Profit Not Satanic, Says Wealthy Banker

Paul Smalera — Sat, 07 Nov 2009 08:22:47 +0000

The moment everyone expected but no one was waiting for has arrived: Unemployment is in double digits. The New York Times says that 10.2 percent is a twenty-six year high in the sixty-year history of government record keeping. Only 1982, when 10.8 percent of workers were sidelined, was worse. Dampening the bad news, President Obama signed an extension of unemployment benefits for the jobless, allowing them to spend nearly two full years on the dole. The article dives into the metrics but also the psychology of long-term unemployment. It cites one worker who, after a year and a half, continues to drive to his unemployment office, send out job applications, and return home to “his sagging couch and his television, where cheerful news anchors tell him that the economy is looking up.”

But, is unemployment 10.2 percent, or 17.5 percent? The later figure includes underemployment, and that actually beats the high of 17.1 percent set in December of 1982. The discouraged and the part-timers who want to be full timers are counted in this figure, notes the Times. “Ten percent is a terribly important number,” a democratic pollster noted in the Wall Street Journal’s take on the figures. No word on his thoughts regarding 17.5 percent.

Citigroup is granting its employees options to convince them to stay, the Times writes. Options grants, which the article says have long been criticized as creating perverse incentives, are being presented by the bank as a way for employees to rebuild their nest eggs while remaining with the company. Employee savings were nearly wiped out when Citigroup stock plunged in value during the height of the financial crisis. Despite the longstanding criticisms of options programs, the construction of this one may make sense: It requires three years of vesting, has a strike price slightly above current share pricing, and preserves capital for the bank. As such, one critic of options grants told the paper, “They are trying to reward staff that had the guts to hold onto their stock during this turbulent period for the company.”

Hedge funds are on edge after several high profile arrests on insider trading charges were made in recent weeks. The Times reports that executives are dropping a dime—to their lawyers—to re-examine their compliance with insider information laws. “Defcon 2” is how one executive described the effort to not run afoul of the rules. Because the executives fear wiretaps, they’re telling staffers to think of phone conversations the way they think of email: as if it could end up on the “front page of The New York Times.” Meanwhile the Journal says SAC Capital may soon be part of the broader and ongoing insider trading investigations.

AIG is profitable again, but executives say the road the company is on won’t necessarily remain smooth. Regulatory filings indicate that its investments are performing well, even as insurance sales are faltering. Looming over future balance sheets is the massive debt the firm must repay to the United States government, and a $5 billion charge related to its’ restructuring. A topic AIG didn’t discuss in its filing was employee retention, but the Times notes several executives have jumped ship to work on a competing venture with Hank Greenberg, who was AIG’s CEO for nearly forty years.

Goldman Sachs wanted to buy tax credits from Fannie Mae, which has lost so much money that the credits are useless. The government said no, reports the Journal, because the deal would be a net loss for taxpayers, and because it didn’t want to appear to be favoring the pre-eminent investment bank in such savvy deals. Meanwhile the Times says Fannie will soon ask for another $15 billion in bailout funds, on top of the $50 billion it’s already received.

The Obama Administration wanted the Federal Reserve to be Wall Street’s primary regulator, but Congress didn’t get a copy of that memo. In fact, the Washington Post explains that Congress basically doesn’t like the Fed, and thinks it’s failed one too many times. So legislators are proposing their own regulatory reform proposals, further dragging out the fight over reform.

The Times catches up to the story of the virtual goods economy, which generated $5 billion in real cash. Skype’s founders reached a settlement with EBay over the auction house’s sale of the online call service. The founders had long railed against the sale, wanting to remove the pressures of short-term profitability from their grander plans for reacquiring the calling firm. Finally Barclays’ CEO, in defense of his industry, recently said, “profit is not satanic.” A Goldman Sachs International advisor seconded the thought, adding, “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.”

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Sat, 07 Nov 2009 08:22:47 +0000

Wall Street Meets "The Wire"

Matthew Yeomans — Fri, 06 Nov 2009 08:57:37 +0000

Shady hedge fund honchos, beware. That's the message the business press declares this morning in its coverage of new charges brought down yesterday against 14 money managers, Wall Street lawyers, and other well-connected investors with ties to the Galleon insider-trading probe. The Wall Street Journal describes their alleged criminal dealings as something out of a James Bond movie, "including packages of money, throwaway cellphones, a ringmaster nicknamed 'Octopussy' and an associate called 'the Greek.' " The New York Times adds the racket "was pierced in part through surveillance and wiretaps." The subterfuge enabled the band of conspirators to net a cool $20 million in profits from dodgy "inside" trades, prosecutors say.

The case came to light last month after federal authorities charged hedge fund tycoon Raj Rajaratnam, founder of Galleon Group, and five others with masterminding a vast insider trading racket. And, the NYT reports, more arrests are expected in the coming weeks as a special FBI unit expands its broader probe into the more murky dealings of hedge funds. Where might the wire take investigators next? "For the first time, the authorities hinted that they might be brushing against the pinnacle of the hedge fund world, S.A.C. Capital Management, a $12 billion Connecticut fund company," the NYT writes, adding, "neither S.A.C. nor any current employee has been charged with wrongdoing."

Elsewhere on Wall Street Thursday, there was reason to celebrate. The Dow once again topped the 10,000 mark after its biggest one-day rise since July. "Today's big news was that we saw fewer claims for unemployment benefits," said Mike Stanfield, chief investment officer at VSR Financial Services, told CNNMoney.com. "That suggests that the underlying economics are continuing to improve." Ah, but of course we've been here before. The Dow has been wildly gyrating above and below 10,000 for much of the month. But there is some cause for sustained hope this time. According to the WSJ, the Labor Department reported on Thursday that U.S. worker productivity improved at its most vigorous rate since the Kennedy administration "even as employers pushed forward with layoffs and cuts in working hours across a wide range of industries."

Ever since the government threw billions of dollars at the financial system last year, pols and analysts have been trying to work out where exactly the money went, who really benefited and whether the policy worked. Well, according to the NYT, one side effect was to allow "a handful of giant institutions to save up to $25 billion on their borrowing costs," including General Electric Capital ($1.9 billion in savings) and Goldman Sachs (GS) ($606 million) as well as smaller sums for Citigroup (C), Bank of America (BAC), and Morgan Stanley (MS). The savings were part of the $4.3 trillion safety net and came in the form of "federal guarantees on more than $300 billion of bonds issued by banks and other financial institutions." But before we get too outraged, it turns out the government has turned a profit on this risky business, collecting $9 billion in fees for guaranteeing the bonds.

To the world of Big Oil now and news that, six years after the overthrow of Saddam Hussein, Iraq has agreed a series of new foreign consortium deals to reinvigorate its sleeping giant of an oil industry. On the heels of a big deal earlier in the week with BP (BP) and China National Petroleum Company, Iraq's Oil Ministry has granted the first drilling concession to a U.S. company in the form of consortium deal led by Exxon Mobil to develop the West Qurna-1 oil field (holding an estimated 8.7 billion barrels of reserves) in the south of the country. Exxon, working with Royal Dutch Shell, offered the highest bid and beat out rival consortiums led by OAO Lukoil, ConocoPhillips (COP), and CNPC.

And finally, how is it that employees of Wall Street's most powerful firms were first on the list to get the precious rations of the swine-flu vaccine? According to the WSJ, "Goldman Sachs Group Inc., Morgan Stanley and Citigroup Inc. are among several large New York City employers that got doses of the H1N1 vaccine," prompting an uproar over how the doses should be distributed to the public. As a result, the Centers for Disease Control and Prevention is warning regional health officials around the country now to distribute the doses to high-risk groups first. And, no, "high-risk" does not necessarily mean bailed-out financial firms.

Mickey Mouse’s Makeover

Caitlin McDevitt — Thu, 05 Nov 2009 09:17:31 +0000

Disney’s (DIS) signature cartoon character Mickey Mouse is getting a makeover, says today’s New York Times. Concerned that kids these days aren’t connecting with the character as much as older generations did, the media and entertainment company is planning to update Mickey by making him edgier. The paper explains that in his new personality, “the formerly squeaky clean character can be cantankerous and cunning, as well as heroic.” The new version of the mouse will make his debut in a video game to be released next year called Epic Mickey. The redesign is a big move and one that the company is making cautiously, the paper explains: “Disney executives are treading carefully, and trying to keep a low profile, as they discuss how much they dare tweak one of the most durable characters in pop culture history to induce new generations of texting, tech-savvy children to embrace him.”

The Wall Street Journal reports that chipmaker Intel (INTC) now faces antitrust charges from the New York attorney general’s office. The suit accuses Intel of using threats and “billions of dollars in kickbacks” to persuade tech companies to use its products. The paper says, “Though the charges are familiar, the latest complaint increases the pressure on Intel, which has already paid a $1.45 billion fine to antitrust authorities in Europe and faces an investigation by the U.S. Federal Trade Commission.” This new complaint also brings to light e-mail correspondences between executives at Intel and other companies, as well as offering up estimates for just how much Intel may have paid to maintain business with its partners.

More than one-quarter of all businesses are owned by women, according to a report from the Center for Women’s Business Research discussed in the New York Times. The center’s report also revealed that a mere 4.2 percent of all revenue generated from U.S. businesses comes from those owned by women, and that only one-fifth of these businesses have employees. So while the seeds of leadership are there, women-owned business development still has a way to go. The paper says, “Armed with the new research, center officials and other women business leaders are approaching the Obama administration, the Small Business Administration and House and Senate small-business committee members to ask for more resources and new programs to support women-owned businesses.”

The Federal Reserve will most likely keep interest rates at near-zero for the next six months, the Financial Times says. While that's nothing new, the paper notes that the Fed has changed its tune ever so slightly, reporting that “[t]he US central bank tweaked guidance in its policy statement that had been unchanged since March, edging away from a simple forecast that it expects to keep rates at 'exceptionally low levels' for an 'extended period'—commonly understood to mean at least six months.” Now, the Fed has spelled out the conditions that could prompt it to raise rates earlier, including “low rates of resource utilisation, subdued inflation trends and stable inflation expectations.”

Automaker Chrysler, still building itself up since its government bailout and hasty partnership with Fiat, has embraced a softer tone, the New York Times reports. At a meeting yesterday, its executives spoke in a “subdued” and “understated” way about the company’s financials and future plans. “Many in the audience remarked on the decided lack of sizzle from an automaker that once sponsored a ‘Lingerie Bowl’ of women playing football in underwear,” the paper says. Sean McAlinden of the Center for Automotive Research told the Times, “They were the ones who mixed the drinks, wore turtlenecks and told all the best jokes. … They let the G.M. and Ford (F) guys wear the gray suits, but I guess things have changed.”

Finally, toys are the new Hollywood A-listers, according to the Wall Street Journal. The paper explains that as toys like Stretch Armstrong and the Transformers steal the spotlight in feature films, they’re increasingly getting treated like star actors in Tinseltown. “Toys now are receiving the same A-list treatment that any bankable movie star here has come to expect,” the article says. “That includes top billing and contracts with special perks. They even have their own talent agents.”

