Pumping Money into the System
Central bankers have put on their firefighter hats. On Dec. 19 the Federal Reserve revealed the results from its new Term Auction Facility, lending $20 billion to banks at a low rate of 4.65%. The European Central Bank went one better, pouring $500 billion into the financial system on Dec. 18 at 4.21% before taking back part of the funds. The combined result was a fall in market rates—but no sign that the credit crunch is under control. What's more, the Fed and the ECB have to worry about igniting inflation while they save the financial system. The core U.S. consumer price index, which excludes food and energy, has risen at a 2.6% rate over the past three months. Stagflation, anyone?
Rewriting Mortgage Rules
On Dec. 18 the Fed moved on another front, proposing rules aimed at the worst abuses by subprime predators. The main thrust is to ensure that lenders verify borrowers' ability to pay from income, rather than relying on a home's rising value or on undocumented assets to keep them solvent. The public has 90 days to comment before the rules take effect. Democratic leaders in Congress scoffed that the rules don't go far enough and promised to push more sweeping legislation. And, of course, the proposals do nothing for folks already in trouble.
Goldman Rides High
Everyone knew that Goldman Sachs (GS) had emerged squeaky-clean from the subprime swamp, but the firm just made clear how clean that is. Goldman posted black ink of $3.22 billion for its fiscal fourth quarter, well above Street expectations. And how about the whole year? Try income of $11.6 billion, a 22% jump over 2006. And was Wall Street pleased? Not really. Goldman's admission of a horrid November and its cautionary outlook sent its shares down 3.4% for the day.
See "Goldman's Golden Touch"
Pandit to the Rescue
For other financial giants, the credit crunch just keeps on coming. Vikram Pandit, Citigroup's (C) new CEO, said on Dec. 13 the company would bail out seven structured investment vehicles, assuming $49 billion of assets. The SIVs invest in mortgages, among other things, and investor demand has evaporated, leading to liquidity problems. The move, which follows other big banks' SIV rescues, should stave off forced asset sales and help soothe fears about capital markets. Moody's (MCO) promptly cut Citi's credit rating, and the stock dipped.
Morgan's Chinese Friend
Another big financial outfit goes hat in hand. First Citigroup, then UBS (UBS) recently landed capital injections from sovereign funds. Now it's Morgan Stanley's (MS) turn. China's $200 billion fund, China Investment Corp., said on Dec. 19 that it's paying $5 billion to buy convertible units that could give it up to a 9.9% stake in the Wall Street firm. It's CIC's biggest investment since it was launched earlier this year. Morgan said on Dec. 19 that it's writing off an additional $5.7 billion in subprime investments, for a total of $9.4 billion, much more than expected.
Bear Led the Way
The subprime bust has Bear Stearns (BSC) fingerprints all over it. An analysis by BusinessWeek shows that Bear fund manager Ralph Cioffi led Wall Street in developing a special type of collateralized debt obligation designed to appeal to money-market funds. The CDOs, which were copied by the rest of the industry, nurtured a culture of sloppy lending. Cioffi, who managed two hedge funds that collapsed in June, is now under federal investigation.
Another once-happy union is going up in smoke. A few months after Marlboro maker Altria (MO) announced plans to split its U.S. and international businesses, Tisch family conglomerate Loews (LTR) said on Dec. 17 it would spin off cigarette unit Lorillard, purveyor of the Newport and Kent brands. Loews had already created Carolina Group, a tracking stock for its tobacco assets. Management said Lorillard will be better able to compete in a tough U.S. market if it no longer has to pass its earnings up to Loews, and the parent could see a boost in its credit ratings and stock price from shedding the risky cigarette business. Investors seemed to disagree, however, dumping both stocks the day of the announcement.
Sprint Nextel (S) on Dec. 18 named a new go-to guy: Daniel Hesse, who headed the company's local phone spin-off, Embarq. He replaces Gary Forsee, ousted as CEO in October. The new chief will have his handset full trying to regain lost market share and deciding whether to continue initiatives such as Sprint's wireless broadband rollout. Also on Dec. 18, Eli Lilly (LLY) said President John Lechleiter will succeed retiring CEO Sidney Taurel in March.
