The Commerce Department reported that May sales of new homes dropped 0.6% to a seasonally adjusted annual rate of 342,000, down from a revised April rate of 344,000.  The results fell short of economists’ forecast of 360,000.  To add to the bad news, there were roughly 292,000 unsold new homes sitting on the market, leaving a 10-month of new homes.  Despite the news, the iShares Dow Jones U.S. Real Estate (IYR) was up about 0.3% in morning trading.

As the Federal Reserve continues its two-day monetary policy meeting, most experts predict that they won’t make any drastic changes or bold new efforts to bolster the economy.  RSome think the Fed may even slow down their already announced programs to purchase either government debt or mortgage-backed securities to snuff out any inflation. Unfortunately, slowing down the process carries the risk of rising rates of government and  mortgage debt, which could further hinder the nation’s economy from getting out of the recession.

On a positive note, durable goods orders rose for the second straight month and a gauge of business investment rose last month by the most in nearly five years.  The Commerce Department said that durable goods orders rose by 1.8% from last month, far better than the 0.6% decline forecast by economists and orders for non-defense capital goods, a measure of business investment, rose by a whopping 4.8%, indicating that business may have stopped trimming their investment spending.

More positive news indicating that the global recession may be nearing a bottom came out of the Organization for Economic Cooperation and Development (OECD) stating that it expects the economies of its members to decline by 4.1% for the year, as opposed to its previous forecast of a decline of 4.3%.  Additionally, the organization expects overall growth across its membership expected to average 0.7% in 2010, which is up from its previous forecast of 0.1% growth.

Lending has loosened up across the pond as the European Central Bank reported that it will lend banks a whopping $621 billion for 12 months, the most it has ever allotted in an auction, states Gabi Thesing of Bloomberg.  All the loans will be lent out at the current benchmark rate of 1% and will get to the banks as soon as tomorrow.  This massive lending spree should lubricate a much-battered European banking system, which accounts for nearly 75% of company financing in the region. The news helped lift the iShares S&P Global Financials (IXG) up nearly 3% in morning trading.

Overall, all three major U.S. indexes were in positive territory this morning, with the Dow Jones Industrial Average up 0.9%, the S&P 500 up about 1.4% and the Nasdaq up nearly 2.1%.

Kevin Grewal contributed to this article.

Low Reserves. It is calculated that Britain has less than $61 billion in foreign reserves with foreign liabilities of U.K. banks at $4.4 trillion, or twice Britain’s annual GDP, reports Ambrose Evans-Pritchard for Telegraph. The British sterling has fallen 10 cents to $1.39 against the dollar in just two days.

Fearful Markets. The U.K. gross public debt burden has increased 11.8% in one year and the market is fearful of a pending collapse of the banking system. The International Monetary Fund (IMF) has announced that the full nationalization of some British banks could be quite possible. It is predicted that if Britain were to forget its $4.4 trillion debt, then it would add pressure to global financials, iShares S&P Global Financials (IXG) with holdings of 7.9% in the United Kingdom, and drag the world into a deep depression.

Expensive Proposition. But the United Kingdom will benefit from the sterling, which is still a major global currency, and it has access to more funding. It is estimated that the cost of recapitalizing the U.K. banking system would cost around 5.7% of the its GDP.

• NETS FTSE 100 Index (LDN): down 9.5% in the last week; down 2.4% in the last month

• iShares MSCI United Kingdon (EWU): down 12.6% in the last week; down 11.1% in the last month

Financials in Trouble. Shareholders may need to brace themselves, because Bank of America slashed its dividend to a penny in an effort to shave off costs and receive help from the Treasury Department. The financial systems remain in a state of distress, and the Treasury Department handed out $350 billion to financial institutions in need through the TARP program, without much question. Bank of America received $25 billion of that money.

What’s Fair? Matthew Goldstein for BusinessWeek reports that going forward, isn’t it only fair to demand that all of the nation’s bankers take whatever steps they can to cut costs and preserve capital before getting any more government help? The government is already pondering if they should nationalize Citigoup, and healthy banks such as Wells Fargo are trimming their dividends – this should be standard practice.

Doing All They Can? Dividends to ordinary stockholders has been cut, but preferred shareholders are still receiving dividends as they take priority over ordinary. The disturbance is that the bank asked for assistance before trimming any other dividend payouts. Analysts don’t expect other major banks to slash their dividends yet, but they’re paying close attention to earnings numbers.