Buffett the Betting Man

Matthew Yeomans — Wed, 04 Nov 2009 08:46:17 +0000

Evidently, Warren Buffett is a betting man. And a big one at that. The Wall Street Journal and the New York Times strike nearly identical headlines this morning in describing Buffett's surprising $26.3 billion acquisition of Burlington Northern Santa Fe Corp, both declaring "Buffett bets big" on, of all things, freight trains. The NYT notes the investment seems more 19^th century than 21^st century, but this is not just the move of a wealthy old man who likes to play with trains. "Mr. Buffett is wagering that as the economy revives, so will the demand for goods to be shipped by train. Burlington Northern carries coal and timber from the West, grain from the Midwest and imports arriving directly from Mexico and Canada, as well as through California ports," the newspaper writes. The move, the WSJ notes, completely transforms Berkshire Hathaway "into a megaoperator of industrial firms, moving the Omaha, Neb., conglomerate further from its roots as a nimble investment outfit." The thinking is that high fuel costs are here to stay and therefore freight trains will be a more efficient way to move goods around the country than trucks.

The world demand for oil, however, has never been so uncertain. According to the WSJ, the world may be on the cusp of shaking off a global recession, but that's not having the expected lift for oil demand. The newspaper writes, citing sources, that "the International Energy Agency next week will make a 'substantial' downward revision to its long-term forecast for global oil demand ... marking the second year running the group has slashed its view of the world's thirst for oil."

General Motors stunned the automotive world yesterday with news that, no, it will not be selling its European division, Opel. "The decision was a blow to the Canadian auto supplier Magna, which was poised to acquire a 55 percent stake in Opel with the backing of the German government and labor unions," the NYT writes. Instead, the new GM board decided it would keep Opel and pour billions into restructuring the unit, which includes British automaker Vauxhall. "GM's change of heart reflects the car maker's increasing confidence about its outlook as well as the direction of its aggressive new chairman, Edward E. Whitacre Jr. The former AT&T Corp. chief, who was picked by the U.S. government for his post, has told GM executives to concentrate on expanding its market, not shrinking it," the WSJ writes. Don't feel so bad for Magna though. In a separate article, the WSJ reports that "being dumped by GM is a blessing." Turning around Opel would be costly and time-consuming for Magna, the newspaper notes. Across town, Chrysler's new turnaround maestro, Sergio Marchionne, the CEO of Fiat, will unveil his plan to restore Chrysler's business later today. How can Marchionne save Chrysler, which has seen U.S. auto sales drop by 40 percent in the past year? With Fiats, writes Business Week. "Marchionne will lay out his plan, which, according to industry insiders, involves plugging Chrysler's product holes with Fiat-engineered cars."

Retail bounced back in October as sales figures show "robust sales growth for the first time in more than a year," the NYT writes. Sales for women's apparel have increased for the first time since August 2008 and across-sector sales in California also appear to be stabilizing. Overall, Thomson Reuters, "which aggregates analysts' estimates for 30 companies, predicts a 2% increase," writes the WSJ. Of course this good news is only relative to how bad things had become during the last 12 months but still, as the NYT writes: "Contrary to predictions made only a few weeks ago, the nation’s stores could be poised for a merrier Christmas this year than last."

China is on a tear with its economy now expected to grow 8.4 percent this year, according to the World Bank’s latest projection, the NYT writes. The Bank raised its forecast for growth in China, "though it cautioned that more policy adjustments would be necessary in the medium term to ensure the country’s recovery would be sustained." But the World Bank also worries that a new Asian economic bubble might be on the rise, notes the WSJ. The sudden injection of billions of dollars in investment capital in the region is "raising concerns about asset price bubbles" in Asian equity markets and in China's, Hong Kong's, Singapore's, and Vietnam's real estate markets, the bank said.

And finally, consider the rotten job the poor human resources manager has these days. Whenever they post a "help wanted" ad, they get inundated with résumés and cover letters, most of them unqualified. CNNMoney.com reports that there are quality job positions that continue to go unfilled despite the highest unemployment rate in generations. The reason? Not enough qualified candidates. CNNMoney.com cites a recent survey by Human Capital Institute and TheLadders. It concluded: "[M]ore than half of employers said 'quality of candidates' or 'availability of candidates' are their greatest challenges—despite the recession."

Ford Is Back on Track

Caitlin McDevitt — Tue, 03 Nov 2009 10:52:34 +0000

Ford (F) released a surprisingly good earnings report yesterday and announced its first profitable quarter in North America since 2005. The automaker earned a profit of nearly $1 billion for the third quarter, says the Detroit Free Press. The paper says, “A much smaller Ford Motor Co.—with 45% fewer workers and more than a dozen fewer factories than in 2005—is heading into the last stretch of 2009 with more money, optimism and fuel-efficient passenger cars than it has had for years.” Ford beat analyst expectations thanks to a combination of cost-cutting and improving sales. Still, the paper says, “Ford owes more debt than its domestic competitors,” and it “has a labor agreement with the UAW that the Dearborn automaker says isn't competitive.” The New York Times agrees that the automaker may still hit some rough spots down the road. The paper says the automaker may not be able to maintain its lead over competitors for long, noting, “Both General Motors and Chrysler, with the stigma of their bankruptcies receding, are moving ahead with their own comeback plans.”

The most recent recession left many economists scratching their heads and revising the trusty models they’d been relying on. But the Wall Street Journal leads today with one economist, John Geanakoplos of Yale University, who got it right. According to the article, he watched his “previously obscure theory about collateral's role in the credit bubble gain currency after it burst.” It’s possible that theories like his could be part of a bigger shift in the way economists think about the markets. The past two big swings in mainstream economic theory occurred after the Depression and following high rates of inflation in the 1970s. The paper says, “Now that the financial crisis has exposed flaws in the models central banks use, economists have launched into a flurry of activity that is likely to reshape the field.”

Two tool makers, Stanley Works (SWK), which is known for its hand tools, and Black & Decker (BDK), which is known for its power tools, have finally decided to merge after nearly 30 years of discussing the possibility. The New York Times reports that “Stanley agreed to buy Black & Decker for about $3.5 billion in an all-stock transaction, creating a global tool maker worth about $8.4 billion.” The new business will be called Stanley Black & Decker. The Times sees the deal as yet another glimmer of hope that the recession has indeed subsided. The article says, “Together with a slate of other deals announced in recent days, the Stanley-Black & Decker combination may represent continuing confidence that the worst of the economic problems have passed.”

Despite sinking company share prices, executive pensions swelled last year, says the Wall Street Journal. The paper’s analysis has revealed that in 2008, executive pensions grew 19 percent on average. “The executive-pension growth stemmed partly from generous pension formulas, which are based on executive pay, according to the filings. Also adding to the pension jumps are arcane techniques that have received little scrutiny, including increases triggered when an executive reaches a certain age or when companies change interest rates used to calculate the pensions,” the paper says.

Finally, the Federal Trade Commission is taking action against the company behind the credit monitoring service freecreditreport.com for its misleading commercials, the New York Times reports. The paper says that the FTC believes the company is “deliberately diverting people from a government-mandated site where consumers can get free credit reports by law, and using the reports as a lure for a $14.95 monthly service that alerts subscribers to important changes in their credit status.” The government has, in what the Times calls an “unusual salvo,” created its own commercials mocking the service and prescribing caution. Here’s an excerpted verse: “Other sites may turn your head; they say they’re free; don’t be misled. Once you’re in their tangled web, they’ll sell you something else instead.”

Did CIT Kill Christmas?

Matthew Yeomans — Mon, 02 Nov 2009 09:04:12 +0000

The most popular day of the week to file for bankruptcy protection, troubled commercial lender CIT (CIT) once again proves, is Sunday. CIT filed for Chapter 11 on Sunday afternoon, doing so with the vast approval—some 90 percent, the Wall Street Journal reports—of its most influential debt holders. This is crucial backing if CIT is to reorganize itself, shed some $10 billion in debt, "and emerge with a new business model by year's end." Year's end may not be soon enough for some retailers. The critical Christmas season is just a few weeks away and CIT's uncertain future is putting even more pressure on small and midsize retailers. "The company provides badly needed credit to thousands of small and mid-sized businesses, and is a critical part of the flow of capital in the retail sector," the Associated Press reports. For example, about 60 percent of the retail industry suppliers rely on CIT credit, according to the AP. Another big loser in the CIT bankruptcy is you, the taxpayer. According to Bloomberg, "the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout."

There's some promising news for bailed-out mortgage lender Fannie Mae (FNM), however. The WSJ reports that Goldman Sachs (GS) is in talks to buy millions of dollars of tax credits from the government-controlled lender, but only if it can get approval of the Treasury for the transaction. The Treasury is saying there's no deal "unless it is clearly in the taxpayers' interest."

Treasury Secretary Timothy Geithner acknowledged on Sunday what you've no doubt been grumbling about for some time: Yes, the federal deficit is a tad high. He also thinks economic recovery is going to be a "little choppy," the Associated Press reports. "Asked repeatedly on 'Meet the Press' on NBC whether that meant taxes would rise, Mr. Geithner avoided providing specifics," the AP writes. Geithner did suggest, though, that those making less than $250,000 are safe. For now. CNNMoney.com notes, Geithner did not declare the recession truly over.

Bank of America (BAC) might be one of the biggest financial institutions in the nation, but running it doesn't appear to be a very attractive proposition, at least not for Bank of New York Mellon CEO Robert Kelly. The WSJ reports that Kelly has been sounded out a couple of times about taking over from outgoing CEO Kenneth Lewis, but the BNY Mellon head has shown no interest in the position. B of A's overtures reflect a growing belief among some shareholders, regulators, and directors that the next CEO should be "someone with no connection to the problems dogging the bank."

Last Friday's opening of China's new Nasdaq-style stock exchange is being heralded as a "watershed moment for the country’s capital markets," the NYT writes. Trading was feverish on the launch day of the Growth Enterprise Market, or GEM, with shares of some companies soaring as much as 210 percent. Up until now, many Chinese tech companies have lacked access to financing. That looks set to change with GEM, though some observers warn that the exchange could quickly fall victim to over speculation. It's like the “V.I.P. table on top of a big casino,” one analyst told the NYT.

And finally, can Newsday columnist Saul Friedman's name become a rallying cry for preserving the status quo of free online news? Friedman quit his writing gig last week "over the paper’s decision to require some readers to pay for access to its Web site," the New York Times reports. And how is Friedman's protest message playing out among the chattering masses? So far, we count, as of press time, just 20 tweets acknowledging his sacrifice for online readers everywhere.

Citigroup Is on Its Fourth Government Bailout

Paul Smalera — Sun, 01 Nov 2009 07:25:44 +0000

The New York Times today has the fascinating story of the dissolution of the Rockrose real estate concern. Three brother of Iranian heritage grew from renovating a building in Greenwich Village to running one of the largest real estate businesses in New York. Yet all it took was a coin flip to split the holdings three ways. Henry Elghanayan, the eldest brother, was concerned for the succession rights of his son, Justin. So the brothers chose to split the company up ahead of any possible disputes. In doing so, they employed a sort of reverse game theory: The low bidder won the right to divide the firm’s holdings into three parcels each brother would select. But as the low bidder, he would choose last, hence, he had the incentive to draw up fair divisions. Henry won the right to the Rockrose name, but horse-trading among the brothers led to some interesting choices that none saw coming. The story is a fascinating tale of economic game theory as applied to a multibillion-dollar real estate company.

