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United Auto Workers Overwhelmingly Vote Down Truck Maker’s Contract Offer

by on October 1, 2011

Huffington Post…

DETROIT (John D. Stoll) – United Auto Workers members overwhelmingly voted down a new five-year contract offer from Oshkosh Corp on Friday despite the company’s offer of a signing bonus and raise to offset higher health care costs, according to the company. The current contract, covering more than 3,000 employees in northeast Wisconsin, was set to expire at midnight. A new contract proposal from Oshkosh was put on the table as the heavy vehicle maker faces uncertainty due to budget constraints at the Department of Defense, which is Oshkosh’s biggest customer. Oshkosh and the UAW — its biggest union — are expected to now head back to the negotiating table on a revised deal that will likely omit a sizable signing bonus. The offer the UAW rejected on Friday included an 8 percent raise over the life of the contract, and a $2,000 signing bonus. In addition, Oshkosh called for a four-fold increase in monthly health care premiums for families. Oshkosh spokesman John Daggett said late on Friday the $2,000 bonus is no longer valid when the contact expires at midnight. Contract talks had been tense as workers and local union officials complained the deal was not generous enough, and that language in the contract was unfavorable to hourly workers. “We are obviously disappointed because we felt we had offered a very comprehensive proposal considering today’s market conditions and the proposed budget cuts in the Department of Defense,” Daggett said in an email to Reuters. He said the company has accepted an invitation from the union for a meeting, details of which are still being worked out. UAW officials were not immediately available for comment. Copyright 2011 Thomson Reuters. Click for Restrictions .

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United Auto Workers Overwhelmingly Vote Down Truck Maker’s Contract Offer

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Major Obama Fundraiser Benefits From Millions In Federal Loans

by on March 31, 2011

Huffington Post…

By Ronnie Greene and Matthew Mosk The Center For Public Integrity In connecting green technology startups with government money, Silicon Valley venture capitalist Steve Westly boasts of a special touch. “We believe that with the Obama administration, and other governments … committing hundreds of billions of dollars to clean tech, there has never been a better time to launch clean tech companies,” says his company website. “The Westly Group is uniquely positioned to take advantage of this surge of interest and growth.” Uniquely positioned, indeed. One of President Barack Obama’s most prolific fundraisers, Westly was among guests at January’s state dinner for the president of China. A month later, he dined with Obama again at an exclusive San Francisco Bay area gathering for prominent high tech CEOs, including the leaders of Facebook, Google and Apple. He visits White House staff and, as a member of a government advisory board on energy policy, has the ear of Energy Secretary Steven Chu, whose department hands out the sort of seed money sought by companies in The Westly Group portfolio. He even has hosted the president at fundraisers in his Northern California home, and co-hosted events for three of Obama’s most influential advisors. All the while, Westly’s four-year-old green business has boomed. Since June 2009, four companies in his venture firm’s portfolio have received more than half a billion dollars in loans, grants or stimulus money from the Obama Energy Department, a review by the Center for Public Integrity and ABC News has found. Relatively few companies succeed in winning such benefits. More than 90 percent of applicants have failed to secure funding in two programs benefiting three Westly-backed firms. Securing government aid helps attract investors and can make corporate stars of even small startups. Funding for The Westly Group firms occurred prior to his joining the government advisory board, though an Obama administration proposal after Westly’s appointment immediately boosted the stock price of one company. Westly’s ability to straddle the worlds of big time fundraising, government advising and private financing for startup companies tells a larger story about how business and politicking intertwine at an Energy Department flush with $35 billion in stimulus money. “It looks like kind of the classic Washington hands washing each other,” said Mary Boyle, a spokeswoman with Common Cause in Washington. “He’s politically active, he gives money, he gets noticed, he lands on an energy board. … Firms that he backs are landing these lucrative energy contracts.” It’s the very cycle of money, influence and access that Obama vowed to break when he came to Washington but which persists two years into his presidency. Westly, a former public official in California, declined repeated requests from the Center for interviews and walked away without comment when questioned by an ABC reporter at a Washington event earlier this month. He isn’t the only politically active investor whose portfolio firms win energy grants. John Doerr, a California billionaire who made a fortune investing in Google, hosted Obama at February’s dinner for Westly and the other high tech executives at his secluded estate south of San Francisco. His venture firm, Kleiner Perkins Caufield & Byers, backs green tech firms, several of which secured DOE funding, records show. Doerr and Kleiner Perkins executives have contributed more than $1 million to federal political causes and campaigns over the last two decades, primarily supporting Democrats, and Doerr serves on Obama’s Economic Recovery Advisory Board. Doerr did not respond to multiple interview requests about his dinner with Obama. Another beneficiary of Energy Department aid is Solyndra Inc., a California solar power firm whose financial backers include Oklahoma oil billionaire George Kaiser, a bundler who raised at least $50,000 for the president’s campaign in 2008. Solyndra, a recipient of a $535 million 2009 loan guarantee to help create jobs, laid off some 180 temporary and fulltime workers the following year, prompting questions in Congress over whether its new manufacturing plant will spur the 1,000 fulltime U.S. jobs the company promised. Company spokesman David Miller said Solyndra, which first applied for the guarantee during the Bush administration, won it on merit. “Over time,” he said, “yes, we believe we will meet those goals.” Obama’s focus on environmentally promising technologies while gaining support from clean tech titans comes at a time when the Energy Department’s handling of government largesse is gaining scrutiny. The Government Accountability Office, the investigatory arm of Congress, raised concerns in a report last year about favoritism in the awarding of some loan guarantees. The Energy Department’s inspector general told Congress this month that some stimulus contracts may have been steered to “friends and family.” A GAO report to be released this week is expected to focus on a specific automotive loan program that benefited five companies, including two supported by the Westly and Doerr venture firms. There’s no indication in public records that any of those investigations focus on Westly, Doerr, Kaiser or their firms. “A lot of these contracts are really being pushed out the door with no oversight,” said Rep. Cliff Stearns, R-Fla., chairman of the Energy and Commerce oversight subcommittee. In an interview, Stearns pointed to the Solyndra contract as an example of poor government oversight. “I think what happens is, they give some of this money out to people who are either contributors or strong supporters.” A TRAIL OF LOANS, GRANTS AND TAX BREAKS The Obama administration’s efforts to reduce pollution, especially from coal-powered plants, and to lower dependence on foreign oil has unleashed an unprecedented wave of federal aid to clean energy startups. The federal dollars help clean tech firms expand their products and grow their bottom line. Four companies in The Westly Group portfolio received Energy Department loans, grants and stimulus money: Tesla Motors, RecycleBank, EdeniQ and Amyris Biotechnologies. Two of those firms, Tesla and Amyris, went public with stock offerings in 2010. The government largesse started with $465 million in loans that helped Tesla develop electric cars that cost $54,700 each. Four months later came a $700,000 federal grant, crucial to expanding a RecycleBank program in Philadelphia. In December 2009, the Energy Department awarded stimulus grants of $20.4 million for an EdeniQ bio-refinery and $25 million for Amyris to develop a diesel substitute through the fermentation of sweet sorghum, both projects in California. Over the last four years, Westly emerged as something of an entrepreneurial superstar in the clean technology movement. Then, in August, he gained a seat at the table when it comes to national energy priorities that affect his business interests. On the White House’s recommendation, Chu appointed him to his 12-member Advisory Board, a government-stamped seal of approval as The Westly Group pursues a $175 million round of fundraising to expand its portfolio. Westly cites that appointment on his company bio. Meeting minutes show he is leading a Chu subcommittee exploring “building energy efficiency.” In his venture capital firm, Westly is actively investing in energy efficient building materials, an area he describes as something of a new investment frontier. This February came perhaps the prized jewel for a Westly investment, when the Obama administration proposed to stimulate sales of electric cars by offering consumers a $7,500 federal rebate at the dealer. Stock in Tesla, the Silicon Valley electric car maker that went public last year, rose 6 percent with the news. Westly sat on Tesla’s board for more than two years, and though his firm recently sold its nearly 2.5 million shares, he personally remains a shareholder. “I think Tesla’s best days are ahead of it,” he told Bloomberg West TV March 11. Some executives of companies financially supported by Westly’s venture firm acknowledge that his activities — which include arranging introductions for them and helping them navigate bureaucracies in Washington even as he serves as an advisor to those bureaucracies — create the potential for a conflict of interest. But they say involving industry expertise is unavoidable, even necessary as the government strives to spur adoption of new technologies. “This is the sort of conflict the DOE and USDA and other agencies run into when they take a step — which I think is a good one — in trying to involve people from industry in helping to advise and set direction,” said Kinkead Reiling, co-founder of Amyris Biotechnologies, which landed a $25 million Energy Department stimulus grant in 2009. The White House and Energy Department deny that political supporters of the president have any edge as they compete for funding. “Grants and loans are competitively awarded on the basis of merit,” said Reid Cherlin, a White House spokesman. The Energy Department said it sees no conflict in his dual roles, saying Westly is an unpaid member of a board that is “advisory in nature.” A spokesman noted that the loans and grants came before his appointment. Because he is not a federal employee, Westly is not required to file disclosure or conflict of interest forms. The DOE said he made it aware of his investment activity and potential conflicts. Asked to release that information, the department said it was confidential. Over the course of two months, Westly — who has often sought attention for political candidates he supports, and for the green energy movement he is part of — declined to answer questions for this story or respond to multiple requests for an interview through his company and via email. “We’ve decided not to comment,” said Michael Kaufman, a Westly Group principal. When Westly came to Washington for Democratic fundraising events in March, he turned his back to ABC News and was escorted away by party officials. Those who have worked with Westly over the years say his greatest assets are as public cheerleader — and tour guide to help companies navigate political terrain. “He is a true believer in green technology at a time frankly when that was not very obvious,” said Marc Tarpenning, one of the founders of eight-year-old Tesla Motors. “Steve was always a supporter and a true believer in it. He’s not really a technologist.” Industry should embrace government, not fear it, Westly told Tesla. “‘Government is not always bad and especially for something that is going to affect your business, you should be involved with it,’” Tarpenning quoted Westly. “He encouraged us to think about Washington.” As a businessman, Westly is in the vanguard of a movement to transform the nation through clean technology, a key initiative of Obama, who is backing his pledge with billions of federal dollars. The push already has benefited a rash of innovative technology companies, including The Westly Group, one of the largest clean tech venture firms in the U.S. According to its website, the venture “has done very well” on a current $127 million investment fund, and is pushing ahead with a new round of financing targeted at $175 million. As a chief fundraiser for the president, he’s also at the vanguard of another development — the need to raise unparalleled sums of money for the 2012 re-election campaign. As a top fundraiser, Westly is in elite company: 52 so-called bundlers who raised more than $500,000 on Obama’s behalf in the 2008 race, according to records maintained by Public Citizen. By hosting fundraisers and making calls to wealthy associates and acquaintances, bundlers from Florida to California raise the millions that help candidates pay for increasingly expensive campaigns. Their work can prove pivotal in contentions races, and they often are rewarded with prestigious posts such as ambassadorships. Obama has continued a long tradition, tapping bundlers as ambassadors to Norway, France and Japan. More than 100 bundlers for the GOP’s George Bush landed government posts, from Cabinet slots to ambassadorships to New Zealand and Portugal. Westly’s success is striking for the string of victories by companies in his portfolio, and for his timing in tapping into a rare area of government growth: Alternative energy, infused with more than $8 billion for research and development in Obama’s budget. He has become the green bundler with the golden touch — and the president’s ear. Companies whose investors include The Westly Group and that have won federal subsidies say the benefits of an association with Westly owe more to his insights than any help on specific Energy Department grants. They say he has made introductions in Washington, where he once worked under Jimmy Carter, and that his background in energy and financial matters was fruitful. “We found that Steve is very helpful and insightful in understanding the political landscape, especially from the energy side,” said Reiling, who also serves as senior vice president of Amyris, which The Westly Group backed until it went public last year. “Because of his past in D.C., he has been able to get some introductions. Once he introduces us, it’s our job to actually do the work and show whoever he has introduced us to the value we can bring.” The Westly Group’s political connections distinguish the firm from many other venture outfits. “One of the things the firm pledges that differentiates The Westly Group from other venture capitalists is they help companies navigate the political landscape,” said Eric Wesoff, a senior analyst who specializes in renewable energy and financing for Greentech Media, which covers news and analysis about the green tech market. “If the premise is that The Westly Group is able to pull some strings to get their companies federal funding, that might actually be part of his business plan.” “Why is this man smiling?” asked the sub-headline on a Wesoff profile of the company. “Three of this investor’s portfolio firms listed on the Nasdaq in 2010.” Westly is quoted as saying he and his team are “experts in helping portfolio companies with their interactions with government — federal, state and local.” Entrenched energy and oil firms have long banked on political connections and policy know-how to secure federal money. Now startup clean tech ventures, following the same playbook, are simply trying to run with the giants. “They are fighting incumbents like oil, gas and coal, and they need every advantage they can possibly extract. And that’s why the DOE is giving out this money to provide some type of kick start to these non-incumbent technologies,” Wesoff said. “This is the way energy works. This is the way business works. And here are these enormous amounts of stimulus funds.” Added Wesoff: “This is the way power brokers broker power.” A POWER BROKER FROM THE START Westly, 54, stepped into politics early. He worked on Capitol Hill and in Carter’s Energy Department Office of Conservation and Solar before returning to California to become special assistant to the president of the California Public Utilities Commission. After earning an MBA from Stanford’s Graduate School of Business in 1983, he stepped into the business world, including a stint at Sprint Telecommunications. His most fortuitous career move: Becoming one of eBay’s early executives in 1997, where he helped the circle of young techies keep their eye on the bottom line in his role as Senior Vice President of Marketing, Business Development, M&A and International. “People were saying things like, ‘Well, you don’t really have to be profitable,’” he told The (San Francisco) Chronicle. His message: “You must be profitable.” The company was. And after Westly cashed out with riches in 2000, he quickly put his eye back on politics. With $5 million of his own money, he narrowly won election as California controller in 2002. Four years later, he sought the Democratic nomination for governor, infusing his campaign with $40 million from his personal fortune — and lost. Westly returned to his business roots and continued to wield influence from the heart of Democratic Party fundraising. By early 2007, he founded The Westly Group, a Menlo Park venture created to tap into the mushrooming clean tech movement by linking companies with green ideas to big money to back their projects. The firm soon hit significant pay dirt, completing a vision its founder set from the start. “We believe that clean-energy innovation can achieve the dual aims of protecting our environment and generating economic opportunity,” Westly wrote in a piece he co-authored in November 2007 for the Progressive Policy Institute, a think tank affiliated with the Democratic Leadership Council. In March 2007, just as The Westly Group was getting off the ground, he joined the board of directors of Tesla, the California electric-car start-up then poised to introduce its first model — a sporty two-seat Roadster with a base price of $109,000. That same month, March 2007, Westly gave $2,300 to Obama, part of a series of federal contributions to political causes. Westly co-chaired California’s Obama for President Campaign, a fact also noted on his company website, and has personally contributed more than $360,000 to Democratic campaigns and causes since 1998, according to federal election records compiled by the Center for Responsive Politics. “I’m here to tell you Obama is the candidate with the momentum. Obama is the candidate of vision, and Obama is the candidate who is going to inspire a new generation of Democratic voters,” Westly, speaking before a “Change We Can Believe In” banner, implored a crowd as Obama battled Hillary Clinton for the Democratic nomination in the 2008 election. “Are you ready to fire it up?” he asked. After Obama’s election, Westly was rumored to be on the short list to become the president’s energy secretary, according to media reports. The slot went instead to Chu. Westly firms quickly tapped into the giant pot of federal money earmarked to the clean tech industry. In winning the 2009 energy department loan, Tesla landed in rare company — just 5 of 130 applicants for the loan pool have received funding, records obtained by The Center show. The department said not all applicants were eligible or a good fit. The GAO has chided the Energy Department for its handling of other loan programs geared toward new technologies and reducing emissions, finding last year that the department “had treated applicants inconsistently in the application review process, favoring some applicants and disadvantaging others.” It said the department fast-tracked approvals for some applicants, and sometimes committed money before all its reviews were finished, “allowing these applicants to receive conditional commitments before incurring expenses that other applicants were required to pay.” Separately, the Energy Department’s inspector general, Gregory Friedman, said his office has 64 open investigations centered on stimulus spending. They include “the directing of contracts and grants to friends and family,” Friedman told the House Subcommittee on Oversight and Investigations. The department has one of the biggest pots of recovery money anywhere in the government – $35 billion. With just one third of that money spent so far, “we expect that our efforts in this area will continue for some time,” Friedman said. Now, a new, pending GAO report is focusing on the Advanced Technology Vehicles Manufacturing (ATVM) loan program that aided Tesla and four other car firms. Documents obtained by the Center for Public Integrity under a Freedom of Information Act request show that one of the firms turned down for funding in that loan pool complained of unfair treatment and being ignored. In a five-page letter to Chu, dated Sept. 21, 2009, the company said it had been given no reason for its rejection and had to call the Energy Department multiple times simply to learn what happened. “DOE reviewers never even talked to the founder, inventor, engineers, project leads or primary contractors to obtain additional information,” said the letter from the California electric car maker, XP Vehicles, Inc. “Why was staff at DOE during the course of the year positive about the outcome and never asked for additional information?” Other firms shut out from the car program have expressed similar frustration, James Taylor, CEO of Ohio’s Amp Electric Vehicles, said in a Q & A last week on Edmunds.com. “These are companies trying to get off the ground and are just like us, starving for cash, looking for investors,” Taylor said. The government money is “not falling through the funnel and getting out to us.” For upstart firms, such loans make a huge difference. Tesla’s came in two parts. The biggest chunk — $365 million — was earmarked to bankroll a manufacturing facility for the $57,400 Model S sedan, which is expected to hit the road in 2012. “The all-electric sedan consumes no gasoline and runs entirely on electricity from any conventional 120V or 220V outlet,” the department said. The other loan “will support a facility to manufacture battery packs and electric drive trains to be used in Teslas and in vehicles built by other automakers, including the Smart For Two city car by Daimler.” “We don’t simply make code that we put out on the Web. You have to buy big pieces of mechanical infrastructure,” Diarmuid O’Connell, Tesla’s Vice President of Business Development, said in an interview. He said the financing, coming at a time commercial bank investments were drying up, was crucial to helping develop the Model S. Consumers will benefit, O’Connell said, as the lower cost Model S is nearly half the price of the Roadster. Versions with longer battery lives will cost $10,000 to $20,000 more, Tesla recently announced. “It’s not at all about the Tesla Roadster or toys for rich boys,” he said. As for Tesla securing funding sought by many but won by few: “Frankly, as a taxpayer I feel pretty good there’s been a high degree of analysis” in the award process. O’Connell said Westly aided the company on big picture issues — “he was a helpful sounding board” — but not the application itself. He said Tesla first explored government funding under Bush, though it secured its loans from Obama. Westly’s biggest role, he said, has been as tireless public cheerleader for Tesla, citing the multiple green energy forums in which Westly has appeared. “He’s a huge advocate of the company.” Now, with his latest blueprint for federal spending, Obama wants to hand consumers a $7,500 rebate when they buy an electric car, helping push his long-shot goal of 1 million electric vehicles on the road by 2015. Tesla, with the Roadster already on the road and the Model S coming next year, could be among electric car makers to reap a windfall from that subsidy. If the rebate goes through, the Obama administration will have aided Tesla at the front and back ends of its production line: The June 2009 loan package, given while Westly served on Tesla’s board of directors, helped the company build a manufacturing hub for the Model S. Now, the administration’s Cash for Clunkers-like rebate — eyed for cutting-edge electric vehicles — could help Tesla sell those cars to buyers wary of the sticker price. Until now, consumers buying hybrid and electric vehicles could pocket a tax credit of up to $7,500, but would have to wait until they filed their tax returns to benefit. Now, the break would come at purchase. The rebate could make a “huge difference” for consumers and electric car makers, said Will Beckett, membership chair of the Electric Auto Association. He said not everyone qualifies for the current tax credit. So, handing a rebate at the dealer could draw in many more buyers — adding to other subsidies already available. In his home state of California, for instance, the state already gives a $5,000 rebate to buyers of electric cars. Tesla’s O’Connell agrees the front-end rebate could lure more consumers. “Any economist will tell you that that’s the best place to stimulate the buyer’s decision,” he said. “It’s helpful on the margins. Will it be decisive? The market will prove that out.” In February, Tesla opened a showroom for its Roadster on K Street, Washington’s lobbying corridor. The Roadster accelerates from 0 to 60 mph in 3.7 seconds without gas and travels 245 miles on a charge. Tesla said 1,500 of the cars are on the road in 30 countries. “We’re excited to bring this spirit of innovation to the nation’s capital,” the company said. While The Westly Group website said the company is no longer a shareholder in Tesla, Westly continues to be, and his venture firm’s relationship ended recently. When Tesla went public in June 2010, Westly Capital Partners Fund sold more than 70,000 shares valued at $1.2 million, a minuscule portion of its nearly 2.5 million shares, according to SEC filings and the VentureBeat publication. The company, which once held more than 3 percent of Tesla, wasn’t fully divested until late last year. Westly sat on Tesla’s board from March 2007-December 2009. ENERGY GRANTS FLOW TO VENTURE-BACKED FIRMS The other energy department grants to Westly-backed firms ranged from several hundred thousand dollars for recycling programs to more than $20 million for green-tech work in California. A $700,000 Energy Efficiency and Conservation Block Grant, filtered to Philadelphia in 2009, helped RecycleBank expand its recycling benefits program in the city. “We can stand on our own two feet. The Westly Group, they’ve helped us in a billion ways, but never in a municipal contract,” said Matt Tucker, RecycleBank’s president. “He’s very focused on financials for us.” In December 2009, Westly-backed EdeniQ landed a $20.4 million Energy Department grant in partnership with Logos Technologies to “modify and operate a pilot-scale bio-refinery plant to produce low-cost ethanol bio-fuel from cellulosic feedstock,” the companies said. “It keeps a good company alive. It gives us more of a runway to develop new technologies,” said Will Gardenswartz, an EdeniQ contractor on the grant, who said the link with long-established Logos was important. That same month, Amyris Biotechnologies landed $25 million in stimulus money that will help the company convert simple sugars into fuel. “On this particular grant there wasn’t a need to bring in the big guns, but he has been very helpful generally,” Reiling said. “He has a good insight into where the political momentum is going and he has made certain introductions to us. … The best idea should win, but he’s been helpful in getting us to the forum.” Logos/EdeniQ and Amyris were two of 19 projects funded under an Energy Department program that attracted over 300 applications. The department said the projects were reviewed by independent experts and that nearly half of the applicants failed to meet eligibility criteria. At least two other companies that later joined The Westly Group portfolio, Amonix and CalStar Products, secured Energy Department funding just before their financial pact with the venture capitalist. Amonix, which makes solar panels, won $9.5 million in stimulus funding in January 2010 for manufacturing work in Nevada and Arizona. Three months later, Amonix announced a $129.4 million round of financing that included The Westly Group. In July, with Amonix in the Westly fold, President Obama spoke alongside Amonix executives during a speech at the University of Nevada at Las Vegas, using the setting to press Congress to pass a $5 billion extension to the administration’s clean energy manufacturing tax credit. The White House said it did not make any trips at Westly’s suggestion. Amonix executives did not respond to interview requests. Doug Koplow, founder of the energy consulting firm Earth Track, which tracks government energy subsidies, said investments to venture capital projects raise important questions. “Is the venture capital firm itself still having a lot of risk and money on the table?” Koplow asked. “When you get easy federal money, it actually can crowd out and worsen the discipline and due diligence.” READY ACCESS TO THE WHITE HOUSE, OBAMA, CHU From California, Westly frequently finds his way to the nation’s capital. In October 2009, he spent two days visiting The White House, records show , the first a meeting with Nancy Hogan, Director of the Office of Presidential Personnel. Hogan’s office referred calls to the White House, which said Westly met her “to discuss potential opportunities for service within the Administration related to green energy policy.” The next day, Oct. 27, Westly spent 30 minutes with Chief Technology Officer Aneesh Chopra, whose duties include job creation. Chopra said he had met Westly in California, and that the venture capitalist came mostly to hear about Chopra’s new role in government. “He shared with me in that meeting he’s very passionate about clean energy and clean technologies,” Chopra said. “He mostly listened. He wanted to hear what I was doing.” Chopra said they didn’t discuss grants or loans. “The White House does not intervene at all on any particular grant programs, procurement activities. We are policy advisors,” said Chopra. White House records also list Westly among the president’s guests at the June 2, 2010 Gershwin Award ceremony honoring Paul McCartney. The concert, in the East Room of the White House, included tributes from Stevie Wonder and Emmylou Harris. In August 2010, Westly was appointed to the Secretary of Energy Advisory Board, along with academics and current or former executives from Lockheed Martin, IBM, DuPont and United Technologies Corp. “They will be providing their expertise and experience at a critical time for our country as we chart a new course toward a clean energy future,” Chu said in a statement. The White House said it “identified the board as a potential fit for Westly, communicated that to DOE staff, and referred Westly to the Department,” wrote spokesman Cherlin. In the board’s introductory meeting in September, Westly was in attendance as the discussion included a DOE presentation on how the Recovery Act “has positioned the Department of Energy to take a different role in Clean Energy Deployment” — and how the department needs to leverage grants, tax incentives and loans, the meeting minutes show. Then Jan. 20, Westly led a subcommittee exploring ways to incentivize building energy efficiency. “Member Westly will compile a menu of options for overall building efficiency and bring it back to the group for discussion,” the minutes say. In his interview with Bloomberg West TV, Westly was asked where his company was putting its money. “But one of the areas that is perhaps least talked about that we like most, is energy efficient building materials, green building materials,” he said. “You are going to see a revolution in clean building materials.” He is backing that talk with investments. In February, The Westly Group took part in a $10 million round of financing for Soladigm, a developer of energy-efficient glass for buildings. A Westly Group managing partner joined Soladigm’s board of directors. As a member of Chu’s Advisory Board, Westly is allowed to discuss policy issues that could impact venture capitalists like himself. Energy department policy states only that he is not to take part in matters that would directly affect The Westly Group. The department said it sought Westly’s expertise as a venture capitalist. Asked about his investment in green building materials even as he leads Chu’s committee on the topic, the department said Westly’s investments were factored in when deciding his role. “The Secretary of Energy Advisory Board is meant to provide advice to the Secretary on energy policy and on the overall direction of the Department of Energy,” spokeswoman Stephanie Mueller wrote in January. Chu did not respond to an interview request in January, and on March 10 said he had no time to talk. “The Secretary’s schedule is unfortunately packed for the next several weeks so he won’t have time for this,” the department wrote. The Center filed a Freedom of Information Act request for correspondence between Westly and the Department of Energy. While the department released some records last week, it cited privacy concerns as reasons for withholding three pages of Westly’s personal financial information, as well as much of the contents of emails detailing discussions between Westly and the Energy Department’s legal counsel. The records do show that the Obama administration asked Westly to co-host events in March 2010 for Chu and senior advisor Valerie Jarrett, each of whom had spoken that month at Stanford University, and for Jim Messina, Obama’s 2012 campaign manager — and that Westly wasn’t shy about mentioning his connections. “Please forgive the delay on this, but the Administration has asked me to co-host events for Valerie Jarrett (last Thursday) and Jim Messina and Secretary Chu (both of which are tomorrow) so things have been a bit busy on this end,” Westly wrote to Sue Wadel, the Energy Department lawyer conducting his conflict of interest review for the board. “The good news is that we will have good turn-outs for all events!” said Westly’s March 2010 email. In October, two months after his appointment to the energy board, Westly helped Obama once more, as Democrats nationwide struggled to win seats amid the battered economy. At a guesthouse on his Atherton property, 30 miles south of San Francisco, Westly raised money for San Francisco District Attorney Kamala Harris’ successful bid to become state attorney general. Then, at his main home that October evening, Westly sought funds for the Democratic National Committee. “It’s an extraordinary honor to host the president at your home,” Westly told local reporters. “And I’ve never seen the president more pumped up.” Westly and his wife rubbed shoulders with the President and Mrs. Obama at the Jan. 19 state dinner featuring a menu of poached Maine lobster, dry-aged rib eye and “An Evening of Jazz.” Then, Westly connected with Obama again Feb. 17 as the president dined in Northern California with high-tech wunderkinds at fellow venture capitalist Doerr’s estate. The meeting, a White House official said, was “part of our ongoing dialogue with the business community on how we can work together to win the future, strengthen our economy, support entrepreneurship, and get the American people back to work.” The president and high tech executives broke bread over “our shared goal of promoting American innovation,” the White House said, along with Obama’s “commitment to new investments in research and development, education and clean energy.” Westly sees only good things ahead. “For our firm, we had three companies go public last year alone. It was a banner year,” he told Bloomberg West TV. “And I think this year is going to be better.”

