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Warren Buffett’s Berkshire Hathaway posted a second-quarter profit that tumbled 40% from a year ago, as the company suffered a $1.4 billion paper loss on its derivatives bets.

The conglomerate reported quarterly net income of $1.97 billion, or $1,195 per Class A share compared with last year’s $3.3 billion, or $2,123 per share, during the same quarter.

Berkshire’s $1.4 billion decline in the market value of its derivatives bets on stock market indexes and other financial instruments followed a gain of $1.5 billion a year ago.

Excluding its investment and derivative business, the Omaha, Neb.-based company booked operating earnings per share of $1,866, a 63% rise from $1,147 in the same period last year.

Berkshire’s book value, which includes capital gains and losses whether they are realized or not, rose 2.6% to $86,661 per share.

While CEO Warren Buffett has famously criticized derivatives as "financial weapons of mass destruction," he has lately expressed opposition to Wall Street regulation designed to make derivative trading safer.

Under the federal government’s proposed derivatives rules, companies like Berkshire would likely be required to produce collateral for any new derivatives contracts, whereas Buffett has said Berkshire rarely engages in deals requiring collateral up front payday loan.

Led by investing legend Buffett, Berkshire owns companies ranging from insurance provider Geico to private jet operator NetJets to the railroad Burlington Northern Santa Fe Corp. Berkshire also has stakes in companies including Kraft Foods (KFT, Fortune 500), Coca-Cola (KO, Fortune 500) and American Express (AXP, Fortune 500).

Berkshire (BRKA, Fortune 500) made itself appealing to a wider investor audience by creating more affordable shares through its 50-for-1 stock split earlier this year. While its Class B shares (BRKB) once traded for more than $3,300 apiece, they now run at about $80 a pop and trade on the S&P 500 Index (SPX).

Year-to-date, Berkshire Hathaway’s class A and class B shares are up more than 20%, but shares were down modestly at the close of trading Friday. 

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The California High-Speed Rail Authority will seek up to $1 billion in a new application for federal funding for the state’s high-speed train project.

For this round of funding, the U.S. Department of Transportation has made $2.3 billion in additional funds available for high-speed and intercity rail projects nationwide. The funds would help complete engineering and other work on the project not covered by previous federal stimulus grants.

Last January, California’s high-speed train project won $2.25 billion, the largest share of federal funding set aside for such projects under the American Recovery and Reinvestment Act.

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A judge on Friday ruled against California Gov. Arnold Schwarzenegger’s request to force the state controller to cut 200,000 state employees’ pay to minimum wage temporarily.

The ruling was a boost for State Controller John Chiang, who for weeks has refused to carry out the cuts.

But the fight isn’t over yet. Sacramento County Superior Court Judge Patrick Marlette scheduled another court session for July 26, a spokeswoman for Chiang’s office said.

Schwarzenegger moved in July to cut 200,000 state workers’ wages to $7.25 an hour starting Aug. 1. But Chiang said he would not make the cuts and would wait until he completed an appeal of another court’s ruling on a similar pay cut order from 2008.

Schwarzenegger’s office sued Chiang last week in an effort to force him to make the cuts, but Chiang promptly filed a cross-complaint alleging that the order violates federal and state law.

The judge said he ruled for Chiang "because the issue of cutting workers’ pay needed more consideration and the controller shouldn’t be forced to make the cuts immediately," according to Chiang’s spokeswoman.

In his refusals, Chiang has also said the payroll computers aren’t equipped to make the cuts, but the court declined to rule on that subject. Chiang’s spokeswoman said Marlette wants that issue to be resolved before the end of August.

"We are confident we will continue to win on the merits of this case, as we already have done twice," Schwarzenegger’s spokeswoman said in a statement. "We hope the legislature passes a budget by then so we don’t have to pay our employees minimum wage."

Marlette’s office did not have comment late Friday.

California budget stalemate: The move to cut paychecks stems from a larger fight over how to close a $19.1 billion budget shortfall. California’s fiscal year began July 1, and Schwarzenegger and the legislature have yet to agree on a budget.