Citigroup (C) has been rescued four times by the U.S. government, the Times writes. As the quintessential “too big too fail” institution, the bank is in danger of becoming a caricature of its own maladies. The latest bailout includes $45 billion in TARP money plus $300 billion in FDIC guarantees. The story raises the question of what to do with a bank that is too big to fail but seemingly incapable of succeeding without government intervention. One of the tactics by CEO Vikram Pandit has been to practically undo the 1998 merger with Travelers Group, treating each asset pool as a separate business line. The second group of assets are businesses that CIti hopes to exit in time. Yet experts quoted in the article foresee little good for the bank. “Eventually what happens with Citigroup is the government is going to turn to the bondholders and say we can’t put any more money into this. You own the company now ,” one analyst told the paper.

States are likely to shape health reform, reports the Washington Post. As the health care plan in Congress is fleshed out, important decisions on opt-out clauses, benefits, and other major aspects are proposed to be left to the individual states. One economist said, "The plus side is that states are uniquely positioned to reflect the tastes of their residents and market conditions. Plus, we can really learn from the different approaches states take," he said. The downside "is that states can screw up and not meet ... minimum standards." In the example of Texas, given in the story, it can take months for residents to be enrolled in Medicaid. Overall, the article seems to be charting the politicization of health care issue, even in the context of solutions being proposed by the federal government.

The Supreme Court finds itself looking at issues of executive compensation, reports the Post, though not exactly in the Kenneth Feinberg way we have become accustomed to. The case revolves around mutual fund fees—whether companies are charging too much to clients who are “locked in” to their business. Yet the ruling could have an unmistakable impact on executive compensation practices throughout the financial services industry.

After years of underperformance, Texas Instruments has finally gotten religion and is revamping its executive structure and board, reports the Times. Shamrock, a money management firm that helped oust Michael Eisner from Disney (DIS), has taken the reins and is seeking to provide value to investors. Indeed, as the firm has won battles against management, “[p]eople are beginning to think like owners,” says Shamrock’s CEO.

Finally, the Times exaplains why Google (GOOG) doesn’t like its phone bills. A few weeks back, it was reported the firm’s Voice product was refusing to connect calls to certain rural phone numbers. It turns out those numbers aren’t Grandma's—they belong to adult entertainment firms and conference call Web sites eager to turn a profit on exorbitant connection fees. Google, which can end up, like any carrier, paying 10 times more to connect a rural number as opposed to a city one, has chosen to block about 100 phone numbers from connecting. It believes the numbers are less about communication and more a money-making scheme. “Grandma wouldn’t be on all day,” a Google lawyer told the paper.

SEC Probes of Madoff Were "a Nightmare"

Paul Smalera — Sat, 31 Oct 2009 06:26:08 +0000

One day after big gains, the stock market was down with its worst drop in six months, reports the Washington Post. Thursday, investors thought that rising consumer spending levels were shoring up the economy and the GDP. Friday, new economic data showed the biggest spending decline in nine months. In other words, the comeback is on hold, at best. The paper also says investors are questioning whether stock prices have climbed too far, too fast in recent months, making any more run-ups dubious in nature. Further complicating the issue is the question of what the “real” economic picture looks like. One investment officer told the Post, "Investors are trying to look past that, the stimulus, to see what is it we're ultimately going to be left with after the government isn't there to prod spending through."

Speaking of consumer spending (which the Post analyzes in a separate story), CIT (CIT), a lender that greases the skids of commerce for thousands of small businesses, could file for bankruptcy protection as soon as Sunday, reports the paper. The Wall Street Journal reports that $2.3 billion in taxpayer money is likely to be wiped out in the filing. CIT’s hand is likely being forced by an urgent need to restructure its debt. The government has encouraged speedy bankruptcies for those companies that have had no option, but in this case, one lawyer tells the paper the filing "is a risky proposition. It's far from a certainty that they will be able to exit ... because of all the challenges a financial services company will face, particularly in this market." CIT has locked up the support of Carl Icahn for its plan, but only after he failed to convince other investors to support liquidation rather than restructuring. The Journal follows the CIT story with another explaining how the lender’s failure could ripple through retailers’ and shoppers’ finances. Firms are scrambling to find lending replacements for the $60 billion CIT typically had outstanding.

The Bernard Madoff story continues to look bad for the regulators charged with catching swindlers like him. The Post reports on the interviews with Madoff conducted by an SEC inspector, where Madoff expresses disbelief that he wasn’t caught sooner. Thousands of pages of transcripts were released yesterday in support of a report that sharply criticized the SEC. Among statements Madoff made were that being probed, “was a nightmare for me," because his scheme "was very basic stuff." The New York Times has a story complete with extensive documents and the fact that the SEC received six substantive tips on the Madoff fraud and botched the investigation of each one. The paper reports that young SEC investigators pestered Madoff “over incidentals like e-mail messages," instead of checking “basics like his account with Wall Street’s central clearinghouse and his dealings with the firms that were supposedly handling his trades.” “If you’re looking at a Ponzi scheme, it’s the first thing you do,” Madoff said.

The Journal says General Electric (GE) and Comcast (CMCSA) are moving closer to an agreement on NBC Universal, with the main argument being over valuation of the unit. A deal could happen within three weeks. The paper also says federal guidelines for bank loans are changing, to encourage banks to modify loans rather than foreclose. There is criticism that the accounting change will allow banks to continue to hide bad loans, but the FDIC, Fed, and OCC have all signed off on the changes, which primarily affect the $1.4 trillion commercial mortgage market.

One might think megabanks are battling the Obama administration’s financial regulatory reform proposals hardest, but in fact a consortium of small community banks, writes the Post, are the ones trying to “kill” the reforms. Finding strength in numbers and local politicking, 8,000 banks and their lobbyists are adroitly pulling on the levers of power in Washington.

Google’s (GOOG) book scanning efforts are facing renewed criticism—from Chinese authors, reports the Times. Two groups there claim the project is violating authors’ rights. The story says Chinese authors had no idea about the project until reading about the proposed settlement in Google’s American lawsuit—which they, like some American companies, didn’t like. “We think that reconciliation is extremely unfair,” a copyright expert said. “We don’t accept it.”

The End of Recession or Another False Dawn?

Matthew Yeomans — Fri, 30 Oct 2009 08:35:43 +0000

At long last, growth! For one day at least, there were cheers for the resilient U.S economy, which the Commerce Department on Thursday declared grew at an annualized rate of 3.5 percent, or, as the New York Times points out, "matching its average growth rate of the last 80 years." Pulling out of the worst recession since World War II lifted the markets Thursday to their best trading day in the past three months as investors cheered a quicker- and stronger-than-expected recovery, the Associated Press reports. Ah, but nobody expects the good times to last very long. The Wall Street Journal is calling the recovery a false dawn, noting that third-quarter growth came from consumer spending aided by temporary stimulus programs that enabled Americans to buy cars and houses that they otherwise might not have been able to afford. "The problem: With much of consumers' spending driven by temporary government stimulus programs, and with more people losing their jobs, it is unlikely they can keep driving robust growth," the WSJ writes. What, then, can sustain growth and provide jobs? Perhaps a weak dollar may prop up exports for a while, the newspaper suggests, but "the signals are mixed."

There are few cheers these days coming from the executive suites of Big Oil. Cheap, or at least relatively cheap, oil is fouling up the profitability of the world's biggest oil companies, The Washington Post reports. The problem is "the recession"—or what's left of the recession—as it "continues to weigh on consumer demand, driving down energy prices," the newspaper writes. The latest oil producers to feel the pain were Exxon Mobil and Royal Dutch Shell, which both reported big profit declines on Thursday. As the Times puts it, "After posting record profits last year, major oil companies have struggled to adapt to a world of lower prices and slower economic growth. They have slashed costs, shed employees and pared high-cost investments made when prices were rising." There could be some good news for investors today, however, as Spain's Repsol is expected to announce a major a new oil discovery in the Gulf of Mexico in U.S. waters, the WSJ reports, adding to the company's recent lucky streak. As the WSJ writes, "For years, Repsol YPF SA was derided as the oil company with no oil, but its gamble on boosting exploration has paid off handsomely, with the Spanish company hitting the jackpot in Brazil, West Africa—and now the U.S."

There's a new twist in the Galleon hedge-fund insider trading case, the NYT reports. To bring everyone up to speed: Federal investigators allege that very wealthy investor Raj Rajaratnam, along with five other accomplices, ran a massive insider-trading operation targeting some of the biggest tech companies that, thanks to the information passed to them by a vast network of informants, brought in $20 million in profit from 2006 to 2009. Now it transpires that the government's main source in the current case, Rhoomy Khan, passed Rajaratnam information about her employer Intel as early as 1998. Khan was prosecuted in federal court in 2000, but the authorities did not pursue Rajaratnam or his firm, Galleon, at the time, leading the NYT to ruminate that, "It would seem to be another example of a missed opportunity by authorities to break up a nascent insider trading ring."

Sony announced this morning its third straight quarter of losses in the July to September period, "hamstrung by the strong yen and still-soft demand for its electronics products," the WSJ reports. But echoing a general tech sentiment of cautious optimism, the giant Japanese electronics maker said that it had returned to operating profit in its core consumer-products business. "With a brighter global economic outlook in place for the second half, Sony said it now expects to lose less in the 12 months through March than it had originally expected," writes the WSJ.

And finally, score a victory for environmental activists against Big Oil. The Washington Post reports that activists at Amazon Watch have unmasked Chevron's prize mole who helped the oil company in August produce embarrassing video footage "that cast doubt on the integrity of a court in Ecuador, where the company is fighting demands that it pay billions of dollars to fix damage done years ago by oil exploration in the Ecuadoran Amazon." Turns out the undercover video producer is Wayne Hansen of Bakersfield, Calif., who went to jail in the 1980s "for conspiring to import 275,000 pounds of marijuana," the Washington Post writes. More recently, Hansen lost a local civil case after his put bull attacked a neighbor. Chevron on Thursday stood behind Hansen's video reportage.

Google May Redefine GPS

Caitlin McDevitt — Thu, 29 Oct 2009 06:05:09 +0000

Yesterday Google (GOOG) announced its plans to offer free mobile GPS, reports the New York Times. The smartphone service, which poses an intimidating challenge to established GPS device makers like Garmin (GRMN) and TomTom, will “offer turn-by-turn directions, live traffic updates and the ability to recognize voice commands.” While it will be accessible only through the Motorola (MOT) Droid phone at first, eventually Google would like to make it more widely available. The company also hinted that ads could eventually be incorporated into the service. On that note, the paper says, “That would make driving directions the latest form of information to shift from being a paid service to one that is ad-supported.”

The firms that got the most government assistance are now getting lots of unwanted attention from politicians, according to a front-page Wall Street Journal story. Some member of Congress would argue that the companies that have taken taxpayer funds now need to consider their constituencies when making business decisions. General Motors (MTLQQ) has felt this pressure more than most bailed-out firms since the government has taken on a majority stake in the business. The paper says, “Probably no company has been more on the receiving end of congressional attention than GM, whose widely scattered factories, suppliers and dealership network put it in touch with nearly every U.S. congressional district.” In GM’s case, lawmakers’ requests have included the reversals of a decisions to shut down various dealerships.

