Bernanke discusses future of Fannie and Freddie

Fed chairman says government will need to back mortgage loans going forward regardless of what happens to Fannie Mae and Freddie Mac.

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Friday that the federal government will need to continue to play a role in the future of the mortgage financing market.

In a speech broadcast to an economic symposium in Berkeley, Calif., Bernanke said there are many alternatives that need to be considered but that all will involve a role for the federal government and federal guarantees for securities backed by mortgage loans.

"Government likely has a role to play in supporting mortgage securitization, at least during periods of high financial stress," he said.

The remarks included a detailing of the recent problems in the mortgage markets, which led to the Treasury Department putting mortgage financing giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) into conservatorship on Sept. 7.

The two government sponsored firms either owned or guaranteed about $5 trillion in mortgages between them and their problems could end up costing taxpayers hundreds of billions of dollars in future losses.

But Bernanke said having them replaced by totally private firms could cause greater problems for the economy during a future financial crisis. Thus, he said that the federal government will likely have a role guaranteeing mortgages into the future.

"From a public policy perspective, a greater concern with fully privatized [firms] is whether mortgage securitization would continue under highly stressed financial conditions," he said. "As I have noted, almost no mortgage securitization is occurring today in the absence of a government guarantee."

Bernanke did not endorse any specific alternative for Fannie and Freddie and he stopped short of advocating for the government to completely nationalize the two firms. Instead, he gave a rundown of numerous proposals that have already been raised by Fed and Treasury officials as well as other experts.

Bernanke did caution that going back to the structure of Fannie Mae and Freddie Mac before the credit crisis -- as shareholder-owned companies with only an implicit government guarantee -- is not a good idea, especially with their huge portfolios of mortgage loans.

"As the Federal Reserve has argued for many years, the enormous [Fannie and Freddie] portfolios pose risks to financial stability," he warned.

Colts could get Sanders back for Patriots game

Injured Indianapolis Colts safety Bob Sanders, running back Joseph Addai and cornerback Kelvin Hayden all practiced Wednesday. They could be healthy enough to play Sunday against archrival New England.

"I expect that they will all be out there (Wednesday), and if all goes well, I expect them to play Sunday," coach Tony Dungy said before practice.

None of the three was listed on the team's practice report, meaning the three players participated in all drills.

The Colts held out of practice two other starters — Pro Bowl receiver Reggie Wayne and cornerback Marlin Jackson — with knee injuries. Wayne was hurt late in Monday night's loss at Tennessee when another player rolled into his leg, but both players finished the game.

The Colts do not provide injury updates after practice.

Dungy said he wanted to see how Sanders, Addai and Hayden each responds when they return to the team complex Thursday morning, and even then the Colts may limit their playing time.

Sanders, the 2007 Defensive Player of the Year, is the emotional leader. He's missed the last five games with a high ankle sprain, an injury that typically takes four to six weeks to heal. He also had arthroscopic knee surgery during his absence. Indianapolis has not said which knee Sanders had repaired, but Dungy has explained the knee injury did not delay Sanders' return.

Second-year safety Melvin Bullitt has played well enough in Sanders' absence that the Colts (3-4) are now trying to make him a regular part of the defense.

"I don't know that Bob will be able to play 60 plays right out of the box," Dungy said. "But we've got to find ways to get Melvin in the game."

Sanders has a long history of injuries. He played in a career-high 15 games last season and has been the subject of a strange even-year hex. He missed a combined total of 22 games in 2004 and 2006, compared with a total of three games in 2005 and 2007.

Addai, who made his first Pro Bowl last season, went down with a hamstring injury early in the Baltimore game Oct. 12. There was speculation Addai tore the hamstring and could miss up to a month, something Dungy denied.

Now, three weeks later, Addai could be back in the lineup. He was replaced by former 1,000-yard runner Dominic Rhodes, who has helped invigorate a previously stagnant ground game. Rhodes sat out Wednesday's practice with an ankle injury.

Hayden missed the last three games after tearing the meniscus in his left knee and said Wednesday he felt good enough to play this week.

"I'll practice today and see how it feels," he said. "It should be a good test. I don't think I'm 100 percent, but I think I'm close enough to 100 percent to play."