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Major Obama Fundraiser Benefits From Millions In Federal Loans

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Kia Recalls Thousands Of Optimas That Can Roll When Parked

March 11, 2011

DETROIT — Kia Motors is recalling more than 70,000 Optima midsize sedans to fix transmission problems that can cause the cars to roll even while they’re in park. The cars are from the 2006 through 2008 model years and were built from Sept. 29, 2005 to June 13, 2007. In documents filed with the National Highway Traffic Safety Administration, Kia said that on some of the cars, a transmission shifter cable was installed incorrectly and can become detached from the shifter. If the cable comes off, the car would stay in the last gear used even if the driver puts the transmission in park, the documents said. “If the driver leaves the vehicle without engaging the parking brake, there is a possibility that the vehicle can roll, creating the risk of a crash,” Kia said. No injuries have been reported from the problem, but Kia has concluded that under “extraordinary circumstances” the cars could roll inadvertently. Kia plans to start the recall this month and will notify owners by mail. Drivers will be told to always use the parking brake when shifting the transmission into park “especially until they can take their vehicle to the dealer,” the documents said. Dealers will inspect the cable and reinstall it if necessary, free of charge. Owners who have questions can call Kia at (800) 333-4542.

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Grant Cardone: Automotive Sales Trainer Shows Tricks to Buying a Car Quick and Easy

November 9, 2010

Below is a step-by-step plan of how to get a great deal on your next car without going through a long, drawn-out and painful process. Because of the internet, manufacturers’ influence, and competition, much of the older advice on how to buy a car written in books, articles and seen on TV is now outdated and actually makes buying your next vehicle more painful than necessary. And I should know because I have been providing automotive sales training to auto dealers for 25 years and know all the secrets. With so many sources of information available from dealerships’ inventory postings, manufacturers’ sites, Kelly Blue Book, Edmund’s, Auto Trader, Autobytel, and more, it is clear that information is not in shortage. All this information without a simple buying plan is just information overload, adding unwanted time and confusion. The goal when buying a car should be to know you got a good deal without spending three weeks in research, shopping at six dealerships and spending countless hours in painful negotiations. These six steps will guarantee you get what you want without wasting time: 1) Approach the dealer as a buyer. Your best offense when buying a car, contrary to popular belief, is to identify yourself as a buyer, not a shopper. Don’t be defensive; present yourself as wide open and easy. This will actually make the dealer easier to deal with. The customer that approaches a car dealer in a defensive and pushy way tends to cause the dealer to respond the same way. 2) Price is not your greatest concern. Let the sales person know that the most important thing to you is not price but knowing that you are on the right car. This will be music to the sales person’s ears and will make them butter in your hands. Communicate that you are confident than once the vehicle is perfect, the dealership and you can come to agreeable terms. This is going to make the sales process quicker by reducing confrontation and, later, making getting your best terms even easier. 3) Make sure you are on the right vehicle. The single biggest mistake a buyer can make is buying the wrong product. Putting price in front of selection is an outdated buying tactic. If the product is not right, the terms can never be good enough! The best way to determine the right unit is not online or on the phone but at the dealership. A trick to make sure you are on the right vehicle is to look at the vehicles just above and just below what you think you want. Any interest on either of the other two product choices means you are not yet on the perfect product for you. 4) Test drive the vehicle. Dealerships love you driving their products. This makes the dealership feel like they have done their job and provides them with more confidence in giving you their best price. Taking time to demonstrate the vehicle will save you time later and give both parties more confidence when negotiating. 5) Ask for a computer-generated proposal. Ask the dealership if they could please present their offer to you electronically rather than by hand. Because of technological advances, the most progressive, customer-satisfaction-driven auto dealers today utilize software technology to provide the buyer with computer-generated proposals. The proposal should include price, trade figures, purchase and lease payment, down payments and interest rates all at one time. Ask your dealer, “Do you use EPencil or electronic proposals?” Computer-generated proposals avoid wasted time in the negotiations and unnecessary figuring by management. An electronically generated proposal can produce nine purchase payments and nine lease payments in less time than it takes to fill out a credit app. This also reduces chances of mistakes and wasting time going back and forth. Computer-generated worksheets guarantee a full disclosure, complete transparency, and a quick and easy negotiation process that is non-confrontational. Car dealers know that time is important to the 21st-century buyer and that extending the negotiations only negatively affects the buying experience and ownership. 6) How to determine a fair price? Just so you know, franchised automotive dealers in the U.S. operate on about the same net margins as a grocery store: about 2 percent net margin (after all expenses). Most car transactions generate more money to state and local taxes than profits for the dealer. For instance, the taxes in California are 8.75 percent, so if the dealer has a mark-up of 6 percent on a $20,000 car, they will have a gross profit (before any expenses) of $1,200 while the state will collect almost $1,800. Keep in mind that the State of California isn’t even in the car business, doesn’t wash the car, service it, or inventory the products; it only promises you schools, roads and hospitals for the taxes they collected. If it were not for dealerships’ service departments and pre-owned cars, the car dealer wouldn’t be able to even stay in business to sell new cars. Can you find another dealer 50 miles away to sell for a couple hundred dollars less? Probably, but your local car dealer, with whom you will be servicing your car, is a human being, too. Remind him when you need something that you came in, didn’t create a problem, weren’t hard to deal with and made the whole process painless for everyone. Most auto dealers are not interested in taking advantage of you and are highly interested in making you happy. It is outdated thinking that a buyer has to shop five locations to get a good deal. So the next time you are ready to roll in something shiny and new, just follow my steps: let your dealer know you are there to buy, be sure you are on the right car, ask that they present their proposal electronically and tell them you know automotive sales training guru Grant Cardone. Follow this advice and you will have a great car-buying experience, avoid wasting valuable time and know you received a great deal. Grant Cardone is Automotive Sales Training Expert and New York Times bestselling author.