State workers have gotten caught in the crossfire. Schwarzenegger’s proposed salary reductions would cut across all job types and pay scales, though affected workers would receive back pay when the budget is passed.

Republicans want severe cuts to state social services such as welfare and Medicare, instead of hiking taxes. But Democrats oppose the program cuts and instead want tax increases on industries such as oil production. 

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Lending through Small Business Administration programs has plummeted since the end of May, when the SBA ran out of money for breaks that made those loans less risky for lenders and more affordable for borrowers.

The drop in SBA lending has occurred even as Congress explores new ways to expand small businesses’ access to credit.

The economic-stimulus bill increased the government guarantee on the SBA’s flagship 7(a) loans to 90 percent from the typical 75 percent. The legislation also reduced or waived fees on those loans as well as 504 loans, which are used primarily for real estate. As a result of those breaks, SBA lending rebounded after cratering during the credit crisis of late 2008.

Through June 25, the SBA had approved $10.5 billion in 7(a) loans this fiscal year, which began Oct. 1. That’s up 80 percent from the same period a year ago.

However, lending slowed dramatically in June due to the loss of the higher guarantee and fee waivers. In May, SBA lenders made about $272 million in 7(a) loans per week. That’s not counting the $732 million in 7(a) loans made during the final week of May, as lenders rushed to get their loans approved before the loan breaks expired. In the first four weeks of June, average weekly loan volume dropped to $86 million.

President Barack Obama has called for reviving and extending the higher loan guarantee and fee waivers through the end of the year, and the proposal has bipartisan support. But Congress left town for its weeklong Fourth of July break without acting on it. That lack of urgency frustrates SBA lenders.

Tony Wilkinson, president and chief executive of the National Association of Government Guaranteed Lenders, criticizes Congress for letting “the one stimulus program that was probably working the best” expire.

“Shame on them,” says Eddie Tuvin, vice president of SBA and commercial lending at Capital Bank in Rockville, Md. “Why isn’t it a priority?”

Restoring the 90 percent guarantee “would do as much to really juice the recovery as anything,” says Charles Green, a former SBA lender in Atlanta who now advises businesses on financial issues.

Tuvin says 7(a) loans “breezed through” his bank’s approval process when the 90 percent guarantee was in place. “It was a major factor in the decision of our loan committee to approve several loans that wouldn’t have been made without it low rates payday advance.”

Now it’s much a harder to get a 7(a) loan approved, he says.

Plus, many borrowers and lenders simply are holding off on SBA loans.

“We have borrowers waiting right now who are willing to create and retain jobs,” Wilkinson says.

The Senate is expected to vote soon on legislation that would restore those SBA loan breaks, as well as establish a $30 billion fund that community banks could tap for small-business lending. Chances for the Small Business Jobs Act are good; it cleared a procedural hurdle by a 66-33 vote before the Fourth of July recess.

But that doesn’t mean the SBA loan breaks will be restored right away. The Senate bill differs in many respects from the House’s version of the Small Business Jobs Act. That means the Senate and House would have to hash out their differences before sending the legislation to the president for his signature. That could take weeks, or even months.

Even though the Senate bill increases the size limits on SBA loans — something lenders have long pushed for — Wilkinson would rather see Congress first pass a simple extension of the higher guarantee and fee waivers, and then work out a more ambitious bill.

Financial regulatory reform also awaits a final vote in the Senate when Congress returns. The legislation aims to end “too big to fail” bank bailouts by imposing new capital and leverage requirements, and creating an orderly system to liquidate large financial firms that fail. It also regulates over-the-counter derivatives and creates a new consumer watchdog for financial products.

Critics fear the bill could hurt the availability of credit to small businesses. Tuvin expects banks may cut back their lending as a result of the additional costs and regulations they would face as a result of the legislation. Green fears the bill could lead to more bank consolidation, because it would make it harder for smaller banks to be profitable.

However, Green thinks small businesses could benefit from the bill’s new consumer protections, since many business owners rely on credit cards and revolving lines of credit.

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Los Alamos National Laboratory and its employees donated a combined $113,000 to the United Way of Santa Fe’s 2009-2010 giving campaign, making LANL the top donor for the ninth consecutive year.