The returns couldn't come at a better time.

Indy has lost two straight, fallen four games behind unbeaten Tennessee in the AFC South and begins a tough stretch against New England on Sunday night. Then Indy visits Pittsburgh, hosts Houston and has consecutive road trips to San Diego and Cleveland.

Linebacker Freddy Keiaho, second in tackles (68), was limited in practice with a knee injury.

Three other starters — defensive ends Dwight Freeney and Robert Mathis and linebacker Gary Brackett — rested Wednesday, along with cornerback Tim Jennings.

Also missing practice Wednesday were running back Clifton Dawson (concussion), receiver Roy Hall (knee), cornerback Dante Hughes (ankle) and tight end Tom Santi (shoulder).

Police: PGA Tour golfer John Daly drunk, detained in North Carolina

WINSTON-SALEM N.C. — Golfer John Daly was taken into custody Sunday morning by Winston-Salem police after he was found drunk outside an area Hooters restaurant.

Police said in a statement Wednesday that said officers went to the restaurant on a medical call.

When they arrived, Daly was being treated by emergency workers after losing consciousness.

While at the restaurant, police said Daly "appeared extremely intoxicated and uncooperative," refused repeatedly to be taken to the hospital and was asked to leave the restaurant by several workers.

Daly was taken to the Forsyth County Law Enforcement Detention Center for a 24-hour stay, until he was sober.

Procter & Gamble Lowers Profit Outlook for Year

lowered its full-year forecasts on Wednesday because of a stronger dollar and higher costs for materials used in products like Tide laundry detergent.

The company lowered the bottom end of its profit forecast for the current fiscal year, which began July 1, citing volatility in commodity, energy and currency markets.

Procter & Gamble, the world’s largest consumer products maker, said it still faced high commodity prices.

“We’re not seeing that commodity recession. You might be seeing it on television, but we’re not seeing it in the reality in the marketplace,” A. G. Lafley, chairman and chief executive, said in a conference call.

Now that prices of some commodities are falling, analysts have questioned whether consumers will soon see lower prices in stores as well.

Mr. Lafley said that the company was not lowering prices at this time, but would do so if commodities moved down in a meaningful way.

P.& G. said consumers were continuing to buy more expensive items like clinical-strength deodorants, as well as products like Luvs diapers, which are priced lower than the company’s Pampers brand.

P.& G. said profit in its fiscal first quarter rose 9 percent, to $3.35 billion, or $1.03 a share, from $3.08 billion, or 92 cents a share, a year earlier, matching analysts’ average forecast, according to Reuters Estimates.

The results were helped by price increases and a benefit from foreign exchange rates.

Now that the dollar is gaining, sales in foreign markets have a lower value on the income statement.

Sales rose 9 percent, to $22.03 billion, from $20.2 billion. Excluding the impact of acquisitions, divestitures and currency changes, sales increased 5 percent.

P.& G. says it now expects to earn $3.77 to $3.87 a share in fiscal 2009, versus a previous forecast of $3.80 to $3.87 a share. Analysts were expecting earnings, on average, of $3.83 a share.

The company said its credit ratings were in the top 5 percent of all public companies, which should allow it to gain access to the credit markets. Its shares fell $1.90 to $61.33.

Fed Creates Swaps With South Korea, Brazil, Mexico

By Steve Matthews and William Sim

Oct. 29 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in its biggest effort yet to curtail the spread of financial market turmoil beyond developed economies.

The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said today in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.''

The global credit crisis that started last year with the collapse of the U.S. mortgage-backed securities market has roiled developing nations, sending the premiums on their government bonds up and their currencies down. Today's Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries.

``The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,'' said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York. ``These are large, relevant emerging countries that have followed responsible fiscal and monetary policies for the past several years and now are going through tough times.''

The yield premium on emerging-market dollar bonds over U.S. Treasuries narrowed today by 61 basis points, or 0.61 percentage point, to 7.21 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The spread has jumped 5.72 percentage points from a record low of 1.49 percentage points in June 2007, and reached its widest since 2002 earlier this month.

Global Crisis

``The hoped-for result is that we don't see the global financial crisis worsen still more,'' said Lyle Gramley, a former Federal Reserve governor who is now senior economic adviser at Stanford Group Co. ``The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.''

