A New Regulatory Map
After weeks of fierce wrangling, and weeks of attendant leaks, the Obama Administration's 85-page proposal to redraw financial regulation contained few surprises when the President unveiled it on June 17. But it will affect nearly every party with an interest in the finance game. The main elements: a new consumer-protection agency to police credit cards and mortgages; tougher capital standards and a merger of two regulators for banks; a new role, with new powers, for the Federal Reserve in monitoring giant financial companies of all kinds; and of course, new rules to allow more supervision of derivatives, hedge funds, private-equity firms, and other largely unregulated corners of the market. Consumer advocates celebrated the proposals as rolling back years of deregulation and vowed a campaign to support or even strengthen them, organizing a new outfit they dubbed Americans for Financial Reform. Industry groups put a good face on the mix, paying homage to the Administration's goals while promising stiff resistance to key provisions. Among the most bothersome for business: the stand-alone consumer agency and rules requiring firms to keep a stake in loans they package and resell; both are seen as threatening profits and innovation.
Turmoil in Iran
Iran's beleaguered business community has never been a big fan of President Mahmoud Ahmadinejad, considering him a poor economic manager and viewing his jousting with the U.S. and Israel as perilous. But now, amid bloody turmoil following the disputed June 12 presidential election, business may be getting something even worse—a prolonged bout of instability that could scare off investment and deep-six an already flagging economy.
Anxiety on the Street
Fretting about the actual strength of the recovery, Wall Street pulled back on June 15-17, with the S&P 500 losing 3.8% in two days following a 40%-plus rise over the past three months. It's easy to see why investors may be perplexed. Housing starts in May leaped a surprising 17% from April's all-time low, but output of U.S. factories and mines continued to shrink as overall industrial production declined 1.1% in May. Manufacturing fell 1.0%, with motor vehicles accounting for about a third of the decrease. Meanwhile, May inflation numbers came in well under expectation, with wholesale prices up 0.2% for the month and consumer prices up just 0.1%. The overall cost of living in May was down 1.3% from a year ago, the biggest drop in 60 years.
See "Housing Starts: Up Is Better Than Down"
Good Day at BlackRock
To paraphrase a line from the late, great senator from Illinois, Everett Dirksen: A trillion here, a trillion there, pretty soon it adds up to real money. As in $2.7 trillion, the amount BlackRock (BLK) will soon have under its purview, making it the world's biggest asset manager. On June 16 Barclays (BCS) said it had accepted BlackRocks' $13.5 billion offer for Barclays Global Investors, home to the iShares family of exchange-traded funds. The money will bolster Barclays' capital levels and likely end worries it might have to be rescued by the British government.
Greenberg vs. AIG
The long-running drama starring Maurice "Hank" Greenberg and the insurer he built, AIG (AIG), went into its fifth or sixth act as a trial began in a Manhattan courtroom on June 15. This time the focus is on a pool of stock that Greenberg, now 84, sold in his capacity as chairman of Starr International after being ousted from AIG in 2005. AIG claims the stock, worth $4.3 billion in 2005, was part of a deferred compensation program for past, present, and future high-performing employees and that the sale was improper. Starr is being sued by AIG and maintains the stock was part of a charitable trust and not the property of AIG. Although Greenberg has already taken the stand as a hostile witness, further fireworks may be limited by the judge's early ruling that AIG's eventual financial meltdown and government bailout are out of bounds.
Aviation Orders Slump
In normal times, the Paris Air Show is a dealfest par excellence. These are not normal times. With global aviation in a nosedive, Boeing (BA) as of June 17 had picked up only two new orders at the show, while Airbus logged 57. And cash-strapped airlines have cancelled dozens of earlier orders, leaving Airbus with a net tally of fewer than 70 since January—and Boeing with fewer than 10. One break in the bad weather for Boeing: Its much delayed 787 Dreamliner is set to make its first test flight this month.
