Desperate Days in the Canyons of Finance
In the same week that yet another hurricane clobbered the Gulf Coast, the howling winds on Wall Street hit 150 miles an hour, and the news flew so fast it was hard to catch a breath. On Sept. 15, Lehman Brothers (LEH) went under, with Barclays (BCS) paying a bargain $1.75 billion for the choice parts of the firm two days later. But the truly earth-shaking event was the Fed's $85 billion bailout of giant insurer AIG (AIG) on Sept. 16, after it became clear that the private sector couldn't raise the needed capital and a collapse would be catastrophic. The Fed, declining to panic, held its key rate steady at 2%. But the Dow plunged 7% from Sept. 15-17, and the depth of lingering fears was highlighted by the price of gold, which went from $780 to $869 on Sept. 17. At press time, only two large independent investment banks were left on the Street—Goldman Sachs (GS) and Morgan Stanley (MS)—but it seemed Goldman might soon be the last man standing. Both firms on Sept. 16 reported profit drops that actually beat analysts' expectations, but that didn't stop investors from stampeding. By the close of trading on Sept. 17, their shares were down 15% and 32%, respectively, and Morgan, fearing for its life, was said to be deep in merger talks with Wachovia (WB) and at least one other bank. The other house that appeared in imminent danger, Washington Mutual (WM), on Sept. 17 won a concession from its biggest investor that would allow it to raise capital, lop off branches, or sell out entirely.
Stop Naked Shorts!
It may be a classic case of shutting the barn door, but the SEC on Sept. 17 issued a rule targeting "naked shorting," in which investors sell shares they don't own without even arranging to borrow them first. The rule, effective immediately, requires shorts to deliver shares to buyers within three days; the agency also finalized two narrower rules limiting the practice. Some see naked shorting behind the failures of Bear Stearns and Lehman Brothers, but critics question how widespread the practice really is and say a temporary rule that expired in August, protecting just 19 financial firms, encumbered legitimate investors.
'Breaking the Buck'
So much for safe havens. On Sept. 16, the Reserve Fund announced that hundreds of millions of dollars in debt securities issued by Lehman Brothers and owned by its money-market Primary Fund were worthless. The result: The fund's net asset value fell from $1 per share to 97 cents. It was only the second time in history that a seemingly safe money fund—a form that Reserve's founder helped invent more than 30 years ago—had "broken the buck." Could other such funds follow? At Evergreen Investments (ERC), parent Wachovia announced it would prop up the value of three money funds so they wouldn't crater along with Lehman debt.
Somewhere in communist heaven, Marx and Lenin must be chuckling. But that will be little consolation to today's capitalist Russia, caught in the bitter winds from Wall Street. On Sept. 16, Moscow's MICEX exchange fell by a staggering 17.5%. The next day, regulators suspended trading on the two main bourses. The debacle follows weeks of slumping prices—not helped by the foray into Georgia in August. Russia's market has tanked by almost two-thirds since early July, wiping out $750 billion in equity value.
German bankers are falling back in love with those middle-class depositors they have taken for granted in recent years. Deutsche Bank (DB) agreed on Sept. 12 to pay $4 billion for a 30% stake in Deutsche Post's Postbank unit, which offers services to customers at post office counters. The deal, the first step on the way to acquiring a majority, marks a return to roots for Deutsche, which has spent the past decade building a global investment banking business. It comes less than two weeks after Commerzbank (CRZBY) bought Dresdner Bank.
Poisoned Milk in China
It was bad enough when the deadly chemical melamine was found in pet food exports from China last year. Now it's turning up in Chinese baby formula, apparently added by unscrupulous dealers because it falsely boosts protein levels in milk on tests. Contaminated powdered milk had killed at least three infants and caused illnesses in 6,244 children as of Sept. 17.