International workers hoping to come to the United States though the H-1B visa program may be out of luck, the Wall Street Journal reports. While historically the program has filled up quickly with highly skilled workers who land tech jobs, thanks to fewer employment opportunities this year, it’s “on track to leave thousands of spots unfilled for the first time since 2003.” While the economy has forced many companies to cut back on new hires, there are also political pressures involved. The paper says, “Companies that receive federal bailout funds must prove they have tried to recruit American workers at prevailing wages and that foreigners aren't replacing U.S. citizens.” Many potential immigrants aren’t having trouble finding jobs at home, though, especially in countries like India and China.

The Washington Post reports that the weakened dollar is “setting off alarm bells overseas.” While the sinking value of the dollar has helped to jump-start the U.S. economy, it has had the opposite effect on many foreign competitors. The article explains that the falling dollar “has made everything from American-made cellular phones to furniture suddenly become more competitive both at home and overseas,” while it’s “had just the opposite effect on German washing machines and Japanese cars, making them less price competitive in the world's largest market—the United States.”

Inching away from its traditional retail model, Saks Inc. (SKS) is experimenting with exclusive private sales online, the Wall Street Journal reports. Earlier this week, members of the Saks e-mail list were invited to a 36-hour exclusive online sale. While most big retailers have yet to dive into this market, small private-sale sites, like Gilt.com and RueLaLa.com, have been steadily winning over cost-conscious shoppers who still want high-end goods. The paper says, “The private-sales sites have been one of the few bright spots for sales of designer apparel this year.”

A new Washington D.C.-based local news organization is coming soon from the people who created Politico. The New York Times reports that the venture will employ a 50-person news staff, led by the former editor of washingtonpost.com, Jim Brady. It’s an expensive undertaking, but according to the paper, “Mr. Brady said they had concluded that the venture had to be done on a large scale or not done at all.” If successful, the site could compete with the Washington Post’s local coverage, which has been an area of renewed focus lately.

Finally, pay czar Kenneth Feinberg isn’t seeking any more authority, according to the Wall Street Journal. The paper says, “Mr. Feinberg, who last week slashed the average compensation for 25 employees at the seven firms by approximately 50%, said he was wary of exceeding his mandate.” While Feinberg mentioned that he’d like it if other companies took note of his pay guidelines, he’s not interested in doing much more beyond what he’s been tasked with already.

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Thu, 29 Oct 2009 06:05:09 +0000

House Price Bubble Redux

Matthew Yeomans — Wed, 28 Oct 2009 09:32:37 +0000

After a resurgent summer buying spree, the rally in house prices is about to run out of steam, the nation's business press glumly report this morning. Yes, there was some good news on Tuesday as the closely watched Standard & Poor’s/Case-Shiller home-price index registered a seasonally adjusted 1 percent increase in August. "That was the first time since early 2006 that the widely watched measure of 20 metropolitan areas put together three consecutive increases," the New York Times writes; the Wall Street Journal counts four consecutive months of house-price rises, but it, too, agrees on where the market is heading. The consensus is that the party appears to already be over. "Plenty of pain yet to come," is how Joshua Shapiro, chief U.S. economist for MFR, described his forecast to the NYT. He is predicting an imminent resumption of price declines. Robert Schiller himself, who is loath to make forward-looking statements about the housing market, told Reuters that home prices in certain regions, such as Minneapolis and San Francisco, appear to be in "bubble territory." He adds: "It is a time of great uncertainty."

GMAC Financial Services has gone back to Uncle Sam for a third helping of federal aid, the WSJ reports this morning. Citing sources, the newspaper writes, "The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008." If the aid goes through, the government would very likely gain a larger ownership stake in the financier—perhaps a full majority stake, the NYT reports; it now stands at 34.5 percent. The willingness of the Treasury to sink yet more taxpayer money into the firm reflects just how important it is seen in the overall recovery of the auto industry. Speaking of survival in the automotive industry, Ford lost a crucial union vote on Tuesday to cut labor costs. According to the NYT, "members of at least five local chapters of the United Automobile Workers union have turned down the proposed changes, which include a six-year wage freeze for newly hired workers, some job-classification changes and a provision that bars the union from striking over demands for better pay and benefits through 2015."

The criminal treasure chest that is the Galleon investigation has ensnared the ex-chief of chip-maker AMD, the WSJ reports. Hector Ruiz (who is not a defendant, it should be stressed) is alleged to have shared confidential information about AMD with a defendant in the expanding insider-trading case. According to the WSJ, Ruiz shared confidential information with Daniele Chiesi (a defendant in the Galleon case), who then worked at the hedge fund New Castle partners, about a 2008 reorganization of AMD. "Galleon and New Castle bought AMD shares in hopes of profiting when the deal was announced, according to the criminal complaint and a civil action by the Securities and Exchange Commission," notes the WSJ, though they didn't profit because the stock market slumped.

Operation Stick It to the Bankers continues apace with the Obama administration proposing new legislation that would give government "broad new powers to shift the cost of rescues of big, troubled financial institutions from taxpayers to other large companies," (read: financial companies) the NYT writes. The legislation, drafted in collaboration with Barney Frank, head of the House financial services committee, would "create a special fund, paid by assessments on financial companies with more than $10 billion in assets, to bear the costs of big firms that fail."

And finally, Bank of America (BAC) originally had hoped it would have a leading candidate or two by now to replace retiring CEO Ken Lewis. According to the WSJ's sources, the selection committee has hit some snags, though, "as directors sift through outside candidates that are in short supply." The main hurdle is that influential shareholders cannot reach a consensus on which type of candidate would be best for the job: an outsider with a strong pedigree or a taint-free insider.

AIG: The Sequel

Caitlin McDevitt — Tue, 27 Oct 2009 08:57:17 +0000

Maurice Greenberg, the ex-chief of American International Group (AIG), “has been quietly building up a family of insurance companies that could compete with AIG,” according to the New York Times. The new venture called C.V. Starr & Co. will be staffed by some of Greenberg’s former employees. Executive compensation limits announced last week may actually help Greenberg fill more of the ranks. “That may hasten the exodus of AIG’s talent, sending more refugees into Mr. Greenberg’s arms, since C. V. Starr is free to pay whatever it wants,” the paper says. Some people are rooting against Greenberg, with the belief that his success will end up hurting taxpayers. By “siphoning off” business from AIG, the beleaguered company could be much less likely to repay its government debt.

An autopsy revealed that Jeffry Picower, a prominent philanthropist accused of gaining about $7 billion in profit from Bernie Madoff’s Ponzi scheme, drowned Sunday after having a heart attack. The New York Times reports that Picower was found at the bottom of the swimming pool at his Palm Beach, Fla., mansion. The paper says, “Mr. Picower had been under growing pressure for months as he faced litigation over his disputed role in the Ponzi scheme operated by Mr. Madoff, who was arrested in December and pleaded guilty in March to operating a long-running fraud that cost thousands of victims billions of dollars.” Picower had a longstanding “professional and personal relationship” with Madoff. The paper says, “Besides investing their personal assets with Mr. Madoff, the Picowers had also entrusted him with money belonging to their personal foundation, which was forced to close in December, after Mr. Madoff’s arrest.”

According to the Washington Post, the White House will unveil a multimillion-dollar plan to convert a closed General Motors (MTLQQ) plant in Wilmington, Del., into an electric car factory. Fisker Automotive of Irvine, Calif., is expected to spend $175 million to fix up the plant. Fisker is also in the process of developing a car under the name “Project Nina,” after the Christopher Columbus ship. A company spokesman says that the name of the project is supposed to be "symbolic of the transfer from the old world to the new in terms of auto technology."

Also in auto news, the Wall Street Journal reports that Chrysler is set to reveal a new product lineup that discards many of its own models in favor of Fiats and vehicles using Fiat technology. The plan is to introduce the high-end, sporty Alfa Romeo brand to the U.S. starting in 2012, in addition to bringing over the 500, the small Fiat car that enjoys popularity in Europe. Some current Chrysler models including “a number of Dodge cars, the Dodge Grand Caravan minivan and several Jeeps” are going to be phased out. Still, the article suggests that new chief executive Sergio Marchionne’s greatest challenge is not winning over the country with this new lineup, but to keep the company afloat until 2012, when most of the new offerings will come to the market.

Betting on a pickup in business spending, technology companies are launching big advertising campaigns to win new customers, the Journal reports. Among the companies jockeying for attention is Google (GOOG). The search giant that typically shies away from traditional advertising recently launched a global ad campaign for its Gmail service and Google Docs offerings. Microsoft (MSFT) spent $300 million on ads to promote the release of its Windows 7 operating system, while Yahoo’s (YHOO) new “It’s You!” campaign, unveiled last month, is its first-ever global ad effort. In the words of one ad executive interviewed for the article, "This is a market now where you stand out or die."

Finally, Bloomberg reports that McDonald's (MCD) restaurants in Iceland will be closed at the end of the month “after the collapse of the krona eroded profits at the fast-food chain.” The closure is largely due to the cost of importing meal ingredients, which has doubled over the past year. “Our competitors all use domestic meat and lettuce and so on, while we are flying in these materials, which is extremely expensive,” says a person familiar with the matter. According to the article, the island has only three McDonald’s restaurants, “all of which will be closed.”

Real Estate Market Reels Again

Matthew Yeomans — Mon, 26 Oct 2009 08:56:18 +0000

America's commercial real estate market continues to look sick. The latest indication comes Sunday, following the abrupt bankruptcy filing of Capmark Financial Group, the massive commercial real estate financier that formed in 2006 when GMAC agreed to sell the majority of its commercial real estate business to Kohlberg Kravis Roberts and others. The firm has been one of the country's biggest investors in strip malls, office buildings, and hotels. According to the New York Times, "Capmark is only the latest to fall victim to continued trouble in the commercial real estate market, which many analysts have said will continue to deteriorate. Many small banks have collapsed this year under the weight of commercial loans." The Wall Street Journal concurs, writing that "problems in that market are far from over." The unraveling of Capmark is a big blow to private-equity owners KKR, Goldman Sachs (GS) Capital Partners, and Five Mile Capital Partners, the newspaper adds, which teamed up to pay $1.5 billion in cash for the business from GMAC in 2006.

All eyes in the automotive industry are once again on Ford (F), but this time for promising reasons. The WSJ cites industry analysts who reckon the carmaker just may report break-even results for its biggest market, North America, on Nov. 2, breaking a string of several years of heavy losses. Ford is gaining ground mainly at the expense of rivals General Motors (MTLQQ) and Chrysler. "Ford gained more than five percentage points of U.S. retail market share in the third quarter compared with the same period of 2008, while Detroit rivals General Motors Co. and Chrysler Group LLC lost ground," the newspaper reports, citing CNW Marketing Research. That's the good news. The reality is the rally isn't expected to last long. By 2010, GM and Chrysler, fresh out of bankruptcy, are expected to bounce back on the strength of new models.

Meanwhile, a GM plant in Delaware is expected to rev to life again—this time as the site of a new manufacturing hub for Fisker Automotive's new hybrid vehicles, the Los Angeles Times reports. The announcement is expected to be made by Delaware's own Joe Biden. Fisker earlier this year got a $528 million loan from the Department of Energy.

