-month high and the Tokyo interbank rate was unchanged at the steepest this year. The Japan Libor-OIS spread, a gauge of cash scarcity among foreign banks seeking yen, rose to a record.

Interbank rates have jumped as lenders hoard cash, sheltering from bank failures and plunges in stock and commodities markets. The Nikkei 225 Stock Average dipped below 10,000 for the first time since December 2003 as Asian shares slumped for a fourth day, extending an equities rout that erased more than $2 trillion from global equities yesterday.

“There's a massive asset bubble deflating and it just encompasses everything,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. “We've been living in a dreamland and that dream has ended.''

Banks increased deposits held at the Reserve Bank of Australia by A$92 million to A$9.493 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site. Those deposits averaged A$1.7 billion last year.

Money held at the BOJ by banks and other financial institutions rose 1.23 trillion yen to 7.22 trillion yen yesterday.

`Hoarding Cash'

The BOJ has pumped about 23 trillion yen into the system over the past three weeks, the most in at least six years, and Australia's central bank is adding twice the daily average injected last year as banks store cash after governments in Europe and the U.S. acted to prevent the collapse of six financial institutions in the past two weeks.

“Despite central banks pumping liquidity into the system, banks are either hoarding cash or putting it into treasury bills,'' said Ong Hock Ann, a money-market dealer at ING Asia Private Bank Ltd. in Singapore. “It's a question of confidence and trust. There is money, but money is not flowing to the right channels.''

The world economy is sliding into its first recession since 2001 as the credit crisis hammers consumers and companies, economists at JPMorgan Chase & Co. and UBS AG said yesterday.

Rate Cuts

Economists predict central banks will cut interest rates as growth concerns outweigh inflation worries. Those at UBS predict the Fed will halve its benchmark rate to 1 percent by April and the European Central Bank will cut its main rate to 3 percent from 4.25 percent by the end of next year.

Australia's central bank today slashed its cash target rate to 6 percent from 7 percent, the biggest reduction since 1992 and double the half-point cut forecast by economists in a Bloomberg News survey (500 fast cash).

Australian banks' borrowing costs were little changed after today's cash injection, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 86 basis points, or 0.86 percentage point, from 88.3 before the RBA operation. The gap has averaged 45 points this year.

Banks hold cash in RBA exchange settlement accounts, on- call deposits at the central bank that receive interest at 0.25 percentage point below the central bank's benchmark rate.

Default Risk

The cost of protecting investors from Australian corporate bond defaults increased to a record.

The Markit iTraxx Australia index rose 34 basis points to 245, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.

The Markit iTraxx Japan index rose 9 basis points to 207, Morgan Stanley prices show.

“Credit markets remain extremely weak and fragile,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. “We expect the market to remain very volatile and thin in the next few days.''

Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.

Cash Auctions

The U.S. dollar Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 287 basis points today, after touching 298 points yesterday. It was at 129 basis points two weeks ago and 81 basis points a month ago. The Japanese Libor-OIS spread widened to a record 61.05 basis points.

Japan's central bank today said it offered $20 billion in three-month loans to 40 financial institutions as part of a currency swap agreement with the Federal Reserve. The operation was held for firms including Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Goldman Sachs Japan Co.

The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps, the central bank said today in a statement. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each. The central bank will also begin paying interest on bank reserves.

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European inflation slowed for a second month in September, easing to the lowest rate since April as oil prices extended declines from a record.

The inflation rate in the euro area fell to 3.6 percent from 3.8 percent in August, the European Union statistics office in Luxembourg said today. That matched the median estimate of 39 economists in a Bloomberg News survey.

Oil prices have dropped by more than one-third from their all-time high in the last three months, cutting the cost of gasoline and heating oil. At the same time, stagnating economic growth is reducing the capacity of companies to increase prices. The European Central Bank will probably keep its key interest rate at 4.25 percent on Oct. 2 as it remains “uneasy about inflation,'' according to governing council member Axel Weber.

“The fall in consumer-price inflation shows that price pressures in the region are finally receding,'' said Jennifer McKeown, an economist at Capital Economics in London. “But the ECB has been concerned that core inflation might pick up sharply if wage growth reacts to the still high level of inflation and the previous strength of the labor market.''

Crude oil extended declines today after falling the most in almost seven years yesterday as U.S. lawmakers rejected a $700 billion financial rescue plan. Crude was at $98.34 a barrel at 12:15 p.m. in London, compared with it July 11 record of $147.27.

Wheat, Cotton

In addition to oil, commodities including wheat, cotton and corn have fallen in recent months, dragging the Reuters/Jefferies CRB Index of 19 commodities around 28 percent from its record in July.

The euro fell for a second day against the dollar today, dropping 0.6 percent to $1.4345 as France and Belgium led a state-backed rescue of Dexia SA, the world's biggest lender to local governments.