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InsideSales.com Names Michael Critchfield as Vice President of Sales

August 11, 2010

Proven Sales Leader Brings Experience From Leading SaaS Companies Arkona & DealerTrack

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Wallace Turbeville: The Murky Realm of (Derivatives) Clearing

August 9, 2010

Matt Taibbi’s latest article in Rolling Stone appropriately characterized the financial reform act as neither an “FDR-style, paradigm-shifting reform, nor a historic assault on free enterprise.” While generally describing the act as a “cop out,” he identified the Fed audit requirement and the Consumer Finance Protection Bureau as positive developments. But he viewed the requirement that many derivatives be cleared as “the biggest win of all.” Alas, Matt may have been too generous, or at least premature. Mandating clearing was a convenient and simple approach for Congress. The idea was to shift the basic derivatives trading risks in an appreciable percentage of the market away from the banks to reduce systemic risk. The problem is that very few people are equipped to understand just how the mandate might work in practice. How much of the market? What are the consequences? I have not seen evidence that anyone on the government’s side can answer these questions effectively. This is not intended to demean anyone’s intellect. Clearing theory is complicated and arcane. It was always a backwater of finance and was taken care of by people at the clearinghouses and in the back offices of the banks. Clearinghouses were largely allowed to regulate themselves through a process of self certification. This limited the Commodity Future’s Trading Commmison’s practical involvement with the markets. Then clearing became the centerpiece of derivatives reform. We decided to concentrate the most dangerous financial risks in the galaxy in a couple of organizations. As fate would have it, I am one of the few people around who knows something about the clearing business and theory and is not employed by an investment bank or clearinghouse. At the end of my career on Wall Street, I was hired to perform a financial autopsy of the special purpose derivatives clearinghouse set up by California as part of an innovative power market structure. It had failed in the state’s power crisis of 2001-02 . Observing the tremendous systemic risk generated by using conventional clearing techniques for all but straightforward derivatives, I embarked on a seven year quest. I formed a company that designed a mathematical, IT and legal structure to provide a transparent and orderly system to manage the risks of those derivatives which shouldn’t be cleared conventionally. Sign up for weekly ND20 highlights, mind-blowing stats, event alerts, and reading/film/music recs . Imagine my surprise when the banks decided against using the system. They preferred taking advantage of the opaque and chaotic bi-lateral derivatives market. The profit potential of the shadowy chaos outweighed efficiency, transparency and sensible risk management. At least I can claim to have been ahead of the times. There are two dangerous forces at work in the endeavor to push derivatives into clearinghouses: 1) Concentrating risks only makes sense if the risks associated with the cleared derivatives can be adequately managed. There is no way to collect enough collateral to cover all potential losses if a derivatives trader defaults. The credit risk embedded in a derivative is, by definition, limitless. Clearinghouses use statistics to measure probable losses. They will require sufficient collateral so long as the statistical analysis reflects reality. The further a type of derivative strays from the standard, liquid markets, the less valid is the statistical measurement of risk. It appears that most people involved with the reform legislation thought “unclearable” transactions were only one-off deals with non-standard contractual terms. The far greater issue concerns commodity classes and financial indices for which statistical risk measurement is unreliable. Historical market data may be too meager or the daily volume may make predicted prices “untransactable.” For certain classes of derivatives, statistical risk measurement is simply impossible, not just unreliable. One might think that clearinghouses would only take on these types of derivatives if the risk of doing so were prudent. One would be wrong. A byproduct of financial deregulation is fierce competition among a handful of clearinghouses. Profit depends on volume. Even before the crisis, competition had already pushed clearinghouses to the edge of prudence and beyond. We cannot assume that clearinghouses will be rational or that the government, so invested in clearing as an answer to the derivatives dilemma, will enforce prudence. Sophisticated and well-capitalized banks recently evaporated because they transacted business that, in retrospect, made no sense. Why not clearinghouses? The risk is that we revisit the world of “Too Big to Fail.” 2) Dealer banks have enormous influence over clearinghouses because they can control volume. Of the two major US clearinghouses, the IntercontinentalExchange (ICE) and Chicago Mercantile Exchange (CME), ICE is more susceptible. After all, the banks created ICE, largely to compete with CME. But CME is under bank influence as well. ICE and CME raced to clear credit default swaps after the market collapse in September 2008. The ICE effort was successful, in part because the special purpose clearinghouse it set up agreed to give the banks a 49.9% share of the revenues. CME naively created a structure with a trading feature attached, assuming that real-time CDS price transparency would be an attractive add-on. The transparency feature angered the dealer banks, which were already inclined to prefer the ICE structure for obvious reasons. The dealers have largely declined to support CME’s massively expensive effort. Privately, CME has vowed never again to take on a project that the dealer banks don’t support. Clearinghouses may take on derivatives imprudently, but the banks may use their influence to limit clearing. These do not balance one another. The banks might well support clearing of some risky derivatives and, at the same time, use their influence to resist clearing of other derivatives which should be cleared. These pitfalls can be avoided. Regulatory implementation and oversight can establish defenses. However, the process must aggressively challenge conventional notions of how clearinghouses work. Most of all, the regulators and proponents of reform have to be aware that the banks and clearinghouses are not necessarily friends. The banks will try to use their superior knowledge, resources and influence to craft a structure that allows them to continue business as usual. I despair that there is no practical counterbalance to the banks, such as AFR and other public interest groups that were so effective during the legislative process. It turns out that this part of financial reform is a marathon, not a sprint. Cross-posted from New Deal 2.0 .

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This Week in Retail: Chrysler Begins Process To Add 125 New Fiat Dealerships

July 7, 2010

Chrysler Group LLC has begun the dealer selection process for the reintroduction of the Fiat brand in the United States. The automaker expects to select dealers in about 125 markets identified for growth potential in the small-car segment. Fiat dealers…

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Bill Singer: Wall Street Blackjack Player Busts, Busted, and Barred

May 25, 2010

They do quite a bit of surveillance at most casinos. Frankly, those paid to watch the games of chance do a better job than those paid to watch our stock markets. Take this recent case. Blackjack Players Go Bust And Get Busted On September 20, 2008, five blackjack players and the dealer at a blackjack table at the Mohegan Sun Casino in Uncasville, Connecticut were under in-house surveillance that allegedly caught them cheating. The six suspects were arrested and initially charged with committing a sixth-degree larceny on September 20, 2008. However, sometimes things are not what they seem. All charges against four of the players were dropped. As with most games of chance, you place your bet, you take your chances. Alas, Lady Luck did not smile upon two of the six blackjack suspects. In October 2008, Rory Shaffer, the 28-year-old blackjack dealer, and 21-year-old Samuel M. Pierce, one of the five arrested players, were charged in Connecticut’s Norwich Superior Court with first degree larceny, cheating while gambling, and conspiracy to commit first degree larceny. Allegedly, Pierce and Shaffer engaged in a scheme to steal $16,000 from a casino whereby Pierce was allowed to keep chips that he bet on losing hands. Notwithstanding the charges, Shaffer and Pierce are presumed innocent until and unless proven guilty in a court of law. Wall Street’s High Standards and Principles In 2007, Pierce apparently started a Wall Street career when he became an Associated Person, which is typically an unregistered Wall Street employee who is generally excluded from dealing with the investing public other than in a clerical or administrative capacity. From July 24, 2008, through January 19, 2009, Pierce was an Associated Person with FINRA member firm Citigroup Global Markets, Inc. The Financial Industry Regulatory Authority (FINRA) is one of the many cops that are supposed to patrol Wall Street. Neither a federal nor state governmental agency, FINRA is what is referred to as a self-regulatory organization (SRO). The concept of an SRO is that a working partnership between the regulator and the regulated should prove invaluable and a potent means to combat Wall Street fraud. In theory, an SRO is an intriguing idea – after all, who knows more about the shenanigans in a given industry than the folks in that industry? Ah, but there is always that old hang-up: in theory things should work; in reality , well, not always. See this for some context: FINRA’s Dubious Madoff Report http://www.brokeandbroker.com/index.php?a=blog&id=250; and FINRA Strikes Out http://www.forbes.com/2009/08/21/singer-regulation-commentary-intelligent-investing-finra.html Having missed out on timely nailing some of the great fraudsters in recent Wall Street history, FINRA now seems to be trying to make up for lost time, and, perhaps, trying to manufacture some feel-good publicity. When Pierce allegedly got nabbed at the Mohegan Sun Casino, FINRA had this rule (from its predecessor the National Association of Securities Dealers or “NASD”) that stated: NASD Conduct Rule 2110: Standards of Commercial Honor and Principles of Trade : A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade. Too often, prosecutors or regulators haul out some rubbery, pliable, stretchy bit of prohibitions and restrictions that they claim covers a whole host of sins, real or imagined. We lawyers have a term for that type of regulation; we call it an Elastic Clause . It’s not a term of endearment. Rule 2110 is just such an example. I mean, seriously — what the hell are “high standards of commercial honor” and “just and equitable principles of trade” when it comes to something as tawdry as Wall Street? The House of Cards Collapses Not prepared to tolerate a dastardly, hardcore card-shark in its midst, FINRA pursued Pierce for violating Rule 2110. Pursuant to a FINRA Letter of Acceptance, Waiver and Consent (“AWC”) (AWC #2008015405101, March 9, 2010) Pierce offered to settle the regulatory case against him, without admitting or denying the findings. Notably, only the alleged blackjack scheme is referenced by FINRA; there is not a single reference to any alleged criminal charge, plea, or final disposition as providing the basis for jurisdiction. Frankly, that’s what caught my eye about this case. FINRA was going after this kid not based upon any criminal conviction (there is none) but simply because he allegedly rigged a blackjack game. I’m not suggesting that Pierce should be permitted to remain in the industry or that he is (or isn’t) a reputable character. The facts are what they are and you are welcome to draw your own inferences and conclusions. Moreover, in FINRA’s defense, this is a matter that Pierce agreed to settle with a bar. Consequently, FINRA agreed to the imposition of a Bar upon Pierce from association with any member in any capacity. Pierce is not presently associated with any FINRA firm and has no other disciplinary history beyond the matter at issue. Accelerated Rehabilitation Pierce’s attorney, David T. Grudberg, of Jacobs, Grudberg, Belt, Dow & Katz, P.C. of New Haven, Ct. advised me that Pierce was presently participating in Connecticut’s pretrial program for accelerated rehabilitation (“AR”). AR gives certain first-time offenders probation for up to two years, during which time the criminal prosecution is suspended. If the defendant satisfactorily completes the probationary period he may then apply to the court for dismissal of the charges against him. For a detailed analysis of AR , visit this link http://www.jacobslaw.com/CM/CriminalDefensePractice/PretrialDiversionPrograms.asp As matters presently stand, Pierce has not admitted to any criminal conduct and the State has not proven any criminal conduct. Accordingly, Pierce continues to be entitled to the presumption of innocence. Further, all charges against Pierce will likely be dismissed if he complies with the terms of the AR. As a matter of law, in two years, his arrest and the charges against him may well be rendered non-events. Bill Singer’s Comment : In taking its bows for Pierce, FINRA might ask us to imagine all the damage that this unregistered 21-year-old alleged card cheat could have done to the unsuspecting investing public. Unfortunately for FINRA’s what-if scenario, Pierce wasn’t registered and probably wasn’t dealing directly with investors. Oh well, minor detail. Compare this case with FINRA’s rather tepid responses to the misdeeds of Bernie Madoff and Sir Allen Stanford. FINRA certainly nipped those major frauds in the bud – okay, maybe not in the bud, maybe whatever a bud becomes after a decade or so and far too many defrauded investors have lost millions of dollars. Is FINRA presently preparing to bar all those fine, upstanding Wall Street execs who bid against the very products that they sold to the public — you know, keeping in mind all that high fallutin’ stuff about commercial honor and equitable principles of trade? What about all those former SEC employees who were terminated for viewing pornography during the workday? If any of those folks apply for work on Wall Street, will FINRA move to bar them? If former Governor Spitzer, or former Senator Edwards, or former Representative Fosella, or sitting Governor Sanford, or sitting Senator Ensign, or sitting Senator Vitter apply for jobs on Wall Street, have their past extramarital actions run afoul of FINRA’s high standards of commercial honor and just and equitable principles of trade? And just what is FINRA’s ethical interpretation about sitting Attorney General Blumenthal’s misstatement about his Vietnam service? Essentially, Pierce is barred for having allegedly cheated while placing a legal bet on a legal card game at a legal casino. How about all those Wall Streeters who place illegal bets in their offices in violation of state and federal anti-gambling laws? What am I talking about? How about all those industry folks who illegally gamble on the office NCAA March Madness or NFL Super Bowl pools? Does that fall under FINRA’s arch concern about honor and and equity? As you may have inferred, some of this is all too sanctimonious for me. The last thing that Wall Street now needs are more hypocritical double-standards. Of course, there is that other interesting question: How much FINRA staff time was diverted and how many regulatory dollars were spent going after young card-shark Pierce — and what about the more serious securities fraudsters who continue to savage the investing public while such a dubious regulatory effort proceeds? I don’t know about you, but I’m sleeping much better at night knowing that Wall Street is being swept clean of allegedly crooked casino gamblers. If only we could get those who police the nation’s casinos to teach those who police Wall Street’s how better to surveil and regulate their own turf.

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Steve Parker: Three automotive stories you want to know

May 24, 2010

Tesla to Downey, CA – Drop dead! If you’re driving through Downey, CA, I wouldn’t recommend driving a Tesla. A dream of Downey leaders to re-open an old Space Shuttle facility in their city, just south of Los Angeles, where Tesla told the city they wanted to build the cars, has fallen through. And Downey is pissed. Tesla buys cars from Lotus and ships them to the US where they are retro-fitted with electric motors and batteries for their all-electric sporty car. They have another, larger car planned for next year. Tesla EV Roadster Downey was once at the center, like much of Southern California, of American aerospace manufacturing. The city boomed from the ’50s through the early ’90s when the country’s space program lost much of its funding and seemed to lose its own dreams for the future. So when Tesla and Downey made the announcement recently that an old Space Shuttle plant would be re-opened for Tesla to build their EVs, a lot of people thought it a good idea. More than 1,000 Downey-area people could be hired in an area which has been hard-hit by the recession. Downey and Tesla were to sign their agreement last Friday, May 21st, and city leaders were looking forward to the ceremony as an early Christmas – and a sure way to guarantee their re-elections. Last Thursday, 24 hours or so before the agreement was to be signed, Tesla made a stunning announcement – Toyota was going to infuse some $50 million into the EV-maker, and Teslas are going to be built at a plant in Fremont, CA (just south of San Francisco), which was shared by Toyota and GM and was recently shuttered, putting some 5,000 mostly-union workers out of their jobs. The plant, called New United Motor Manufacturing Inc. (NUMMI) was a joint venture between the two auto giants, with Toyota running the plant and making Corollas and GM building Pontiac Vibes there, too. Toyota gets some good press from their investment and plant re-opening (1,000 people may be hired initially) and will learn more about EV technology and maybe share some of their knowledge with Tesla. PayPal co-founder Elon Musk, Chairman, Product Architect and CEO of Tesla, is now on the big map as far as mass-produced EVs are concerned and so is California. The only loser here is Downey and the people there who thought they might be getting new gigs in the green economy. Was it bad faith negotiating on Tesla’s part? Or just business? What do you think? When will the first lawsuit from Downey be filed? Things were a lot simpler when Downey was mostly known as the home of Karen and Richard Carpenter. Los Angeles Times – Toyota does it again In yesterday’s Sunday edition, the lead story on the LA Times’ front page was yet another expose’ by writer Ken Bensinger about Toyota failing to notify the public about a serious problem. Bensinger has broken much of the big news about the Toyota scandal and we predict a Pulitzer for him and the paper this year. The piece says Toyota, through their Lexus division, never publicly acknowledged or reported to the government about a serious problem with the automatic transmissions in their 2002 through 2006 Lexus ES300 sedans. 2002 ES300 Apparently, according to the article, Toyota/Lexus issued what’s known as a “secret recall” and possibly a Technical Service Bulletin (TSD) to their dealers. What this essentially means is that if an ES300 owner came into the dealer and complained specifically about the transmission problem, the dealer could then fix or replace the transmission and get paid by Toyota for the service. But if an owner never said anything, the car wouldn’t be fixed by a dealer. The transmission problems reportedly included hard shifts, surging and unintended acceleration. Is Toyota playing business as usual? Or had their arrogance grown so great that they felt they had no responsibility to report potential serious safety problems to the public at all? What do you think? Where will this all end? Car dealers exempt from proposed consumer agency One of the more consumer-friendly parts of the proposed laws surrounding the world of money in this country is the creation of a new watchdog agency to oversee companies which make consumer loans. But don’t expect car dealers which make loans to buyers to have to report to the agency. Automotive News reports today that dealer groups prevailed in a U.S. Senate vote on whether to exempt dealers from oversight by a proposed consumer finance agency. The Senate voted to recommend to its leaders that they agree to the exemption in a conference committee with House leaders. The non-binding vote today was 60-30. Senate and House leaders will meet in weeks ahead to reconcile differences in the financial regulation bills that passed the two chambers. The House measure included a regulatory exemption for dealers who are arranging consumer loans. The Senate bill did not contain such an exemption. What can you say about something which appears so blatantly to profit and protect dealers and not give car-buyers use of an agency whose jobs it is to oversee consumer loans? What do you think?

