Friday morning bits on income, bank capital and more

Yesterday was one of the nastiest days for the stock market in a while. And the market as a whole is on track for its worst June since the Great Depression, according to Bloomberg. That's not exactly the kind of news you want to read while you're drinking your coffee and munching on your bagel. But it is what it is.

What else has caught my eye this morning?

First, the regulators are trying to do anything they can to encourage the funneling of capital into the banking system. Why? Banks need all the help they can get to shore up their balance sheets amid billions and billions of writedowns and loan and securities losses. Now, it looks like the Fed may allow bigger infusions of capital from private equity firms. Per the Wall Street Journal:

"The Federal Reserve may soon make it easier for private-equity firms and others to invest in the nation's ailing banks, according to people familiar with the matter.

"With bank stocks crumbling and the second quarter drawing to a close Monday, the changes could offer a lifeline to cash-strapped lenders desperate to secure capital.

"This would be a bit of a sea change for the Fed," said Gregory Lyons, head of the financial-services practice at law firm Goodwin Procter LLP. "A number of banks would love to access the private-equity pool. It's a clean slug of money."

"The move comes as regulators grow increasingly worried about the ability of many banks to replenish capital amid the worst banking crisis in decades. Small and regional lenders are expected to have a tougher time lining up new investors, particularly since some recent capital infusions have stuck banks' new shareholders with big losses."

Second, we continue to see elevated loss and writedown forecasts for the country's major financial institutions. One example: Lehman Brothers is forecasting that Merrill Lynch will end up taking another $5.4 billion in writedowns in the second quarter.

Third, personal income and spending wasn't so bad in May. Income jumped 1.9%, more than four times the 0.4% increase economists were expecting. Disposable income jumped 5.7% in the month, the biggest increase since May 1975. Spending rose 0.8%, slightly higher than the 0.7% rise that was expected. The personal consumption expenditures "core" index gained just 0.1%, below the 0.2% forecast (meanwhile, the headline PCE deflator jumped 0.4%, the biggest rise since November).

One problem: The tax rebates were the driving force behind the surge in incomes. As the Bureau of Economic Analysis notes:

"The May and April changes in disposable personal income (DPI) -- personal income less personal current taxes -- were boosted as a result of provisions of the Economic Stimulus Act of 2008. The federal government issued rebate payments of $48.1 billion in May ($577.1 billion at an annual rate) and $1.9 billion in April ($23.3 billion at an annual rate). These payments reduced personal current taxes and increased government social benefit payments. As a result, disposable personal income increased substantially. Excluding these special factors, which are discussed more fully below, disposable personal income increased $46.4 billion or 0.4 percent in May, after increasing $16.6 billion, or 0.2 percent, in April."