Companies and consumers have scaled back their predictions for price growth in the euro area as oil prices have declined. A gauge of company selling-price expectations fell to 12 in September from 17 in August, reaching the lowest in 10 months, according to a monthly European Commission survey cash advance. Consumers' outlook for prices dropped to 17 from 22.

A decline in headline inflation next year “is likely to be partly offset by rising core inflation, but this should no longer be an issue from 2010,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. “Indeed, downside risks to the growth outlook and the implications of weaker growth for the medium-term inflation outlook is likely to increasingly be the focus of the ECB's attention in the coming months.''

`Magic Away'

The ECB aims to keep inflation close to but below 2 percent. In Germany, Europe's largest economy, inflation slowed less than economists forecast this month, according to national data published Sept. 26. Prices rose 3 percent from a year earlier, compared with economists' forecasts for 2.9 percent.

While the ECB is “aware'' that the economy is in a “phase of weakening,'' the economic slowdown “won't magic away the inflation problem,'' Weber said on Sept. 23.

Still, as consumer-price growth eases and growth cools, economists at banks including Societe Generale and BNP have revised their predictions for ECB interest rates.

James Nixon, an economist at Societe Generale in London, on Sept. 26 forecast three quarter-percentage-point cuts in 2009, revising a previous forecast for rates to remain unchanged throughout next year.

Wattret at BNP also forecast three rate cuts next year in a note this month, having earlier predicted no change. Both see the benchmark rate being lowered to 3.5 percent in 2009.

The figures published today are an estimate. The statistics office will publish a detailed breakdown of the data and the core rate on Oct. 15.

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Gas prices fell another 2 cents, marking the fourth straight decline after rising more than 18 cents in 8 days following Hurricane Ike, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped 2 cents to $3.757 a gallon, from $3.777 a gallon, according to the survey released by motorist group AAA.

While prices have remained under $4 for some time, they are still much higher from a year ago, when gas was selling for less than $3 a gallon.

Current prices are about 34% higher from a year earlier at this time. Still, prices are 54 cents, or 13%, down from the record high price of $4.114 a gallon set on July 17

Gas prices had been moving higher following the devastation left behind by hurricanes Ike and Gustav.

More than 30 refineries, which convert crude oil into usable gasoline, had shut down or were operating with reduced capacity in the Gulf region after the storms hit. The number has since fallen by more than half, restoring gasoline supply to retailers and easing consumer prices cash advance loans.

Many crude pipelines in Texas and Louisiana had also shuttered ahead of the hurricanes. Those are slowly coming back on line.

Lower oil prices have also helped lower the cost of retail gas. Crude has been moving lower since mid-July amid weakening demand, losing more than a third of its value since it reached a record of near $150 just two months ago.

But oil prices rallied back above $104 a barrel Friday amid growing optimism that the government’s various rescue plans will help ease the credit crisis currently stifling the U.S. economy.

Meanwhile, only three states now continue to report gas prices above $4 a gallon: Alaska, Hawaii and Illinois. Alaska continues to be the state with the most expensive gas prices, at $4.339 a gallon. The cheapest gas can be found in New Jersey, where gas cost $3.468 a gallon, according to AAA’s Web site. 

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Shares of Google Inc. fell Monday with analysts citing technical trading patterns, and broader market issues including turmoil in the mortgage market and the impact of a strengthening dollar as possible culprits.

The Internet search company’s stock fell $24.30, or 5.5%, to 419.95 in regular trading and extended losses in after-hours activity, slipping another 14 cents to $419.81.

Stanford Group analyst Clayton Moran pointed to technical trading patterns that in the past kept shares of the Mountain View, Calif, company above a "support level" of $440. But once the stock broke through that barrier on Monday, he said, that support disappeared — triggering more selling and pushing the shares to as low as $417.55 at one point.

"It’s a psychological thing," Moran said.

Sanford Bernstein & Co. analyst Jeffrey Lindsay said Google’s (GOOG, Fortune 500) shares may be a victim of the turmoil shaking the housing and mortgage market, which led the government on Sunday to take over mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), sinking their shares.

Big institutional investors that have sustained major losses could be reacting by cutting their holdings in other high-profile stocks, including Google overnight payday loans. Lindsay added that while Google’s new Android software platform for cell phones and other mobile devices has not officially hit the market, early online reviews in blogs have generally been disappointing.

And in another development, Goldman Sachs analysts wrote in a note to investors that a strengthening dollar could hurt revenue of Internet companies that derive sales overseas in the near-term, including Google.

Longer-term, after hedges — investments used to reduce possible losses — expire, a stronger U.S. currency could have a bigger negative impact, the analysts wrote. 