Insurance for an Insurer
Buffeted bond insurer ACA Capital Holdings, which reported a negative net worth of $883 million in November, may get a reprieve. A group of Wall Street banks including Merrill Lynch (MER) and Bear Stearns are in talks to shore up ACA, The New York Times reported on Dec. 19. A bailout can't come soon enough for ACA, which saw its credit rating cut to CCC, almost the lowest level above default, by Standard & Poor's the same day. That could slash the value of securities it insured. Guess who's on the hook if the securities plummet? The Wall Street banks.
More Miles per Gallon
For the first time since they were put in place 32 years ago, fuel economy standards are about to rise. President George W. Bush signed into law on Dec. 19 an energy bill that boosts fleet standards to 35 mpg by 2020. The bill includes a 70% increase in efficiency standards for light bulbs, dramatic increases in the production of ethanol, and regulations on other appliances. To the dismay of the greens, the Senate whacked higher taxes on oil giants and failed to extend tax credits for solar power.
Trane's Short Life
Not long ago, American Standard changed its name to Trane after shedding two other main businesses—its namesake bathroom-fixtures unit and vehicle components maker Wabco (WBC)—to focus on air conditioning. The new company didn't last a month. On Dec. 17, Ingersoll Rand (IR) said it would pay $10.1 billion for Trane. Investors ran hot and cool: Trane shares leaped 25% from the Nov. 28 rechristening, while Ingersoll tanked by 10%.
Kevin Martin's Revenge
Embattled FCC Chairman Kevin Martin thumbed his nose at fierce pressure and won a round by pushing two measures through his fragmented agency. One would restrict operators to controlling no more than 30% of the national cable TV market. That's a blow to giant Comcast (CMCSA), which already services an estimated 27% of the country, and the rule is likely to be challenged in court. The other new rule would allow media companies to buy additional TV and radio stations in markets where they own newspaper properties. Federal legislators who worry that media companies would exercise too much control over news gathering may try to upend that one.
German airline Lufthansa made an unexpected landing in the U.S. market on Dec. 13, paying $300 million for a 19% stake in low-cost carrier JetBlue (JBLU). The deal brings a welcome cache of cash for the U.S. airline, which has been straining to make money, but Lufthansa's logic is cloudy. The Germans get a seat on JetBlue's board, though rules limit their influence. Lufthansa may be hoping Washington eventually relaxes regs barring foreigners from owning more than 25% of a U.S. line.
See "JetBlue Makes a Deal with Lufthansa"
CalPERS' New Look
It's the fattest pension fund in the U.S., lording over $250 billion in retirement savings for 1.5 million workers. So where are the sharpies who run the California Public Employees' Retirement System (CalPERS) putting their money? Surprisingly, they're shifting into riskier assets. The giant fund said on Dec. 17 that it will boost investments in private equity to 10% from 6% of the portfolio. Real estate also gets a bump, to 10% from 8%. CalPERS created a new inflation-linked asset class to hold commodities and infrastructure that will account for 5% of the mix. The big losers are bonds, which will shrink to 19% from 26% of assets, and stocks, which will slip to 56% from 60%.
Petrodollars at Work
Maybe the Kuwaitis have been watching The Graduate, in which the lead character is famously given career advice consisting of one word: plastics. Kuwait Petroleum will spend $9.5 billion for a 50% stake in much of Dow Chemical's (DOW) global petrochemical business. Dow will provide the assets and knowhow, the Kuwaitis the cheap feedstock to make products used in many kinds of plastics. The deal trims Dow's exposure to commodity petrochemicals while freeing up capital for higher-margin specialty chemicals.
See "Dow and Kuwait Petro: Profit-Margin Play"
Another Oil Patch Deal
Oilfield services companies are drilling for deals. Houston-based National Oilwell Varco (NOV) announced on Dec. 17 that it would spend $7.3 billion to buy rival Grant Prideco (GRP). While both make gear for oil production, National specializes in motors and pumps, and Grant is a leader in drilling pipe. The move follows a $17.4 billion merger in November by Transocean (RIG) and GlobalSantaFe (GSF), two large drill-rig operators.
The Top Gun of Games?
Uber-producer Jerry Bruckheimer, who already turns out everything from CBS's C.S.I. threesome of TV shows to Walt Disney's (DIS) Pirates of the Caribbean movies, is taking his zeitgeist-seeking talents to video games. A Dec. 19 deal to build a studio for MTV Games will give the Viacom (VIA) unit a shot of testosterone action to go with its megahit game Rock Band. Bruckheimer plans to work with MTV on games that could become TV shows or movies, the company says. Disney owns the rights to games developed from movies he does for the studio.
