A Stillborn Plan, a Bailout Takes Shape
On Mar. 31, with fanfare, Treasury Secretary Henry Paulson released a blueprint to revamp the regulatory structure governing the world of finance. The plan would give more power to the Fed and consolidate the hodgepodge of oversight agencies. It promptly drew fire from many quarters and in an election year will likely generate little action. But a bill to help ease the housing crisis was moving swiftly through Congress, though help for mortgage holders will likely come later this year. Meanwhile, Housing & Urban Development Secretary Alphonso Jackson resigned on Mar. 31.
Two words Ben Bernanke is loath to utter: recession and bailout. The Fed chief predicted on Apr. 2 in congressional testimony that the economy "will not grow much, if at all, over the first half of 2008 and could even contract slightly," but he never said the U.S. was in a recession. As for the Fed's financing to help JPMorgan Chase's (JPM) takeover of Bear Stearns (BSC), Bernanke said "sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions...and could have severely shaken confidence."
See "What Bernanke Didn't Say"
More Big Writedowns
Banks reveal monster losses, Wall Street rejoices. Is this some kind of April Fools' joke? On Apr. 1, Swiss giant UBS (UBS) announced $19 billion and Deutsche Bank (DB) $3.9 billion in mortgage-related writedowns. UBS is expected to post a first-quarter loss of $12 billion, and the grim numbers cost Chairman Marcel Ospel his job. The bank plans to plug the hole in its finances with a $15 billion share offering. Partly prompted by the notion that banks are nearing the end of nasty revelations, investors pushed up European stocks, and the Dow jumped nearly 392 points, or more than 3%.
See "UBS: Is This the End of Writedowns?"
Two lenders, two different fates. Thornburg Mortgage (TMA) fought off bankruptcy speculation by securing $1.35 billion in new financing and should be able to resume lending in weeks. Thornburg fell victim to the evaporating value of its mortgage securities and had been unable to meet a $610 million margin call. Fremont General (FMT) is still in the soup. The FDIC on Mar. 26 ordered the Brea (Calif.) bank to recapitalize or put itself up for sale. Fremont, beset by subprime woes, said it might not be able to comply.
Lehman's Busy Week
Sue a company for fraud, then raise $4 billion. So went the week for Lehman Brothers (LEH). On Mar. 31 the investment bank filed a lawsuit in Tokyo against Japanese trading company Marubeni. Lehman said that it had been swindled out of $350 million by two Marubeni employees who forged documents to obtain loans. Marubeni says the company played no part in the forgery. The next day, Lehman raised $4 billion to regain the confidence of investors worried about a repeat of the Bear Stearns scenario.
See "Lehman Sues Japanese Trader Marubeni"
In December, 2006, when a posse of private equity firms—Blackstone Group (BX), Carlyle Group, TPG, and Permira Advisers—bought Freescale Semiconductor (FSL), they thought they had bagged the industry's crown jewel. But Freescale's CEO recently left, and BusinessWeek has learned that the buyers have written down their $7 billion stake by 15%, or $1 billion. Here's how a tech deal went awry.
Pernod Ricard on Mar. 31 took a big slug of vodka, buying V&S Group, parent company of Absolut, from the Swedish state for $8.9 billion. The French drinks group outbid rivals Fortune Brands (FO) and Bacardi. The stiff price rattled some investors. But Absolut will give Pernod a boost in the U.S., where it's been a distant second to global No. 1 Diageo (DEO).
See "Pernod Ricard Swallows Absolut"
Rebate Gold Rush
They're after your tax rebate. Consumer-goods companies are crafting campaigns aimed at corralling as much as possible of the $106 billion windfall headed to American households in May. Sony (SNE), figuring that shoppers may spend both their regular tax refunds and the rebate before they arrive, is urging them to "Turn your 1040 into a Sony 1080p"—that is, a high-definition TV. And Home Depot (HD) suggests that it would do both the country and the planet good if you spend the rebate fast—on "green" items. (Advertising Age)
The drugs Vytorin and Zetia are great at lowering cholesterol. But now they're lowering something else—the value of the companies that co-market them, Merck (MRK) and Schering-Plough (SGP). On Mar. 31, Schering plunged 26% and Merck 14.7%, wiping out $22 billion in shareholder value. The reason: Top cardiologists at a scientific meeting recommended that the blockbuster drugs, which pulled in $5 billion last year, be used only as a last resort. A clinical trial showed that while Zetia and Vytorin do cut "bad" cholesterol, the reduction didn't seem to benefit patients.