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Federal Reserve Bank of Kansas City President Thomas Hoenig said for economies to work best, institutions must be allowed to `fail.'

Economies must “find a balance between financial stability and a stable price environment and in doing so must be able to allow individual institutions to fail,'' Hoenig said in a speech today in Buenos Aires.

Turmoil in financial markets has persisted, even after the Fed started and expanded emergency programs to lend to commercial and investment banks. Changes in financial markets combined with the subprime-mortgage crisis have “raised anew questions about the role of central banks in maintaining financial stability,'' he said.

The subprime-mortgage collapse has taken a toll on banks and other financial companies, which have reported $514 billion of writedowns since the start of 2007. The Fed rescued Bear Stearns Cos. from bankruptcy in March, facilitating the firm's merger with JPMorgan Chase & Co. by lending against $29 billion of Bear securities.

“Financial crises will occur despite our best efforts to prevent them,'' Hoenig said in prepared remarks at an event hosted by Argentina's central bank. “The `Too Big to Fail' issue will only grow in importance as the consolidation of the financial industry grows in both size and scope in future decades.''

Hoenig didn't comment on the U.S. economic outlook or monetary policy in his remarks.

Job Losses

About 463,000 Americans have lost jobs since January as the worst housing recession in a quarter century has curtailed spending and bank lending free credit report.com. Economists expect annualized rates of growth of 1 percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August.

Earlier today, Federal Reserve Governor Randall Kroszner said the U.S. housing slump and financial turmoil have rippled to global emerging markets, slowing growth and bringing stock market declines.

The Fed said Aug. 11 in a quarterly survey that more banks tightened lending for homes, small businesses and credit cards. About 75 percent of U.S. banks indicated they raised standards on prime mortgage loans, up from 60 percent in the previous survey, the central bank said.

Federal Reserve Chairman Ben S. Bernanke said on Aug. 22 that financial turmoil has “not yet subsided,'' and is contributing to weaker economic growth and higher unemployment. Policy makers will “continue to review'' the Fed's measures to ensure liquidity to determine “if they are having their intended effects,'' Bernanke said.

Hoenig, 61, dissented from a rate cut on Oct. 31 because of inflation concerns. Hoenig doesn't vote this year and will vote next in 2010. Dallas Fed President Richard Fisher has dissented from Federal Open Market Committee votes five times this year, preferring to raise interest rates last month.

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Hovnanian Enterprises Inc., New Jersey's largest homebuilder, cut the number of unsold houses by more than 50 percent over the past two years after lowering prices and still had 1,500 on its books as of April.

“We pretty much start a home these days when we have a contract from a buyer wanting to purchase one,'' Chief Financial Officer Larry Sorsby said in an interview from his office in Red Bank, New Jersey. The company's sales price in the northeast for homes under contract dropped 7.4 percent in April from a year earlier. “We don't build them and hope they come,'' he said.

There are 3.9 million unsold existing single-family homes, the most since at least 1982, when the Chicago-based National Association of Realtors started compiling the data. The inventory of existing houses and condominiums must fall by almost 50 percent for prices to stabilize, said William Wheaton, an economics professor at the Massachusetts Institute of Technology in Cambridge. There is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005, according to the National Association of Realtors data.

It now takes 10 weeks to 12 weeks on average to sell a house, compared with four weeks or five weeks at the height of the five- year housing boom, said Walter Molony, a spokesman for the Realtors group.

`Fifth Inning'

Homebuilders are facing record foreclosures, waning consumer confidence and stricter mortgage standards. Almost one of every 10 U.S. mortgages was in trouble during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association. Delinquencies, or home loans with payments 30 days or more overdue, rose to 6.35 percent of outstanding mortgages and the share of homes in foreclosure rose to 2.47 percent.

“It's going to take several years to get rid of all this inventory,'' Eli Broad, the philanthropist who co-founded Los Angeles-based KB Home, said in an Aug. 1 interview. Homebuilders have no choice but to sell at “discounted prices,'' he said.

Broad, who got his start by selling homes to World War II veterans, said the U.S. housing recession is in the “fifth inning, not the eighth inning or not the second inning.''

Builders are contending with the fallout of a housing boom fueled by a “grand social experiment'' where the barriers to buying a house were lowered and mortgage products for people with bad credit were widely available, said Mark Dotzour, chief economist of the Real Estate Center at Texas A&M University in College Station.

Loan Standards

Mortgage originations for purchase peaked during 2005 at $1.5 trillion, 67 percent higher than 2000, the Mortgage Bankers said.

Housing unraveled as consumers started missing mortgage payments and put their homes on the market or lost them to foreclosure, increasing the supply of properties for sale and spurring losses for financial firms. Homebuilders were then stuck with inventory they built on expectations demand would continue.