• PowerShares Dividend Achievers (PFM): down 9% year-to-date; BofA Inc. 2.4%

• WisdomTree Total Dividend (DTD): down 9.2% year-to-date; BofA Inc. 2.7%

A group of very well-known and trusted economic advisers, lead by former Federal Reserve Chairman Paul Volcker, recommends the following steps to restructure the weak financial system, states The Economist. Among their ideas?

• Imposing strict capital requirement restrictions on banks, especially on high-risk proprietary activities – this will force investment banks to focus on client services and not so much on trading, leading to the separation of commercial and investment banks
• Raising the level at which banks are considered to be well-capitalized
• Hedge funds that have pools of private capital that live on borrowed money should have to register with a regulator and provide full transparency
• Bank-like regulation for money market funds, giving assurance of a stable net-asset value
• Set up a mechanism for dealing with non-bank failures and a more refined analysis of liquidity in stressed markets and more robust contingency planning
• Central banks need to have a more vital role in policing such things, need to be vigilant during times when credit is expanding and be more involved in supervising bank safety and soundness
• A formal system of regulation for over-the-counter derivatives
• Urge regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on as well as more flexibility in the guidelines for loan-loss reserves
• Rethink certain accounting policies and procedures, like mark-to-market
• Enforcement and rule-making should be in harmony around the globe; after all this is a global crisis

Some ETFs to take a look at that could be influenced if the Obama administration practices what Volcker and his team preaches are the following:

iShares S&P Global Financials Sector Index Fund (IXG): down 17.4% in the last month

PowerShares Dynamic Banking Portfolio (PJB): down 12.8% in the last month

S&P bases the downgrade on pressures facing the large financial institutions in the future, because of increasing risk and a worsening global recession, reports Kerry E. Grace for the Wall Street Journal. They note that government intervention in order to bring stability to the sector should balance out some of the pressure, though.

In ordinary times, S&P doesn’t consider government support to be a factor in its ratings process. But so many governments have stepped in that an exception has been made. None of the banks should have a rating lower than A+, because of the expectation of that support.

Banks downgraded are: Bank of America (BAC), Barclays, Citigroup (C), Credit Suisse Group (CS), Deutsche Bank (DB), J.P. Morgan Chase & Co. (JPM), Morgan Stanley (MS), Royal Bank of Scotland, UBS (UBS), Wells Fargo (WFC) and Goldman Sachs (GS).

HSBC’s (HSBA) outlook has been changed to negative, meaning a downgrade is possible.

Several of these banks can be found in financial ETFs, including:

• iShares S&P Global Financial (IXG): down 56.2% year-to-date; Bank of America, 2.8%; Citigroup, 1.6%; HSBC, 4.6%; JP Morgan, 4%; Wells Fargo, 3.7%.

• Financial Select Sector SPDR (XLF): down 57.1% year-to-date; Bank of America, 9.6%; Citigroup, 5.9%; Goldman Sachs, 3.2%; JP Morgan, 12%; Wells Fargo, 8.9%.

The Institute of International Finance will release its global economic outlook for 2009, and the estimate is that banks around the world will have collectively lost nearly $1 trillion dollars, says Nancy Marshal Genzer for Marketplace.

On the plus side, those losses were nearly balanced out by $920 billion in new investment. However, about one-third of that came from governments. Some banks would have failed without it, though, and it stemmed what could have become an all-out financial panic.

The fallout from the Madoff Scandal can’t have helped matters, as a number of global banks have come forward to announce that they, too, lost money through his alleged Ponzi scheme.

Broken down, European banks have reported losses of $300 billion. America leads the way, with losses of $678 billion, report James Quinn and Jamie Dunkley for the Telegraph.

• iShares S&P Global Financials (IXG): down 55.8% year-to-date. Unfortunately, global financial institutions have not been insulated from the crisis this year, leaving this ETF vulnerable. 

A suspicious bank that had smelled the suspicious activity a while back, Société Générale (GLE), allegedly kept their suspicions to themselves, although the red flags at Madoff’s firm were so obvious, said one banker with direct knowledge of the case.

The bank saved themselves millions, and the embarrassment, with its total exposure to Madoff’s supposed Ponzi scheme at less than $13.8 million, reports Nelson D. Schwartz for The New York Times. BNP Paribas and HSBC Holdings are all burned, taking huge losses and spreading the misery across Europe.

Large banks like HSBC and the Royal Bank of Scotland loaned more than $1.5 billion to money management firms, which leveraged larger returns on their investments with Madoff. These banks received collateral for their losses in the form of assets from Madoff’s firm, which is likely worth nothing now.

Several of these impacted banks are top 10 holdings in the iShares S&P Global Financials (IXG), which is down 53.4% year-to-date. Banco Santader is 1.8%; BNP Paribas is 1.7%; HSBC is 4.6%.