The media reincarnation of Michael Eisner continues apace. On Monday, the former head of Disney (DIS) is expected to announce that his fledgling Web video studio, named Vuguru, will become its own company, thanks to a multimillion-dollar investment by Canadian media company Rogers Communications, the NYT reports. The main thrust of this investment is to help Eisner increase the volume of Vuguru's output. "Under a dozen series have been released by Vuguru to date, but he would like the company years from now to be producing 30 series a year," writes the NYT. Eisner seems to think that by bolstering Vuguru now, he will able to see off other underfinanced competition in a market that could attract greater levels of advertising when the economy rebounds.

There are some major rumblings in the financial world this morning. The NYT reports that the Obama administration and Congress are poised to introduce legislation that would give the government sweeping powers over companies and institutions deemed too big to fail. "The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution," it writes. Meanwhile, long-time activist investor Nelson Peltz is set to grab a seat on the board of mutual fund giant Legg Mason after acquiring a 4.3 percent stake in the firm, the WSJ writes. Why would Legg be so magnanimous with its directorships? "In exchange for the board seat, Mr. Peltz's Trian Fund Management, a New York-based hedge fund, has agreed to a 'standstill' pact in which it will accumulate no more than 9.9% of Legg Mason stock for the next two years and vote its shares in favor of the company's slate of director nominees in that period," writes the WSJ. And in late-breaking finance news, ING Group, the Dutch financial-services company, plans to raise up to 7.5 billion euros, or $11.3 billion, in a new rights issue as part of a deal with the Dutch government to repay bailout money ahead of schedule. As part of the plan, ING will split its insurance and banking businesses.

And, finally, there's a hopeful prediction on fuel prices for those of you who watched in horror over the past week as the price of a gallon of gas shot upward. Crude may have broken the $80 barrier, the highest price in more than a year, last week, but it probably won't go much higher, Business Week says, citing industry analysts.

Main Street Bailout

Caitlin McDevitt — Sun, 25 Oct 2009 10:10:48 +0000

In his weekly radio address yesterday, President Obama mentioned the importance of small businesses, noting the difficulty too many small companies are still facing in finding loans. "While credit may be more available for large businesses, too many small-business owners are still struggling to get the credit they need," he said. "These are the very taxpayers who stood by America's banks in a crisis—and now it's time for our banks to stand by creditworthy small businesses, and make the loans they need to open their doors, grow their operations, and create new jobs." Earlier this week, the Wall Street Journal says, Obama announced that the focus of the Troubled Asset Relief Program will shift to bailing out small business.

In the address, Obama also brought up his plans to mitigate “the crushing costs of health care—costs that have forced too many small businesses to cut benefits, shed jobs, or shut their doors for good.” Health care costs are an increasing burden for American small businesses as they’re seeing the “steepest rise” in insurance premiums in years. Today’s New York Times says, “Insurance brokers and benefits consultants say their small business clients are seeing premiums go up an average of about 15 percent for the coming year—double the rate of last year’s increases. That would mean an annual premium that was $4,500 per employee in 2008 and $4,800 this year would rise to $5,500 in 2010.” Since big employers tend to have more “negotiating clout,” these types of increases tend to be less steep for them.

According to the Washington Post, an early version of the Senate climate bill is taking shape. Late Friday night, Senate Environment and Public Works Committee Chairman Barbara Boxer, D-Calif., issued a version that includes “big benefits for farmers, provisions for deficit reduction and a ceiling on carbon prices.” The proposal calls for a more ambitious reduction of U.S. greenhouse gas emissions by 2020 to a level 20 percent below 2005 emissions. The legislation favors a cap-and-trade system that lets companies buy and sell permits to meet their greenshouse gas emission needs. It would also “give away the vast majority of allowances for a transition period of 20 years to ease burdens on energy-intensive industries and on consumers in states that rely heavily on coal for electricity.”

Upper management ranks at film studios are downsizing, the New York Times reports. Earlier this month, Universal Pictures ousted its chairman and co-chairman but, instead of hiring new outsiders, pulled people from within to fill the positions. Disney (DIS) announced that it’s cutting 50 employees, including “a number of managers,” at its Miramax unit. Falling revenue, particularly from sluggish DVD sales, has motivated Hollywood’s general efforts to cut back production costs. The paper predicts, “It’s a safe bet that movies aren’t going to become more daring or interesting as executives become jittery about their thinning ranks.”

According to the Wall Street Journal, “the recession has ruffled the economics of even law and order.” The paper explains that 137 percent capacity rates at federal prisons should be good news for private prisons that profit from absorbing the spillover. Unfortunately for those companies, which includes Corrections Corp. of America (CXW), “cash-strapped states are mulling measures, such as quicker paroles and earlier releases. As a result, private-prison stocks are selling at unusual—and untenable—discounts to their historical multiples or value.”

Finally, though Barnes & Noble’s (BKS) new e-reader, the Nook, has been called a Kindle-killer, it may turn out to be a bigger predator for another company. According to Bloomberg, “If there’s a real loser in the Kindle-Nook shootout, it may turn out to be Sony (SNE), whose Reader models were already overshadowed by the Kindle and now must wonder if they will end up being eclipsed altogether.”

Bernanke Bangs Reform Drum

Paul Smalera — Sat, 24 Oct 2009 05:56:53 +0000

Fed Reserve Chairman Ben Bernanke beat the drum yet again yesterday for financial regulatory reform, reports the New York Times. After the Obama team finally managed to unify its message among the scores of regulators, economists, and central bankers that constitute its economic team, that team has taken to the streets to espouse the need for reform. Bernanke, at a Fed conference, told colleagues, “With the financial turmoil abating, now is the time for policy makers to take action to reduce the probability and severity of any future crises.” Or in other words, just because the front is quiet doesn’t mean the war is over.

The main reform in the plan is the idea that the Fed should have the power to wind down failed investment banks safely, the way the FDIC can swoop in to take over and sell failed savings banks. It’s a nice idea—one that would resolve the dilemma the government faces now, where bailing out banks—and thus rewarding risky behavior—was the only tool available during the recent crisis. Bernanke should be pushing the reform, by the way: The paper writes the “plan would expand the Fed’s powers over big financial institutions but reduce it over consumers,” giving him more and better regulatory powers. The Washington Post also covered Bernanke’s speech and noted his example of AIG as a firm whose unique position allowed it to avoid financial regulation, something the reforms are designed to prevent.

Amazon (AMZN), the dot com whose investors ages ago fretted over if, and when, it would ever be profitable, continues to impress. The Wall Street Journal reports, that in the dot-com boom, “Amazon was growing quickly but losing money. Now, Amazon's stock gains are fueled on solid revenue growth and profits. On Thursday, the company posted a profit of $199 million for the third quarter as sales surged 28% to $5.45 billion, surpassing the average analyst estimate on Thomson Reuters of $5.03 billion.” The stock, which then-analyst Henry Blodget once thought would hit $400 in the go-go days of the boom, is worth $700 today. Blodget, who was barred by the SEC from working in securities, wrote on his media Web site, according to the Journal, that he was “raising a glass,” to Jeff Bezos, Amazon’s founder and CEO.

The Galleon hedge-fund insider-trading investigation just keeps getting more interesting. Roomy Khan, a former Galleon employee, is written about by the Times today as having a decade-long history of passing information to the fund, from her days working for Intel. Apparently she passed disgraced Galleon CEO Raj Rajaratnam information about Google and other companies and was convicted of wire fraud in 2002. Thing is, Khan is a lead government witness in the case against Rajaratnam.

Lease prices are cheap; fuel costs, while not great, are low; and the competition is choking on expenses. Great time to start a discount airline! The cycle of cheap flights returns, this time with an international twist, reports the Times. Air Asia X is among those expending its network out the “backpacker routes” of Southeast Asia and Australia and into Europe and possibly even the United States. Meanwhile, Ryanair, which has long coveted a cheap London-New York route (once speculating on one-way prices as low as $10), is playing the waiting game. The numbers aren’t quite right, says a representative: “We had expected the bottom to fall out of the market for long-haul aircraft, but so far that hasn’t happened.”

Finally, Smart Choices, a packaging label purporting to tell consumers when they were picking healthy foods, that in reality was supported by the food industry and often applied to products like sugary cereal, is shrinking. PepsiCo (PEP) and Kellogg’s (K), under pressure from the government, reports the Times, are removing the label from their products. The label, which, let’s face it, was designed to try to undercut the need for a federal label, which would likely have far stricter standards, is not going away altogether, though. Kraft Foods (KFT) has, “no plans to remove the logo from packaging.”

Throttling Fat Cat Pay

Matthew Yeomans — Fri, 23 Oct 2009 08:10:00 +0000

A resurgent stock market on Thursday couldn't undo the sour mood on Wall Street after executives of the most powerful financial firms in the world learned the inevitable—new pay cuts are on the way. The Wall Street Journal called the caps "a one-two punch at the pay culture of banks and Wall Street firms blamed for the financial crisis." Pay czar Kenneth Feinberg said Thursday the highest-earning execs at the seven bailed-out firms getting exceptional federal aid will have their cash salaries capped at $500,000, and the group's total pay level will be slashed in half. And the Fed and state regulators will also begin reviewing compensation packages as part of their oversight of financial firms. As harsh as the new pay rules seem, the Washington Post notes that Feinberg could have gone even further—had some of the executives he was to monitor stayed on the job. "At Bank of America (BAC), for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision," the newspaper details.

Wall Street reacted with skepticism, outrage and even revisionist logic to the pay-cut proposal, saying "the measures may hurt the very companies the U.S. is intent on saving," Bloomberg reports. The recurring argument is that the pay caps risk creating an imbalanced competitive market. When one banker's pay is capped, the argument goes, vulture recruiters circle and swoop. BusinessWeek reports there is some truth to this fear of executive recruiters targeting Wall Street's undercompensated and perhaps unmotivated. "Recruitment experts hired by Wall Street trading houses, which are expanding to handle booming stock and bond trades, say they are zeroing in on companies such as Citigroup (C), American International Group (AIG), and others that are under U.S. or European pay restrictions," the magazine writes.

Were the guts of the iPhone actually developed by Finnish telecoms giant Nokia and not Apple (AAPL)? That's the contention of a new lawsuit filed by Nokia accusing Apple of widespread patent infringement for its hot-selling handset. As BusinessWeek puts it, "Apple's iPhone has been giving Nokia smartphones a hard time in the marketplace. Now Nokia is giving Apple a hard time in the courtroom." Nokia contends that Apple is infringing on its patents that enable the handset to make phone calls and connect to the Internet—in other words, what makes the device a phone and not just a music player. Fortune's Brainstorm Tech blog notes that the move is hardly surprising given the drubbing Nokia is taking in the North American smartphone market at the hands of Apple. "Despite its best efforts, Nokia has steadily lost ground. It holds 40% of the market, down from 43% last year, according to IDC. And in the competitive North American market, Nokia is barely holding its own with just 3%," it reports.