Now stricter lending standards are constraining consumers' ability to obtain mortgages and falling home prices are cutting purchases. Sixty percent of lenders said they made it more difficult for the most qualified prospective buyers to secure financing in the first quarter, a Federal Reserve survey shows.

The 18 percent drop in U.S. prices since July 2006 is creating a silver lining for some buyers and increasing sales in markets such as California.

Eager Buyers

Augustine Noronha, 38, and his wife Barbara started looking to buy about two years ago in the Cleveland area, eager to become first-time homeowners. New homes they looked at were too expensive.

Last month, they purchased a three-bedroom, 2,209-square-foot house from DB Homes, a closely held builder in Mayfield Heights, at almost 25 percent off the original list of $370,000.

“Previously it was out of my price range,'' said Noronha, who bought for $285,000. “This fell right into place.''

The 11-month supply of existing single-family homes on the market is the highest since 1985 and there's a 10-month supply for new homes, data from the Realtors and the U.S. Commerce Department show.

Six months' supply of homes at the current sales pace would reflect a balanced market for existing homes, according to the Realtors.

New homes “should be around four or five months at the most,'' Dotzour said instant payday advance.

Excess Supply

Reducing inventory will take longer because foreclosures alone may add 2.5 million homes to the market this year, according to mortgage-default data compiled by RealtyTrac Inc. in Irvine, California. New homes also are being built. The annual pace of housing starts was 1.066 million in June, data compiled by the Commerce Department show.

That total, down 53 percent from the peak in 2006, may decline as much as 34 percent more before bottoming, Dotzour said. Housing starts may fall to as low as 700,000 before reaching their nadir, Dotzour said.

“There's a lot of places in America that don't need any homes being built right now,'' Dotzour said. “If we have this final capitulation in the homebuilders next summer, that will be the beginning of the absorption process needed to soak up the excess supply, and that could be several years.''

Market Glut

The lowest that housing starts fell since the Commerce Department began collecting the data in 1959 was in January 1991, when total starts declined to an annual pace of 798,000. To reach that point again, starts would have to drop another 25 percent.

The lowest that new-home sales got was in September 1981 — an annual rate of 338,000. That's 36 percent less than the June pace of 530,000.

Home construction companies are still building as new orders come in, but more than 25 percent of those homes are coming back on the market when customers cancel. The average cancellation rate in the spring of 2008 was 29 percent, according to a report from New York-based Moody's Investors Service.

More U.S. consumers signed contracts to purchase existing homes in June. The index of pending home resales rose 5.3 percent after a revised 4.9 percent decline in May, the Realtors group said today. The gain is the third this year.

The glut of new and existing houses and the dearth of demand have forced U.S. homebuilders to file for bankruptcy protection, including WCI Communities Inc., the Florida builder whose chairman is Carl Icahn.

Prices Sink

The average price for a Centex Corp. home, the fourth-largest builder, fell 10 percent to $262,044 in the three months ended June 30. The average price for a Lennar Corp. house, the second- largest builder, fell 8 percent to $274,000 in the quarter ended May 31.

Hovnanian and competitors are selling or writing down land and clearing inventory. Over the past year, publicly traded homebuilders reduced unsold inventory by 39 percent to 23,400 from 38,200, Hovnanian's Sorsby said. The average price of a house in the northeast region in Hovnanian's backlog, or homes under contract and not yet sold, was $479,908 at the end of April.

Hovnanian, a home seller in 19 states, reduced its unsold houses by 46 percent at the end of April from a year earlier and the company has put expansion plans on hold, Sorsby said.

“We're not buying any new land,'' Sorsby said. “We're not starting any new communities.''

No `Imminent Bottom'

A Standard & Poor's measure of U.S. homebuilders fell 37 percent in the past year. Home construction shares sometimes rise six months to nine months before business conditions improve, said Ken Leon, an analyst at Standard & Poor's in New York.

“They will bottom well before the fundamentals bottom, whenever that is,'' said Eric Landry, an analyst at Morningstar Inc. in Chicago. “The evidence on the surface does not appear to be pointing to an imminent bottom.''

The housing bill signed by President Bush last week will help boost demand, Richard Dugas, the chief executive officer of Pulte Homes Inc., said in an interview. The legislation includes a $7,500 tax credit for first-time buyers.

“This is the first bit of good news we've had, in, candidly, two or three years for housing,'' Dugas said. Pulte, based in Bloomfield Hills, Michigan, is the third-largest U.S. homebuilder by revenue.

Dugas said housing legislation won't cure all the market's woes. Broad, the former homebuilding executive, agreed.

“It's of some help,'' Broad said. “Is it a major help? No.''

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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 free credit report without a credit card. 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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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 .. faxless payday advance. 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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