An Antidote to Toxic Assets?
Thanks, Tim, we needed that. Wall Street breathed a sigh of relief on Mar. 23 after Treasury Secretary Timothy Geithner described the details of a plan to buy up to $1 trillion in devalued assets squatting uncomfortably on banks' balance sheets. The Dow soared 498 points, or 6.8%. Geithner's program essentially invites private investors to bid against each other for mortgage-related assets—with Washington loaning them most of the money and assuming most of the risk. Some big private equity firms said they're ready to jump in. The big question is whether banks will participate, knowing such sales will force them to take fat writedowns against their already slender capital.
The AIG Mess Gets Worse
At this time of year, the three most hated letters in America are usually IRS. Not this year. Popular rage over AIG's $165 million in retention payments to staffers whose unit sank the company looked, at first, to vastly complicate President Barack Obama's task in reviving the financial sector. Never mind that New York Attorney General Andrew Cuomo said on Mar. 23 that some $50 million has already been voluntarily returned. Or that CEO Edward Liddy, himself working for $1 a year, asked bonus recipients to cough up half their pay, despite fearing that resignations would follow. But as days wore on, the fury seemed to cool, at least in Congress, and fears faded that firms would refuse to participate in the toxic-assets plan. Still, AIG has yet another cross to bear: On Mar. 23 The Wall Street Journal reported that the IRS is challenging tax-cutting deals structured for other companies by the same unit that brought the insurer to grief.
Obama's Power Play
So you don't like the way we handled AIG? Then give us more clout. So said Treasury Secretary Geithner and President Obama, in congressional testimony and a news conference, respectively, on Mar. 24. Obama wants Congress to greatly expand the government's powers to seize nonbank financial firms, such as hedge funds, insurers, private equity houses, and other outfits deemed too big to fail. The House promised action within weeks. Obama also announced that he has summoned a dozen of the nation's top bankers to a White House confab on Mar. 25.
Goldman Sachs has $10 billion burning a hole in its pocket—that is, CEO Lloyd Blankfein apparently can't wait to give the money back to the feds. Sometime in the next month, Goldman hopes to return the aid it received last fall, reported The New York Times on Mar. 24. Goldman isn't commenting, but it has made no secret of its desire to liberate itself from government strictures on executive pay. And it appears the Goldman talk is prompting other banks to cry: "Me too." The Los Angeles Times said on Mar. 25 that Bank of America would like to begin repaying some of its $45 billion in TARP money in April.
Housing: Signs of Life?
First-time home buyers seem to have decided that foreclosure-sale prices are too good to pass up. On Mar. 23 the National Association of Realtors reported that deals for existing homes in February rose a higher-than-expected 5.1% over January. The median price of a single-family home was $164,600 nationally, down 15% from the same month last year. Foreclosures made up more than 40% of sales, and the association's chief economist, Lawrence Yun, said bank-owned homes typically sell for 20% less than the normal market price. But wait: New home sales are climbing as well, up 4.7% in February, the first month-to-month jump since July, said the Commerce Dept. on Mar. 25. The median price, however, sagged 18% from February, 2008, partly because many builders have chopped prices to compete with bank-owned homes. Mar. 25 also brought word that durable-goods orders rose 3.4% in February, a total surprise to economists—but the January number was revised downward.
Dump the Dollar?
China has fired another shot across Washington's bow, again signaling Beijing's anxiety about its vast Treasury holdings and its ambition to have more say in global financial matters. On Mar. 23, just a week before the Group of 20 meeting in London, People's Bank of China Governor Zhou Xiaochuan called for a new "super-sovereign reserve currency" to replace the world's reliance on the dollar. The goal, Zhou wrote on the bank's Web site, is to create a currency "that is disconnected from individual nations and is able to remain stable in the long run." Not surprisingly, U.S. officials were not amused, and Treasury Secretary Geithner said on Mar. 25 that any changes should be "evolutionary." Just about everyone agrees that the dollar won't be dethroned soon.