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Steve Parker: Three automotive stories you want to know

May 24, 2010

Tesla to Downey, CA – Drop dead! If you’re driving through Downey, CA, I wouldn’t recommend driving a Tesla. A dream of Downey leaders to re-open an old Space Shuttle facility in their city, just south of Los Angeles, where Tesla told the city they wanted to build the cars, has fallen through. And Downey is pissed. Tesla buys cars from Lotus and ships them to the US where they are retro-fitted with electric motors and batteries for their all-electric sporty car. They have another, larger car planned for next year. Tesla EV Roadster Downey was once at the center, like much of Southern California, of American aerospace manufacturing. The city boomed from the ’50s through the early ’90s when the country’s space program lost much of its funding and seemed to lose its own dreams for the future. So when Tesla and Downey made the announcement recently that an old Space Shuttle plant would be re-opened for Tesla to build their EVs, a lot of people thought it a good idea. More than 1,000 Downey-area people could be hired in an area which has been hard-hit by the recession. Downey and Tesla were to sign their agreement last Friday, May 21st, and city leaders were looking forward to the ceremony as an early Christmas – and a sure way to guarantee their re-elections. Last Thursday, 24 hours or so before the agreement was to be signed, Tesla made a stunning announcement – Toyota was going to infuse some $50 million into the EV-maker, and Teslas are going to be built at a plant in Fremont, CA (just south of San Francisco), which was shared by Toyota and GM and was recently shuttered, putting some 5,000 mostly-union workers out of their jobs. The plant, called New United Motor Manufacturing Inc. (NUMMI) was a joint venture between the two auto giants, with Toyota running the plant and making Corollas and GM building Pontiac Vibes there, too. Toyota gets some good press from their investment and plant re-opening (1,000 people may be hired initially) and will learn more about EV technology and maybe share some of their knowledge with Tesla. PayPal co-founder Elon Musk, Chairman, Product Architect and CEO of Tesla, is now on the big map as far as mass-produced EVs are concerned and so is California. The only loser here is Downey and the people there who thought they might be getting new gigs in the green economy. Was it bad faith negotiating on Tesla’s part? Or just business? What do you think? When will the first lawsuit from Downey be filed? Things were a lot simpler when Downey was mostly known as the home of Karen and Richard Carpenter. Los Angeles Times – Toyota does it again In yesterday’s Sunday edition, the lead story on the LA Times’ front page was yet another expose’ by writer Ken Bensinger about Toyota failing to notify the public about a serious problem. Bensinger has broken much of the big news about the Toyota scandal and we predict a Pulitzer for him and the paper this year. The piece says Toyota, through their Lexus division, never publicly acknowledged or reported to the government about a serious problem with the automatic transmissions in their 2002 through 2006 Lexus ES300 sedans. 2002 ES300 Apparently, according to the article, Toyota/Lexus issued what’s known as a “secret recall” and possibly a Technical Service Bulletin (TSD) to their dealers. What this essentially means is that if an ES300 owner came into the dealer and complained specifically about the transmission problem, the dealer could then fix or replace the transmission and get paid by Toyota for the service. But if an owner never said anything, the car wouldn’t be fixed by a dealer. The transmission problems reportedly included hard shifts, surging and unintended acceleration. Is Toyota playing business as usual? Or had their arrogance grown so great that they felt they had no responsibility to report potential serious safety problems to the public at all? What do you think? Where will this all end? Car dealers exempt from proposed consumer agency One of the more consumer-friendly parts of the proposed laws surrounding the world of money in this country is the creation of a new watchdog agency to oversee companies which make consumer loans. But don’t expect car dealers which make loans to buyers to have to report to the agency. Automotive News reports today that dealer groups prevailed in a U.S. Senate vote on whether to exempt dealers from oversight by a proposed consumer finance agency. The Senate voted to recommend to its leaders that they agree to the exemption in a conference committee with House leaders. The non-binding vote today was 60-30. Senate and House leaders will meet in weeks ahead to reconcile differences in the financial regulation bills that passed the two chambers. The House measure included a regulatory exemption for dealers who are arranging consumer loans. The Senate bill did not contain such an exemption. What can you say about something which appears so blatantly to profit and protect dealers and not give car-buyers use of an agency whose jobs it is to oversee consumer loans? What do you think?

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Grant Cardone: Brownback Amendment ENSURES Auto Lending is Competitive

May 22, 2010

Passing the Brownback Amendment is more important for the protection of consumers than it is for auto dealers. The spin from Washington is that auto dealers need to be regulated but no one would ever suggest that car dealers in anyway contribute to the financial crisis. In case you didn’t know a car is not a house! The recent financial problems were caused because Wall Street was repackaging home loans and selling them off to other groups without any sense of the real value of the property supporting the loan. Wall Street was not reselling auto loans. Fannie Mae and Freddie, Bear Stearns and Lehmans have nothing to do with auto loans. The people that need to be regulated should be regulated, not entrepreneurial retail small businesses that are the economic engine of this country. Auto dealers are the wrong target here and should not be included in this reform. Mr. Obama is either being misinformed or (I pray this is not the case) he has an agenda to give a handful big banks more power and the consumer fewer choices. The idea that auto dealers somehow contributed to the financial problems because they help car buyers with loans does not have any basis in reality. How do I know? My company has worked with large and small companies over the last 25 years to strengthen their processes and procedures and ensure the companies are more effective with client retention and customer loyalty. As a result I have been exposed to the inner workings of auto dealers and manufacturers. I know how they make their money, how they operate, where their money is made and what it takes for them to be profitable. Contrary to the public’s belief car dealers make most of their money servicing automobiles, not selling them, much less financing them. If car dealers are making too much money, why were thousands of them recently shut down by the manufacturers? So that the public understands the truth; auto dealers provide financing to auto buyers as a service to make it easy for the customer to buy a car and get a loan in one stop. The customer has the freedom to get the money from their own bank, credit union or have the auto dealer provide options. Financing is merely a service the dealer provides the consumer. Options give customer choices and choices provide competition which leads to more competitive rates for customers. There exist rates, as I write this, as low as 0% financing for customers because the manufacturer and dealer are working together to provide low cost financing and make the automobile purchase more affordable. Try to get 0% from your bank or any bank- you can’t! Rather than listening to all the spin from Washington or even believing me, call your bank today and then call your favorite auto dealer and I assure your dealer can get you a lower rate from the very same bank where you have an account. That’s right, a finance department in a car dealership is actually able to get you a lower rate from your bank, than you can from your own bank. Getting a loan from a car dealer is no different than going to Macy’s or Target to buy clothes and they offer you a credit card on the spot to fund the purchase. It is a service point for the dealer, not a financial opportunity. Do car dealers make money on this service? Sometimes they do and sometimes not; depending on the loan, loan amount, the terms, the credit rating and other factors. If it wasn’t for the retail auto dealer’s many of the credit challenged would never obtain auto financing because traditional banks won’t even consider them. Without the option provided by the car dealer the person with poor credit score would not be able to acquire transportation they need. Vote to pass the Brownback Amendment. It is in the best interest of every American to keep lending competitive. Auto dealers did NOT contribute to the financial problems of this country! The lending services of the auto dealer force banks to be competitive and make it cheaper for Americans to get a loan. ACTION NEEDED Call your Senators through the Capitol Switchboard (202-224-3121) and tell them to vote “YES” on the Brownback. For more information click here. Grant Cardone, Author and Business Expert

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EVCARCO (OTCBB: EVCA) Initiates Expansion Plan by Appointing Alternative Energy Vehicle Expert Bill Williams

April 15, 2010

EVCARCO Brings Aboard Electric Car Expert to Head Up Dealer Development for North America, Bill Williams Appointed by EVCARCO

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Chuck Collins: Honk If You Want To Raise Taxes on the Wealthy

April 12, 2010

The House Ways and Means committee is beginning to debate whether to let the Bush-era tax cuts for the wealthy expire at the end of this year. There will be the usual carping about how this would hurt the economy, punish the successful, kill the geese that lay the golden eggs. But some of the geese think it’s a good idea. It’s not surprising that 60 percent of all Americans support raising taxes on households with incomes over $250,000, according Quinnipiac University poll . What’s curious is some of the people who will pay these higher taxes also agree. The Quinnipiac poll reveals that 64 percent of those with incomes over $250,000 support the tax hike. This is echoed by the unusual voices of retired CEOs, current business leaders and small business owners, many of them affiliated with Wealth for the Common Good , a network concerned about tax fairness that I co-founded. They don’t sound like they’re fomenting class warfare. If anything, they are waxing poetic and patriotic. “I hope Congress has the courage to let my tax cut expire,” wrote Gene Mulligan, an investment manager from Alexandria, Va., in a syndicated column . “Our nation has built a remarkable marketplace for enterprise and wealth creation. Taxes paid for the public investments in research, education, infrastructure and technology that made this possible. They paid for law enforcement and orderly marketplaces. These public investments buoyed my personal opportunities and wealth. I am certain they have done the same for millions of other Americans.” Arul Menezes, a principal architect at Microsoft, wrote i n an op-ed for that was published in The Cleveland Plain Dealer that the meritocratic system and infrastructure that made his entrepreneurial success possible is eroding. “Our investment as citizens in our collective “commons” lays the foundation for our individual wealth and success. Taxes are the price we pay to live in a civilized and healthy society. Those of us who have disproportionately benefited from public investments have a responsibility to pay back our society so that others can have similar opportunities.” Edgar Bronfman, the retired Chairman of Seagrams, who pushed the conversation along with an article in HuffPost said, “In the midst of an economic crisis, Americans are aware of who gets bailed out and who doesn’t. The economy needs everyone’s optimism, initiative, and resolve to get through bad times together. For the past eight years the wealthy have gotten wealthier. Now it’s our turn to pay the piper and help build a more moral America.” More than 300 higher income taxpayers have signed a public petition calling on Congress and President Obama to let the tax cuts expire. These include Bernard Rapoport, Chairman Emeritus, American Income Life Insurance Co.; Chuck Denny, Jr., retired CEO, ADC Communications; John Steel, attorney and former mayor of Telluride, Colo.; Paul Grundy, IBM Corporation’s Global Director, IBM Healthcare Transformation; and Julie Johnson, Managing Director, Fresh Pond Capital. A signer to the petition, Todd B. Achilles, Managing Member of Balius Ventures LLC, said, “It is fundamental to our American values that we have a strong meritocracy which provides equality of opportunity to all Americans. Ensuring that everyone has an opportunity to be successful and pursue their dreams means ensuring that each and every American contributes appropriately to the nation’s well-being.” According to a new report from Wealth for the Common Good, Shifting Responsibility , the wealthy have received massive tax cuts not just under President George W. Bush, but for decades before. Since 1960, the share of household income that middle class households paid in federal taxes has increased slightly, from 15.9 to 16.1 percent. But America’s wealthiest taxpayers have seen their tax outlays, as a share of income, drop by almost half. The top 1 percent of taxpayers, those with incomes starting at $2 million, saw the share of income paid in federal taxes decline from 60 to 33.6 percent between 1960 and 2004. During President Bush’s eight years in office, Congress expanded tax cuts to Americans with incomes over $250,000. We had to add another $700 billion to the national debt to cover them. “It’s time to rebalance the tax code,” said Ken Lewis, retired President of Lasco Shipping Company. “If we extend the Bush tax cuts for people of my income level, it will add an estimated $826 billion over the next decade. This would be very irresponsible. In my global travels, I’ve seen that societies that do not have functioning and fair tax systems have lower standards of living, poorer public services and less economic mobility and opportunity.” It’s not the perspective we hear everyday. It is heartening that there are geese who want to make sure the next generation can also lay golden eggs.

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Nathan Lewis: How to Buy Real Gold

April 12, 2010

If you’ve been following any of the hair-raising stories about the gold bullion market, you are probably thinking about how to own real gold, instead of “paper gold.” There are a few simple rules when it comes to owning gold: 1) Gold is metal. If you can’t hold a block of metal in your hand within 24 hours, you don’t own gold. 2) Everyone’s a damn crook. If you observe those two rules, you’ll do fine. First, how to buy real gold? The following suggestions will pertain for individual holdings of $1000 up to about $10 million. If you want institutional size, you should find better advice than a column on the Huffington Post . The usual caveats apply. This is not a recommendation to buy gold. This is a suggestion on how to buy gold. For a while, it was possible to take delivery on Comex futures contracts. These days, I’d say don’t press your luck. Go to a reputable gold dealer. I would suggest the Tulving Company at tulving.com or Blanchard and Company at blanchardonline.com. These dealers have been around for years, and do big business with tight margins. All gold is the same. You want to pay as little for it as possible. You should be very aware of the “premium” you are paying to “spot.” “Spot” is the price for very large accounts, trading in 400oz. institutional bars. (Ideally – reality can be a bit different.) In small sizes, from a dealer, you have to pay a little more. The dealer has to pay for his business, and that comes from buying low and selling high – the “spread.” Tulving is selling new kilobars (about 33 troy oz.) direct from the smelter for $8.95/oz. over spot. Since gold is about $1150 today , that is about a 0.78% premium. Plus, it includes free shipping. If you ask, either Tulving or Blanchard might have some larger 100oz. and 400oz. bars available. Tulving says they shipped $285 million dollars of precious metals in 2009, and $5.3 million on February 4, 2010 alone. So, they won’t flinch at your $1 million or $2 million order. For a 1 oz. Krugerrand, the premium is $29.95/coin. There are two additional costs here – one is for the dealer, and one is for the minting of the coin. It comes out to a 2.60% premium. That’s not bad. If you’re paying more than this, you’re paying too much. Dealers like Tulving and Blanchard have insurance that covers delivery to and from the dealer. So, if they send something to you, it is insured under their policy until it arrives at your door. I’ve sent 100oz. gold bars via Fedex. Insured, of course. Get it in writing if you’re nervous. Now you hold some gold in your hand. Where to store it? From time immemorial, people have stored gold at their residences. People are still unearthing gold hoards from Roman-era manors. Wealthy French stored gold at their estates during World War II. Bury it, or hide it somehow. Don’t tell anyone about it of course. If you don’t like that solution, the only other solution I would suggest (not counting overseas options) is to use an independent depository. I suggest First State Depository , in Wilmington, Delaware. There might be a comparable solution on the West Coast. Do not use any depository affiliated with a bank or the Comex. This means Scotia Moccatta, HSBC, Brinks, JP Morgan, Goldman Sachs, UBS etc. etc. Don’t ask your dealer to “hold it for you.” I wouldn’t use bank safe deposit boxes. Apparently, during the S&L crisis in the early 1990s when many Texas banks failed, the contents of bank safe deposit boxes were confiscated. Was that “legal”? Who knows. Who cares. It happened. With a “real” depository like First State, you can make an appointment to visit (“audit”) your gold on 24 hours’ notice. Go there and hold it in your hand. Check the serial numbers and specific weights if you like. See Rule #1. You should be able to hold your gold in your hand within 24 hours. The “dubious” depositories, such as the Comex depositories, do not allow you to visit your gold. They used to provide information on serial numbers and specific weights, on paper warehouse certificates. However, they have phased out the warehouse certificates as well. Besides, the service stinks. You can wait weeks to get delivery of your gold, compared to hours from a real depository. How many more red flags do you need? (See Rule #1 and Rule #2.) The storage fees charged by a “real” depository are the same as those of a “dubious” depository, and also the fees on ETFs. It doesn’t cost any more. It’s just a lot better. Want to hear some horror stories? Listen to this interview with someone who personally visited the Scotia Moccatta depository. If you listen to something like this and don’t take delivery on your gold and silver, you are a moron. The iShares Comex Gold Trust, an ETF with the ticker IAU, claims to be holding 1.4 million ounces of gold apparently in this Toronto vault. However, the eyewitness account only saw 89,000 ounces! If you like, you can have a dealer like Blanchard send your gold directly to a depository like First State. Of course, the depository is also insured. So, the entire chain of delivery and storage is fully insured. Since I’m extra-paranoid, I have also had my bullion examined for tungsten counterfeits. You might want to politely inform your dealer that you plan to examine all incoming bullion for fakes. They are less likely to send you anything “suspicious” that way. Analyst Rob Kirby has released a detailed account of the tungsten counterfeit scam, including names and places. For the visually inclined, here’s a report on German television showing a 500g tungsten fake identified by Heraeus, one of the world’s premier gold smelters. Fortunately, avoiding counterfeit scams is now pretty easy, with the help of a company called Bullion Analysis Inc. (bullionanalysis.com) In the old days, up to about nine months ago, if you wanted to assay your gold, you had to either drill it for samples or send the whole bar out to a lab or smelter. Ugh. Bullion Analysis has a new, non-invasive technique that will detect even the recent high-quality tungsten phonies that have been floating about. Bullion Analysis Inc. is located in Virginia, just a short drive from First State in Delaware. You can make an appointment for them to travel with their equipment to First State, rather than sending the bullion to Virginia. They can do all the analysis on-site. For those of you with hundreds or thousands of 400oz. institutional bars, I would put those Bullion Analysis technicians on a plane pronto. If you own shares of stock, you have to sell on the stock exchange. However, you can sell gold bullion to anyone. For example, if you have some gold at First State, you might be able to ask around at investment advisers and wealth managers to see if anyone would like to buy your gold, without it leaving the depository. Then you could sell it for the highest possible price, and not have to ship it. Otherwise, you can sell to a large dealer like Tulving or Blanchard, for close to the spot price. Don’t use any advertised “cash for gold” outfits, which normally offer horrible prices. Lots of people sell 1 oz. coins on eBay. If this sounds like too much hassle and expense for you, I’d look into “hybrid” systems like Bullionvault (bullionvault.com) and Goldmoney (goldmoney.com). They are much less likely to be crooks – in my opinion – than any bank-affiliated organization. (See Rule #2.) In any case, stay away from all “paper gold” schemes like ETFs, futures, pooled accounts, and anything offered by a bank or London Bullion Market Association member. This is all a lot easier than it sounds – as long as you don’t try to trade it too much. It’s a lot safer than any brokerage account. That has always been one of the main attractions of gold bullion: ultimate safety.