Amazon has posted a 69 percent increase in third-quarter profit compared to last year in a "rosy outlook" that could bring glad tidings to Christmas retail figures, the WSJ reports. The mammoth online retailer said its income for the quarter increased to $199 million, or 45 cents a share, from $118 million, or 27 cents a share, a year ago. The results were pumped by a 44 percent rise in sales of electronics and general merchandise, including TVs and office supplies. It also saw a big jump in the sales of media products, not least the release of Dan Brown's new book, The Lost Symbol. That's likely to heighten the tensions in a growing Godzilla-like price war between Amazon (AMZN) and offline monster retailer, Wal-Mart (WMT).

Such is the malaise of the news industry nowadays that the New York Times Co. lost $35.6 million in its third quarter with advertising revenue dropping nearly 30 percent but still beat Wall Street's expectations, and so the news sent the company's stock price soaring by 22 percent. The company recently announced 100 newsroom layoffs but also believes that "the drop in advertising was slowing in the fourth quarter," the NYT reports on itself. Nevertheless the company has reached a "watershed moment": It now gets more revenue from readers than from advertisers, "in an industry where advertising revenue traditionally outweighed revenue from circulation by at least three to one."

And finally, leave it to a bunch of 4-year-olds to try to cheat the government out of a few grand. IRS investigators revealed Thursday that there were more than 100,000 fraudulent claims for the First-Time Homebuyer Tax Credit program. How low did some of these schemers go in trying to score a tax credit worth as much as $8,000? "Some of the filers for the credit were just four years old," BusinessWeek writes.

Executive Pay Crackdown

Caitlin McDevitt — Thu, 22 Oct 2009 10:32:06 +0000

The pay czar has spoken. Kenneth Feinberg, the Treasury Department's special master for compensation, will slash compensation for the 25 highest-paid employees at the seven firms that got the biggest federal bailouts, “with the vast majority of salaries coming in under $500,000,” says the Wall Street Journal's front-page story. 175 employees—of Citigroup (C), Bank of America (BAC), the American International Group (AIG), General Motors (MTLQQ), Chrysler, and the financing arms of the two automakers—will see their compensation shrink by an average of 50 percent, says the article. Salaries will drop 90 percent on average. According to the article, “The largest single compensation package will be less than $10 million and is destined for a Bank of America Corp. employee, according to people familiar with the matter. That is much less than Wall Street's standard payouts for star employees.” The New York Times also makes the news its lead story, reporting that executives at the companies seeking more than $250,000 in “special perks”—like private planes or country club memberships—must first seek government permission.

Insider-trading allegations have pushed hedge fund Galleon Group to shut its doors, the Wall Street Journal reports. In a letter to employees and investors yesterday, co-founder Raj Rajaratnam said the firm will "conduct an orderly wind down" of its funds. According to people familiar with the matter, the informant who tipped off regulators to the suspicious activity at the firm is Roomy Khan, a hedge fund manager who worked for there for a short time in the late 1990s. According to the New York Times, Khan has “a history of financial trouble” and “agreed to cooperate with prosecutors after she was caught making trades using inside information.”

Google (GOOG) plans to announce its new music initiative at an event in Hollywood next week. According to the Times, “The service will give users a more efficient way to find, learn about and sample music after they search for information about bands, albums or songs, said a person who has seen an early demonstration.” Google won’t host any music, but the paper says it has “struck deals” with some streaming music services that will allow song sampling. Facebook is also planning to experiment with music in the near future too, most likely through its virtual gift store. The paper explains, “There will be two ways to buy songs: For 10 cents, or one Facebook credit, users can buy Web songs that can be played by the recipient online in perpetuity. Or they can pay full price, probably a dollar or 10 credits, then download the song and transfer it to a music player.”

The Washington Post reports that while the Obama administration is “winding down” aid to big banks and automakers, it’s now redirecting its attention to small business and the housing market. "There is still too little credit flowing to our small businesses,” the president said in a speech yesterday. Under the current plan, small companies can obtain low-interest loans through local banks with less than $1 billion in assets. Those institutions, in turn, will be allowed to borrow from the Troubled Assets Relief Program at a lower-than-usual 3 percent rate.

Two deals announced yesterday suggest that money-making could be in Twitter’s future, says the New York Times. The “back-to-back deals” make the messaging service’s stream of posts available to Microsoft (MSFT) and Google’s (GOOG)’s search engines. Microsoft says that at least “for now” it doesn’t plan to put ads on its Twitter search service. Google says ads may be coming “at a later date.” The paper notes that “Microsoft also said that it had reached a separate agreement to soon include status updates from Facebook in Bing, but it gave few details of what that service would look like.”

Finally, Stephen King's publisher knows how to build suspense. The company is withholding the e-book edition of King’s novel Under the Dome until the day before Christmas. It’s a strategic move that comes at a time of increasing tension between book publishers and retailers over how to price industry blockbusters like King's novels. The Journal reports, “Aiming to preserve the value of the hardcover edition, Scribner, an imprint of CBS Corp.'s (CBS) Simon & Schuster publishing arm, is delaying the electronic-book publication of the King thriller until Dec. 24, or six weeks after the $35 hardcover hits the bookstores on Nov. 10.”

Break Up the Banks

Matthew Yeomans — Wed, 21 Oct 2009 08:20:45 +0000

If you think tougher government oversight will avert future financial calamities, think again. That was the message in a stunning rebuke of Big Finance on Tuesday by Bank of England Governor Mervyn King, who "made a strong call for the breaking up of some of the world's biggest financial firms," the Wall Street Journal reports. King did not mince words. "The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question," the U.K.'s top central banker said in a speech on Tuesday. "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." King did not end there. He grumbled that the "too big to fail"—what the Brits refer to as "too important to fail"—concept is destructive. "The scale of the support to the banking system is 'breathtaking' and we will paying for the impact of the crisis on the public finances 'for a generation,' " the Guardian writes.

Ah, but this view is little more than the crazy ramblings of a European central banker. Right? Think again. Former Fed Chairman Paul Volcker has been pressing members of Congress and the Obama administration's top financial advisers to dramatically recast America's banking sector, too, so as to prohibit commercial banks from participating in investment banking activities. "He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008," the New York Times writes. Volcker wants to "roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities," the newspaper adds. The Obama administration is more content to leave them intact but pile on more regulation. The clamor about how to secure the banking system is likely to grow louder now that it's been determined taxpayers are "extremely unlikely" to see any kind of return from their $700 billion emergency bailout last year of the financial sector, Bloomberg reports, citing the latest TARP audit.

Could the worst be over for Yahoo (YHOO), a firm that's become a measuring stick for the state of Internet advertising? On Tuesday, Yahoo reported sales fell 12 percent to $1.58 billion from a year ago, but there is a positive sign, indicating that spending on Internet ads is showing signs of life, the WSJ reports. "The ad dollars are starting to flow a little bit better," Tim Morse, Yahoo's finance chief, said on a conference call. The NYT notes Yahoo beat analysts' expectations. "Aided by cost-cutting, the sales of some assets and better-than-expected revenue from display ads, Yahoo’s net income more than tripled in the third quarter," the newspaper writes. Staying in tech, things aren't quite as rosy at Sun Microsystems (JAVA). The company announced on Tuesday, it would shed 3,000 more jobs as part of a restructuring as it awaits European approval for its $7.4 billion merger with Oracle (ORCL), the San Francisco Chronicle reports.

What did Bank of America (BAC) executives know and when did they know it? That's what congressional investigators want to discover as they sift through reams of internal documents relating to last year's snap purchase of Merrill Lynch, the Washington Post writes. Sources tell the Post that the files show that BofA execs "were alarmed by mounting losses" at Merrill "well before shareholders voted to approve the merger." Furthermore, investigators suspect that, "Bank of America chief executive Kenneth D. Lewis used the threat of backing out of the government-backed deal as leverage for billions more in taxpayer bailout money," the Post writes.

Can the Nook dethrone the Kindle? Yesterday Barnes & Noble (BKS) unveiled its own electronic book reader to rival Amazon's fast-selling hit. The Nook will cost $259 (the same price as the Kindle), and some of its content will also be sharable on other Nooks, cell phones, or computers. As the WSJ writes, "Barnes & Noble unveiled the Nook in Manhattan at an event well attended by CEOs of many of the industry's biggest publishing houses. Those connections helped the nation's largest bookstore chain win a concession: the ability for buyers of some e-books to lend their purchases to friends for as many as 14 days at a time."

And finally, the New York Mets may have finished near the bottom of the National League standings this season, but team ownership may have pulled off the least likely of victories this year. Mets Limited Partnership, a group connected to team owners Sterling Equities Inc., made money on its business dealings with convicted swindler Bernard Madoff, the WSJ reports, actually netting $48 million from Madoff. That money could be well spent on another starting pitcher or slugging outfielder, your correspondent hopefully notes.

Sweet Profits for Apple

Caitlin McDevitt — Tue, 20 Oct 2009 08:56:09 +0000

Yesterday was a good day for Apple (AAPL). According to the Wall Street Journal, the company's fourth-quarter profit jumped 47 percent “as consumers continued to snap up its iPhones and Macintosh computers.” Surprisingly resilient demand for its laptops and smartphones have carried Apple though the recession. This past quarter, Apple sold 7.4 million iPhones and 3.1 million Macintosh computers. Apple’s CFO called sales of Macintoshes “phenomenal,” and the quarter Apple’s "most profitable ever." Brad Stone, in the New York Times, says it well: “Apple, in its recent history, has overcome nearly every obstacle thrown its way. Now it has surpassed another: the burden of high expectations.”

The New York Times will cut 8 percent of its news staff by the end of the year. The paper announced yesterday that it will shed 100 newsroom jobs though a voluntary buyout program and, possibly, layoffs. According to CNNMoney.com, “The paper employs 1,250 people in its news department, making it by far the largest newspaper staff in the United States.” In early 2008, the Times cut 100 journalism positions, which marked “the first mass newsroom layoff in the company's history.” Reporting on itself, the Times repeats the words of its executive editor, Bill Keller, who in his note to the staff wrote, “I won’t pretend that these staff cuts will not add to the burdens of journalists whose responsibilities have grown faster than their compensation.”

At the biggest bailed out banks, the Washington Post reveals, there hasn’t been much skimping on perks. An analysis of corporate filings in recent months has shown that rescued funds, which took more than $350 billion in federal funds, increased perks and benefits an average of 4 percent last year. Some chief executives saw an increase in the personal use of corporate jets, chauffeured services, and even hefty country club membership fees. The paper explains that “[a]lthough perks represent a relatively small portion of an executive's overall compensation package, they have been targeted some shareholders who argue that these fringe benefits are meant largely to stroke the egos of top company brass.”

The case against Raj Rajaratnam, the billionaire hedge fund manager who was arrested for possible insider trading late last week, may be tricky to prove, the New York Times says. That’s because of the fuzzy, thin line between purchasing legitimate research, circulating rumors and gossip, and illegally paying for “market-moving” information. A close read of filings so far “suggests a web in which hedge fund managers, analysts, corporate executives, and consultants and other people outside Wall Street traded tips—sometimes for money, sometimes for other tips, and sometimes for little more than the promise of unspecified future favors.” Meanwhile, back at the hedge fund that Rajaratnam co-founded, Galleon Group, clients are jumping ship. The Journal says, “The investor withdrawal requests began pouring in Friday morning, just after news surfaced about Mr. Rajaratnam's arrest, say people within Galleon. Many clients faxed or called the New York firm to formally request withdrawal of their funds.”

