Forget Rates. Let's Print Money
Merrily we sail along into uncharted waters. In a move unprecedented anywhere, the Fed on Dec. 16 said it was not only cutting its key rate to near-invisibility—a range of 0% to .25%—but also would now focus on reviving the economy by pumping out a tsunami of cash. Among other actions, it pledged to buy "large quantities" of mortgage-related debt and possibly T-bonds. More grim numbers presumably spurred the Fed: Consumer prices fell 1.7% in November, the most since records began in 1947, sparking fears of deflation; and housing starts tumbled 18.9%, with no bottom in sight. On the same day the Fed acted, President-elect Barack Obama met with his team to design a stimulus program that could total as much as $1 trillion over two years.
Red Ink on the Street
The financial crisis continues to make mincemeat of earnings at the last two independent investment banks. Both Goldman Sachs (GS) and Morgan Stanley (MS) managed to eke out profits for the year but were slammed by big losses for the fourth quarter. Morgan bled $2.37 billion, much more than analysts had expected, while Goldman lost $2.29 billion, its first quarterly loss since the firm now run by Lloyd Blankfein went public in 1999. Both banks have been aggressively shrinking their balance sheets and shoring up capital with outside money.
Who else was in on Bernard Madoff's alleged massive Ponzi scheme? How did the SEC miss it? And where did all that money go? These are just a few of the questions afloat in the wake of what may be the largest swindle in Wall Street history. But answers may be a long time in coming. On Dec. 16 the head of the Securities Investor Protection Corp. said Madoff's financial records were "utterly unreliable" and would take six months to sort out. The same day, SEC Chairman Christopher Cox admitted the agency's "apparent multiple failures over at least a decade." Litigation will likely drag on for years, and the hedge fund industry will never be the same.
Auto Bailout Redux?
Since the fiery crash of Congress' bailout deal last week, the Bush Administration has been looking for a new route to get General Motors (GM) and Chrysler at least $14 billion in bridge loans from the $700 billion Troubled Asset Relief Program. At press time, the Treasury was hammering out details of what would be required from the automakers to prove their long-term viability, and was weighing "car czar" candidates to oversee the companies' restructuring. Meanwhile, Chrysler will close all 30 of its plants on Dec. 19 for at least a month.
Pumping Less Oil
Does OPEC even matter at this point? Alarmed by black gold's vertiginous slide, the cartel's oil ministers said on Dec. 17 that they'll tighten the spigots by 2.2 million barrels per day, starting on Jan. 1. That comes in addition to cuts of 2 million barrels in September and October. Russia—not an OPEC member—joined in to say it would slash 320,000 barrels per day. Oil traders were unimpressed, sending crude down $3.54 per barrel to $40.06 in New York, partly because they doubt OPEC can make the cuts stick.
Where there's smoke, there's litigation, as the cigarette companies were unpleasantly reminded this week. On Dec. 15 the Supreme Court ruled 5-4 that smokers may use state consumer protection laws to sue cigarette purveyors for the way they promote "light" and "low-tar" brands. Altria (MO), maker of Marlboro, and Reynolds American (RAI), which makes Camel, had argued that the federal law mandating warning labels trumped state regulation. A day later the companies did prevail in a product liability case brought in New York on the issue of whether they were wrong to sell regular cigarettes when they could have used lower levels of tar and nicotine. The stocks of both companies, which have been sliding most of the year, sank further.
More Picks from Obama
President-elect Barack Obama made much of appointing a team of rivals when it came to national security and economic policy, but his energy and environment candidates appear largely to think alike. Obama's pick for Interior Secretary, Colorado Senator Ken Salazar, has been best known recently for his go-slow approach toward oil-shale production. The Energy Secretary choice, Nobel laureate Steven Chu, runs the Lawrence Berkeley National Laboratory at the University of California at Berkeley, where he championed accelerated work on alternatives to fossil fuels. Meanwhile, on Dec. 17, Obama chose Mary Schapiro, head of the private Financial Industry Regulatory Authority (Finra), to run the SEC.
MGM's Pot of Gold
Argh, maties, MGM Mirage (MGM) cut itself a timber-shiverin' deal. The Las Vegas casino giant, which has been struggling for financing to complete its $9 billion CityCenter casino project on the Strip, will off-load its Treasure Island Hotel & Casino to gambling entrepreneur Phil Ruffin for $775 million. MGM Mirage stock leaped 15% on the news.
Siemens Pays Up
Forking over legal penalties of more than $1.6 billion isn't usually reason to celebrate, but top executives at Siemens (SI) were visibly relieved on Dec. 15 when they unveiled a settlement with U.S. and German authorities on far-ranging bribery charges. The record haircut could have been worse, considering the scale of the payoffs—$1.36 billion from 2001-07 to win contracts, mostly in emerging nations. In addition, the U.S. didn't bar Siemens from competing for federal contracts. Siemens paid $800 million in the U.S. and $574 million in Germany, following a $274 million fine already levied there.
See "Siemens Settlement: Relief, But Is It Over?"
A Rich Time for Hackers
What cross-border industry is profiting from the global slump? Cybercrime. The past 12 months have seen a sharp boost in the volume of malware, according to a new report by McAfee (MFE). The IT security specialist figures the number of PCs infected and turned into zombie machines has quadrupled in the last quarter alone. And criminals are exploiting the fact that more people are using the Internet to search for good deals and good jobs. For instance, fake job listing sites have popped up to collect detailed personal information and then use it for nefarious ends. (McAfee Virtual Criminology Report, 2008)
Two Chinas Get Closer
As of Dec. 15 you can hop a plane, sail a container ship, or mail a letter from mainland China to Taiwan—or vice versa. That may not seem like a big deal, but it lifts a ban dating back to the civil war that ended in 1949. Direct trade, transport, and postal links signal thawing tensions and are expected to boost the economies of both sides. The curbs have forced people and goods moving across the 160-kilometer Taiwan Strait to make costly and time-consuming diversions through Hong Kong, Macau, and Okinawa.
See "China and Taiwan Economic Ties Grow Closer"
GE: Fewer Forecasts
General Electric (GE) has been famed for meeting quarterly targets, but it won't be announcing them anymore. On Dec. 16, CEO Jeffrey Immelt said at its annual investor outlook meeting that the company would stop offering quarterly earnings guidance. He did, however, say profit growth in GE's industrial business will shrink to between zero and 5% in 2009. The company also will maintain its dividend payment and won't sell or spin off its iconic appliance and lightbulb businesses—for now. The same day, GE trumpeted a $3 billion gas turbine order from Iraq, the biggest ever for GE Energy.
See "GE: No More Earnings Forecasts"
It's tough building a global brand—just ask Chinese companies. A mere handful have made a name outside their home market. But it's only a matter of time before Chinese pioneers like Haier and Lenovo (LNVGY) are joined by others. The December edition of BusinessWeek China profiles four up-and-comers. One is China Merchants Bank, which has exploited technological innovation to become a force in the credit-card market. Also featured: South Beauty, a chain of restaurants and upscale clubs; Aigo, a maker of cameras, MP3 players, and other digital gizmos; and Mindray (MR), a medical device manufacturer and successful exporter.