LANL and its management company, Los Alamos National Security LLC (LANS), will receive the 2010 Top Workplace Contributor Award, along with the lab’s Community Programs Office. In addition, Debbi Wersonick – who coordinates community-giving programs for LANL – will receive a Community Ambassador plaque cashadvance.

LANL employees raised more than $2 million in its most recent giving campaign for the United Way of Santa Fe County and United Way of Northern New Mexico. The total included a dollar-for-dollar match from LANS.

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are widely regarded as being in much better position than the top banks in the U.S..

"The recession was milder since Canada’s banking system is fairly healthy," said Paul Ashworth, senior economist with Capital Economics, a research firm based in Toronto. "Canada never had a housing downturn that was anything like what happened in the U.S."

Some Canadian companies have even tried to capitalize on this image of financial strength in their ad campaigns. Toronto-based insurer Sun Life Financial (SLF), which has a big presence in the U.S. and even has the naming rights for the Miami stadium where the Dolphins and Marlins play, boasts in commercials that it didn’t take any government bailout money.

That’s all well and good. But will Canada keep attracting strong investor interest or is the fact that Canada isn’t the U.S. already priced into their currency, stocks and bonds?

Ashworth said that the rise in gold, which is partly a fear trade, has certainly helped Canada. So if gold prices cool, that could hurt the Canadian dollar.

But he said that if gold falls on hopes that the global economy is going to avoid another major meltdown, the trade-off would probably be higher oil prices. That could offset any weakness in gold.

"The bottom line is that the loonie is still a petro currency," he said.

So as long as the Canadian economy holds up, there is a good chance that Canadian assets could continue to perform well. After all, Canada’s central bank took the first step towards bringing interest rates back to normal earlier this month.

The Bank of Canada boosted rates by a quarter-of-a-point to 0.5%. That makes Canada the first of the so-called G-7 group of industrial nations to raise rates since the onset of the global financial crisis in 2008.

Stefane Marion, chief economist and strategist with National Bank Financial Group in Montreal, points out that the Bank of Canada is likely to raise rates again next month. And that’s lifting bond rates in Canada.

The difference between the yield on 2-year Canadian bonds and the 2-year U.S. note is about a full percentage point. In other words, investors believe they’ll be able to get a better rate of return in Canada because the economic fundamentals look stronger.

"Gone are the days when foreign investors thought of North America as only the U.S.," Marion said. "People are discriminating between Canada and the U.S. There’s probably limited downside for the Canadian dollar and other assets unless there’s a major global economic relapse."

Reader comment of the week. To quote Hannibal from "The A-Team" (and did they really need to make a movie of the TV show?), I love it when a plan comes together. This week’s best reader retort fits perfectly with the theme of today’s column.

I wrote on Monday about how Brazilian oil company Petrobras could benefit from the BP fiasco in the Gulf of Mexico. Paul Dupuis took issue with that.

"Why would you suggest Brazil when there is over a trillion barrels in oil reserves in Alberta??? No drilling in water here and we are already are the largest supplier of oil to the U.S.," he wrote.

Well said.

- The opinions expressed in this commentary are solely those of Paul R. La Monica.  

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Forget the worries about China’s economy cooling off. Overheating might be the greater concern.

China reported Thursday that its exports grew nearly 50%. Property prices in the biggest cities shot up 12% compared to a year earlier, the second biggest jump on record. Industrial production is up nearly 19% so far this year.

While a robust Chinese economy could benefit the U.S., it’s also a concern since further strength may lead China to take more steps to rein in growth.

There are other signs that the Chinese economy is once again white hot, despite recent worries about a slowdown in demand for its products in Europe and the United States.

The Chinese government reported Friday that consumer prices jumped 3.1% in May compared to a year ago, and that spending on consumer soared 19% on that basis.

But one of the most significant is a series of strikes and labor agreements in recent days granting large pay increases to Chinese workers.

After labor stoppages shut down some of the operations of Honda Motor (HMC) in China, workers got wage increases of between 24% and 32%. Foxconn Technology, which makes products for Apple (AAPL, Fortune 500), Dell (DELL, Fortune 500), Hewlett Packard (HPQ, Fortune 500) and Sony (SNE) on a contract basis, has doubled the wages of its estimated 800,000 workers in China.