See "Chinese Again Victimized by Poisoned Products"
Layoffs at HP
The announcement came as a shock, especially with the financial markets in crisis: Hewlett-Packard (HPQ) said on Sept. 15 that it will cut 24,600 jobs. But here's the glass-half-full part: The cuts will come over three years in the process of integrating technology outsourcing outfit Electronic Data Systems (EDS). About half will come in the U.S. And HP said it would hire 12,000 workers over the same period as it beefs up its business of managing companies' IT needs.
See "HP to Cut Nearly 25,000 Jobs"
No Deal for Take-Two
Electronic Arts (ERTS) made another U-turn in its pursuit of the maker of smash franchise Grand Theft Auto—and this one could mean "game over." EA, one of the largest independent video game publishers, said on Sept. 15 that it had ended talks to acquire Take-Two Interactive (TTWO). With the $2 billion offer off the table, Take-Two says it plans to explore "strategic alternatives." EA is betting it can boost profits without taking on extra debt, thanks to its new world-building game, Spore, and more than a dozen other titles due in the next six months.
See "EA Abandons Pursuit of Take-Two"
To Heck with Green
With consumers feeling blue, companies are dialing back on green marketing. In a survey of 72 companies by Duke University's Fuqua School of Business, chief marketing officers ranked environmental issues lowest on a list of five priorities over the coming 12 months. Even Wal-Mart (WMT), which has beaten the sustainability drum in recent years, is going easy. Green issues were mentioned in 12 of its press releases in the year through Sept. 11, compared with 29 during the same period last year. (Advertising Age)
A Jolt from the Volt
General Motors (GM) wrapped some steel around the hype it has generated for its Chevrolet Volt electric car on Sept. 16, when it rolled out the production version of the green machine at its 100th anniversary event in Detroit. The Volt will arrive in showrooms in late 2010. It will be able to go 40 miles on electric drive before a gasoline engine kicks in to recharge the battery. Some critics carped that the production model had lost some of the edgier styling that wowed the crowds at last year's Detroit Auto Show.
See "GM Charges Up the Electric Chevy Volt"
The global financial system may be trembling, but the urge to merge runs strong—especially in fast-consolidating industries. German chemicals giant BASF (BF) on Sept. 15 made a $5.4 billion friendly offer for Swiss specialty chemicals maker Ciba (CSBHY). BASF even found banks willing to lend it money for the deal. The combined company will be the world's top supplier of chemicals to the paper industry. Elsewhere on the deal front, Samsung on Sept. 17 made public a $5.8 billion offer for flash-chip maker Sandisk, which spurned the bid as inadequate.
Hurricane Ike slammed the Texas and Louisiana coasts on Sept. 13 and then rampaged across the Midwest, causing an estimated $16 billion in damages. Some 1.3 million barrels of daily oil production, already shut down because of Hurricane Gustav, stayed down. But oil traders shrugged that off, and futures prices continued their recent swift fall. Oil sank as low as $90.51 a barrel on Sept. 16 before firming a bit on Sept. 17. Traders are focusing on the bigger picture: Wall Street turmoil, economic gloom, and signs of dissension in OPEC. The Saudis have signaled that they don't feel bound by production cuts agreed to by the cartel on Sept. 10.
Harvard Scores Again
How in heaven's name does Harvard do it? The university's $37 billion endowment fund, known for racking up superrich returns, posted a gain of 8.6% for the year ended June 30. The fund far outperformed most other large college funds, which lost 4.4% on average, and walloped the S&P 500, which dropped 13.1% in the same period. The fund relies on a bevy of unusual investments, ranging from hedge funds to timber forests, to maintain its scintillating performance.
The High Cost of NATO
Membership in NATO has its privileges, but it also carries a steep price. Romania, a member since 2004, is gearing up to make its biggest military equipment purchase ever: 48 fighter jets, reports BusinessWeek Romania in its Sept. 23 issue. Companies including Alenia, Lockheed Martin (LMT), and Saab (GM) are set to bid on the estimated $5 billion contract. And that's a fraction of the $18 billion tab to bring Romania's armed forces up to NATO snuff, the government figures.