Stepping Up the Foreclosure Fight
Let's share the pain. That was the gist of President Barack Obama's plan, unveiled on Feb. 18 in Arizona, to slow the flood of foreclosures swamping the economy. The centerpieces of the effort: injecting $200 billion more into Fannie Mae (FNM) and Freddie Mac (FRE) and spending $75 billion to subsidize rate cuts on mortgages so that 7 million to 9 million homeowners can stay in their homes. Essentially, Washington will pick up some of the banks' losses. The proposal arrived amid more grim news, including a Fed prediction that gross domestic product will shrink 1.3% this year, and word that housing starts sank to record lows of 466,000 in January. Bears ruled the Street, with the Dow dropping 298 points on Feb . 17 to near its November bottom.
Detroit's Latest Plea
Surprise! General Motors (GM) and Chrysler, which presented their restructuring plans on Feb. 17, want more federal dollars—a bunch more. GM, warning that bankruptcy would prove a far costlier road, says it requires $4.5 billion on top of the $18 billion it asked for in December. Oh, and in the event the economy gets worse, GM could need an additional $7.5 billion. For its part, Chrysler requests $5 billion on top of the $4 billion it has already borrowed. The two pledge to cut tens of thousands more workers, close more plants, and jettison some brands, including Saab, Saturn, and probably Pontiac. Will taxpayers ever get their money back? GM estimates that if car sales vroom to record levels in five years, the company can pay it off in 2014. If sales continue in a deep slump, the company will owe Uncle Sam almost $30 billion by then.
A New 'Massive' Fraud?
Bernard Madoff is still the king, having allegedly engineered a $50 billion Ponzi scheme, but it appears there's a worthy crown prince on the scene. Charging another "massive, ongoing fraud," the SEC on Feb. 17 filed suit to stop R. Allen Stanford and two of his lieutenants from selling purported certificates of deposit that he claimed would pay dramatically high returns. The action came after Stanford, a Texan operating out of Antigua whose whereabouts were unknown at press time, had already sold some $8 billion of his instruments. The SEC apparently began poking into his operations at least three years ago.
In one artful act of legislative legerdemain, Congress did what years of shareholder agitation has failed to accomplish: sharply curb top executives' pay at poorly performing companies. The stimulus package that President Obama signed on Feb. 17 contains a little item pushed by Senator Christopher Dodd (D-Conn.) that restricts bonuses at companies receiving money from the Troubled Asset Relief Program to no more than one-third of the recipient's total annual compensation. What's more, the bonuses can take the form of restricted stock only—and the measure is retroactive, applying to companies that have already taken cash. Needless to say, Wall Street is aghast—and pay consultants fret that the moves will send top banking talent stampeding for the exits. More than 350 banks have taken TARP money, along with AIG (AIG), Chrysler, and General Motors (GM).
A Booster for Sirius
John Malone loves to extend a helping hand to the down and out. As he did in the past with Ted Turner, the Liberty Media (LINTA) dealmaker will pump major money into satellite radio operator Sirius XM (SIRI), probably allowing it to stave off bankruptcy. Incidentally, the $530 million may also keep it from the clutches of a Malone archrival, EchoStar's (SATS) Charlie Ergen, who had amassed a ton of Sirius debt. Malone gets two board seats, a steep 15% interest rate on a $280 million loan, and can take up to 40% of the company. Sirius can accept a better bid by Apr. 15, and could buy out Malone by Dec. 31, paying him a 5% penalty.
See "John Malone: King of Satellite?"
Sinking Fast in Japan
If you think the U.S. has big troubles, cast an eye across the Pacific. Tokyo said on Feb. 16 that Japan's gross domestic product, whacked by collapsing exports and a soaring yen, slumped at an astonishing annualized rate of 12.7% between October and December—the steepest fall since 1974. So Japan, once seen as well placed to weather the economic storm, is harder hit than the U.S. or Europe. And just to add indignity to insult, Finance Minister Shoichi Nakagawa quit on Feb. 17 after seeming to be drunk at the recent Group of Seven meeting in Rome. Prime Minister Taro Aso, in office since September, now enjoys a popularity rating of 10%. The long-ruling Liberal Democratic Party must call elections by September and could well be thrown out of office.
