Financial Turmoil Spreads Worldwide
The U.S. House of Representatives' passage of the $700 billion rescue package already seems so—well, last week. After a brief moment of relief, investors focused on their fears again, and the result was a drawn-out bloodbath on global bourses. The Dow sank 370 points on Monday, 508 on Tuesday, and 189 more on Wednesday. The toll in Europe on Monday alone: Britain down 7.9%, Germany 7.1%, France 9%. Emerging markets joined in, with Russia off 19% on Monday and Brazil dropping 13% in the three days through Oct. 8. Asia got into the act in a big way on Wednesday as Hong Kong, Singapore, South Korea, and others fell 5% or more and Japan cratered by 9.4%, the biggest one-day loss there in two decades. "This isn't normal," said new Japanese Prime Minister Taro Aso, in the understatement of the year. The plunge, he added, is "frankly beyond our imagination."
As it became clear that the U.S. bailout hadn't calmed the markets, authorities tried to craft a more global response. Governments made vast amounts of money available to banks in hopes of unfreezing credit. The Fed entered uncharted waters by announcing that it will start buying short-term debt from nonfinancial corporations. And on Oct. 8 six major central banks, including the Fed, slashed their benchmark interest rates by half a percentage point in a bid to limit the economic damage wreaked by the crisis.
The contagion seemed to be spreading most virulently to Europe. Britain unveiled plans on Oct. 8 to inject up to $88 billion into major banks in return for equity stakes and up to $800 billion to ease liquidity. European financial ministers on Oct. 7 proposed increasing deposit guarantees for bank customers to head off runs. Iceland apparently teetered on the edge of bankruptcy, nationalizing two of the nation's three biggest banks and pleading for a $5.4 billion loan from Russia. Among other banks falling into state hands was the Dutch subsidiary of Benelux lender Fortis. The German government announced on Oct. 5 a new $68.3 billion plan to prop up Hypo Real Estate after commercial lenders pulled out of a previous deal.
Hedge Fund Blues
Among the investors getting clobbered in the chaos are the alleged best and brightest—that is, hedge funds. Chicago-based Hedge Fund Research says the average fund has lost 9.41% this year. Of course, that's a lot better than the more than 30% plunge in the S&P 500, but hedge managers are supposed to be expert at managing risk and navigating both soaring and tumbling markets. Instead, Ken Griffin's Citadel Investment has seen its main fund post a nearly 20% decline this year, industry sources say. Other prominent losers include big funds managed by QVT, Third Point, Tosca, and Kinetics. But it's not all devastation. One notable winner is John Paulson, whose $30 billion Paulson & Co. boasts several big funds with double-digit gains this year.
Reality Bites BofA
Maybe they should have thrown in a free toaster. Bank of America (BAC) on Oct. 6 reported a 68% drop in third-quarter earnings, below Wall Street's expectations. It also slashed its dividend by 50%. That so unnerved investors that they balked at BofA's original price on a share offering to shore up its capital base, and it had to cut the price from $28 a share to $22 in order to raise $10 billion.
Who Gets Wachovia?
Ben Bernanke may need to summon his inner Solomon to settle this feud. When Wachovia's board on Oct. 3 said it would renounce its earlier, government- brokered deal to be acquired by Citigroup (C) and would accept a higher, $15 billion offer from Wells Fargo (WFC), Citi didn't take the rejection well. Citi sued Wachovia, Wachovia sued back, and the prospect of a protracted legal battle prompted Fed officials to call a ceasefire in hopes that they could forge a compromise, with Citi and Wells each getting a slice. On Oct. 8, The Wall Street Journal said Citi will recruit partners to join in its quest for the bank, suggesting the dispute could drag on.
Wachovia: A Split May Boost the Banking Industry
With Senator Barack Obama edging ahead in the polls, most pundits figured Senator John McCain needed to pull off something dramatic in the Oct. 7 Presidential debate. That didn't happen. But McCain did come up with one policy surprise: He wants to spend $300 billion to buy loans of homeowners nearing foreclosure and help them arrange more affordable mortgages. As his campaign explained later, the change from what Congress enacted in a bill this summer—and what Treasury is expected to do as part of its rescue plan—is that lenders and investors would receive full value of original mortgages, though homes often are worth far less. Taxpayers, rather than lenders, would eat the difference.