The Fed also created this week a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

The Bank of Korea cut interest rates by a record amount on Oct. 27 and the government pledged to guarantee local banks' debts to help lenders struggling to access foreign funds. Stocks and the won tumbled last week, prompting concern the country may face a currency crisis a decade after the IMF organized a $57 billion bailout to help repay overseas debt.

``The Bank of Korea will continue to strive for financial market stability through cooperation with other central banks,'' the bank said in a statement. Using the swap line, the central bank ``will provide liquidity in Korea through competitive auction facilities to banks established in Korea.''

Market motion sickness to continue

The Dow soared nearly 900 points Tuesday. Experts say investors need to prepare for more big moves - both up and down - in the coming months.

NEW YORK (CNNMoney.com) -- Don't get too excited: The Dow may have surged nearly 11% on Tuesday, but we've been here before...just two weeks ago.

On Oct. 13, the Dow jumped 936 points, and then went on to shed more than 1,200 points, or 13%, in the days before yesterday's big move.

The plain fact is, massive selling will lead to occasional massive pops.

Peter Sorrentino, senior portfolio manager with Huntington Asset Advisors in Cincinnati, said that many mutual funds and hedge funds have been forced to sell stocks because they face looming redemptions, i.e. investors demanding their money.

Talkback: How much longer will the market volatility last?

But at the same time, whenever there is even a whiff of a rally, other investors that have piles of cash waiting to invest may need to jump in and buy due to fear of missing a big move upwards.

"The hedge funds are still out there. Many are forced sellers and they have no choice. But there are also people that have gone to cash who are left at the dock and are afraid that the boat is going to set sail," Sorrentino said.

With that in mind, it's hard to make sense of where the market is headed in the near-term as long as it remains this tumultuous. And so far this month, just about every day has seen either a big gain or a huge loss.

The Dow has experienced a move of at least 100 points in 18 of the 20 trading days in October, as well as in each of the past 11 sessions.

It's going to be tough to declare that the market has finally bottomed out until stocks finally stop shooting up and down so violently.

"It's encouraging to see that we don't plunge day after day but it's still disconcerting that volatility remains this high," said Sorrentino. "Investors can't believe in the rally until the volatility goes away."

We are undeniably in a bear market and, it seems apparent that we are in a recession - even though the National Bureau of Economic Research has yet to declare it as such.

But as I've written consistently in the past few months, I do think that there are signs of hope that a recovery will soon be in the cards. This may be a longer and more painful recession than most but it's still a recession, not a depression.

The government's controversial bank bailout plan has slowly started to loosen up the gummed-up credit markets. That's a good thing.

Investments in stronger banks by the Treasury Department may also encourage consolidation. Weeding out the weak banks is also a good thing.

And the Fed cut rates again this afternoon, which should also eventually help get the credit markets back on track.

Still, any reasonable investor should realize that it may take months for the bailout, as well as all the Fed's previous rate cuts, to truly work their magic and stimulate the borrowing and lending activity that is crucial to a growing economy.

But just because they aren't working overnight doesn't mean that they are a failure.

"There is starting to be a sense that it will take time for all this to work out. There have been ounces of medicine and the market is digesting a pound of cure," said Matthew Lloyd, chief investment strategist of Advisors Asset Management, an institutional investment firm based in Monument, Colo.

Lloyd added that even though it would be premature to declare that yesterday's stock surge is a sign that the worst is over, it is still a good sign that some investors appear to be out there bargain hunting since many stocks are trading at attractive valuations.

"At least there's money out there that's willing to come in and buy at certain levels. It gives us some consolation that the bottom may be near," he said.

Bill Stone, chief investment strategist for PNC Wealth Management in Philadelphia, agreed. He pointed out that stocks rallied yesterday despite more evidence that housing prices are continuing to fall and a report showing that consumer confidence dropped to its lowest level in history.

"You can't really spin a big up day into that much of a worrisome sign. One thing's for sure. We were so oversold that the spring was coiled for a rally," Stone said.

"Eventually, all the bad news will be priced in and the selling will have exhausted itself. It's impossible to know when but the market likely will move before economic data gets better," he added.