See "China Talks Tough with Call to Dump Dollar"
Daimler's New Partner
A cash infusion from one sovereign wealth fund is good; from two, even better. Germany's Daimler, already 6.9% owned by Kuwait, said on Mar. 22 that Abu Dhabi's Aabar Investments will pay $2.6 billion for a 9.1% stake in the maker of Mercedes cars and trucks. Daimler will issue new shares to Aabar and aims to use the low-cost capital to develop electric vehicles and other eco-friendly technology. Along with Kuwait, Aabar could also help Daimler repel raiders who might be tempted to take advantage of its stalled-out share price.
See "Abu Dhabi Fund Takes 9.1% Daimler Stake"
U-Turn at the EPA
Two years ago the Supreme Court ruled that the EPA has the authority to fight global warming under the Clean Air Act—but first it has to show that carbon dioxide and other greenhouse gases pose a danger. President George W. Bush's EPA balked at such a finding. In contrast, the Obama Administration forwarded one on Mar. 20 to the Office of Management & Budget, laying the groundwork for regulatory curbs on emissions. Most companies—and environmentalists—prefer that climate change be tackled through new legislation, and the threat of EPA action turns up the heat on Congress.
It took six years' gestation, but the cute little Nano is finally with us. On Mar. 23, Tata Motors Chairman Ratan Tata launched the world's cheapest car in Mumbai. The first 100,000 customers, out of millions of expected applicants, will be picked by lottery to buy the base model-there are two more deluxe models—for about $1,900. The Nano will roll off the assembly line in July. From an initial 50,000 a month, output should rise to 250,000 once a new plant in western India starts humming in late 2009. A version with lower emission levels will hit the road in Europe in 2011, while a year later a Nano sporting a sturdier engine will rev up in the U.S.
See "Tata: Making the Nano More Affordable"
Rolling the Dice in Vegas
The stakes just got a whole lot higher for MGM Mirage's controlling shareholder, Kirk Kerkorian. Dubai World, an investment arm of the Dubai government, sued MGM, its partner in a massive and troubled project on the Las Vegas Strip. The $8.6 billion CityCenter would be the largest playground in the gaming mecca, comprising three hotels, two condo towers, a shopping mall, and a casino resort. Its roulette wheels are due to start spinning at the end of the year. In the suit, Dubai World blames its partner for cost overruns and asks the court to free it from future funding obligations. Auditors had previously questioned MGM's ability to meet its financial commitments. An MGM spokesman said the Dubai World suit is "completely without merit" and that MGM "is ready, willing, and able to fund its share of the costs to complete CityCenter."
Oil Patch Marriage
There's oodles of oil in Canada. Unfortunately, much of it is mixed with sand, making for high-cost fields where the sludgy stuff is dug up from the ground and processed in large, expensive separating facilities. That helps explain why two Canadian oil giants, Suncor and Petro-Canada, agreed on Mar. 23 to merge in a $15.5 billion deal. Both companies have large holdings in the oil sands, but the plunge in crude prices over the past year—even given the recent bounce-back to about $52 a barrel—has put them under pressure. The deal has experts predicting a new round of consolidation in the oil patch. Sanford C. Bernstein analyst Ben Dell figures that the stock market is now valuing oil companies at just $10-$12 per barrel of reserves, half their historical norm.
The U.S. is a world-beater when it comes to innovation, right? Think again. According to a study by Boston Consulting Group and the National Association of Manufacturers, the U.S. barely makes it into the top 10 most innovative countries. It ranks a lowly No. 8, behind the likes of Hong Kong, Singapore, and Switzerland. The study ranks 110 countries based on factors such as tax policies, education systems, infrastructure, and number of patents issued. (Boston Consulting Group and National Association of Manufacturers)
2. South Korea
6. Hong Kong
Data: Boston Consulting Group