Going from Bad to Worse
It's like one of those nightmares when no matter where you run, the monsters keep coming. Despite Washington's frantic efforts, the financial crisis and resulting recession look more scary by the day. The big banks, having absorbed some of their weaker brethren and swallowed up hundreds of billions in government aid, still seem so shaky that talk of nationalization is ever louder, with Citigroup (C) already negotiating a deal under which the feds would take up to 40% of the common stock. Fear of shareholder wipeout in the financial sector helped send stocks to new lows on Feb. 23, with the S&P 500 ignominiously sinking to levels last seen in 1997. To combat investor terrors, Fed Chairman Ben Bernanke waxed as optimistic as he could in congressional appearances on Feb. 24 and 25, promising recovery in 2010—if, that is, rescue efforts work as planned, which they certainly haven't so far. He added that the Administration of President Barack Obama isn't contemplating "anything like" the type of nationalization that "zeroes out" shareholders.
Nevertheless, the storm of bad news raged on. Titanic insurer AIG (AIG), kept afloat by some $150 billion in government money, is poised to announce a $60 billion loss last quarter and wants to restructure its bailout yet again, The Wall Street Journal reported on Feb. 24. The median price of an existing home sold in January sagged to $170,300, down 26% from the peak in July 2006, and the annual pace of sales was the weakest in a decade.
Obama's Bully Pulpit
The President apparently believes in Chief of Staff Rahm Emanuel's dictum that one should never let a crisis go to waste. On Feb. 24, Obama spoke to a joint session of Congress, presaging the release of his budget two days later. He both painted a sobering picture of the economy and argued that this is precisely the time to launch ambitious programs. Saying he'll halve the deficit in his first term and end government accounting gimmicks, he added that reforming health care "will not wait another year" and offered initiatives to spur green-energy production and strengthen education. The next day, The Wall Street Journal reported that the budget would include a $634 billion, 10-year health-care program to be funded by boosting taxes on the wealthy and paring federal health outlays. The cuts would hit managed care companies, pharmaceutical makers, and hospitals.
Woes in Europe, Too
Across the Atlantic, things aren't much better, and European Central Bank President Jean-Claude Trichet is itching for more power to make changes. Speaking at a conference on Feb. 23, Trichet said the Continent's financial-services industry was "under severe strain" and is harming the rest of the economy. What's needed, he said, is more regulatory oversight, including tighter supervision of hedge funds and credit rating agencies. The speech seemed aimed at nudging policymakers to give Trichet the clout he wants.
A Detroit Milestone?
Ford (F), the only one of the U.S. auto industry's Big Three with enough cash to skirt the need for government help, is also leading the pack in coming to terms with the United Auto Workers on restructuring. On Feb. 23 the company and the union announced a deal under which Ford can use its stock for up to 50% of the $13.2 billion it must pay into a union-led trust fund for retiree health care. The pact may serve as a model for Chrysler and General Motors (GM). GM's troubles reverberated in Europe, where its Saab unit filed for Sweden's version of bankruptcy on Feb. 20, and its German unit, Opel, said it would need "at least" $4.2 billion in government help to survive. Meanwhile, the Treasury Dept. is quietly looking to line up at least $40 billion for the biggest bankruptcy loan ever if Chrysler and GM go under.
What's impervious to the downturn? Health-care costs. But they're not soaring as fast as in the bad old days, according to a recent survey. Large employers figure such costs will go up 6% this year, the same as last year, whereas in 2007 and '08 they jumped 8%. One reason for the slowdown: Some 51% of big companies now offer so-called consumer-directed health plans, or health savings accounts. And what's the most-cited challenge to keeping costs down? Some two-thirds of companies say it's their employees' lousy health habits.
New Yahoo () CEO Carol Bartz appears to be wasting no time making her mark. On Feb. 20, Kara Swisher of the blog BoomTown reported that Bartz is expected to reorganize management into a simpler structure that would help the embattled Web portal move more nimbly than it could with the complex hierarchy under former CEOs Jerry Yang and Terry Semel. At press time the nature and timing of the changes remained in flux. But they would represent Bartz's first real bid to change the culture of the company, which spent much of last year fending off unwanted deals with rival Microsoft (MSFT).
