Will Taxpayers Ever See a Return?
As the government pledged an additional $30 billion to General Motors (GMGMQ), President Barack Obama declared the country "reluctant shareholders" in the carmaker. Reluctant may be an understatement.
The recent move brings Uncle Sam's total outlay in GM to $50 billion. If the company emerges from bankruptcy as planned in 60 to 90 days, the government will own roughly 60% and hold $8.8 billion of its debt. For taxpayers just to break even, the market value of GM will have to hit $69 billion, roughly the same as McDonald's (MCD) or ConocoPhillips today. "If you want to call it an investment, you'd have to call it highly speculative," says Kurt Brouwer, a financial adviser in Tiburon, Calif.
Taxpayers may not see a return on GM for quite a while. The market valued GM at less than $500 million on May 29, just days before it filed for Chapter 11. The U.S. has bigger concerns than its investment gains, but in a background briefing before GM's filing, one Administration official said: "I don't know how much we're going to recover. We hope to recover as much as we can."
AIG Breaks New Ground, Investing in 'Death Bonds'
American International Group (AIG), the insurer that's fighting for its life, may be the first major financial firm to sell a "death bond" to investors.
Wall Street firms have been salivating over so-called life settlements for years. Under such arrangements, people sell their life insurance policies to financial firms that pay the premiums and collect the payouts. The idea was to bundle the policies into exotic securities, reaping huge fees from the death bonds. After the credit crisis, the plans got shelved.
But AIG recently packaged policies into a bond worth $2 billion, the largest investment backed by life settlements. For now, AIG is keeping the bonds on its books, rather than selling them. Says an AIG spokesman in a written statement: "The [securities] are an attractive asset class because their performance is not correlated to credit or real estate markets and the [bonds] pay an attractive coupon."
Home Depot Fights Credit-Card Fees
Borrowers aren't the only ones reeling from high credit-card fees. Retailer Home Depot (HD) claims to spend more on interchange fees—the tab paid by retailers to credit-card companies each time a customer pays with plastic—than it does on health care. At a payments conference held by the Chicago Federal Reserve in May, Home Depot executives said such costs have jumped 16% in the past couple of years while total purchases have only increased by 10%.
Home Depot, like other retailers, is pushing U.S. regulators to follow Australia's lead. In 2003 the country's central bank forced credit-card companies to lower the interchange rates to 0.5%, down from more than 1%. The move, says Home Depot, would translate into more jobs: By lowering the fees, the company estimates it could hire an additional 10 employees per store. "Our interchange fees are our third-largest cost, behind rent and salary," Dwaine Kimmet, Home Depot's vice-president for financial services, said at the conference. "If card acceptance costs were lower, Home Depot might pass some of those savings to shoppers."
New Stock Issues: The Great Market Leveler
Pensions and hedge funds have plowed about $200 billion into stocks over the past few months to rebalance their portfolios and put cash to work, according to Trim Tabs Investment Research. That's a big reason why the market has jumped 39% from its 13-year low on Mar. 9 (chart, right). But the rally may be on its last legs.
Why? The bulk of new money isn't going to buy existing shares but to purchase newly issued stock. Companies, including a number of big banks, have issued $88 billion of shares since March. Trim Tabs CEO Charles Biderman figures the amount will top $125 billion by the end of the quarter, the highest three-month tally in recent history. Says Biderman: More companies will need to issue new shares "as long as the economy keeps slumping."