See "A Weak Prognosis for Vytorin and Zetia"
A Bonanza for Bono
The music industry is dancing to all kinds of different drummers these days, and Live Nation is one of the loudest. On Mar. 31 the concert promoter said it has locked up supergroup U2 with a 12-year deal for an estimated $100 million. Live Nation gets the rights to the Bono-led band's megatours as well as its merchandising. Unlike Live Nation's $120 million deal with Madonna last fall, this one doesn't include the rights to distribute U2's music, which stays with Universal Music. But the deal gives Live Nation more clout for its plan to set up a service to battle Ticketmaster.
Tinseltown's New Soap
Already patching itself up after a 12-week writers' strike, Hollywood faces another potential crisis: warring guilds. On Mar. 30 one of the two unions representing actors, the American Federation of Television & Radio Artists, broke away from its longtime partner, the Screen Actors Guild. The studios will likely play the rival guilds against one another when talks begin to replace the contract that expires on June 30. They're expected to start negotiating with SAG on Apr. 15.
Google Falls to Earth
Ever since its 2004 IPO, Google (GOOG) has led an enchanted corporate life, blowing past rivals such as Yahoo! (YHOO) to become the most fearsome force in online advertising. But suddenly the giant has discovered gravity. Amid concerns that clicks on its lucrative search ads are slowing, investors have knocked its shares down 40% from their intraday high of 747 last November. The question leading up to its Apr. 17 earnings report: Can Google maintain its magic?
Sinking Auto Sales
The United Auto Workers strike at American Axle drags into its sixth week with the two sides remaining far apart on key issues. General Motors (GM) has the most to lose, since it can't put together most of its trucks and some cars without items from the supplier. Perversely, sputtering sales have kept the strike from denting GM much, since inventories were fat. Overall U.S. auto sales fell 12% in March, with GM's plummeting 19%.
Round One to Diller
Media mogul turned Internet power Barry Diller won approval on Mar. 28 from a Delaware judge to break IAC/InterActive (AICI) into five pieces. That stymied John Malone, who argued that Diller had overstepped a 1995 agreement under which Diller could vote the controlling stake in IAC held by Malone's Liberty Media. But there could be a rematch: The judge said Malone could bring suit if the board approves the split and he wants to press "claims related to the [board's] fiduciary duties."
For U.S. farmers, soybeans and wheat are hot, while corn is cooling—and that has rattled the commodities markets. The Agriculture Dept. on Mar. 31 said farmers plan this year to boost their soybean acreage some 18%, while they'll cut acres in corn by about 8%. Farmers are chasing high prices for soybeans, used in everything from meatless burgers to milk substitutes. But the report is having a contrary effect: Traders at the Chicago Board of Trade sent corn prices to new records, while soybean futures slipped as speculators feared a glut.
Harvard's Money Maven
Apparently Harvard's endowment has had it with money management superstars. Faced with its second CEO search in two years, the $35 billion Harvard Management on Mar. 27 picked a familiar face: Jane Medillo, who worked there for 15 years before leaving to head investing at Wellesley College in 2002. The fund's prior chief, Mohamed El-Erian, was a top-ranked fund manager at Pacific Investment Management before joining Harvard in October, 2005. His old outfit wooed him back last September.
Setback for Tesco?
Britain's No. 1 supermarket chain is taking a breather in the U.S. Tesco (TESO), whose recipe for growth has proven just about infallible so far, revealed on Mar. 26 that it'll postpone further expansion on the West Coast for three months after opening 59 Fresh & Easy outlets in just four months. Analysts reckon the neighborhood markets are proving to be a tougher sell than anticipated.