Bloomberg reports that the U.S. Chamber of Commerce fell victim to “a hoax by a satirical group that staged a phony announcement saying the business organization had flip-flopped on climate change.” The Yes Men, a New York group that pulls pranks on corporations, created a fake press release under chamber’s letterhead yesterday and held a news conference at the National Press Club announcing that chamber had changed its mind and now favors a tax on carbon emissions. The chamber’s executive director of communications had to personally go to the press club to break up the fake news conference.

Finally, “the luxury-goods industry is stuck in a slump,” says the WSJ. Consulting firm Bain & Co. released a forecast yesterday that says not to expect a full recovery until 2011 or 2012. The United States, which accounts for about a third of luxury-goods sales, remains the hardest-hit market. The consulting firm expects U.S. sales of high-end clothing, accessories, tableware, cosmetics, and jewelry to sink by 16 percent this year. The chief financial officer of luxury retailer and industry bellwether LVMH told the paper, "I don't think we can say the crisis is over, but we can start to see the light at the end of the tunnel, even though the light is far away.”

Big Pharma To Profit From Health Care Reform

Matthew Yeomans — Mon, 19 Oct 2009 08:16:30 +0000

It may be a bit too early, but the Wall Street Journal this morning wastes no time in lining up the winners and losers of health care reform. The list is hardly a surprise. "The drug industry stands to gain in a health-care overhaul by getting tens of millions of newly insured customers, while insurance companie—especially those that cater to the individual market—look like they are in for a tougher time," the newspaper writes. The $829 billion plan being worked over by Congress would extend health coverage to 29 million Americans—a boon, in effect, for drug makers, pharmacists, and hospitals. And insurance companies? They "would get more customers, too, but not necessarily the ones they want," the WSJ concludes.

Speaking of winners and losers, money managers at even some of the largest mutual funds will be left out of the bonus windfall due to hit Wall Street this year, the WSJ reports. Citing figures from recruiting firm Russell Reynolds Associates, the newspaper writes that "bonus pools at fund-management firms are likely to shrink by as much as 35% as the $10 trillion industry copes with reduced assets and a stock market that has been hard on business."

There's renewed talk this morning that French media giant Vivendi will finally offload its remaining stake in NBC Universal as it once again looks to reinvent itself, the New York Times reports from Paris. The expected bidder is cable giant Comcast (CMCSA), an acquisition that "would clear the way for the formation of the next big American media giant," the newspaper writes. The dominoes set in motion from such would also mean General Electric (GE), which holds an 80 percent stake in NBC Universal, eventually exits the entertainment business. But there's a small matter of money that stands in the way of this new world order in the biz. The WSJ, citing sources, says GE and Vivendi "are about $500 million apart in talks over what Vivendi should be paid for its minority stake." All parties on this side of the Atlantic appear to agree in principle on an NBC Universal-Comcast tie-up. GE and Vivendi, too, appear ready to sort out a deal that would eventually get them out of the business. It all comes down to last minute haggling over the value of Vivendi's stake. "One person familiar with the price discussions said Vivendi's asking price is higher than anticipated, but 'hardly a deal killer,' " the WSJ writes.

Google (GOOG) has fired another shot across Microsoft's (MSFT) bow with the launch of a rare major advertising campaign, writes the Guardian. The European part of a global promotional push, titled Gone Google, is for its online office software that includes Google mail, Google Docs, a calendar, and digital-security services. Google says these cloud-based services now are used by some 2 million businesses, notes Reuters. While Google's business apps are just a tiny part of the company's overall business, they offer a chance to drive a strategic dagger through the armor of Office, Microsoft's business-enterprise software.

Chevron (CVX) has announced a new natural gas find to bolster its ambitious Gorgon project off the Australian coast, the BBC reports. Along with drilling partners Shell and Exxon Mobil, Chevron expects Gorgon to come online in 2014 just as Asia's demand for natural gas skyrockets. But while the supermajors have no problem collaborating on new fossil fuel finds, trying to get them and other energy companies to agree on climate change is a whole other problem. As the NYT reports, the forthcoming Senate climate change bill is pitching oil companies against pure-play natural gas providers who, in turn, are squabbling with coal producers even as utility providers argue over the merits of coal providers versus renewable energy upstarts. Despite having already spent $200 million this year in lobbying against the bill, such are the fissures in an energy industry normally be united against climate change legislation that, "some supporters of global warming legislation believe that the division[s] ... could improve the prospects for the legislation."

And, finally, you'd think keeping CEOs out of harm's way would be a lucrative enough business these days. Alas, maybe not. According to the Financial Times, corporate security specialist Kroll is planning to enter the credit-ratings business. Founder Jules Kroll is already making his pitch. "What I am telling institutional investors is you basically have to take charge. This is your money. When people come to sell you products and offer you ratings from the oligopoly, you say to them you want a Kroll.”

Presented By:

Mon, 19 Oct 2009 08:16:30 +0000

Clouds Ahead for Microsoft

Caitlin McDevitt — Sun, 18 Oct 2009 09:18:40 +0000

According to the New York Times, the forecast for Microsoft (MSFT) is “partly cloudy.” While the company is planning a high-profile software release later on this week, doubts remain whether Microsoft can build as much buzz as its rivals. Its chief software architect says the company is reinventing itself or at least trying to. The article says that it's got stiff competition: “Consumers now buy more PCs than businesses do, and their wants and desires for better-looking devices have invaded the cubicle. The current breed of consumer has shown an ability to turn something like the Apple (AAPL) iPhone into an overnight sensation, then demand that companies embrace it. Google (GOOG), meanwhile, uses its influential Web search and YouTube properties to introduce people to its e-mail, document and Web browser software, and Facebook now provides inspiration to business software makers.”

Also from the Times, Congress has given the Federal Communications Commission a mandate to produce a plan with specific recommendations regarding faster Internet connections by next February. The paper says, “Congress is clearly irritated that the United States has not done well in the international broadband Olympics. Other countries have national plans to accelerate the diffusion of broadband; America does not.” Still, there’s no need to race, the paper explains. “We shouldn’t get caught up, however, in a space-race panic. We’ve actually done surprisingly well making a broadband connection accessible to a vast majority of American households. No less than 96 percent of households either subscribe to or have access to broadband service, according to an F.C.C. task force, which presented a status report to the commission last month.”

CNNMoney.com reports that the country’s tally of bank casualties for this year hit 99 on Friday night. State regulators shut down San Joaquin Bank, based in Bakersfield, Calif.—the 10th bank to fail in the state. The Web site says, “There are about 8,000 banks in the nation, and an average of 10 banks have failed per month this year, nearly four times the number that failed in 2008. This is the highest tally since 1992, when 181 banks failed.”

The Washington Post reports that Verizon (VZ0) and Motorola have at last revealed their new Droid Android phone, which could be available as soon as the end of this month. “Make no mistake, this is Android's flagship product, and the first phone that will pose a significant threat to Apple's iPhone,” the paper says. “The Droid poses a different and more significant challenge to the iPhone than any other phone to date. The Palm Pre could have been that challenger, but it lacked the Verizon network, and users were unimpressed with the hardware.” According to the paper’s sources, the phone is “the most sophisticated mobile device to hit the market to date from a hardware standpoint.”

Finally, from Reuters, big rule changes meant to shed light on so-called “dark pools,” could end up hurting the traditional investors. The U.S. Securities and Exchange Commission meets this week to discuss changes that the industry largely expects will bring more clarity to these exchanges. Still, the article states, “Executives at a conference said political pressure had a hand in pushing new regulations. They argued that although some changes may be needed, a lack of understanding the way orders circulate among the more than 40 U.S. trading venues could lead to poorer prices and executions for mutual funds, pension funds, and individual retail investors.”

Could Obama's Change Run Out of Cash?

Paul Smalera — Sat, 17 Oct 2009 07:53:35 +0000

Much has been made of President Obama’s desire to fundamentally restructure large portions of the federal bureaucracy—but what if he runs out of money first? The Washington Post reported that the federal budget deficit, at $1.4 trillion for this fiscal year, is, “unequaled in the postwar era.” Democrats, the paper notes, are defending Obama’s budget, believing George W. Bush and the financial collapse left him no choice but to spend his way out of an economic death spiral. Still, the startling figure casts a shadow over the administration’s attempts to spur job creation, economic recovery, and expansion of the social safety net, all of which would likely require more outlays and thus even larger deficits.

Speaking of safety nets, the administration did receive the good news from the Congressional Budget Office. Two of the health care proposals floating around Congress are near the $900 billion mark, a figure all sides have agreed on. The Post notes that both plans include forms of the much-debated public option.

The SEC has charged Raj Rajaratnam and five others in a vast insider-trading ring, reports the Wall Street Journal. One of his own employees clued the agency in to how Rajaratnam used information from industry executives to execute trades on stocks including IBM (IBM), Akamai (AKAM), and Hilton. Rajaratnam’s lawyer proclaimed his innocence, but federal wiretaps exposed the ring’s conspirators as fearing jail time and leaks—in essence, it seems, proving they understood the illegality of their actions. The investment firm Rajaratnam founded and leads, Galleon, said it was shocked by the arrest and is still in business.

The hydrogen car won’t die. The Post reports the Senate has restored funding for the controversial program, which the Obama administration had removed. The funding, just $187 million, is a drop in the federal bucket. But with its worldwide focus on electric and fuel-cell technology, critics believe the program will distract from the real goal of developing a single alternative-fuel platform. Despite the Senate restoring the funding against his wishes, Obama will likely sign the bill.

How did big banks make so much money last year? The answer we’ve all been waiting for, from the New York Times: bailouts. The paper cites studies and economists who say the massive capital outlay by the government allowed banks like Goldman Sachs and JPMorgan Chase to take big new risks and consolidate power in the securities industry. But in a curious twist, as earnings this week have made clear, banks focused on consumer banking, like Citibank, Bank of America, and a slew of regional banks, are still having a tough time, despite government funding, digging themselves out of this mess.

Aides to Bernard Madoff may have known about the frauds perpetrated by him and Frank DiPascali Jr., according to new charges against them by the bankruptcy trustee, Irving Picard. As the Times put it, “a basic assumption about Bernard L. Madoff’s enormous Ponzi scheme was that the trades shown in his clients’ account statements were fictional,” an assumption that is no longer the case. The story also notes that victims are suing Picard, because he rejected claims made by some who had taken out more money from their investments than they had ever put in. They argue those withdrawals, though based on completely fictitious earning statements, should be honored as if the returns Madoff generated were real after all.

That was fast. The Dow is no longer at or above 10,000, reports the Post. Earnings reports early in the week helped bump the Dow past the psychological barrier, but poor reports later in the week contributed to the decline. Among them, General Electric (GE), writes the Journal. Though profits were down 20 cents a share year over year, CEO Jeff Immelt tried to paint a picture of a stabilized company for investors. Yet, many fear that GE’s exposure in the commercial real estate market will create serious problems for the conglomerate’s financial-services division, as soon as next year.