McCain's Mortgage Bailout Plan
Bad Omen on Profits
The biggest aluminum maker in the U.S. looks as mighty as a crumpled old can. Alcoa (AA) kicked off the third-quarter earnings parade on Oct. 7 by reporting a 52% plunge in profits, to $268 million, as revenue slipped 2%, to $7.23 billion. The company said it had suspended all "noncritical" capital outlays and share buybacks. Alcoa stock promptly hit a 10-year low, closing on Oct. 8 at 14.91. That's down 67% from its May peak of 44.77.
Google-Yahoo in Limbo
The search advertising deal that set rivals and watchdogs snarling has been put on hold as of Oct. 3 to give the Justice Dept. more time to review it. The pact calls for Yahoo! (YHOO) to run some of Google's (GOOG) ads on its pages to boost Yahoo revenues by as much as $800 million a year. But many advertisers—and rivals such as Microsoft—(MSFT) worry about the deal's potential to make the 800-pound Google even more powerful. Some observers think Justice could give its O.K. by the end of October, imposing restrictions or oversight.
Battle in the Aisles
The balance of power between consumer product companies and retailers is shifting. The big chains have spent several years raiding the ranks of Procter & Gamble (PG), Unilever (NSRGY), and Nestlé for marketing talent to build their own private-label brands. Now they want consumer product companies to spend more on in-store marketing. And why not? A recent survey by Deloitte Consulting and the Grocery Manufacturers' Assn. showed that in-store promotions yield a higher return on investment compared with ads in traditional media.
Score One for Icahn
We won't have ImClone to kick around much longer. As rumored last week, Eli Lilly (LLY) proved to be the mystery suitor cited by Imclone Chairman Carl Icahn in spurning Bristol- Myers Squibb's (BMY) $62-a-share bid. Lilly agreed on Oct. 6 to buy the biotech for $65 million, or $70 a share, a 50% bump over the price in July before Bristol's offer. ImClone's only product on the market is cancer drug Erbitux, but Lilly mostly wants the pipeline. Imclone will forever be linked to the insider-trading scandal that sent founder Sam Waksal and his pal Martha Stewart to jail.
Tata's Strategic Retreat
Tiny car, monster hassle. India's Tata Motors (TTM), which is all set to launch the $2,500 Nano by yearend, said on Oct. 6 that it's ditching the already-built factory at Singur, near Kolkata, and trucking on over to Sanand in the west Indian state of Gujarat. Months of protests by peasants and local politicians against land acquisition methods at the original site had stalled work. Until the Sanand plant, with a capacity of 250,000 vehicles annually, is ready, Tata may consider using existing facilities in Pune, near Mumbai, and Pantnagar in north India to meet the deadline.
A Helping Hand for AMD
Groaning under the weight of building and maintaining multibillion-dollar factories, Advanced Micro Devices (AMD) said on Oct. 7 that it will split into two companies—one devoted to designing and selling microprocessors and graphics chips for PCs, the other to manufacturing them. AMD will be a minority partner in the new outfit—for now called Foundry Co.—with an Abu Dhabi investment firm holding the rest. But it's getting $1.2 billion in debt off its books, plus $700 million in badly needed cash and equity amounting to 44%. AMD stock rallied about 8% on the news.
AMD's Spin-off: Abu Dhabi to the Rescue
In what may be a harbinger of more pink slips as the financial crisis whacks Silicon Valley, battered online auctioneer eBay (EBAY) said on Oct. 7 that it will lay off 1,600 employees, or 10% of its workforce. While that's a reflection of eBay's troubles in its core business, beset by fierce competition from Amazon.com (AMZN), CEO John Donahoe also signaled bigger plans for the online-payments business by acquiring a company called Bill Me Later and two other outfits for $1.3 billion. They'll be melded with eBay's lucrative PayPal unit.
Why Bill Me Later Said 'Buy Me Today' to eBay