For a second time, Facebook has lots of egg on its face. In early February the social networking site slipped in changes to its service agreement giving it "irrevocable" license to all content shared on the site, even after the termination of an account. Following an outcry by consumer groups, blogs, and activist users on its own pages, the company backed down on Feb. 18. Sound familiar? In 2007, Facebook ended its advertising program Beacon after users complained that it violated their privacy.
See "Facebook's Fine-Print Fiasco"
No Slump at Wal-Mart
As you might expect in the midst of a brutal downturn, Wal-Mart's (WMT) profit fell 7.4% in the fourth quarter, said the world's biggest retailer on Feb. 17. But look closer. Without a $255 million aftertax charge to settle lawsuits alleging that it underpaid workers, profits would have ticked up a tad. Annual sales topped $400 billion for the first time. Same-store sales actually rose 2.8% while most other retailers were slogging through a horrid holiday season. And Wal-Mart said earnings will jump 6% this year. Investors paid close attention, boosting the stock 3.7% that day.
Sleepless in Sacramento
On Feb. 18, California legislators were hauling sleeping bags and cots to the capitol as they continued their weeks-long battle over ways to fix a $42 billion budget shortfall. Ratings agency Standard & Poor's had already dropped the state's rating to the lowest among the 50 states. Governor Arnold Schwarzenegger, giving new meaning to his "Terminator" identity, sent layoff warnings to 20,000 state employees after first imposing mandatory unpaid days off. He and state Democrats are pushing for $14.4 billion in tax hikes, including an extra 12 cents per gallon for gasoline. State Republicans bounced their leader on Feb. 17 after he expressed support for the new levies.
Snake Eyes for Trump
Maybe the third time will be the charm. Donald Trump's casino empire has gone into bankruptcy once, twice, and on Feb. 17, thrice. Trump Entertainment Resorts (TRMP), which owns three casinos in Atlantic City, listed assets of $2 billion and debts of $1.7 billion. The Atlantic City casino market is in the midst of its worst losing streak, a victim of the rotten economy and new competition in Pennsylvania. Trump, who owned about 28% of the company's shares, stepped down as chairman on Feb. 13. He lashed out at bondholders who rejected his offer to buy the company—and even declared his own stake in the business "worthless."
India Eases the Rules
The country's foreign-investment doors are opening a little wider, and economic nationalists don't like it one bit. Rules approved by the government in mid-February give foreign companies a way around ownership caps that apply to sensitive industries such as telecom, aviation, media, and retailing. Experts say the revised norms will allow foreign companies to exercise effective control in a simpler way than the arcane methods they have used thus far. (The Economic Times of India)
UBS Pays Up
Putting an ugly scandal behind it, Swiss banking giant UBS (UBS) agreed on Feb. 18 to make reforms and pay fat reparations for helping wealthy U.S. clients conceal $20 billion from the tax man. UBS took in some $200 million in annual revenue by helping clients set up fake entities in tax havens such as Panama, Switzerland, and the Virgin Islands. Its sins will cost it $400 million in tax-related payments, plus $300 million in disgorgements under a deal with prosecutors and the SEC. But in settling, the bank avoided an even worse fate: criminal prosecution.
The SBA's New Chief
Who would want this job? Venture capitalist and researcher Karen Gordon Mills, President Obama's pick to head the Small Business Administration, will inherit an agency pummeled by budget cuts and steep declines in its flagship 7(a) loan program, reports the new issue of BusinessWeek's SmallBiz. The Harvard B-School grad is best-known as a proponent of public-private partnerships as tools for helping entrepreneurs. But the SBA has a meager track record on economic development issues, which means Mills may have a tough time putting some of her prior experience to work.