Finally, Amazon (AMZN) and Wal-Mart (WMT) are engaged in a secretive book-price war, as reported by the Journal. Publishers, who have long abhorred the $10 price point for new hardcover books, suddenly found themselves with two of their largest retailers setting prices at the $9 mark. One publisher said a race to the bottom would make it, “increasingly difficult ... to launch what he described as ‘the writers of tomorrow.’ ”

Ken Lewis' Year Without Pay

Matthew Yeomans — Fri, 16 Oct 2009 09:13:44 +0000

Sorry, no paycheck for you. That's the unprecedented demand put on Bank of America (BAC) CEO Ken Lewis by the Treasury's pay czar Kenneth Feinberg. According to The Wall Street Journal, the BoA chief has been asked to give back the roughly $1 million he's collected so far this year and forgo another $1.5 million still due to him. Oh, and no 2009 bonus either. But don't feel too bad for Lewis. "Mr. Feinberg pushed for the deal because he thought the package of retirement benefits and unvested stock Mr. Lewis takes with him when he steps down at year's end—currently worth at least $69.3 million, according to securities filings—was large enough, and possibly too big," the newspaper writes. While Lewis "voluntarily agreed" to the arrangement without much fuss, others on Wall Street were outraged. "This is punitive," exclaimed banking analyst Nancy Bush of NAB Research.

The New York Times notes that the Lewis forfeiture comes as the controversy around BoA's Merrill Lynch acquisition intensifies. Citing sources, the NYT says BoA will turn over documents implicating Wall Street law firm Wachtell, Lipton, Rosen & Katz in a massive shareholder cover-up. The firm "initially advised Bank of America to withhold information about the perilous state of Merrill from the bank’s shareholders, but later advised it to alert federal officials to the growing losses, according to four people with direct knowledge of the matter," the newspaper writes.

The worst of the recession is over for Google (GOOG), the business press are declaring this morning. The Net juggernaut astounded Wall Street with a recession-defying third quarter profit on Thursday. Sales were up 7 percent and net profit rose a whopping 27 percent to $1.64 billion from the year earlier period thanks to a solid rebound in online advertising. "While there's obviously a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and we're seeing lots of signs of that in all of the industries that we pay attention to," Google Chief Executive Eric Schmidt said on a conference call following the results, the WSJ reports. The Financial Times takes the statement a step further, paraphrasing Schmidt as saying "the advertising revival appeared to have spread across the Internet more broadly." According to the NYT, Google plans to rehire thousands and once again rev up the acquisitions and investment. "Mr. Schmidt said that while some uncertainty remained about the pace of the recovery, Google is 'very optimistic about the future. We now have the business confidence to invest heavily in the next phase of innovation,'” the newspaper writes.

If you believe the Lazarus-like recovery of the investment banks means all is rosy in the world of finance think again. As the Financial Times outlines, Citigroup's (C) poor figures, when compared to Goldman Sachs's (GS) bumper profits, demonstrates "the gap between the financial resilience of Wall Street and the woes of Main Street, fresh evidence that two Americas are emerging from the crisis." Citi's seventh loss in eight quarters is bad news for the bank and its shareholders but is worse for the rest of America and the bank's performance is due to consumers continuing to fall behind on credit card bills and mortgage payments. And it's bad news for the Obama administration as well. News stories of record banking bonuses will hardly help win public support for further financial sector stimulus packages should the retail banking industry prove more fragile than it currently does.

Is it love on the rocks for the Ticketmaster-Live Nation merger? The WSJ writes that the move to create a music industry powerhouse is facing "stiff resistance" from the Justice Department that could force the two companies to make major concessions if they want to avoid having the deal blocked. The merger is the first to come under the scrutiny of the Obama administration and its tough anti-trust stance. "The Ticketmaster-Live Nation deal is widely regarded as a bellwether of the department's attitude toward such potential deals as Comcast Corp.'s proposal to take a majority stake in General Electric Co.'s NBC Universal. Like the proposed Ticketmaster-Live Nation alliance, a Comcast-NBC deal would represent 'vertical integration,' in which several links in the chain between producer and consumer are controlled by a single entity," writes the WSJ.

The sudden death on Wednesday of Lazard Ltd. (LAZ) Chief Executive Bruce Wasserstein is triggering what the WSJ calls the "death payout." And, it's a big one, coming in at a $188 million payday for his heirs. "Mr. Wasserstein's pay package underscored a fact of life at Lazard: In addition to being the public face of the investment-banking firm, Mr. Wasserstein received the lion's share of its pay." Wasserstein's total compensation in 2008 topped $20 million, exceeding "the combined pay of the next four Lazard officers by nearly $3 million."

Dow Passes 10,000

Caitlin McDevitt — Thu, 15 Oct 2009 09:31:54 +0000

The Wall Street Journal and the Washington Post lead with stories about the state of the recovery, prompted by the fact that yesterday marked first time the Dow passed 10,000 since October last year. Though noting that the Dow has gained 53 percent in just seven months, the WSJ says to hold the Champagne: “The underlying economy is troubled, with banks still holding bad debts and foreclosures widespread,” the article cautions. “Consumer spending and borrowing, as well as employment, are expected to remain sub-par for some time.” The Post concedes that while investors and big banks may be feeling settled, the rest of America is waiting for employment to bounce back. The paper says, “For most Americans, a real recovery comes down to one issue: jobs. With the U.S. unemployment rate at 9.8 percent and expected to crest above 10 percent, 15 million jobless Americans may find little to cheer about in Dow 10,000.”

Another reason to hold off on celebrating: The number of foreclosure filings hit a record high in the third quarter, says CNNMoney.com. One in every 136 U.S. homes was in foreclosure, “which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008.” Nevada is still the hardest-hit state with one filing for every 23 households. Vermont saw foreclosure filings jump nearly 170 percent compared with the third quarter of last year. A spokesperson from RealtyTrac, the online marketer of foreclosed homes, told the Web site, "They were the worst three months of all time."

The New York Times checks in on the state of bailout paybacks this morning. The article explains that while 10 big financial institutions repaid nearly $70 billion in June, several other firms were able to but did not. There’s a debate brewing about whether federal bank regulators should “send a signal” encouraging the big banks to pay up. “That would be a big change from the reluctance that Treasury officials displayed for much of this year, when they wanted to make sure that banks had enough capital to shore up confidence in the financial system and to handle their own losses,” the paper notes.

Microsoft (MSFT) has been busy these days. While it’s been trying to build buzz for its new Windows 7 operating system, which goes on sale next week, the company is also planning to “quietly” unveil its first retail stores. According to the Wall Street Journal, the software giant is following through on a plan announced in February to build stores to better compete with Apple (AAPL). The company is “putting the final touches” on a new store in Scottsdale, Ariz., and plans to open up a second store in a California mall very soon.

Dealmaker Bruce Wasserstein, chairman and CEO of Lazard Ltd (LAZ), died yesterday at the age of 61, the New York Times reports. Wasserstein’s career intersected with law and media, but he made a name for himself as an investment banker “who helped pioneer the hostile takeover in the 1980s and reshaped the mergers and acquisitions business into a high art.” He worked on some of the biggest deals in recent Wall Street history, and lately, he had been leading a team advising Kraft (KFT) on its potential takeover of Cadbury (CBY).

According to the Journal, analysts and lawmakers are speaking out against the cost of usefulness of the credit for first-time home buyers. The stimulus measure, which was adopted in February and is scheduled to expire in November, gives first-time home buyers an $8,000 tax credit. Some people want only a one-month extension of the program or none at all. The paper says, “A number of House Democrats, however, are expressing reservations about a big extension or expansion of the credit, particularly one that isn't offset with tax increases or spending cuts.” On the flip side, supporters of the credit would like to extend it at least to next summer and make it available to all home buyers.

Perhaps at last ending a saga that started last spring, the New York Times says today that its company will not sell the the Boston Globe. “The Globe did not draw high bids,” the article says. Bids for the Globe and another paper were about $35 million. The New York Times Co. (NYT) paid $1.1 billion for the Globe when it was solidly profitable in 1993, which was at the time “the highest price paid for a single newspaper.”

More Big Bucks for Bankers

Matthew Yeomans — Wed, 14 Oct 2009 08:17:06 +0000

Investment bankers and the like will no doubt grin broadly when they check out the front page of today's Wall Street Journal and see the big headline predicting a "record year" for Wall Street pay. According to the newspaper's annual analysis of projected pay packages, "total compensation and benefits at the publicly traded firms ... are on track to increase 20% from last year's $117 billion—and to top 2007's $130 billion payout." The average employee at the 23 firms analyzed will take home a respectable $143,400 in compensation and benefits, up nearly $2,000 from 2007's record level.

The good old times are not necessarily back for everyone in the world of finance, however. Kenneth Feinberg, aka "the federal pay czar," is bracing to do battle with AIG, "informally" advising the troubled insurer "not to pay the full $198 million in retention payments promised to key employees of its derivatives unit, AIG Financial Products," Marketwatch.com reports. AIG had pledged to get at least $45 million back from employees but has so far collected just $19 million, Dow Jones Newswire reports. The problem is that "some AIG employees are balking at returning 2009 bonuses until they know how much they will receive in 2010," the WSJ reports, citing people familiar with the matter.

It's confirmed. China is the new global king of exports, causing rifts around the world. "China’s exports this year have already vaulted it past Germany to become the world’s biggest exporter. Now, those market share gains are threatening to increase trade frictions with the United States and Europe," the New York Times writes. According to the most recent global trade statistics, Chinese products represent 19 percent of all U.S. imports, up from 14 percent a year ago, evidence that the global recession is hardly slowing down China Inc. And the signs of recovery are looking even brighter in China. According to the WSJ, new data out on Wednesday morning show Chinese "exports in September fell 15.2% from a year earlier, less than forecast, while imports were off just 3.5%. Exports gained 6.3% from August on a seasonally-adjusted basis." Meanwhile, in Japan, the economic outlook is as murky as ever. The Bank of Japan this morning left rates unchanged at a minuscule 0.10 percent, but it didn't say anything about how long it might continue to fund the ongoing generous corporate stimulus package, leaving the markets to guess, Reuters reports.

Is tech finally bouncing back? That's the upbeat analyst prognosis now that Intel surpassed its own third-quarter sales expectations, the WSJ reports. Intel (INTC)—maker of the chips that power a good portion of the world's PCs and a bellwether of entire tech sector—predicts that market conditions will further improve in this current quarter with expected revenue of $10.1 billion (up about 7 percent from the third period). The rebound is being driven by strong U.S. back-to-school sales and, yes, increased demand from China.

Just when Ford (F) was making claims to be the one bright light in American auto manufacturing, the healthiest of the Detroit Big Three announces it is recalling 4.5 million vehicles because of a switch that can overheat and catch fire, the Detroit Free Press reports. Ford is recalling 1.1 million Ford Windstar minivans and 3.4 million Ford Excursions, Explorers, and Rangers of various model years, going back as far as 1992. The switch was made by a former division of Texas Instruments (TXN) (the company insists its product is not the root cause of the Ford fires). Whomever is to blame, this latest recall is the eighth involving the same switch for Ford this decade and has affected some 14 million vehicles.

And, finally, hedge funds lie. Not all of them, mind you. Just one in five has a tendency to stretch the truth, according to new research by New York University's Stern School of Business. "Managers most commonly misrepresented the amount of money they had entrusted to their funds, their performance and their regulatory and legal histories, according to the research," the Financial Times writes.

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