What that means is that is probably a great time to buy stocks for the long-term. You just have to resist the urge to check on how your portfolio is doing every 10 minutes.

A lot of traders will make impulsive moves. Investors, however, should recognize that stocks are probably going to keep spinning wildly, like those cups in Disney World's Mad Tea Party ride.

"When you get in periods like this where people are trying to figure out where the bottom is, emotions start to drive things," said Jason Tyler, senior vice president and director of research operations with Ariel Capital Management, an institutional investment firm in Chicago.

"We have to get used to a prolonged period of volatility for the next several months.

Canadian convicted of terror charges

OTTAWA (AFP) — Mohammed Momin Khawaja, the first Canadian tried under the nation's anti-terrorism law, was found guilty Wednesday of several charges related to a foiled plot against several British targets.

The Ottawa software developer of Pakistani descent was found to have "knowingly participated" and "knowingly facilitated" a terrorist group's plan to attack a popular London nightclub, a shopping mall and a natural gas network.

However, he may not have known about the plot itself, Justice Douglas Rutherford said in his 52-page decision.

Khawaja, 29, was arrested in March 2004 and was accused of developing bomb detonators, possession of explosives, financing terrorism, and training as a terrorist in Pakistan.

Khawaja's defense lawyer had argued Khawaja meant all of this in support of an insurgency in Afghanistan against coalition forces, not against British targets.

The judge ruled the prosecution did not prove Khawaja's "guilty knowledge of the fertilizer bomb plot" in London.

"There is no direct evidence that Khawaja knew of the ammonium nitrate fertilizer (obtained by his co-conspirators) or the consideration of domestic targets" in Britain, he said.

However, Khawaja's description to one of his co-conspirators about how the bomb detonator he built for them worked "leaves no doubt that Momim Khawaja knew he was building a device to trigger explosions," the judge said.

And so, "I have no reasonable doubt in concluding that in doing the things the evidence clearly establishes that he did, Momin Khawaja was knowingly participating in and supporting a terrorist group," the judge concluded.

Khawaja's defense lawyer Lawrence Greenspon claimed a partial victory in that "he was acquitted of the London bombing."

He did not indicate whether he would appeal the verdict.

Wesley Wark, a visiting professor at the University of Ottawa and a specialist in intelligence and national security issues, however, said: "It does not matter that Momin Khawaja did not know the full details of what his London co-conspirators intended to do."

"He was convicted for the fact that he aligned himself with the London group and he facilitated its preparation to conduct terrorism," he told AFP.

Canada's anti-terrorism law was written to reflect the fact that not all members of terrorist groups are privy to all plot details, he explained.

The prosecution was considered a key test of Canada's anti-terrorism legislation, enacted after the September 11, 2001 attacks in the United States, and tweaked last year after a portion of it was thrown out by a judge because it attempted to define terrorism by what motivated it, and so wrongly attempted to police people's thoughts, religious beliefs or opinions.

Still, the trial was allowed to continue while parliament worked on a fix.

"The anti-terrorism act provisions themselves were on trial in the Khawaja case," said Wark.

"They have been controversial provisions," he said. But "I think the very clear conclusion to be drawn from the Khawaja case is that the antiterrorism act works."

Khawaja was the first to be arrested under the act, and pleaded not guilty.

The devout Muslim was born in Canada of Pakistani immigrant parents and once worked as a computer expert at Canada's Foreign Affairs Department.

The prosecution had argued he sought out the fanatic group of British Muslims, also of Pakistani descent, and designed for them a remote detonator to set off a fertilizer bomb.

The detonator was found in Khawaja's Ottawa house along with an arsenal of guns during a police raid in 2004, the court heard.

The prosecution also laid out emails, and descriptions of video and wiretap surveillance that purportedly tied him to the bomb plot.

In one email sent from a Foreign Affairs ministry computer, according to prosecutors, Khawaja discussed using a courier to send the detonator to his contacts in London.

In 2003, Khawaja also traveled to northern Pakistan for weapons training, and made his secondary residence in Pakistan available to his new "bros" (brothers).

Sentencing is set for November 18.

Khawaja faces possible life in prison.