'Signs of Progress' vs. Signs of Slump
President Barack Obama vowed to rebuild the U.S. economy on a foundation of rock. Good thing, too, because the structure is still shaky, according to a slew of economic reports. Obama's Apr. 14 speech at Georgetown University called for five pillars on which to base a recovery: Wall Street regulation, education, renewable energy, containment of health-care costs, and long-term deficit reduction. While Obama said he sees "signs of economic progress," the recession shows plenty of staying power. Demand is so soft that companies are being forced to cut prices almost across the board. In March, producer prices dropped 1.2% and consumer prices fell 0.1%, posting their first annual decline since 1955. What's more, retail sales in March sank 1.1%, and industrial production slid 1.5%. The Fed added a smidge of cheer: Its Beige Book report on regional conditions on Apr. 15 said that 5 of its 12 banks saw "moderation in the pace of decline."
When Washington unveiled plans to subject big banks to "stress tests" to see how they would fare if the economy got even worse, regulators indicated the results would stay secret to avoid spooking investors and setting off bank runs. Now, Uncle Sam is thinking again, on the theory that keeping investors in the dark could torpedo confidence if word leaked out about which banks got bad grades, said The New York Times on Apr. 15. Meantime, The Wall Street Journal reported that Treasury may name Herb Allison, the former TIAA-CREF chief brought in to run Fannie Mae (FNM) last fall, to head the financial stabilization office. That would leave another high-profile vacancy at the government-run housing giants, which have seen a rush for the exits in recent months.
Goldman Sachs (GS) CEO Lloyd Blankfein is trying awfully hard to make his firm look like the last man standing amid the wreckage. On Apr. 14, Goldman posted a better-than-expected first-quarter profit of $1.8 billion, and the next day it raised $5 billion in a stock offering. It aims to use the proceeds to pay back the $10 billion in bailout money it got last fall. But critics didn't take long to find blemishes in Goldman's carefully crafted image. For starters, much of the profit came from an outsize gain in bond and commodities trading, which many view as unsustainable. The results also excluded a nearly $1 billion loss in December, which Goldman was able to obscure by shifting to a more traditional quarterly reporting system that runs from January to March. Others say that if Goldman is doing so well, why not return the $13 billion in bailout money it got through AIG (AIG)?
See "Goldman, Give It All Back"
Weighing GM's Fate
It's beginning to look a lot like bankruptcy for General Motors (GM) largely because of its bondholders. Thousands of them collectively hold $28 billion in debt, and they're in for an ugly haircut. GM proposed that bondholders accept two-thirds of the value of the debt in stock. The Treasury Dept. wants them to get even less in order to clean up GM's balance sheet and allow it to qualify for more government loans. The problem is getting roughly 90% of those noteholders to sign off on the deal. If they won't, Chapter 11 may be the company's only option. The New York Times said on Apr. 13 that Treasury told GM to prepare for a filing by June 1.
Consumers aren't the only ones afflicted by rising health-care costs: Insurers feel the pain, too. So one of them, Wellpoint (WLP), decided to unlock shareholder value by bailing on the pharmacy benefits management (PBM) business. On Apr. 13, WellPoint agreed to sell its PBM unit, which manages drug costs for insurers and employers, to Express Scripts (ESRX) for $4.7 billion. That vaults Express Scripts over CVS Caremark (CVS) into the No. 2 spot in the business, behind Medco Health Solutions (MHS).
Beijing's Bond Appetite
Is China turning cold to U.S. Treasuries? Despite Beijing's recent grumbling about the dollar losing its value, the answer is: probably not. In the first quarter, China topped up its world-leading $1.95 trillion hoard of foreign reserves by a measly $7.7 billion, compared with a $153.9 billion increase in the same period last year. And in the first two months, China actually unloaded some Treasuries and other bonds. But the main reason appears to be the dramatic drop in exports and slower foreign direct investment. In March, purchases revved up again as the trade surplus jumped to $18.6 billion from $4.8 billion in February.
Global advertising spending is poised to slump 6.9% this year—the most in a generation, according to an Apr. 14 forecast from ZenithOptimedia, a unit of giant Publicis. In the U.S., spending across major media will fall an even more precipitous 8.7%, reflecting the hit corporate profits are absorbing in the recession. The one bright spot will be digital: Online spending is expected to increase 8.6% worldwide. But that's still a far cry from the 21% growth of online ads in 2008. (ZenithOptimedia)
A Pension Fraud Plea
New York Attorney General Andrew Cuomo has landed a guilty plea in the state pension fund scandal. That could boost pressure on others involved, including some big-name investment firms. On Apr. 14, Dallas hedge fund manager Barrett Wissman pleaded guilty to state securities fraud charges and will cooperate with the probe by Cuomo and the SEC. Wissman admitted illegally accepting millions of dollars from investment firms, among them Carlyle Group, in exchange for using his political contacts to secure investments from state pension funds. Carlyle has denied wrongdoing. In March, Cuomo and the SEC brought charges against two aides to the state's former comptroller, Alan Hevesi. The two, Hank Morris and David Loglisci, have maintained their innocence.
Selling Off Skype
EBay (EBAY) wants to offload its Web-phone unit, Skype, but apparently no one's coming up with the right number. So on Apr. 14 the online auction house said it will spin out Skype in an IPO scheduled for the first half of 2010. Analysts think the IPO could take place as early as January and fetch $3 billion to $5 billion. EBay CEO John Donahoe, admitting that Skype hasn't mixed well with eBay's other operations, called it "a great stand-alone business." A sale could still happen. On Apr. 11, The New York Times reported that Skype co-founders Janus Friis and Niklas Zennstrom are talking with private equity firms about funding to buy their baby back.
See "EBay Unveils Skype IPO Plans"