Just over four months on the job, and Fed Chairman Ben Bernanke has already figured out how to yank the punch bowl away. His remarks on inflation on June 5 put the fear of God into investors who thought the Fed was done raising rates. The Dow, which a month ago was tantalizingly near a record high, suffered its steepest loss since January, falling 199 points, to 11,049. The S&P 500 sank back to where it was at the end of 2005.
What was Bernanke thinking? The economy isn't exactly burning: It added 75,000 jobs in May, half the expected amount; housing keeps cooling; and consumer spending has "decelerated," he says. But he doesn't want high energy and commodity prices "permanently embedded in core inflation." So the market now sees at least one more quarter-point rise in the federal funds rate, to 5.25%, in the works.
See "The Chill in Bernanke's Words"
On June 2, Goldman Sachs (GS) announced the inevitable: President Lloyd Blankfein, 51, will be the investment bank's next chairman and CEO if Henry Paulson is confirmed as Treasury Secretary. Blankfein, whose father was a postal worker and who grew up in Brooklyn public housing projects, has long been viewed as the heir apparent because of his role in building up Goldman's insanely profitable trading ops. His fierce drive and a 24/7 obsession with global markets propelled him to the top.
Does the battle for Britain's BAA finally have a winner? On June 6 the world's largest airport operator accepted an enriched $19 billion bid from a consortium captained by Spanish construction outfit Grupo Ferrovial, spurning a slightly higher proposal from a group led by Goldman Sachs. The investment bank has until June 16 to try again or walk away. Ferrovial is betting on the latter: It says it has snapped up 15.8% of BAA, putting a pothole in the runway for rivals.
First came the busted deal, now the lawsuits. Plaintiff's law firm Motley Rice charged on June 2 that telecom Vonage (VG) and underwriters led by Citigroup broke securities laws relating to Vonage's May 23 IPO. The lawyers say bankers failed to consider if the stock, which has fallen 29.5% since the $17-a-share offering, was too risky for individuals and that its prospectus made false and misleading statements. Vonage declined comment. On June 1 another Net phone outfit, Skype, owned by eBay (EBAY), was sued by Net2Phone for patent infringement.
See "Skype Under Attack"
High gas prices are hobbling U.S. carmakers. In May, Asian companies grabbed a record 40.2% of the U.S. market as buyers picked fuel-efficient Hondas (HMC) and Toyotas (TM). Detroit, more dependent on SUVs and pickups, got rear-ended: GM (GM) down 12.5% from May, 2005, Chrysler (DCX) down 11%, Ford (F) down 2%. GM Chairman Rick Wagoner waxed upbeat about the company's prospects at the annual meeting on June 6, but stockholders pushed through two nonbinding resolutions that, if implemented, would give them more clout when electing directors.
This has been a tough year for Japanese business mavericks. On June 5 shareholder-activist fund manager Yoshiaki Murakami said he had confessed to illegal insider trading. Hours later he was arrested. Murakami got tripped up by an obscure securities law that had rarely been enforced. With the plea, he's likely to get away with a fine and a commuted sentence, experts say.
See "An Activist's Fall from Grace"
The Google-vs.-Gates hostilities are moving from search engines and Net ads to Microsoft's (MSFT) stronghold of office software. On June 6 the search giant unveiled a trial version of Google Spreadsheets, an online program that could challenge Microsoft Excel. This follows Google's March acquisition of Upstartle, which is crafting an online word processing program dubbed Writely. But don't expect Google to seize this territory fast. Microsoft owns 90% of the market, while Google's offerings are available only to a select few trial testers.
CEO Paul Otellini said he'd ax lackluster businesses, and apparently he's making good. After losing billions trying to sell chips to communications and cellular outfits, Intel (INTC) plans to unload units that don't fit into its new approach of selling chips and software for PCs, servers, medical devices, and developing markets, according to the San Jose Mercury News, which first reported the news on June 3. The company made a mad push into new markets during the Net boom, but few of those investments have panned out.
See "A Flash Sale for Intel"
Big Pharma breathed easier after Pfizer's (PFE) little blue crown jewel survived a challenge in China. On June 2 a Beijing court ruled against Chinese drugmakers seeking to make generic versions of Viagra. The libido-boosting pill hauled in $1.6 billion in worldwide sales last year, and Pfizer's ability to hold on to the huge Chinese market is vital, especially since blockbusters such as Zoloft and Zyrtec are about to lose patent protection in the U.S. Pfizer also announced on June 6 that it had received healthy bids, north of $14 billion, for its consumer products unit.
Earlier this year, medical implant maker Boston Scientific (BSX) coughed up $27 billion to steal Guidant away from would-be acquirer Johnson & Johnson (JNJ). Boston knew Guidant was under investigation for how it handled the recall of defective pacemakers but figured those problems were manageable. Maybe not: On June 7, The New York Times reported that Guidant drafted a letter to doctors in January, 2005, warning them of hazards from its devices. The alert was never sent, which meant more heart patients received the implants. Boston shares, which lost 1.5%, are down 17.5% this year.
Three down, one to go. Former Silicon Valley investment banking kingpin Frank Quattrone notched his third legal triumph on June 1 as the NASD dropped charges that he gave clients IPO shares of high-flying companies in exchange for steering banking business to Credit Suisse First Boston (CSR). On Mar. 24 the SEC reversed its earlier decision to ban Quattrone from the securities business for the rest of his life. And on Mar. 20 an appellate court tossed out Quattrone's conviction on criminal obstruction-of-justice charges stemming from a 2000 e-mail that he forwarded to subordinates urging them to "clean up those files" before they were subpoenaed in potential civil suits. Prosecutors said he knew about a related government probe and was obliged not to destroy records. His lawyers and the feds are negotiating in hopes of avoiding a third trial: The first ended in a hung jury. If the government backs off without Quattrone pleading guilty to a serious charge, he could be hanging out a shingle in Silicon Valley again.