Although Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke do not mention costs in their speeches, the tally is at $3.45 trillion and counting. The major signs down the road are higher interest rates and hyper inflation to offset the spending that is radically going on now, reports Aaron Task for Tech Ticker.

The “Hope for Homeowners” program is having trouble getting lenders to participate, causing a revamp of the program. The government may allow more borrowers to qualify for a $300 billion program designed to let troubled homeowners swap risky loans for more affordable ones, reports Alan Zibel for Associated Press.

Meanwhile, Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending.

Dollars will not be spent rescuing troubled assets from banks as originally announced,as the new goal will focus on a program to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans, reports Martin Crutsinger for Associated Press.

In England, the economy is set to shrink and inflation will plague the nation, but The Bank of England is trying to set a softer landing, with another rate cut.

It will cut interest rates even below their current half-century low, as the economy has already settled into recession mode and will most likely contract more in 2009, reports Sumeet Desai and Christina Fincher for Reuters.

Annual inflation, which is at 5.2%, would fall to just below 1% in two years, half the central bank’s target, it forecast a week after making a surprising 1.5% interest rate cut to 3%.

• iShares S&P Global Financials Sector Index Fund (IXG), down 52.9% year-to-date

• Financial Sector SPDR (XLF), down 52.7% year-to-date

The financial landscape is shifting and changing, and the truth is, no one knows where it or the related exchange traded funds (ETFs) are going to wind up when all is said and done.

As efforts to make repairs are ongoing, one can’t help but wonder: where are the trillions of taxpayer dollars used to bailout financial institutions actually going?

As the Federal Reserve relaxed collateral requirements for new lending, it has distributed more than $1.1 trillion to faltering financial institutions and has refused to disclose the details on which institutions took out these loans, except for the $150 billion given to AIG, report Erik Holm and Stephanie Luke for Bloomberg.  Why hide these transactions? The market has already plummeted and some believe that lack of transparency is one reason for this.  After all, it is the taxpayers who are funding the plans to recover the failing economy, shouldn’t they know exactly how much and where every dollar is being allocated?

On one hand, regulators fear that if investors and traders find out which institutions took the loans, a frenzy of short-selling and additional runs on deposits could result, which was seen in the demise of Bear Stearns, Washington Mutual and Lehman Brothers. On the other hand, regulators state that disclosure of the Fed’s pricing methods is necessary to help alleviate the problems of a dangerously illiquid market, states Adrew Jeffrey at Minyanville Publishing & Multimedia, LLC.

No one wants to see the market take another huge hit. But, it would be just as devastating, if not worse, to hide the truth and have it come back to only haunt us.  Only time will tell if the bailout and taxpayer dollars will help these institutions, their stock prices and indexes that track their sector rebound from a catastrophic year. 

Meanwhile, we’re seeing more and more institutions become traditional banks. Next up on the list is credit card giant American Express (AXP), which can now accept deposits and permanently access financing from the Fed, reports Martin Crutsinger for the Associated Press. If more companies start making these moves, perhaps there will be greater restrictions on how this Fed money can be spent.

The money should be used to free up lending, but many of these institutions are using it to pay off debt, pay bonuses and buy other banks. Many hope that President-Elect Barack Obama can come in and fix this mess, but who knows what it’s going to look like two months from now when he finally takes office?

Financial Select Sector SPDR (XLF) is down 51% for the year and iShares S&P Global Financial Index Fund (IXG) is down 50.6% for the year.

The London interbank offered rate (Libor) fell to 2.51% from 4.82% compared to the Federal Reserve’s target interest rate of 1%, reports by Gavin Finch of Bloomberg. Libor is seen as the benchmark rate for financial contracts from derivatives to company loans and mortgages.

Large government bailouts coupled with cash injections by central banks helped drive Libor down without much conviction for lending by financial institutions. Banks are cutting back and unwilling to extend credit.

As of November, the Fed stated that about 85% of U.S. banks tightened lending standards for large- and mid-sized companies.

Central Banks from all over have helped drive down money-market rates by offering oodles of money in concert to reduce interest rates. But there is a catch: the banks may not pass the benefits of lower rates to consumers and businesses. Banks world wide are reassessing the price for risk with the intention of increasing cost for loans.

The sales of corporate bond in Europe and the United States both dropped, which is seen as another sign that lending remains restricted.

Two financial ETFs influenced by credit market crunch:

• Financial Select Sector SPDR (XLF): down 46.8% year-to-date

• iShares S&P Global Financial Index Fund (IXG): down 47.5% year-to-date