Wage increases are spreading beyond these plants. Some provincial governments are raising minimum wages by as much as 16% in order to attract skilled workers.

Nicholas Lardy, economist and China specialist at the Peterson Institute for International Economics, said the increases are nothing new. Wages have been rising at least 15% a year for the last decade in China, although off a very low base.

But Lardy predicted more wage increases ahead. For Chinese exporters, especially manufacturers of electronics, labor costs are only a small part of their costs bad credit payday loans. So they can afford to raise wages without losing production to even lower-wage countries like Vietnam.

If wages continue to go up, that could eventually cause higher prices for some Chinese exports, as well as create inflation pressures in China. That could lead to additional wage hikes, creating an inflationary cycle that could have an impact on the price of goods across the globe.

Treasury Secretary Tim Geithner testified before a Senate committee Thursday that the U.S. believes rising Chinese wages will be a plus for U.S. jobs, however.

"China has to be a key part of any strategy to increase U.S. exports and jobs," Geithner said. "Over time Chinese households will be able to earn more and buy more, including American goods and services."

But Lardy said U.S. exports to China still make up a relatively small percentage of consumer purchases there. Most U.S. multinational corporations trying to reach Chinese consumers are producing the goods in China. Chinese imports are still dominated mostly by capital goods or industrial commodities.

In addition to spending more, better-paid Chinese workers are likely to invest more as well, which could feed into asset bubbles there.

Rates on savings accounts in China are well below 1%. That has driven many people to invest in real estate to try to get better returns on those savings.

John Makin, a China expert and principal at Caxton Associates, a hedge fund, said the overall Chinese economy isn’t in danger of overheating even with the large wage hikes, but that the housing market is at risk.

"I think the overheating pressure has been concentrated in the real estate sector. They’re making people very nervous," he said. 

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Treasurys rallied Thursday as stocks plunged and investors worried about European debt and its effect on the global economy.

What prices are doing: The benchmark 10-year note rose 1-10/32 to 102-13/32, pushing the yield down to 3.22% from 3.36% on Wednesday. Bond prices and yields move in opposite directions.

The 30-year bond added 2-18/32 to 104-25/32 and yielded 4.1%, while the 2-year note edged up 4/32 to 100-18/32 with a 0.72% yield. The 5-year note rose to 102-13/32, yielding 2.99%.

What’s moving the market: Investors flocked to the safety of government-backed bonds on Thursday as stocks dropped more than 10% from the session’s highs.

"We’re seeing a massive flight to quality," said Kim Rupert, fixed income analyst at Action Economics. "Equities are really losing a grip, and Treasurys are the beneficiary."

Markets have been rattled over the past month as investors worry about European debt, despite a $1 trillion rescue package aimed at stabilizing the euro and helping troubled nations such as Greece reduce their debt loads.

On Wednesday, the euro was briefly lifted by Germany’s announcement that it would ban so-called naked short selling of debt securities issued by euro zone countries and 10 large financial firms cash advance companies.

But because investors were still skeptical of the health of European banks, Treasurys rallied following the announcement.

By the end of the day Wednesday, however, bonds pared gains and ended the day slightly lower after the Federal Reserve raised its outlook for economic growth and lowered its unemployment rate forecast.

Economy: Investors were also digesting several disappointing economic reports from the government on Thursday.

The Labor Department reported that weekly jobless claims rose unexpectedly by 25,000 to 471,000 last week, while economists expected a drop to 440,000 claims.

After the start of trading, the Conference Board said its index of leading economic indicators fell 0.1% in April after rising 1.3% in March. Economists surveyed by Briefing.com expected the index to rise 0.2%.

A regional manufacturing survey for May was also released Thursday. The Philadelphia Fed index rose to 21.4 in May from 20.2 in April, beating the estimated rise to 20.7. 

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Stanley Furniture will cut about 530 jobs from its factories in Virginia as part of a manufacturing restructuring, the company has announced.

