Chapter 11 for GM
The cultural revolution that General Motors has long needed could be around the corner. The company filed for bankruptcy protection on June 1, seeking to ditch weak brands, some $27 billion in bond debt, and billions in retiree health-care costs. If the reorganization goes according to plan, the company will emerge with four core brands—Buick, Cadillac, Chevrolet, and GMC—and also with a cleaner balance sheet. The federal government will own 60% of the company, with the Canadian government, the UAW, and bondholders holding the rest. The company also reached a deal to sell its Hummer brand to China's Sichuan Tengzhong Heavy Industrial Machinery and sold a majority stake in its European Opel unit to parts maker Magna International (MGA). GM hopes to motor out of Chapter 11 within three months, but rival Chrysler's own bankruptcy exit is being delayed by dissident creditors who are appealing the in-court sale to Italy's Fiat (FIATY).
A Pivotal Patent Case
The U.S. Supreme Court is going to grapple with what might be called "the method mess." The Justices announced on June 1 that they would take up a key issue in intellectual-property law: What kind of "business methods" are entitled to patent protection? Over the past decade, many financial, consulting, and e-commerce firms have rushed to patent such processes as ways to structure financial products, manage organizations, or transact Web business. In agreeing to review what's known as the Bilski case—involving a method for hedging risk in commodities trading—the high court is venturing into a hot dispute. A ruling isn't likely until next year.
They Still Love T-Bills
Everyone, it seems, is fretting about the dollar, but few seem to be doing anything about it. Despite mounting anxiety about U.S. creditworthiness, the foreign appetite for Treasuries looks undiminished. The Fed's holdings of Treasuries on behalf of foreign banks and institutions grew $68.8 billion in May, or 3.3%. Brad Setser, an economist at the Council on Foreign Relations, crunched numbers and found that, Beijing's protestations aside, China continued to add to its stockpile of T-bills through the first quarter even as it shifted out of other types of dollar assets. Other members of the BRIC club of countries—Russia and India—also kept buying Uncle Sam's paper, though not on the same scale as China. Brazil, on the other hand, has scaled back a bit. Look for Setser's updates every quarter. (Council on Foreign Relations)
Home Buyer Help
Blamed for worsening the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. But now, under a program announced May 29, the Federal Housing Administration will be the one forking over money at closing. The idea is to let first-time home buyers apply the $8,000 tax credit provided under the stimulus package directly to closing costs. That will cover most costs even for homes above the national median price of $169,000. Officials hope it will help revive the market, and the industry predicts 40,000 new sales from the move. Critics warn that defaults and foreclosures rise when buyers get down-payment help, likely because they have little at stake.
See "FHA Loans: Return to 0% Down"
Geithner in China
If this visit is any indication, the Obama Administration seems inclined to make nice with Beijing. Treasury Secretary Timothy Geithner wrapped up two days of high-level meetings on June 2, maintaining a conciliatory tone throughout. Rather than directly addressing the volatile issue of the dollar's future role as a reserve currency, he said: "I believe the Chinese expect the dollar to be the principal reserve currency for a long period of time, as do we," though he did pledge that Washington would cut its fiscal deficit. At the close of the visit, the Treasury said the next round of the new U.S.-China Strategic Economic Dialogue will be held in Washington at the end of July.
Remodeling the Dow
It didn't suit the blue-chip image of the Dow Jones industrial average to continue to include the stocks of bankrupt General Motors and ward-of-the-state Citigroup. So Dow owner News Corp. (NWS) said on June 1 that it's casting them out of the list of 30 in favor of Cisco Systems (CSCO) and Travelers (TRV). Cisco, a tech stalwart, has an A+ credit rating. Travelers, a property and casualty insurance company that was once part of Citi, kept its assets safe in the financial crisis and is still rated A-. Cisco trades around 20 and Travelers at 40-plus, compared with less than 4 for the discards. The higher prices will tend to make the Dow move more erratically because of the way the average is calculated. But that's a minor blemish compared with the better reputations of the new stocks.
A Discounter Struggles
Quick: What's the biggest airline in Europe by both market cap and number of passengers? If you're thinking one of the major national carriers, think again. It's onetime upstart Ryanair (RYAAY), which recently overtook Lufthansa (DLAKY) in the passenger department, with 58.5 million in 2008, vs. the German stalwart's 56 million. Ryanair has hit a downdraft recently, announcing on June 2 that it's posting an annual loss for the first time: $239 million for the year ended March. CEO Michael O'Leary pointed out that much of the loss stemmed from a writedown of Ryanair's 30% stake in Aer Lingus. He also did his best to ease the sting by saying he's pondering a bid for Lufthansa, though not anytime soon. He also plans to add 40 aircraft to his fleet and slash ticket prices by an average of 20%. O'Leary, who likes to say that any publicity is good publicity, added that he's dropping an idea he floated a few months back: charging overweight passengers extra. The notion was widely denounced, and now he says it would be tough to enforce.