More Hunger Ahead?
Droughts and floods linked to climate change, hot demand for biofuels—add it all up, and you've got a looming food crisis, says the Food & Agriculture Organization. In the November issue of its Food Outlook report, the U.N. body estimates that the costs of imported comestibles jumped 25% in 2007 for low-income countries. Some 37 nations are acutely at risk, so the FAO wants rich nations to ramp up aid to poor farmers. (FAO.org)
Bilbo Gets Star Billing
What's four feet tall and may be worth $1 billion? Bilbo Baggins, heart and soul of J.R.R. Tolkien's The Hobbit, prelude to his Lord of the Rings trilogy. The film, in limbo for years as Lord of the Rings director Peter Jackson battled over money in court with New Line Cinema, is on track again. It will be produced jointly by MGM (MGM) and New Line, which shares rights to The Hobbit, and by Jackson, who signed on as executive producer but won't direct. Jackson and New Line also settled their lawsuit, thanks to MGM Chairman Harry Sloan, who mediated. Lord of the Rings grossed nearly $3 billion in theaters, according to BoxOfficeMojo.com.
See "Ring Up The Hobbit, Times Two"
The Limping Irish
Notre Dame, the NCAA's richest football team, is sitting out the Bowl season after its rotten 3-9 year. Worse, its TV ratings on NBC, which pays $9 million a year for rights to its home games, scored half of 2005 levels. Despite the Irish's global fan base, the shrinking TV audience and a questionable team for 2008 could clobber its negotiating leverage for the next broadcast deal.
Steroids? So What?
Former Senator George Mitchell's report on steroid use hit the Major Leagues with the force of a 99-mph beanball. But somehow, hardly any of the sport's biggest business backers got clocked. That's because none of the 80-odd players named are power hitters in terms of endorsement deals. (AT&T (T) featured Yankees pitcher Roger Clemens in one of its ads, but that spot stopped running in November.) Baseball's No. 1 corporate fan, General Motors (GM), is still in talks to renew a sponsorship deal that expired last season. And State Farm, headed into the second year of a three-year accord, seems equally unfazed. (AdAge.com)
A Greenhouse Deal
It was a cliff-hanger, and after two grueling weeks in Bali, Indonesia, delegates from more than 180 nations managed only a small step towards combating global warming, with an agreement to come up with a post-Kyoto Accord plan by 2009. In a surprise, the developing nations pledged to cut their own emissions in the future. But greater progress, such as setting actual reduction targets, was blocked by the U.S. delegation, earning it boos and hisses from their frustrated confreres.
More Refco Charges
When companies founder in a typhoon of fraud, it's rare for prosecutors to go after their lawyers. But on Dec. 18 the feds filed charges against Joseph Collins, a partner at big Chicago firm Mayer Brown and former outside counsel to Refco, a major commodities broker that went under two years ago. Collins is charged with helping ex-Refco CEO Phillip Bennett orchestrate an alleged scheme that concealed hundreds of millions in bad debts. Bennett is set to go on trial in March along with other ex-Refco executives. The SEC also filed civil charges against Collins, whose lawyer says he's innocent.
Blackstone in Africa
Call Blackstone Group (BX) the Last King of Private Equity. Amid a global deal slowdown, the buyout shop's Sithe Global Power arm is powering $110 million into the $872 million effort to build a dam in Uganda. Downstream from enormous Lake Victoria, the Bujagali hydroelectric station, a lightning rod for sub-Saharan conservationists, will inject badly needed megawattage into the blackout-prone nation of 32 million—former stomping grounds for dictator Idi Amin.
Windy City Elite
The guard is changing in Corporate Chicago. The CEOs who could rally the city's corporate, civic, and philanthropic interests behind a big idea—Millennium Park, for example—are in their 70s. Taking their place is a generation that springs from a new power base: privately held firms in the financial and service sectors, reports BusinessWeek's spin-off, BW Chicago, in the cover story of its January issue. The change reflects increased demands on chiefs of publicly held companies, as well as the evolution of Chicago's economy. And the new elite doesn't consist of white males only. Women and minorities have cracked it.