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Steve Parker: Road Test – 2010 Buick LaCrosse

April 1, 2010

Let’s kick-off our road test series with the 2010 Buick LaCrosse, an all-new car which is one of the prime examples of how far American-made car quality and attention to detail has come. And I see nothing wrong with sometimes rooting for the home team, especially when it’s well-deserved. Buick has had growing sales (comparing month-by-month to the past year) for six straight months and in March sales were up an impressive 76%. And collaboration between designers in the United States and China, in partnership with the GM’s Pan Asia Technical Automotive Center (PATAC) as well as chassis and body engineers in Europe, has resulted in the first General Motors vehicle to be created on three continents. Buick’s 2010 LaCrosse is a perfect competitor for the Lexus ES 350 and Chrysler 300 (which is pretty long in the tooth), thanks to its looks, a choice of three direct-injected engines, optional Haldex all-wheel drive (on CXL) and a healthy mix of standard and optional interior gadgets, including in-dash nav, rear entertainment system and a rearview camera. Another thing LaCrosse has over the Lexus is its styling. Buick says the car’s styling, a continuation of what started with their Enclave cross-over, is “seductive and uninterrupted”. That may be so to some eyes, but I find LaCrosse’s appearance to be aggressive and powerful, not quite intimidating but certainly muscular for a pretty big four-door sedan. The Chrysler 300? We’ve seen it for a long while now; nothing really new. And Lexus makes a point of not changing styling on an annual basis; they know their buyers don’t like a lot of change in existing models. Two design cues harkening back to Buick back in the day is the large grille with vertical louvers. In years past people would say about Buick’s signature big grille that, “I don’t know whether to drive it or shave with it.” The distinctive Buick portholes are back, too Now they’re found next to the engine compartment on the inside top of the fenders. You have three engine choices: for the first time in a decade, Buick offers a four-cylinder engine standard on the CX. It’s a direct injected Ecotec 2.4L which pumps out 182 horsepower. The CX has a new 3.0L V-6 powerplant which make 255 horsepower. The high-zoot CXL comes with a 3.6L V-6 liter providing 280 horses. All engines are direct injection, which increases power and mileage and can decrease pollutants. Six speed automatics come on all three cars and they have a center console stick with a now-taken-for-granted tap-to-change-gear feature found on so many cars and trucks (no paddle shifters, though). For 2010, only the 3L CXL model will have AWD available; in 2011, the CXS standard with the 3.6 V-6 will have the option. That’ll do away with any nasty understeer (more later). Buick will stop offering the 3L V-6 in North American LaCrosses at the end of the 2010 model year, leaving just the four-cylinder and the 3.6 liter V-6. The reason for killing the 3L engine is that the 2011 model will now be able to offer all-wheel drive paired with the direct-injection 3.6-liter LaCrosse 2011 models start production on June 14th of this year and will be available about six to eight weeks after that. If it were me and I had the kick I’d wait a few months for the CXS AWD. Inside, it’s Buick-level plush and quiet, and that says a lot. It has one of the best dashboards, switchgear, gauges and driver positioning in the industry. It’s all very easy to use and quite instinctive. Most people will feel right at home in the driver’s seat in just a few minutes. Precise detail and fit and finish inside (and out) shows GM is paying attention to details which the old GM would have let slide. “Ship it and let the dealer fix it” was the long-time GM mantra and thankfully those days are gone. Driving LaCrosse on either the 17″ (CX), 18″ or optional 19″ wheels is mostly a pleasure and can be fun. Front-drive cars sometimes have a lot of torque steer, also called understeer, what NASCAR drivers call “push”. You’ve experienced it, too, every time you adjust the steering wheel at moderate or higher speeds and it seems the front wheels simply won’t turn. Engineers worldwide have done a good job of reducing this phenomenon (especially Honda) and LaCrosse, while it has its share of understeer, is fairly predictable and controllable. If you want no understeer, order the AWD option. The HiPer Strut front suspension, standard on the CXL, is a modified MacPherson strut system which allows the car to launch without too much understeer. The HiPer Strut suspension will come standard on all 2010 CSX models produced after May with no price increase. The car, despite its luxury look, feels taut and surprisingly sporty. Fuel mileage, GM says, ranges between 17 and 26 mpg depending on the engine ordered, though I found my mileage quite a bit lower. Around town mileage was between 12 and 15 mpg, and on the open highway was in the 21 to 23 mpg category, but not 26. The 2.4-L is EPA-rated 30 mpg on the highway and 19 mpg in the city. Still all fairly impressive for a 3,929 pound automobile (yep, just a tad short of two tons). Base price for the 4-cylinder is $26,995, for the V-6 CX $27,835, $30,395 for CXL and $33,765 for the top-line CSX with the big 3.6L V-6. Our tester, a CSX with a sunroof, Xenon headlamps, heads-up info display and optional paint, Red Jewel Tintcoat, came in at $36,130. LaCrosse is built at GM’s Fairfax Assembly facility in Kansas City, KS. Buick was always known as the “doctor’s car” because, in the days of yore and house calls, no doctor wanted to pull up to your home in a Cadillac; a Buick was perceived as more conservative, less expensive and more sensible than its big bro Caddy. But they’d take the Cadillac to the country club on Wednesdays (the traditional doctor day off in the old days). LaCrosse signals Buick sedans are headed into a much higher realm. If this is your kind of car, there’s little to complain about, including not much rear seat legroom, the aforementioned torque steer, not the greatest sound system and some other problems. But there’s plenty to enjoy, too, and that’s right for a car which tops out at nearly $40,000. Buick may find itself gone at some point, melded into Cadillac (in the 1920s and ’30s, Caddy offered a less expensive model called La Salle). I’ve said that GM should consist of Chevrolet, Cadillac and nothing more. LaCrosse is a car which could make the quality argument for consumers and the money argument for GM to keep the division right where it is. And as I said, nothing wrong with rooting for the home team. On my scale of one to five, four tires and a spare, LaCrosse rates a 3+ to 4.

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Steve Parker: Road Test – 2010 Buick LaCrosse

April 1, 2010

Let’s kick-off our road test series with the 2010 Buick LaCrosse, an all-new car which is one of the prime examples of how far American-made car quality and attention to detail has come. And I see nothing wrong with sometimes rooting for the home team, especially when it’s well-deserved. Buick has had growing sales (comparing month-by-month to the past year) for six straight months and in March sales were up an impressive 76%. And collaboration between designers in the United States and China, in partnership with the GM’s Pan Asia Technical Automotive Center (PATAC) as well as chassis and body engineers in Europe, has resulted in the first General Motors vehicle to be created on three continents. Buick’s 2010 LaCrosse is a perfect competitor for the Lexus ES 350 and Chrysler 300 (which is pretty long in the tooth), thanks to its looks, a choice of three direct-injected engines, optional Haldex all-wheel drive (on CXL) and a healthy mix of standard and optional interior gadgets, including in-dash nav, rear entertainment system and a rearview camera. Another thing LaCrosse has over the Lexus is its styling. Buick says the car’s styling, a continuation of what started with their Enclave cross-over, is “seductive and uninterrupted”. That may be so to some eyes, but I find LaCrosse’s appearance to be aggressive and powerful, not quite intimidating but certainly muscular for a pretty big four-door sedan. The Chrysler 300? We’ve seen it for a long while now; nothing really new. And Lexus makes a point of not changing styling on an annual basis; they know their buyers don’t like a lot of change in existing models. Two design cues harkening back to Buick back in the day is the large grille with vertical louvers. In years past people would say about Buick’s signature big grille that, “I don’t know whether to drive it or shave with it.” The distinctive Buick portholes are back, too Now they’re found next to the engine compartment on the inside top of the fenders. You have three engine choices: for the first time in a decade, Buick offers a four-cylinder engine standard on the CX. It’s a direct injected Ecotec 2.4L which pumps out 182 horsepower. The CX has a new 3.0L V-6 powerplant which make 255 horsepower. The high-zoot CXL comes with a 3.6L V-6 liter providing 280 horses. All engines are direct injection, which increases power and mileage and can decrease pollutants. Six speed automatics come on all three cars and they have a center console stick with a now-taken-for-granted tap-to-change-gear feature found on so many cars and trucks (no paddle shifters, though). For 2010, only the 3L CXL model will have AWD available; in 2011, the CXS standard with the 3.6 V-6 will have the option. That’ll do away with any nasty understeer (more later). Buick will stop offering the 3L V-6 in North American LaCrosses at the end of the 2010 model year, leaving just the four-cylinder and the 3.6 liter V-6. The reason for killing the 3L engine is that the 2011 model will now be able to offer all-wheel drive paired with the direct-injection 3.6-liter LaCrosse 2011 models start production on June 14th of this year and will be available about six to eight weeks after that. If it were me and I had the kick I’d wait a few months for the CXS AWD. Inside, it’s Buick-level plush and quiet, and that says a lot. It has one of the best dashboards, switchgear, gauges and driver positioning in the industry. It’s all very easy to use and quite instinctive. Most people will feel right at home in the driver’s seat in just a few minutes. Precise detail and fit and finish inside (and out) shows GM is paying attention to details which the old GM would have let slide. “Ship it and let the dealer fix it” was the long-time GM mantra and thankfully those days are gone. Driving LaCrosse on either the 17″ (CX), 18″ or optional 19″ wheels is mostly a pleasure and can be fun. Front-drive cars sometimes have a lot of torque steer, also called understeer, what NASCAR drivers call “push”. You’ve experienced it, too, every time you adjust the steering wheel at moderate or higher speeds and it seems the front wheels simply won’t turn. Engineers worldwide have done a good job of reducing this phenomenon (especially Honda) and LaCrosse, while it has its share of understeer, is fairly predictable and controllable. If you want no understeer, order the AWD option. The HiPer Strut front suspension, standard on the CXL, is a modified MacPherson strut system which allows the car to launch without too much understeer. The HiPer Strut suspension will come standard on all 2010 CSX models produced after May with no price increase. The car, despite its luxury look, feels taut and surprisingly sporty. Fuel mileage, GM says, ranges between 17 and 26 mpg depending on the engine ordered, though I found my mileage quite a bit lower. Around town mileage was between 12 and 15 mpg, and on the open highway was in the 21 to 23 mpg category, but not 26. The 2.4-L is EPA-rated 30 mpg on the highway and 19 mpg in the city. Still all fairly impressive for a 3,929 pound automobile (yep, just a tad short of two tons). Base price for the 4-cylinder is $26,995, for the V-6 CX $27,835, $30,395 for CXL and $33,765 for the top-line CSX with the big 3.6L V-6. Our tester, a CSX with a sunroof, Xenon headlamps, heads-up info display and optional paint, Red Jewel Tintcoat, came in at $36,130. LaCrosse is built at GM’s Fairfax Assembly facility in Kansas City, KS. Buick was always known as the “doctor’s car” because, in the days of yore and house calls, no doctor wanted to pull up to your home in a Cadillac; a Buick was perceived as more conservative, less expensive and more sensible than its big bro Caddy. But they’d take the Cadillac to the country club on Wednesdays (the traditional doctor day off in the old days). LaCrosse signals Buick sedans are headed into a much higher realm. If this is your kind of car, there’s little to complain about, including not much rear seat legroom, the aforementioned torque steer, not the greatest sound system and some other problems. But there’s plenty to enjoy, too, and that’s right for a car which tops out at nearly $40,000. Buick may find itself gone at some point, melded into Cadillac (in the 1920s and ’30s, Caddy offered a less expensive model called La Salle). I’ve said that GM should consist of Chevrolet, Cadillac and nothing more. LaCrosse is a car which could make the quality argument for consumers and the money argument for GM to keep the division right where it is. And as I said, nothing wrong with rooting for the home team. On my scale of one to five, four tires and a spare, LaCrosse rates a 3+ to 4.

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Honda Recalls 410,000 Vehicles Over Faulty Brake System

March 16, 2010

Honda has recalled more than 400,000 vehicles over concerns of brake failure, according to several news reports today. While Honda’s announcement pales in comparison to Toyota’s recall of 8.5 million vehicles , its part of a growing number of automaker concerns about the possibility of faulty brake systems. Here’s the AP: The recall includes 344,000 Odysseys and 68,000 Elements from the 2007 and 2008 model years. Honda said in a statement that over time, brake pedals can feel “soft” and must be pressed closer to the floor to stop the vehicles. Left unrepaired, the problem could cause loss of braking power and possibly a crash, Honda spokesman Chris Martin said. “It’s definitely not operating the way it should, and it’s safety systems, so it brings it to the recall status,” he said. The National Highway Traffic Safety Administration has reported three crashes due to the problem with minor injuries and no deaths, Martin said. Honda notified NHTSA of the recall on Monday, he said. The problems with uncontrolled acceleration acceleration seem to not be limited to Toyota. As Bloomberg noted yesterday , American automakers may also have had brake issues. Here’s Bloomberg: U.S. regulators have tracked more deaths in vehicles made by Ford Motor Co., Chrysler Group LLC and other companies combined than by Toyota Motor Corp. during three decades of unintended acceleration reviews that often blamed human error. The agency received 15,174 complaints involving unintended acceleration in the past decade and has run 141 investigations of the phenomenon since 1980, closing 112 of them without corrective action. NHTSA’s repeated conclusion that crashes occurred because drivers mistakenly stomped the accelerator became a policy position that caused investigators to take complaints of runaway vehicles less seriously than they should have, safety advocates say. Here’s more from the AP: Drivers who fear that they’ve lost braking power should have their dealer check the brakes sooner, Martin said. The dealer can “bleed” air bubbles out of the hydraulic lines, which should fix the problem until the parts arrive for the final repair, he said. Honda technicians will put plastic caps and sealant over two small holes in the device to stop the air from getting in, Martin said. The automaker is still preparing a list of affected vehicles. After April 19, owners can determine if their vehicles are being recalled by going to or by calling (800) 999-1009, and selecting option number four. http://www.recalls.honda.com

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Goldman Sachs Squeezes Hedge Funds in $110 Billion `Collateral Arbitrage’

March 15, 2010

By Michael J. Moore and Christine Harper March 15 (Bloomberg) — Goldman Sachs Group Inc. and JPMorgan Chase & Co. , two of the biggest traders of over-the- counter derivatives, are exploiting their growing clout in that market to secure cheap funding in addition to billions in revenue from the business. Both New York-based banks are demanding unequal arrangements with hedge-fund firms, forcing them to post more cash collateral to offset risks on trades while putting up less on their own wagers. At the end of December this imbalance furnished Goldman Sachs with $110 billion, according to a filing. That’s money it can reinvest in higher-yielding assets. “If you’re seen as a major player and you have a product that people can’t get elsewhere, you have the negotiating power,” said Richard Lindsey , a former director of market regulation at the U.S. Securities and Exchange Commission who ran the prime brokerage unit at Bear Stearns Cos. from 1999 to 2006. “Goldman and a handful of other banks are the places where people can get over-the-counter products today.” The collapse of American International Group Inc. in 2008 was hastened by the insurer’s inability to meet $20 billion in collateral demands after its credit-default swaps lost value and its credit rating was lowered, Treasury Secretary Timothy F. Geithner , president of the Federal Reserve Bank of New York at the time of the bailout, testified on Jan. 27. Goldman Sachs was among AIG’s biggest counterparties. Goldman Sachs Chief Financial Officer David Viniar has said that his firm’s stringent collateral agreements would have helped protect the firm against a default by AIG. Instead, a $182.3 billion taxpayer bailout of AIG ensured that Goldman Sachs and others were repaid in full. Extracting Collateral Over the last three years, Goldman Sachs has extracted more collateral from counterparties in the $605 trillion over-the- counter derivatives markets, according to filings with the SEC. The firm led by Chief Executive Officer Lloyd C. Blankfein collected cash collateral that represented 57 percent of outstanding over-the-counter derivatives assets as of December 2009, while it posted just 16 percent on liabilities, the firm said in a filing this month. That gap has widened from rates of 45 percent versus 18 percent in 2008 and 32 percent versus 19 percent in 2007, company filings show. “That’s classic collateral arbitrage,” said Brad Hintz , an analyst at Sanford C. Bernstein & Co. in New York who previously worked as treasurer at Morgan Stanley and chief financial officer at Lehman Brothers Holdings Inc. “You always want to enter into something where you’re getting more collateral in than what you’re putting out.” Using the Cash The banks get to use the cash collateral, said Robert Claassen , a Palo Alto, California-based partner in the corporate and capital markets practice at law firm Paul, Hastings, Janofsky & Walker LLP. “They do have to pay interest on it, usually at the Fed funds rate, but that’s a low rate,” Claassen said. Goldman Sachs’s $110 billion net collateral balance in December was almost three times the amount it had attracted from depositors at its regulated bank subsidiaries. The collateral could earn the bank an annual return of $439 million, assuming it’s financed at the current Fed funds effective rate of 0.15 percent and that half is reinvested at the same rate and half in two-year Treasury notes yielding 0.948 percent. “We manage our collateral arrangements as part of our overall risk-management discipline and not as a driver of profits,” said Michael DuVally , a spokesman for Goldman Sachs. He said that Bloomberg’s estimates of the firm’s potential returns on collateral were “flawed” and declined to provide further explanation. JPMorgan, Citigroup JPMorgan received cash collateral equal to 57 percent of the fair value of its derivatives receivables after accounting for offsetting positions, according to data contained in the firm’s most recent annual filing. It posted collateral equal to 45 percent of the comparable payables, leaving it with a $37 billion net cash collateral balance, the filing shows. In 2008 the cash collateral received by JPMorgan made up 47 percent of derivative assets, while the amount posted was 37 percent of liabilities. The percentages were 47 percent and 26 percent in 2007, according to data in company filings. By contrast, New York-based Citigroup Inc. , a bank that’s 27 percent owned by the U.S. government, paid out $11 billion more in collateral on over-the-counter derivatives than it collected at the end of 2009, a company filing shows. Brian Marchiony , a spokesman for JPMorgan, and Alexander Samuelson , a spokesman for Citigroup, both declined to comment. Derivatives Market The five biggest U.S. commercial banks in the derivatives market — Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo & Co. — account for 97 percent of the notional value of derivatives held in the banking industry, according to the Office of the Comptroller of the Currency. In credit-default swaps, the world’s five biggest dealers are JPMorgan, Goldman Sachs, Morgan Stanley, Frankfurt-based Deutsche Bank AG and London-based Barclays Plc, according to a report by Deutsche Bank Research that cited the European Central Bank and filings with the SEC. Goldman Sachs and JPMorgan had combined revenue of $29.1 billion from trading derivatives and cash securities in the first nine months of 2009, according to Federal Reserve reports. The U.S. Congress is considering bills that would require more derivatives deals be processed through clearinghouses, privately owned third parties that guarantee transactions and keep track of collateral and margin. A clearinghouse that includes both banks and hedge funds would erode the banks’ collateral balances, said Kevin McPartland , a senior analyst at research firm Tabb Group in New York. ‘Level Playing Field’ When contracts are negotiated between two parties, collateral arrangements are determined by the relative credit ratings of the two companies and other factors in the relationship, such as how much trading a fund does with a bank, McPartland said. When trades are cleared, the requirements have “nothing to do with credit so much as the mark-to-market value of your current net position.” “Once you’re able to use a clearinghouse, presumably everyone’s on a level playing field,” he said. Still, banks may maintain their advantage in parts of the market that aren’t standardized or liquid enough for clearing, McPartland said. JPMorgan CEO Jamie Dimon and Goldman Sachs’s Blankfein both told the Financial Crisis Inquiry Commission in January that they support central clearing for all standardized over-the-counter derivatives. “The percentage of products that are suitable for central clearing is relatively small in comparison to the entire OTC derivatives market,” McPartland said. Bilateral Agreements A report this month by the New York-based International Swaps & Derivatives Association found that 84 percent of collateral agreements are bilateral, meaning collateral is exchanged in two directions. Banks have an advantage in dealing with asset managers because they can require collateral when initiating a trade, sometimes amounting to as much as 20 percent of the notional value, said Craig Stein , a partner at law firm Schulte Roth & Zabel LLP in New York who represents hedge-fund clients. JPMorgan’s filing shows that these initiation amounts provided the firm with about $11 billion of its $37.4 billion net collateral balance at the end of December, down from about $22 billion a year earlier and $17 billion at the end of 2007. Goldman Sachs doesn’t break out that category. A bank’s net collateral balance doesn’t get included in its capital calculations and has to be held in liquid products because it can change quickly, according to an executive at one of the biggest U.S. banks who declined to be identified because he wasn’t authorized to speak publicly. Counterparty Demands Counterparties demanding collateral helped speed the collapse of Bear Stearns and Lehman Brothers, according to a New York Fed report published in January. Those that had posted collateral with Lehman were often in the same position as unsecured creditors when they tried to recover funds from the bankrupt firm, the report said. “When the collateral is posted to a derivatives dealer like Goldman or any of the others, those funds are not segregated, which means that the dealer bank gets to use them to finance itself,” said Darrell Duffie , a professor of finance at Stanford University in Palo Alto. “That’s all fine until a crisis comes along and counterparties pull back and the money that dealer banks thought they had disappears.” ‘Greater Push Back’ While some hedge-fund firms have pushed for banks to put up more cash after the collapse of Lehman Brothers, Goldman Sachs and other survivors of the credit crisis have benefited from the drop in competition. “When the crisis started developing, I definitely thought it was going to be an opportunity for our fund clients to make some headway in negotiating, and actually the exact opposite has happened,” said Schulte Roth’s Stein. “Post-financial crisis, I’ve definitely seen a greater push back on their side.” Hedge-fund firms that don’t have the negotiating power to strike two-way collateral agreements with banks have more to gain from a clearinghouse than those that do, said Stein. Regulators should encourage banks to post more collateral to their counterparties to lower the impact of a single bank’s failure, according to the January New York Fed report. Pressure from regulators and a move to greater use of clearinghouses may mean the banks’ advantage has peaked. “Before the financial crisis, collateral was very unevenly demanded and somewhat insufficiently demanded,” Stanford’s Duffie said. A clearinghouse “should reduce the asymmetry and raise the total amount of collateral.” To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net ; Christine Harper in New York at charper@bloomberg.net .