See "Ryanair Goes into the Red and Mulls Bid for Lufthansa"
Taking Aim at Outsourcers on U.S. Soil
A new bill in Washington, introduced by Senators Dick Durbin (D-Ill.) and Chuck Grassley (R-Iowa), could jeopardize the business models of such outsourcing firms as Wipro (WIT) and Infosys (INFY). The legislation aims at tightening the rules for companies in the U.S. that hire skilled workers from abroad on temporary work visas, known as H-1Bs and L-1s. The most controversial provision would bar companies with more than 50 employees in the U.S. from landing any additional work visas if more than half their stateside workforce is made up of H-1B or L-1 visa holders. The bill is likely to be considered alongside immigration reform later this year, and it's unclear whether it has the support to become law. Som Mittal, president of the Nasscom trade group that represents India's outsourcers, says the proposal is misguided. If enacted, it would stop virtually all the major Indian outsourcers from bringing new employees into the U. S. "Both U.S. and Indian industry would suffer," he says. Azim Premji, chairman of Wipro, says India is likely to take action if the bill passes in its current form. "There is no way our government can take it lightly," he says. "[The tech services industry] is a vital piece of the economy."
See "Work Visa Bill Threatens Indian Outsourcers"
Federal sleuths wonder whether U.S. tech titans are engaging in a practice of "Don't hire, don't tell." According to The Washington Post on June 3, the Justice Dept. has launched a probe into whether a wide range of high-tech companies violated antitrust laws by agreeing to avoid actively recruiting each other's employees. The inquiry focuses on Google (GOOG), Yahoo (YHOO), Apple (AAPL), Genentech (DNA), and many other tech outfits. The probe is said to be in the early stages, with no certainty that a lawsuit will be filed.
Going After Microsoft
Critics call it a rearguard action and meddling by a power-mad bureaucracy, but fans argue it will level the playing field. The Wall Street Journal on May 30 said the European Commission, a longtime Microsoft (MSFT) antagonist, may force the software giant to preinstall Web browsers from rival makers, such as Firefox, Chrome, or Opera, onto Windows computers sold in Europe. The goal would be to boost alternatives to Internet Explorer, thus trimming Microsoft's power to dictate standards for Web sites. Both the company and the commission declined to comment.
German Chancellor Angela Merkel reinforced her street cred as a fiscal conservative when she hosed the U.S. Federal Reserve, the Bank of England, and various other international institutions for flooding the world with liquidity. On June 2, Merkel complained to an audience in Berlin that the "all-powerful" Fed had pressured a reluctant European Central Bank to make bond purchases to encourage more bank lending and pleaded for "a return to a policy of reason." Otherwise, she warned, "in 10 years we'll be back in exactly the same place." Merkel seems still to be sore that the financial crisis forced Germany to bail out many of its banks, widening a budget deficit she had spent much of her term trying to eliminate.
Dreaming Big in Turkey
A "mad genius." That's what BusinessWeek Turkey dubbed designer and architect Hakan Gursu in its May 31 cover story. Gursu's Ankara-based firm Designnobis has racked up scores of awards in the past couple of years. Among its creations are the Fire Knight vehicle, which sprays soil instead of water to extinguish forest fires, and Volitan, a "sailboat" powered by solar energy. Now Gursu is dreaming on a much bigger scale. He has drafted a blueprint for a mini city in Ankara, Designopolis, that will house research and development laboratories and light manufacturing, along with residential units and such amenities as health clubs and restaurants. Gursu is already signing up investors. The price tag? A cool $1 billion-plus. If it gets off the ground, Designopolis could help Turkey overcome its reputation as a laggard in innovation.
The CEO Conundrum
The great debate over how much chief executives matter rages on. One landmark study from 1972, for instance, found that decisions by CEOs explained just 14.5% of the variance in corporate profits among a sample of 167 companies. More recent research seems to show that leadership matters less in old-line industries, where the pace of change is slow, than in, say, the tech sector. Such bosses as Steve Jobs of Apple are the furthest thing from titular figureheads: They have the power to make or break a company. Also, studies show that having the right man or woman in the corner suite may be more important in bad times than in good. (The Atlantic)