Mobile Gold Mine
Powered by iPhones (AAPL), BlackBerrys (RIM), and thousands of new software apps, the mobile Internet is generating oceans of data about people's movements and predilections. Algorithm-powered companies, from a startup in New York to Google (GOOG), are sifting these data to place people into new behavioral tribes—and predict their moves. This is the Next Net. Analysis of mobile data could help researchers fine-tune transit systems and track the spread of disease or crime. But the first application, naturally, is marketing.
Exiting News Corp.
Two weeks after reporting a $6 billion loss, News Corp. Chairman Rupert Murdoch is losing his longtime lieutenant, President Peter Chernin. The 57-year-old said on Feb. 23 that he'll leave in June after 12 years of running the company's entertainment assets while the globe-trotting Murdoch built his media empire. Chernin pushed for the acquisition of MySpace and helped build the studio, cable TV, and Web units. But he was said to differ with Murdoch on last year's $5.6 billion deal for Dow Jones. He'll become a TV and film producer at Fox under a six-year contract. For now, the entertainment unit reports to Murdoch, who is likely to come under pressure to name a successor—possibly his 36-year-old son, James, who directs News Corp.'s European and Asian operations.
Commerce, Take Three
After two strikeouts on Commerce Secretary nominations, President Obama stepped to the plate again on Feb. 25, naming former Washington Governor Gary Locke. Since leaving public life in 2005, Locke, a Democrat and the nation's first Chinese-American governor, has traveled to his ancestors' homeland multiple times as a corporate lawyer, helping companies enter the Chinese market and build connections in Beijing. He also has been a champion of transportation spending and tax breaks, including a successful effort that convinced Boeing (BA) to build the 787 jetliner in Everett, Wash.
Obama Names Locke for Commerce
Honda's New Driver
Amid plunging sales, Honda (HMC) CEO Takeo Fukui said on Feb. 23 that he'll cede the wheel to Takanobu Ito, chief of automobile operations, in June. The change had been planned and isn't related to Honda's expected earnings slump of 87% this year. Ito is a 31-year Honda veteran who began his career in auto R&D. In 1990 he led the development of the all-aluminum uniframe body, the first of its kind, for the NSX sports car. Also on Feb. 23, Toyota (TM) said three senior executives, including Masatami Takimoto, executive vice-president for R&D, will retire in June when Akio Toyoda replaces Katsuaki Watanabe as president.
Extra! Chapter 11!
The bloodied newspaper business keeps getting redder all over. On Feb. 21, Journal Register (JRCO.PK), owner of 20 daily newspapers including the New Haven Register, declared bankruptcy. The company was staggering under $692 million in debt, much of it taken on through the 2004 acquisition of four papers in economically depressed Michigan. Two days after Journal Register's filing, Philadelphia Media Holdings, which bought the Philadelphia Inquirer and Philadelphia Daily News from McClatchy (MNI) in 2006, also filed for Chapter 11. And on Feb. 24, Hearst said it may shut down the San Francisco Chronicle if costs can't be cut or a buyer found.
Insurers Get Whacked
Those Medicare Advantage accounts—offered by private companies to the elderly and subsidized by the feds—have proved a bonanza for health insurers. But what Washington giveth, Washington can take away. The stocks of big insurers took a hit on Feb. 23 after the government announced the prior Friday that it will boost reimbursements by just half a percent next year for companies that manage such accounts. Analysts had expected an increase of 3% to 5%. Humana (HUM) shares swooned 24% on the news, while UnitedHealth Group (UNH) fell nearly 15%. The proposal may not prove to be the last word, however—final re- imbursement rates will be revealed on Apr. 6.
UBS: It's Not Over
The battered Swiss bank, which acknowledges helping some wealthy U.S. clients evade the tax man, is caught in a bind. As part of a deferred prosecution agreement, it agreed on Feb. 19 to pay $780 million in penalties and disclose information on U.S. clients "who appear to have committed tax fraud and the like." The U.S., however, promptly filed a civil suit demanding that UBS () hand over names and data on up to 52,000 accounts. Because of Switzerland's famous bank secrecy laws, UBS can't comply unless the authorities say O.K. The bank says it will fight the suit.
"The End of Swiss Banking As We Knew It?"