Executive Summary

Financial Reform

Federal Reserve Chairman Ben Bernanke can claim at least one victory: The central bank's emergency, short-term lending operations have been so successful in stabilizing the financial system that they're no longer necessary. On Mar. 8 the Fed quietly conducted the last auction of $25 billion worth of one-month loans under the two-year-old Term Auction Facility. It attracted bids for only $3 billion, a sign that the emergency has waned. While the banking system may be stabilizing, the economy remains weak. On Mar. 5 the Labor Dept. said that nonfarm payrolls fell by 36,000 in February, with the unemployment rate staying steady at 9.7%. For the Fed, that means it's still too soon to take the next step and raise interest rates. For investors, the message is more ambiguous. Will economic weakness restrain stocks, or is the bull just catching its breath?

A Fund for Europe?

Debt-ridden Greece promises it won't default, but the European Union isn't taking any chances. On Mar. 8 the EU announced plans to create a European Monetary Fund to bail out countries whose finances are in disrepair. Officials said any cash would be contingent on nations reining in debt and ratcheting up revenues. German Chancellor Angela Merkel backed the plan, though EU central bankers cautioned that the fund could disincent countries from cleaning up their books of their own accord. During a meeting with U.S. President Barack Obama on Mar. 9, Greek Prime Minister George Papandreou called for a clampdown on financial speculators he blamed for worsening his country's situation.

Adios, Debit Overdrafts

Bank of America (BAC), the No. 1 U.S. bank by assets, will soon make it impossible for customers to spend more with a debit card than they have in their accounts—unless they arrange in advance for overdraft protection. That will cost the bank tens of millions of dollars in fees, said The New York Times on Mar. 10, though the bank declined to comment on that figure. The measures will take effect on June 19 for new accounts and in August for existing ones. BofA's move will also pressure rivals to take similar action before July 1, when new Fed rules require that they do so.

Stimulus Spending: How to Get More Bang for the Buck

Economists just can't agree about the Obama Administration's stimulus program. Some argue that the $787 billion spending push, much of it devoted to infrastructure projects, paved the way for an economic recovery. Others hold that at best it had little effect and at worst was detrimental.

A recent working paper from the National Bureau of Economic Research in Cambridge, Mass., titled "On the Ease of Overstating the Fiscal Stimulus in the U.S., 2008-9," provides more grist for the controversy mill. In it a pair of economists argue that when you examine the increase in federal spending in 2009 and adjust it for the decline in fiscal expenditures of the 50 states, the net effect is close to zero.

The authors of the paper, Joshua Aizenman of the University of California at Santa Cruz and Gurnain Kaur Pasricha of the Bank of Canada, don't go as far as to label the stimulus a failure. They concede that it would be difficult to project how the U.S. economy would have performed in the absence of ramped-up federal spending. Their goal is to arrive at a better understanding of how fiscal policy can be made to work more effectively. Federal transfers to the states might yield a bigger bang for the buck, the authors suggest.

However, this must be done in a way that mitigates "moral hazard"—that is, Washington should not reward states for imprudent behavior such as excessive borrowing. One option would be to channel funds to states on a per capita basis, suggest Aizenman and Pasricha. State governments would also have to commit to spend the funds and not use them to repay debts. (National Bureau of Economic Research)

Another Deal for AIG

American International Group (AIG) took one more step toward getting out of hock to the federal government, agreeing on Mar. 8 to sell its American Life Insurance unit to MetLife (MET) for $15.5 billion. Along with its Mar. 1 deal to sell its Asian life insurance operations for $35.5 billion to Britain's Prudential (PUK), the transactions will generate $31.5 billion in cash repayments for the Federal Reserve Bank of New York, which saved the firm from bankruptcy in September 2008. An additional $19.2 billion will be paid in securities that AIG will liquidate to cut its debt to the bank. Presuming the value of those securities holds steady, AIG would still owe $44 billion to the government. The company's bonds have been on a tear thanks to reduced worries about its obligations, and AIG stock rose 29% on this week's news, to close at 36.24 on Mar. 10. A year ago it sold for 8.40.

Northrop Gives Up

After a decade-long dogfight, Boeing (BA) looks set to grab a $35 billion U.S. Air Force refueling tanker contract after its only rival—Northrop Grumman (NOC) and its partner European Aeronautic Defence & Space—dropped out. Northrop withdrew on Mar. 8, saying Pentagon specs "clearly" favored Boeing's plane. The announcement, which leaves no competition for one of the biggest defense contracts in history, sparked a protest from the European Union's trade chief, Karel De Gucht, who called the situation "highly regrettable." The tanker specs were rewritten after Boeing protested a 2008 decision to give the contract to Northrop and EADS. Losing it will rock EADS, which is struggling with cost overruns on its A400M military transport plane in Europe. On Mar. 9, EADS posted a $1.04 billion full-year loss after taking a $2.45 billion charge on the A400M.

Prius Problems

Has Toyota (TM) really repaired its acceleration flaws? Twice last week, motorists claimed their Prius hybrids unexpectedly sped up. The first was a driver in San Diego who said his 2008 Prius revved out of control on the highway. The second complaint came from a woman in Westchester County, N.Y., who smashed into a concrete wall. Toyota has already recalled the 2004 through 2009 Prius for floor mat problems. The National Highway Traffic Safety Administration is looking into the latest incidents. Meanwhile, the carmaker disputed claims from Southern Illinois University professor David Gilbert, aired on ABC (DIS), that electronics are to blame for the sudden surges. Gilbert testified before a House panel on Feb. 23 that he found weaknesses in Toyota's throttle system. The company said his attempts to replicate unintended acceleration bore little resemblance to actual conditions.

Shell's Aussie Bid

Royal Dutch Shell (RDS) is covering two strategic bases with its $3.4 billion bid for Australia's Arrow Energy. The primary goal of the acquisition is to increase its natural gas supplies—Shell is a leader in the global boom in liquefied natural gas, and Arrow has the largest plot of coal-seam methane gas down under—25,000 square miles. Shell also hopes to reinforce its prospects for access to the Chinese market; the company chose state-owned PetroChina (PTR) as its partner in the Arrow bid.

The Movie That Roared

Not since Hollywood started tracking box-office receipts has the Oscar for Best Picture gone to a movie with such a small take: $14.7 million. While The Hurt Locker's sheaf of awards humbled Avatar and its $2.5 billion mega-gross, the little Iraq war movie probably won't get much of a post-Oscar box-office bounce, since distributor Summit Entertainment has already shipped it to DVD. At least New York's TV audience could see The Hurt Locker's winning moment: Minutes into the ABC telecast, viewers serviced by Cablevision (CVC) in Long island had their reception restored after the two settled their dispute over "retransmission" fees that ABC wanted the cable operator to pay to air shows from network affiliates.

The Optimism Meter: A Brighter Outlook, but Not on Jobs

The Meter clocked in at 55 on Mar. 9, up from 53 a week earlier. Despite the overall increase, Americans remain decidedly bearish on U.S. employment: 46% describe the prospect of finding a new job as "very hard." Developed by Bloomberg BusinessWeek using data from pollster YouGov, the Meter is a proprietary measure of sentiment and expectations, economic statistics, and market forecasts. It evaluates shifts in outlook among individuals, professional investors, and economists in the areas of U.S. economic growth, jobs, equity markets, and real estate. (Calculated using consumer polling, economic forecasts, and financial markets data; 0=lowest and 100=highest)

Data: YouGov, Bloomberg BusinessWeek

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