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Monsanto 7-State Probe Threatens Profit From 93% Hold on U.S. Soybean Crop

March 10, 2010

By Alison Fitzgerald March 10 (Bloomberg) — At least seven U.S. state attorneys general are investigating whether Monsanto Co., the world’s largest seed producer, has abused its market power to lock out competitors and raise prices. Iowa and Illinois, whose antitrust probes Monsanto disclosed previously, have joined with Ohio, Texas, Virginia and two other states in a working group coordinating the inquiries, according to investigators, farmers and seed dealers. They declined to identify the sixth and seventh states. The state investigations add to pressure on Monsanto over allegations of abusive competitive tactics. The U.S. Justice Department is probing the company’s marketing practices, and DuPont Co. has accused its rival in licensing litigation of anti-competitive actions. At stake are the costs to farmers who produce $80.3 billion a year in corn and soybeans, used in products ranging from Coca-Cola to cattle feed to ethanol. “Monsanto has become such a dominant player in the seed business that producers have real concerns that the price they pay for seed is going to be anywhere near reasonable,” said John Crabtree, a spokesman for the Center for Rural Affairs in Lyons, Nebraska, a nonprofit group that provides services to farm communities. “The fear is that the sky’s the limit.” Monsanto rose to dominance via its genetically engineered Roundup Ready seed line, which was in 93 percent of the soybeans and 82 percent of the corn produced in the U.S. last year. The gene Monsanto adds to the seeds allows crops to withstand use of its Roundup weed killer. Rebates, Incentives The states are probing whether Monsanto violated any laws by offering rebates to distributors for excluding rival seeds, imposing limits on combining the product with other genetic enhancements, or offering cash incentives to switch farmers to a more-expensive generation of seeds, according to one person involved in the probe who asked not to be named because he isn’t authorized to discuss it. The five states known to be part of the inquiry accounted for almost 39%, or $31 billion, of U.S. corn and soybeans last year, based on U.S. Department of Agriculture data. A state- level investigation, on top of the federal one, “can lengthen the lawsuit and potential settlements, and it can increase uncertainty and costs for Monsanto,” said Daniel Sokol, a law professor at the University of Florida in Gainesville who edits a blog on antitrust and competition policy. Monsanto Vice President Jim Tobin will address the concerns at a hearing March 12 in Ankeny, Iowa, where the U.S. Justice and Agriculture departments are holding a workshop on seed- industry competition. It’s the first of a series of sessions the agencies are sponsoring to examine whether consolidation in agriculture is harming competition. ‘Unsubstantiated Allegations’ “There have been unsubstantiated allegations of a lack of competition in the seed market for several years now,” said Kelli Powers , a spokeswoman for St. Louis-based Monsanto. “We’re confident an objective review will reveal competition is alive and flourishing in the seed market.” Monsanto has a “broad licensing approach that is “in fact pro-competitive,” she said. “We produced millions of pages of documents” for the state working group, said Scott Partridge , a Monsanto attorney, in an interview. “For about a year now they haven’t had any more questions.” Seed producers and dealers say the state group has spoken to them as recently as December about their Monsanto licensing agreements. The rebates investigators are exploring in the Monsanto case are similar to incentives that have figured in past antitrust inquiries that led to settlements, said Herb Hovenkamp a professor at the University of Iowa Law School in Iowa City and the author of “Antitrust Law,” a 23-volume text. FTC Sues Intel The Federal Trade Commission sued Intel Corp. in December alleging it used “threats and rewards,” including rebates, to coerce companies not to buy rivals’ computer chips. In a separate civil dispute, Intel agreed in November, without admitting any liability or fault, to pay $1.25 billion to Advanced Micro Devices Inc. to settle allegations Intel gave discounts to customers that avoided AMD products. Courts disagree on whether such financial incentives are anti-competitive, Hovenkamp said. “These things have been so controversial and so heavily litigated that some firms have taken preventative steps and just gotten rid of them,” Hovenkamp said. Monsanto phased out its market-share discounts as of last year, said Powers, the spokeswoman. Of Monsanto’s $11.7 billion in revenue in the fiscal year ended Aug. 31, 2009, $7.3 billion came from sales and licensing of seeds and seed genes. Revenue grew by an annual average of 17% from 2004 to 2009, as earnings expanded eight-fold to $2.11 billion, driven by genetically engineered products and acquisitions of other seed companies. Generic Roundup Revenue then declined as generic rivals to Roundup flooded into the U.S. from China. In the fiscal first quarter ended Nov. 30, Monsanto had a loss of $19 million as sales declined 36% to $1.70 billion. Monsanto lost 74 cents, or 1 percent, to close at $71.28 yesterday in New York Stock Exchange composite trading. Showing that Monsanto engaged in anti-competitive behavior that harmed residents of their states could enable the attorneys general to demand civil monetary damages in addition to any penalties that the Justice Department may seek, Hovenkamp said. In one soybean licensing agreement reviewed by Bloomberg, Monsanto offered the licensee financial incentives to favor Roundup Ready seeds and Roundup brand chemicals over those of competitors. The dealer’s agreement with Monsanto is confidential, and he asked that his name not be used. ‘You Had To’ Under the agreement, the licensee would earn a rebate of 7.5 percent of the royalty it pays Monsanto if Roundup Ready accounts for 70 percent of the dealer’s annual herbicide- resistant seed sales. The rebate is halved if the Roundup Ready share is between 50 percent and 75 percent, and isn’t paid at all below 50 percent. Similar terms were in Monsanto’s licensing agreements with Stine Seed Co. until Monsanto phased them out in recent years, according to Harry Stine, president and founder of the largest closely held seed company in the U.S., based in Adel, Iowa. “In order to get the large rebate they would give you, you had to minimize your sales of other companies’ seeds,” Stine said. “The rebates were so large that for all practical purposes you had to do it.” At one time, the requirement for earning the full rebate was as high as 90 percent, he said. Stine has a collaborative agreement to develop seeds with Monsanto, he said. Gene Restrictions The agreement reviewed by Bloomberg prohibited the dealer from combining the Roundup Ready trait with herbicide-tolerant traits that the licensee or other companies developed. It specifically bars the dealer from using any non-Monsanto genetic modification that makes crops tolerant to glyphosate, the herbicide found in Roundup. Such terms could be anti-competitive because Monsanto controls such a large share of the corn and soybean markets with its Roundup Ready gene, Hovenkamp said. Monsanto’s Partridge said the company routinely negotiates agreements that allow seed companies to combine Roundup Ready with genetic modifications of its competitors. “Monsanto has a demonstrated track record of both in- licensing and out-licensing trait technologies to support the development of stacked products,” he said in an interview. “We’ve done this more than any other company in this industry.” Monsanto is also under scrutiny because the rising price of its seeds has been a sore point for farmers, said Peter Carstensen, a antitrust professor at the University of Wisconsin Law School in Madison. Farmers’ Costs Rise “Buying seed used to be not terribly costly,” said Charles Benbrook, chief scientist at the Organic Center in Boulder, Colorado, who in December completed a study of 35 years of seed pricing. “Now farmers are locked into these high seed costs on an annual basis.” The study showed that soybean farmers spent between 4 percent and 8 percent of their farm income on seeds from 1975 through 1997. Last year, farmers who planted genetically modified soybeans spent 16.4 percent of their income on seeds, it found. Monsanto’s licensing royalty on soybean seeds with the Roundup Ready trait climbed to $15.65 for each 140,000-seed bag last year from about $6.50 a decade ago, according to the owner of one seed company. A bag of Roundup Ready seed sells for about $35 and can plant three-quarters of an acre (0.3 hectare). He asked not to be named because the terms are confidential under his licensing agreement. Monsanto sells him seeds including the genetic trait, which he then reproduces and sells under his own brand, the person said. ‘Triple Stack’ Corn Farmers who adopt Monsanto’s Roundup Ready 2 Yield technology, being introduced this year as a replacement for Roundup Ready, will have to pay a royalty of as much as $39.75 a bag, according to documents reviewed by Bloomberg. Cal Dalton, a farmer in Pardeeville, Wisconsin, said he switched to a competitor last year when Monsanto sought a $30 price increase, to $210 a bag, for its “triple stack” corn seed, a line that resists glyphosate, rootworm, and corn borers. Monsanto still earned a royalty on the purchase because the seeds he bought carried the Roundup Ready trait, he said. The list price for Monsanto’s “Yieldgard VT Triple” brand of triple-stack corn seed rose to about $277.50 a bag this year from $201.83 in 2008, based on seed prices per acre provided by Powers, the spokeswoman. She declined to discuss prices or royalties individual customers pay. Roundup Ready 2 In the licensing agreement reviewed by Bloomberg, Monsanto agreed to rebate to the dealer as much as 4% of the dealer’s royalty if he developed a plan to move his customers from Roundup Ready to Roundup Ready 2. Monsanto says Roundup Ready 2 soybean seeds boost crop yields by 4.7 bushels an acre compared with traditional Roundup Ready. Soybeans yielded on average 44 bushels an acre last year, according to the USDA. Stine, who said he’s been on conference calls with the state attorneys general group to discuss the Monsanto investigation, hasn’t made up his mind whether Monsanto’s dealings are anticompetitive. “On the one hand,” Monsanto is “hard to get along with and very restrictive,” Stine said. “However, in general, their traits and products have been superior to other companies’.” To contact the reporter on this story: Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net .

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Bernanke Can Tell Congress He Stiffed the Banks: Caroline Baum

February 22, 2010

Commentary by Caroline Baum Feb. 22 (Bloomberg) — When Ben Bernanke makes his pilgrimage to Capitol Hill Wednesday to present the Federal Reserve’s semi-annual monetary policy report to Congress, he will have one new strike against him: the increase in the discount rate . If he plays his cards right, he can turn a liability into an asset — especially if he follows a few basic pointers, which I’ll get to in a minute. Last week, the Fed raised the discount rate by 0.25 point to 0.75 percent and said the term of these direct loans to banks will revert to overnight next month from 28 days now. It left the benchmark overnight rate at 0 percent to 0.25 percent and invoked the “extended period” clause to assure markets that rate isn’t going up anytime soon. Before the crisis, the discount rate stood 100 basis points more than the federal funds rate, a reminder that borrowing at the Fed window is a privilege, albeit at a price. During the crisis, the Fed adopted a “come one, come all” policy, knowing access to Fed credit was essential to banks’ provision of private credit . The Fed portrayed the discount rate increase as a technical adjustment, a step in the gradual process that has already entailed the shuttering of various emergency lending facilities . Policy makers further downplayed the significance of the move by including the announcement in its regular Thursday data dump, sandwiched between the headlines “Fed Balance-Sheet Assets Rose $21 billion” and “U.S. Primary Dealer Settlement Fails.” Target Practice If Fed officials were contemplating an imminent increase in the fed funds rate or reduction in the bank’s $2.3 trillion balance sheet , they wouldn’t have reiterated their intention to complete the purchase of $1.25 trillion of agency mortgage- backed securities by the end of March, which they did at the Jan. 27 meeting . You don’t load the boat in March to unload it in April and May. That said, the increase in the discount rate signals the era of uber-liquidity is coming to an end. Congress, never one to split hairs over which rate is being manipulated, will view the discount-rate adjustment through its binary operating filter: down, good; up, bad. Here’s where Bernanke can play his trump card. Who gets to borrow at the Fed’s discount window? The banks. Who is Congress’ favorite whipping boy? The banks. From whom does Congress seek retribution? The banks. See, it’s not that hard, Ben. Just tell them you are doing God’s work. Pointers for Ben When it comes to monetary matters, you could say nothing and still come out ahead. Congress has a unique ability to make even the smarmiest witness seem sympathetic. So Ben, here are a few pointers in dealing with the House Financial Services and Senate Banking Committees this week: 1. Transparency is highly overrated. Look how far dispensing empty platitudes got your predecessor. Alan Greenspan was treated like a celebrity, and no one had any idea what the Master of Garblements was saying. Lawmakers don’t know a discount rate from a discount store. It all feels like a perk to them. 2. Think and talk like a politician. Politicians are skilled at non-answer answers. When a prominent Republican lawmaker is asked if he thinks Sarah Palin is fit to be president, he says something like, “I haven’t decided who I’m going to support in 2012.” Answers don’t have to fit the questions. Besides, these folks love to hear themselves talk. They rarely get to the question in the five minutes allotted. And if they do, they aren’t really interested in your answer. 3. Table the talk about low interest rates not fueling the housing bubble. That may have been an appropriate academic exercise for your address at the annual meeting of the American Economic Association on Jan. 3. It won’t fly with House Financial Services Chairman Barney “ roll-the-dice ” Frank. Pretty soon, you will have to explain to him why the benchmark rate can’t stay at zero for an extended period; how easy money eventually leads to higher prices for goods and services or for assets. If low interest rates didn’t inflate the housing bubble in 2004 and 2005 when unemployment was hovering near 5 percent, why should they be harmful when the jobless rate is twice that? 4. Downplay the Fed’s regulatory failures. If the Fed wants to stay in the game of bank regulation, it’s best not to advertise one’s own shortcomings, as you did at the AEA meeting. No one buys the idea that a new and improved systemic risk regulator will be able to spot the next financial crisis. Senate Banking Committee Chairman Chris Dodd is about to introduce a bill to overhaul financial regulation, and guess who stands to lose some regulatory authority? Right. It’s best not to advertise your failures if you want to be a player. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .

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Daniel Grant: Title Insurance: Not Necessary in the Primary or Contemporary Art Market

February 19, 2010

Is title insurance a solution in search of a problem? Back in 2006, ARIS Corporation began offering title insurance, which was designed to calm art collectors who worried that someone might lay claim to an object they purchased innocently. Lawyers and those in the art trade heartily endorsed the concept. “You sell a painting and then, six years later, something comes up and your headaches begin,” said New York City art dealer Edward Tyler Nahem. Those headaches are largely the cost of defending against a lawsuit by people claiming the artwork actually belongs to them and then launching another lawsuit against the dealer from whom one unknowingly bought the art. Several years later, the opportunity to purchase artwork headache-free does not appear to have been picked up by many art collectors or dealers, and that includes Edward Nahem. “We haven’t written a big number of title insurance policies,” said Steven Pincus, managing director of DeWitt Stern, a New York City insurance brokerage firm that specializes in artworks. Robert Salmon, managing director of the New York- and London-based Willis Fine Art said, “The level of interest in title insurance was short-lived and may not have resulted in many policies being written.” Yet another fine art insurance broker noted that many collectors find title policies an unnecessary expense — “they either feel comfortable with the provenance or they just decide to walk away from the person selling it.” Lawrence Shindell, chairman and chief executive officer of ARIS Art Title Insurance, noted that “old habits die hard” and that “it takes a while for the forward-thinking new guard participants to emerge” who both see the value of title insurance and purchase coverage. However, he stated that policy-writing is “increasing at multiples.” Neither he nor Judy Pearson, president of the company, would reveal the number of title insurance policies that have been written since 2006, but she claimed that “we wrote as much premium for the first six weeks of 2009 as in all of 2008, and it has been continuing at that pace ever since.” Those policy-holders include private collectors, art dealers and gallery owners, auction houses, trust and estate attorneys and “more than one museum.” The works of art involved range widely, from objects costing only $7,000 to $100 million, she said. That person selling it is most often an art dealer, who might him- or herself consider purchasing title insurance, but Gilbert Edelson, administrative vice-president of the Art Dealers Association of America, noted that dealers tend to “rely on their own research” into the object’s history of ownership, referred to as “due diligence.” “If there is a problem with the title, no sensible dealer would want to be involved with it. If there is a real question with the title, you’re not going to be able to get insurance for it anyway.” ARIS offers coverage for “defects” in title due to theft, illegal export or import, the seller not having the legal authority to sell the work or any liens against the title. ARIS’ title insurance policies are not inexpensive, costing between one and three percent of the value of the object, and the price is paid up-front, rather than in installments over the course of the policy. The application form that would-be policyholders are required to fill out is also quite time-consuming, Salmon noted, adding that “if you are able to answer ‘yes’ to all the questions in the application, you may be led to believe that you don’t really need the product.” All in all, if title insurance “were cheaper and less cumbersome, it might be a different story.” The major insurers of fine art collections have also found that their private collector clients see little reason to purchase title insurance policies. “We don’t hear many requests” for title insurance, Christiane Fischer, chief executive officer of AXA Art Insurance, said, although she stated that there are instances involving inheritances, divorces and stolen artworks in circulation in which such coverage makes sense. Dorit Strauss, vice-president and worldwide specialty fine art manager at Chubb Insurance, also claimed that title insurance “makes sense, but no one wants to buy it.” Collectors “expect dealers to have done their due diligence,” which should solve the problem of ownership. She noted that Chubb considered adding a title insurance program years ago but found that “the only people who want title insurance are the people who have an impediment to the title of something in their possession, and they are looking to transfer the risk to someone else.” However, Strauss stated that Chubb has added to its all-risk Masterpiece fine arts coverage up to $100,000 in legal defense costs in the event of a challenge to the title of one or more works in a policyholder’s collection. The insurer also refers policyholders to the Philadelphia-based Art Title Advisors, which for a fee of between $750 and $2,500 will research the history of ownership of a particular artwork, issuing a report that would clarify all known information about title. Jonathan Ziff, managing director of Art Title Advisors, noted that in a world in which art theft is the third largest area of crime dollar-wise (behind gun- and drug-running) art collectors should position themselves “in the event of a title challenge.” However, he said, collectors are “largely oblivious to the potential problems and feel comfortable self-insuring. They feel pretty comfortable about their chances, believing that it’s not going to happen to me.” Ziff noted that there hasn’t been a large number of collectors who have sought his company’s services. That comfort-level may be illusory, Shindell said, since “the art world operates in absolute secrecy. The buyer often doesn’t know who the seller is and no one can be certain of title. There is always some degree of risk.” Title insurance, he claimed, permits collectors to transfer that risk to a third party — the insurance company. Gaps in the history of an artwork’s ownership are a concern throughout the art world. Garnering a lot of attention is artwork confiscated from European collectors and art dealers during the Nazi era that has turned up in American collections. Additionally, art buyers are wary of creditors in a bankruptcy proceedings, the government in cases of tax delinquency, banks for artwork used as collateral for loans, contested wills, divorce settlements and other legal judgments. Thefts, however, are of much greater likelihood than artwork contested in divorce or inheritance lawsuits. Even with thefts, the need for title insurance may look increasingly remote, considering art theft databases at the Federal Bureau of Investigations, its European counterpart Interpol and the Art Loss Register in New York and London to which collectors and the art trade may refer. Title insurance is not necessary in the primary or contemporary art market, Edelson noted, and “more and more of the secondary market is work of postwar art” for which provenance is rarely in question.

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Adam Hanft: HOW TYLENOL IS DRAGGING DOWN TOYOTA- And the five things Jim Lentz needs to do NOW.

February 6, 2010

As his company’s reputation slides out from under him, Toyota CEO Jim Lentz is listening to old-school experts for whom the history of damage control stopped with the Tylenol poisonings in 1982. Sure, there are basic principles of honesty and truth-telling that apply. And stopping production was necessary – although far from sufficient. But Lentz forgets that the poisoning was something done to Tylenol. This recall is something Toyota did to itself – so the public’s tolerance isn’t remotely comparable. What’s more, don’t you think the media world has changed a little bit since the early 80s? This profoundly different landscape – one in which consumers are more in charge than ever, where immediacy and transparency are essential elements of a response strategy – requires a new kind of dramatic action. Yet there hasn’t been anything bold or innovative in Toyota’s response. It’s predictable, shallow, disappointing. There’s nothing that shows the company’s commitment to leaving no stone unturned in understanding what brought them to this precipice. Sure, they’ve done the obligatory things. They ran full-page newspaper ads – a mini-boon to the struggling industry – and cranked up a recall website and a Facebook page. In fact, the website (Toyota.com/recall) is woefully inadequate – it’s frigidly cold and unconvincingly mechanical. It’s also dumb. Check out their messaging, below. How reassuring is it that the recall letters haven’t even gone out yet? And do you really want sleep-deprived mechanics making a repair they’ve done before? 1. We’re starting to send letters this weekend to owners involved in the recall to schedule an appointment at their dealer. 2. Dealerships have extended their hours – some of them working 24/7 – to fix your vehicle as quickly as possible. And just today, Lentz announced a gimmicky Q&A with Digg for Monday. But his problem goes way beyond just making himself available for public questioning – and its just a manipulated event where he answers the questions he has chosen in advance. Here are five bold and stretchy things he can and should do right now to show that he is stripping the company bare, in public. They are a combination of high theater, high transparency, high commitment. 1. Lentz-Cam Yes, you can trot the CEO out on the “Today Show” and he have him spout the spin-controlled talking points he’s been primed on. But cynical consumers wonder what he’s really saying when the camera is off him. That’s what matters. That’s where the real agenda is revealed. Those are the secret sessions where the promise of putting the customer first is really tested. Lentz-cam would solve that directly. Every minute, every second of his working day would be streamed live, on the web. That’s the kind of naked transparency, corporate warts and all, that’s required to – in the word we’ve heard time and time again since the recall – “rebuilt trust.” Lentz cam would be the Tylenol gold standard for the digital media era. 2. Hire Tom Kean Akio Toyoda – who runs the big ship in Japan, announced on Friday that he will “personally will take the lead toward improving quality…by establishing a global quality task force that will conduct quality improvement activities region by region.” Three “qualities” in one sentence makes me more nervous than two of them would. More important than style, though, is substance. This is an epically bad idea. Insiders reviewing insiders – particularly given the Japanese culture’s bias towards insularity – is a conventional corporate smokescreen that’s about as trustworthy as the Chinese looking into the treatment of Tibet. I would advise Toyota to hire Tom Kean – the former New Jersey governor who is generally acknowledged to have done a fine job running the 9/11 Commission – to conduct an outside-in investigation of what happened. Kean would put together a team of experts in manufacturing and process management to conduct a headlight-to-taillight examination. Where did the systemic breakdowns occur? Why weren’t early warnings noted, and why weren’t the familiar dots connected (shades of 9/11) before a massive recall became necessary? The announcement would be positive news for Toyota, a giant media win. Some might argue that the release of the findings – months into the future – would be a negative reminder of the crisis while the company is trying to put it to bed. Not so. It would reinforce Toyota’s openness to self-examination. 3. Full transparency into the replacement bar. Everything is riding on this cheap piece of metal. There’s a video on their recall website which attempts to explain the fix, saying that “Toyota has determined that a precision cut steel reinforcement” bar will solve the problem.” But it’s a far from convincing story. It’s certainly not intuitive that a metal bar can reduce friction. And they try to make their point – and address a billion dollar reputational nightmare – with a crappy animated demo that looks less sophisticated than what a high-school computer graphics class could turn out. It’s laughable. What they need to do – and do immediately – is put their entire research program online. Show us how Toyota engineers developed the bar. That means everything should be posted – lab reports, technical drawings and analysis, and most important – before-and-after videos that show how the previous assembly got stuck under certain conditions. And how the replacement bar solves it 4. Launch a fund for the families of those killed. Toyota has been conspicuously silent about this. They should immediate announce that the company is putting $19 million dollars into the fund for the families of the 19 people killed. And it is simultaneously launching a company-wide payroll contribution plan, so employees can express their grief and support by making a donation through their paychecks. We should be able to check the amounts – and who contributed – in real-time, on the site. Create an internal competition within Toyota to raise money. 5. $1,000 off your next Toyota. Everyone who now owns a Toyota, whether or not it’s involved with the recall, gets a $1,000 gift certificate that’s transferable and never expires. These are big gestures for a big problem. But Toyota needs a monumental effort, and needs it fast. Because what they’re facing is a much tougher pill to swallow than Tylenol ever dealt with. And Dorothy, this isn’t the 1980s anymore.

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Toyota Owners Ditch Recalled Vehicles for Loaners, If They Can Get Them

February 3, 2010

By Mike Ramsey and Tom Moroney Feb. 4 (Bloomberg) — Rudi Barth stopped driving his 2007 Toyota Avalon sedan without waiting to hear from U.S. Transportation Secretary Ray LaHood. As LaHood issued and then retracted a call for drivers to stop using recalled Toyota Motor Corp. autos until they are repaired, Barth said his wife had left their car at a dealership in Norwood, Massachusetts, a few days earlier. “If you’re nervous about it, you shouldn’t be driving,” said Barth, 81. Until his car is fixed, the dealer loaned him one. “I wouldn’t say I’m happy about it.” Toyota owners face a barrage of news about the risk of unintended acceleration in their vehicles. LaHood’s reversal highlighted a week of uncertainty about the safety of the 2.3 million U.S. vehicles most recently recalled by Toyota. The eight models covered by the safety action, including the popular Camry and Corolla sedans, are temporarily off the market. “This flip-flop is not helping concerned motorists who are being presented with confusing and contradictory information about the Toyota recall at every turn,” Jeremy Anwyl , chief executive officer of auto research Web site Edmunds.com, based in Santa Monica, California, said in a statement. Toyota, the world’s largest automaker, has recalled a total 7.6 million vehicles worldwide for two different flaws that could lead to unintended acceleration. One fix deals with slipping floor mats that could entrap the accelerator pedal. The other aims to prevent those pedals from sticking or returning slowly after being depressed. Kits Shipped Travis Hall, 31, can’t choose to stop driving his 2007 Toyota Tundra pickup until his pedal is repaired. “It makes perfect sense, but I don’t have that option,” said Hall, taking a break from baking bagels in Greensboro, North Carolina. He drives his truck about 14 miles (23 kilometers) round trip to his job at the Bruegger’s bagel chain. “I have to work.” Hall’s wife is at home with their 4-year-old son, and he prefers to be the one driving the vehicle that might take off uncontrollably. “I can’t risk it tearing up on them,” he said. He’s had no sticking of the accelerator pedal on the Tundra, which he’s owned for 1 1/2 years. He drives it only for work and uses the family’s Hyundai Motor Co. Santa Fe sport- utility vehicle elsewhere, he said. Toyota ‘Confident’ “Our message to Toyota owners is this — if you experience any issues with your accelerator pedal, please contact your dealer without delay,” Toyota said in a statement yesterday. “If you are not experiencing any issues with your pedal, we are confident that your vehicle is safe to drive.” A Transportation Department official said Feb. 2 the government is investigating whether an electronic throttle system is the cause, as at least 17 lawsuits allege. Toyota said this week it would fix the sticky-pedal defect by having dealers install a steel plate to reduce friction that can develop with wear and condensation. Repair kits have begun to be shipped to dealers around the country. The U.S. recall for pedals that stick applies to three SUVs from these model years, the 2009-2010 RAV4, 2010 Highlander and 2008-2010 Sequoia. Also covered by the safety action are the 2009-2010 Corolla and 2005-2010 Avalon sedans, some 2007-2010 Camry sedans, 2009-2010 Matrix hatchbacks, and 2007-2010 Tundra. Toyota also has recalled and plans to fix about 5.6 million Toyota- and Lexus -brand cars and trucks in the U.S. and Canada because of floor mats that might trap gas pedals and cause vehicles to speed out of control. It includes the 2007-2010 Lexus ES350, 2006-2010 Lexus IS250 and 2006-2010 Lexus IS350. About 2.1 million Toyotas are covered by both recalls. ‘Unofficial Spokesperson’ Mike Stevens, 47, calls himself “the unofficial spokesperson for the Camry” after leasing 4 of the sedans in the last 12 years. LaHood’s comments urging Toyota owners to stop driving went too far, Stevens said, and he was happy for the retraction. “Someone probably gave him a smack on the side of the head,” said Stevens, of Northborough, Massachusetts, 30 miles west of Boston. A regional account representative for Sun Trust Mortgage Inc. , he spends part of most workdays driving a Camry. “They realized how many people might be driving to Toyota dealerships, and how inundated they might be.” ‘I’m Terrified’ Scott McLeigh, 42, doesn’t think it’s an overreaction. The Ormond Beach, Florida, man doesn’t want to drive his 2007 Tundra, and is dubious that either recall fixes the issue. “I’m terrified to even drive to the grocery store,” said McLeigh, who is married with two children, 4 and 6. “I definitely wouldn’t put the kids in it.” McLeigh’s concern about whether the recalls will prevent unintended acceleration also worries Susan Baker, 42, a Los Angeles resident with a 2005 Prius , which is covered by the floor-mat recall. “We’ve taken out the floor mat and we’ve practiced the method for shutting off the car — well, at least mentally — but still it does not leave us with very much confidence,” Baker said. “What makes us the most nervous is that when we first heard about this it didn’t make sense to us that this would cause the problem,” she said. “I just have a hard time believing that this is — the floor mat is — the issue.” To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net ; Tom Moroney in Boston at tmorrone@bloomberg.net .

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Toyota Slumps to 10-Month Low on U.S. Recall Pressure, Prius Complaints