The Stanleytown, Va.-based company said the move is necessary to return to profitability. The company lost $19.1 million in the first quarter on sales of $36.5 million. Revenues were down 8.1 percent from the first quarter of 2009.

Stanley will move most of the manufacturing of its traditional products from Virginia to several offshore vendors. Much of the factory space will be converted into a warehouse and distribution center.

The company will continue to manufacture its "Young America" youth and nursery product lines in Robinsville, N.C., though, said CEO Glenn Prillaman, because that market segment demands quicker shipments and more finishes and flexibility. It’s a different story for the furniture that had been made in Virginia.

"The luxury segment of the adult market demands sophisticated finishes, exotic materials and labor-intensive features that domestic manufacturing in our Stanleytown facility can no longer profitably provide,” he said.

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Millions of Americans are not only upside down on their mortgage, they also appear to be shunning that monthly payment in favor of meeting their everyday expenses.

In the state of California, for example, more than 10% of credit card-carrying consumers were choosing to pay that bill rather than their mortgage as of last fall, according to a recent study published by the credit reporting agency TransUnion.

Borrowers across the country have also been just as anxious to pay down their home equity line of credit rather than their primary mortgage, based on recent figures from the FDIC, if for no other reason but to continue using their house like an ATM.

History has shown that when cash-strapped consumers are trying to make ends meet, the mortgage is often the first thing people stop paying, said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

When the U.S. housing market bubble burst, it had that exact effect, shaking up consumers so-called "payment hierarchy."

In good economic times, consumers usually pay the mortgage first, car loan second, and their credit cards and everything else after that.

So with many economists declaring that the recession is likely over, you’d expect more consumers to go back to paying their mortgage first. That’s not happening.

The TransUnion study revealed that the number of consumers who were delinquent on their mortgage but current on their credit card stood at 6.6% in the second half of 2009, up from 4.3% at the start of 2008.

Elevated unemployment levels have helped fuel the change in consumer behavior. But other factors are also at work, according to experts.

For most borrowers, paying the credit card or home equity line of credit is simply more feasible than trying to tackle a significantly larger mortgage payment.

Others have gotten wise to the fact that even after they stop making payments on their mortgage, chances are they won’t be evicted from their home until much, much later. In states such as Florida, for example, foreclosure proceedings have been known to take as long as 18 months.

More often than not however, struggling homeowners simply want to maintain some access to credit in the event they need to take care of their day-to-day expenses such as groceries or to fix the broken muffler on their car.

Unlike in years past where it was relatively easy for questionable borrowers to secure a credit card or home equity loan, banks now make it much more difficult for borrowers to secure a line of credit, said Ezra Becker, director of consulting and strategy in TransUnion’s financial services unit.

Banks have also tried their own programs aimed at getting consumers back on track. Some have attempted modifications on borrowers’ primary mortgage and home equity loan.

The nation’s four largest banks - Citigroup (C, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) - recently agreed to participate in the Obama administration’s Second Lien Modification Program, which aims to stem the rising tide of foreclosures by having banks modify a borrower’s second mortgage.

In instances where consumers have loans with two different financial institutions, banks have tried collaborating in order to minimize losses for both the lender and the borrower, said Shelley Leonard, senior vice-president of consumer lender strategy for Lender Processing Services, a provider of mortgage data to the banking industry.

"I think all the banks are interested in the best outcome for the borrower," she said. "In order for that to be achieved, they will have to address the first and second mortgage."

Others have adopted a proactive approach with customers believed to be at risk of faltering on their loan payments, in an effort to mitigate losses.

The Birmingham, Ala.-based Regions Financial (RF, Fortune 500), for example, implemented a financial check-up in late 2007 on some of its largest mortgage holders or those with adjustable-rate mortgages that were poised to reset.

That appeared to have some success as the percentage of loans in the company’s mortgage portfolio that were in foreclosure stood at 1.95% at the end of last year, less than half the national and regional average, said Barb Godin, an executive in Regions’ consumer credit division.

Consumers are unlikely to stick to such unorthodox financial behavior for good. Experts said that eventually, homeowners will once again start paying their mortgage before everything else.

But for that to happen though, notes Moody’s Hoyt, home prices will have to start improving first. 

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