See "Defense on Center Stage at Paris Air Show"
Stay Home, Young Man
Are you a young executive yearning for adventure? Tough luck. According to a recently published survey, multinational companies are planning to send fewer employees on global assignments this year. Of the 180 companies polled, more than two-thirds said they will decrease or, at most, maintain expatriate levels. And those still willing to relocate employees are turning to older and more experienced workers. Only 9% of expats in surveyed companies were 20 to 29 years old—the lowest in the survey's 14-year history. (Brookfield Global Relocation) Services
GM Unloads Another Unit
Saab may live to accelerate another day. General Motors on June 16 said it had found a buyer for its long-sputtering unit: a consortium led by Koenigsegg, a Swedish producer of super-swanky sports cars. No price was named. GM, Koenigsegg, and the European Investment Bank will pump in funding to keep Saab rolling and developing new models. But can a tiny niche carmaker like Koenigsegg save the brand? The new owner will have to come up with a broader range of offerings to lure more buyers.
See "The Story of Saab Buyer Koenigsegg"
Woes for a Hotelier
There's not much comfy about the hotel business these days. The downturn has brought a bust in corporate travel and the rise of the dreaded "staycation" as folks stick close to home. The latest victim: Extended Stay Hotels, a chain with 680-plus properties where the average stay runs 18 to 20 nights. The chain filed for Chapter 11 on June 15. Besides the recession's ravages, Extended Stay suffered from $7.4 billion in debt taken on during a top-of-the-market buyout in 2007 led by David Lichtenstein's Lightstone Group. Gary DeLapp, head of the company that manages Extended Stay, said it will not close or sell any hotels or cut employee pay or benefits.
Corner Office Cheer
Whatever Wall Street's take on the economy, the mood in C-suites around the world seems to be one of cautious optimism. In a June survey of more than 1,400 executives, one-third of respondents said they expect their companies to log a profit increase this year, up from just 8% of those polled six weeks prior. What's more, the share of executives expecting to pare back their payrolls has dropped to less than half for the first time since January. But don't sing hallelujah just yet: Fewer than one-third of those polled expect their national economies to move into recovery this year. (McKinsey & Co.)
Less Space at MySpace
Rupert Murdoch is clipping the wings of News Corp.'s (NWS) once high-flying social networking site. Four years after paying $580 million for MySpace, with grand designs to make it the online distribution outlet for its TV shows, movies, and other content, News Corp. is slashing 30% of the site's staff, roughly 425 positions. Losses have mounted at MySpace as it aggressively expanded abroad and added such services as music streaming—and Facebook surpassed it this year as the top social networking site. At the same time, overall online advertising dropped 5% in the first quarter.
See "Van Natta Cuts Jobs at MySpace"
A sum of $775,000 wouldn't pay for a year's supply of lattes at cash-rich Microsoft (MSFT). But that's what the company is seeking in a lawsuit against three Canadians for so-called click fraud. The allegation: that Melanie Suen, Eric Lam, and Gordon Lam—believed to be a mother and her two sons—have been clicking on ads on Microsoft Web sites for financial gain. The company thinks the family, which makes money on Web ads, may have clicked repeatedly on rival advertisers' links, thus boosting the fees they pay and depleting their budgets—which could result in higher placement for ads tied to the family. Experts say the suit could provide a much needed deterrent to such practices, which may make up more than 10% of all clicks on paid links.
How Is Europe Doing? The ECB Weighs in
Kids aren't the only ones who get a report card before heading off for summer vacation. On June 15 the European Central Bank, headed by Jean-Claude Trichet, published its biannual Financial Stability Review—a report grading how the euro zone has dealt with the tumultuous past six months. The ECB's grade: a so-so B-.
Actually, that's not too bad, considering it's the first time the 16-nation zone has had to cope with a raging crisis. But the zone is hardly home free. The ECB predicts Europe's banks may have to write off $283 billion more by the end of next year. That's on top of the $366 billion they've already kissed goodbye, for a possible total of $649 billion.
The ECB doesn't mince words about ominous near-term risks, either. So how does the zone rate a B-? The central bank's praise falls into several categories. National guarantees for bank bonds "has been helpful for securing access to medium-term funding when needed." The ECB's own moves on May 7—including longer-term refinance options for banks and the purchase of euro-denominated bonds to increase market liquidity and free up capital—beefed up banks' funding options. And the ECB congratulated itself on cutting the zone's base interest rate to a record low of 1%.
See "Has Europe Done Enough to Stop the Financial Crisis?"