February 3, 2010

By Angela Greiling Keane Feb. 3 (Bloomberg) — U.S. Transportation Secretary Ray LaHood stepped up pressure on Toyota Motor Corp. to fix defects that have caused the recall of millions of vehicles because they may suddenly accelerate, causing drivers to lose control. LaHood told reporters in Washington he planned to call Toyota President Akio Toyoda “and explain to him that this is serious business.” LaHood also told a House panel that drivers should stop driving the recalled vehicles, a comment he later called a misstatement. The remarks underscore a growing crisis at Toyota that has caused it to lose $29.5 billion in market value since the current recalls began and has tarnished its reputation for quality. The U.S. also said today that it’s looking into Toyota’s Prius hybrid cars following an order to the company by Japan’s government to investigate potential brake defects. “Up until the last couple days we had all expected the consumer hit wouldn’t be as serious as the media hit they were taking,” said Wes Brown , an analyst with market research firm Iceology in Los Angeles. “Now things may start to shift that image hit to the consumer side that had been steadfastly loyal. They are really starting to run the risk of escalating things tremendously.” LaHood had told a congressional panel today that owners of recalled cars should “stop driving it and take it to a Toyota dealer.” “What I said in there was obviously a misstatement,” LaHood told reporters later. “If you own one of these cars, take it to the dealer. If you are in doubt, take it to the dealer and have them fix it.” Shares Decline Toyota said this week it would fix the defect by having dealers install shims in accelerators. LaHood said the government is investigating to see whether an electronic throttle system is the cause, as at least seven lawsuits allege. Toyota’s American depositary receipts , each representing two ordinary shares, fell $4.69, or 6 percent, to $73.49 at 4 p.m. in New York Stock Exchange composite trading. That was the lowest closing price for the ADRs since April. LaHood told reporters in Washington he will phone Toyoda “in the next couple days” to be certain regulators agency have “pushed them over the line” so that Toyota is doing all it can to resolve defects. Separately, the Toyota City, Japan-based carmaker has been ordered by Japan’s government to investigate brake-related problems with the latest version of its Prius hybrid car, the nation’s transportation ministry said today. The ministry said it has received 14 complaints related to Prius brakes. It has also asked other carmakers to look into similar reports. Such requests are “routine,” said Masaya Ota , an official in the ministry’s recall division. U.S. Inquiry The U.S. National Highway Traffic Safety Administration “has received a number of complaints” about a possible Prius brake defect and is looking the matter, the agency said today in an e-mailed statement. Toyota began shipping steel plates to U.S. dealers on Feb. 1 as a fix for sticky gas pedals that have caused the carmaker to recall about 2.57 million vehicles in the U.S. and Canada. “We know what the problem is,” Jim Lentz , Toyota’s president of U.S. sales, said in an interview on Bloomberg Television on Feb. 1. “We have the fix.” The U.S. recall for pedals that stick applies to model years 2009-2010 RAV4, 2010 Highlander and 2008-2010 Sequoia sport-utility vehicles, 2009-2010 Corolla and 2005-2010 Avalon sedans, some 2007-2010 Camry sedans, 2009-2010 Matrix hatchbacks, and 2007-2010 Tundra pickups, according to Toyota. Floor Mats Toyota also has recalled and plans to fix about 5.6 million Toyota- and Lexus-brand cars and trucks in the U.S. and Canada because of floor mats that might trap gas pedals and cause vehicles to speed out of control. Some Toyota brand vehicles are affected by both types of recalls. The investigation of the Prius in Japan could undermine sales in Toyota’s home market , where it hasn’t recalled any vehicles due to the sudden-acceleration issue. The model was Japan’s best-selling vehicle in 2009. “The Prius is Toyota’s flagship model, its key to the future,” said Ashvin Chotai , managing director of London-based Intelligence Automotive Asia Ltd., a consulting company. “If that model gets tainted, that would suggest Toyota’s crisis has moved on to the next level.” In the U.S., the National Highway Traffic Safety Administration, part of the Transportation Department, is examining the electronics of automakers including Toyota in response to complaints, LaHood told reporters today. Among the questions is whether electromagnetic interference from power lines could affect the computerized systems that help run today’s vehicles, he said. Feet to the Fire “We will continue our investigations into all aspects of these vehicles, including the electronics,” LaHood said. “We’re going to hold Toyota’s feet to the fire.” Toyota has said it ruled out electronics as a cause of sudden acceleration in its cars and trucks. At least 15 lawsuits seeking class action status have been filed against Toyota on the acceleration issue, and seven of them claim an electronic throttle system called ETCS-i is at fault instead of the pedals. In cars with the ETCS-i system, the engine’s throttle is controlled by electronic signals, which are sent from a sensor that detects how far the gas pedal is depressed. The signals are transmitted to a computer module that controls how much the throttle opens. Lawyers claiming an electronic defect contend that floor mats or stuck pedals don’t explain the sudden-acceleration incidents that triggered their lawsuits. ‘Sitting Dead Still’ In a Texas lawsuit filed on Jan. 29, plaintiff Alfred Pena said his 2008 Toyota Avalon unexpectedly accelerated at a stop sign on Jan. 14, causing a collision. He wasn’t injured, said Robert Hilliard , an attorney representing Pena. Pena’s wife, Sylvia, had a previous episode of unintended acceleration that didn’t result in an accident, Hilliard said. Sylvia Pena “was sitting dead still,” and the car accelerated as she released the brake before she touched the gas pedal, Hilliard, of Corpus Christi, Texas, said in an interview. “My belief is that fixed Toyotas with new pedals will still inadvertently accelerate,” Hilliard said. NHTSA tested throttle electronics last year in response to a petition from a 2007 Lexus ES 350 owner who had experienced sudden acceleration of his vehicle. The agency denied the petition in October after subjecting the same model of car to “multiple electrical signals” and “magnetic fields.” ‘Exhaustive Testing’ Toyota said at the time that the October decision marked the fifth in which the agency had rejected similar requests to investigate company vehicles for defects including electronics related to unintended acceleration. “In terms of electronics of the vehicle, we’ve done exhaustive testing and we’ve found no issues with the electronics,” Toyota’s Lentz said on a conference call with reporters Feb. 1. Toyota, as required by law, stopped selling eight vehicles recalled in the U.S. last week. The company said it will begin fixing accelerator pedals, which were supplied by Elkhart, Indiana-based CTS Corp. , this week, with some dealerships preparing to do repairs around the clock. The Transportation Department and its auto safety agency have been called to testify at two congressional hearings on the handling of the Toyota recalls. House Hearings A House Oversight and Government Reform Committee panel will hold a hearing on the recalls on Feb. 10, followed by the House Energy and Commerce Committee on Feb. 25. Representative Edolphus Towns , a New York Democrat and chairman of the oversight and reform panel, asked Toyota North America President Yoshimi Inaba in a letter today to explain whether “it is safe to drive the Toyota models that have been recalled.” Representative John Dingell , a Michigan Democrat who serves on the House Energy and Commerce Committee , today questioned whether Toyota has found the cause of sudden acceleration in its vehicles. “I am in no way certain that Toyota’s explanation for the cause of incidents of sudden acceleration in its vehicles satisfies me,” Dingell said in a statement. To contact the reporters on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net ; Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net .

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Tishman Speyer Walked Away From Its Stuyvesant Town, Peter Cooper Village Mortgage. Why Can’t You?

January 31, 2010

NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business. Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat. Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can’t. Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000. “I have 12 years of money put into this property that I will never get out,” said the 50-year-old Gilson, from Rapid City, S.D. “But I am still paying because this is what I have been told to do. That’s what I think is right.” Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country – Florida, Nevada, Michigan, California and Arizona – the share tops 40 percent. Some experts say it makes sense for some people to walk away if they’re deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money. The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They’ll make fewer loans. Home prices will plunge more. The rules are different, though, for the walkaway of all walkaways. That title is reserved for what happened to one of New York’s trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan’s east side, it’s the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city’s middle class. Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 – right at the market’s peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents. Then the housing crash hit. The value now: $1.8 billion. And you thought you overpaid for your house. “They made assumptions that things would grow to the moon, and things certainly did not,” said Len Blum, a managing partner at investment bank Westwood Capital. Tishman said last week that it was turning the property back over to creditors to avoid filing for bankruptcy protection. In recent weeks, Tishman failed to restructure $4.4 billion in debt, and couldn’t find another buyer, according to a statement from the company. Tishman exits the deal with a ding to its reputation, but it will be fine. It still has Rockefeller Center and the Chrysler Center in New York, and dozens of properties in cities worldwide. The company has about $33 billion in assets. Residential homeowners wouldn’t get off so easy. For most underwater homeowners, the thought of walking away from their commitment is impossible to fathom. After all, it’s part of the culture. Pay your bills. Uphold contracts. University of Arizona law professor Brent White, who has written about mortgage walkaways, says societal pressures often trump what’s actually legal. He thinks individual borrowers believe they are obliged to repay their loans even when it isn’t in their financial interest. “The problem is that we have a structure whereby corporations can walk away with impunity but individuals can’t,” White said. Gilson reads what’s happening 1,700 miles away in Manhattan and gets angry. His mobile home started depreciating the minute he moved in 12 years ago, much as a car loses value as soon as you drive it out of the dealer’s lot. Three years ago, he bought a new home that he lives in with his wife. Since he can’t sell the mobile home for anything near what he paid for it, he rents it out in order to make the $300.36 mortgage payment every month. “I get so stressed over this,” Gilson said. “It’s like the elephant in the room and there is nothing you can do about it.” Gilson is frustrated that real-estate tycoons can default on a $4.4 billion mortgage, but he’s not supposed to do the same on his $31,000 loan. How can you blame him? ___ Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

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Adam Hanft: The U.S. Government Controls GM; Do They Have the Guts to Go After Toyota?

January 28, 2010

It’s the biggest post-bankruptcy gift GM can have. Toyota’s massive recall of five million cars – nearly half of the total number of cars it sold worldwide in its peak year – could be a turning point in the public’s perception that Japanese cars win the quality Olympics, versus America’s tinny junk. The AP is blunt in its assessment: ” A flood of recalls in the U.S. shows Toyota compromised on quality control in an overzealous drive to cut costs and expand sales during its climb to the top of the world auto market.” Meanwhile, American cars have dramatically improved their quality ratings. The gap between imports and domestics is lower than it’s ever been, and American cars have improved their “initial quality” ratings more than imports, says JD Powers . But perception has lagged, and that continues to be a huge problem for Detroit. The massive Toyota recall is one of those high visibility moments that can be a catalyst for a profound realignment of consumer thinking. GM needs to use the recall and the massive news coverage it’s generated to re-activate the latent but recoverable archetype of “Made in Japan” standing for cheap and unreliable stuff. This is an unprecedented opportunity, a moment for GM to paint a stark contrast between its commitment to making great cars – a new era of American quality – and Toyota’s sloppiness in pursuit of global dominance. Take everything Toyota stands for and turn it upside down and inside out. Remind us that cheapness has a price, and that price can be life-threatening. And use every communication channel in your arsenal to pump this out – advertising, PR, social media, your employees, your dealer network, happy owners. The UAW. This would be smartly opportunistic, given not just the recall, but the mood of the American people. We’re looking for glimmers of American resurgence, and we want our investment in GM to pay off. We want to believe that a smaller, tighter, more quality-obsessed GM is prepared to beat the global, grow-at-any-cost monolith that Toyota has become. The question is, would the GM have the testosterone to do this, and would the U.S. government approve a big, bold, feisty campaign that strikes directly at the business practices of an iconic Japanese company, and could have geopolitical consequences? I can imagine the firestorm this species of government-approved trade warfare would trigger. Prime Minister Hatoyama would be on the phone with Secretary of State Clinton before you could say “accelerator pedal.” After all, this wouldn’t be just a competitive strategy for GM. It would be an effort to bring the perception of Japanese quality tumbling down by seizing this national embarrassment and turning into a broader indictment. The unacknowledged truth is that United States Government has an inherent conflict-of-interest problem. There is an undeniable structural stress between its role as the controlling shareholder in GM, and its global economic needs. So the law of unintended consequences appears once again. The loan guarantees to GM restrict its ability to seize opportunity, and the gift of the recall will remain unopened and unenjoyed.

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California’s Bonds Fail on Wall Street Advice Bill Lockyer Couldn’t Refuse

December 17, 2009

By Michael B. Marois Dec. 17 (Bloomberg) — For California Treasurer Bill Lockyer , the offer from Goldman Sachs Group Inc. , JPMorgan Chase & Co. and Citigroup Inc. was too good to refuse. If California were willing to forgo competitive bidding for a $4.5 billion bond offering, the banks promised more orders from individuals and a lower bill to the taxpayers. The firms insisted that by negotiating with them, the state would benefit from its special relationship with the Wall Street troika and wind up with what two underwriters called a salutary “buzz” to boost demand for the debt. When the October offering failed to sell as planned, California was forced to accept 8 percent less money than it needed and to pay as much as $123 million more in interest than the banks said was sufficient for the market. And the threesome made $12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout. “Just because someone earns a big wad of money doesn’t mean that they can do what they say they can do,” said Marilyn Cohen , who watched the sale unfold from Los Angeles as president of Envision Capital Management, which oversees $250 million in bonds for individuals. “And shame on the state if they were drinking that Kool-Aid.” The California sale helped send the municipal-bond market to its worst month in a year. It ended a rally that had pushed borrowing costs for cities and states to a 42-year low, as measured by the Bond Buyer’s index of 20-year general obligation bonds. Familiarity Over Price California, with a bigger economy than Russia’s , seeks bids for everything from building roads and schools to buying portable toilets and fire extinguishers. When the state with the worst credit rating sells municipal bonds, it usually chooses bankers through a negotiation process that lets experience and familiarity trump price. For the October deal, state Treasurer Lockyer picked the world’s most profitable investment bank and the nation’s two biggest bond underwriters, which together have sold $31 billion of debt for California since he took office in 2007. The U.S. municipal bond market’s largest borrower has sold tax-backed debt nine times this year, for a total of about $37 billion, more than four times second-place New York’s total, data compiled by Bloomberg show. ‘Conflicts’ The state’s former public finance director, Juan Fernandez , worked on the sale as JPMorgan’s executive director in San Francisco. Goldman’s bankers included Kathleen Brown , a former state treasurer. She’s the daughter of one past governor, Pat Brown , and the sister of another, current Attorney General Jerry Brown . “The whole business is full of conflicts, and that’s a gigantic problem,” Cohen said. Goldman, JPMorgan and Citigroup declined to comment, as did Fernandez. Kathleen Brown didn’t respond to phone and e-mail messages. The $2.8 trillion market for state and local government bonds used to be more competitive. In 1970, 73 percent of municipal offerings were sold at auctions, the General Accounting Office said in a 1983 report. In such deals, the bank that offers the lowest interest cost via the highest bid, or price, buys the securities and tries to sell them for more. This year, 16 percent of $368 billion in new fixed-rate issues were sold that way, Bloomberg data show. The rest were negotiated offerings, in which underwriters are selected before the sale based on assurances they’ll deliver cheaper rates by lining up investors. ‘Bad Week’ When the New York banks’ promises to California proved unreliable, Lockyer, 68, not his underwriters, tried to explain the miscalculation to taxpayers. “It turned into a bad week for bonds,” the treasurer said in an Oct. 9 interview. “This seemed to be a very hard week with some headwinds for issuers.” The underwriters left Lockyer “standing on the platform alone,” said Christopher Taylor , former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia, a self-regulatory organization. Taxpayers “probably didn’t get their money’s worth because California only got someone taking orders,” he said. “They didn’t get somebody out there that had any really strong incentive to sell.” Banks don’t want “any unsold bonds hanging around,” so they prefer to help states set rates and see if the bonds sell, as happens in negotiated deals, Taylor said. If demand falls short, the dealers say, “Listen, we can’t sell this” without higher yields, he said. “It’s a wonderful world that the dealer community has created — just fees, no risk.” Saving a ‘Boatload’ Lockyer has no regrets about using a no-bid process because an auction would have led to even higher interest costs, said Tom Dresslar , his spokesman. While auctions may be effective for smaller issues, multibillion-dollar sales of both taxable and tax-exempt bonds like this one require advance marketing that banks will deliver only if they are hired beforehand, he said. “We have saved taxpayers a boatload of money through negotiated bond sales,” Dresslar said, citing an analysis in the winter 2008 issue of the Municipal Finance Journal that was funded by the Securities Industry and Financial Markets Association. The authors concluded that competitive sales have “no general advantage” and criticized past studies that found interest costs on negotiated sales were as much as 70 basis points, or 0.7 percentage point, higher. True Interest Cost California’s estimate of the so-called true interest cost on the tax-exempt portion of the October sale indicates it spent more the last time it sold competitively. Including fees, the $1.3 billion negotiated sale cost 33 basis points less than the national average for 20-year general- obligation bonds at the time, excluding a risk premium of almost 1 percentage point the state paid after approaching insolvency, Bloomberg data show. When the state sold $1.1 billion in tax- free securities at auction on Feb. 14, 2007, the cost was 13 basis points over the average. “Even though they couldn’t sell as much as they wanted, and even though they sold at yields at higher levels than what they wanted,” the deal “went well from California’s point of view,” said Gary Pollack , who oversees $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “They were able to borrow $4.1 billion at relatively historically low yields.” After the sale, several states scaled back borrowing plans as municipal bond yields climbed the most in two weeks since December. ‘Litmus Test’ Maryland sold $200 million of debt on Oct. 21, about 25 percent of what it had wanted to offer, Bloomberg data show. Minnesota issued $576 million of bonds, or 64 percent of its planned total. Hawaii and Washington took similar steps after rising yields erased projected savings from refinancing. “California’s large offering proved to be a litmus test for investors’ tolerance for new supply at relatively low yields,” said Chris Holmes , a fixed-income strategist at JPMorgan in New York, in a note to clients after the sale. It “set a tepid tone for subsequent large offerings by other issuers,” he said. Municipal yields rose almost half a percentage point from their 3.94 percent low following the sale and were a quarter- point above that mark as of Dec. 10, the weekly Bond Buyer index shows. Unemployment California is strapped for cash amid the worst global recession since World War II. The most-populous state’s personal income tax revenue fell 33.4 percent in the second quarter, compared with a 27.5 percent national average, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. Unemployment in California was 12.5 percent in October, the worst since at least 1976. Nationwide joblessness was 10.2 percent in October, a 26-year high, and 10 percent in November. The October sale was California’s first long-term debt offering since Republican Governor Arnold Schwarzenegger and the Democratic Legislature settled a three-month impasse over how to erase a $24 billion deficit in July. The stalemate, which put the state on the brink of insolvency for the second time this year, ended with the approval of an $85 billion budget. California has cut spending by $32 billion, raised taxes by $12.5 billion and papered over $6 billion in shortages with borrowing and what Pacific Investment Management Co.’s Bill Gross has called “accounting tricks that couldn’t fool a grade-schooler .” Imminent Downgrade The July compromise prompted credit-rating companies to remove California from lists of borrowers facing imminent downgrades. The state’s general obligation bonds are graded BBB by Fitch Ratings, Baa1 by Moody’s Investors Service and A by Standard & Poor’s. Public Resources Advisory Group, a financial consultant for the state since 1991, recommended a negotiated sale instead of a competitive one, a memo obtained through California’s Public Records Act shows. In past auctions, winning underwriters couldn’t line up enough buyers ahead of time, so “they bear more risk and the price they are willing to pay the state for the bonds will likely be lower,” increasing taxpayers’ interest costs, the New York firm wrote. If the consultant “had not recommended a negotiated sale, had they recommended a competitive sale to get the best deal for taxpayers, that’s what we would have done,” said Dresslar, the treasurer’s spokesman. Taylor, the former MSRB official, said financial advisers rarely recommend auctions. ‘Blackballed’ “The FA has no incentive to irritate the underwriter community by pushing the risk on them,” he said. “Any FA that pushes a competitive sale is going to get ‘blackballed.’” Lockyer’s staff advised him on Aug. 24 to hire Goldman and JPMorgan to manage a $3.2 billion mix of taxable debt, including federally subsidized Build America Bonds, and Citigroup to lead the simultaneous sale $1.3 billion of tax-exempt securities. Goldman, which accepted $10 billion in bailout money last year and repaid it eight months later, produced a $3.44 billion profit in the second quarter, a record for a U.S. investment bank. Its shares have almost doubled this year. JPMorgan, which has repaid its $25 billion bailout, is this year’s top U.S. bond underwriter, according to Bloomberg data that excludes municipal issues. Its shares are up 31 percent. JPMorgan’s investment bank and Goldman will set aside an unprecedented $32.1 billion for compensation this year, according to an estimate by David Trone , a Macquarie Securities Group analyst. That will produce record bonuses totaling $19.3 billion, based on New York pay consultant Options Group’s estimate that year-end awards usually account for 60 percent of compensation costs. ‘Lowest Borrowing Costs’ Second-ranked underwriter Citigroup is repaying $20 billion of its $45 billion bailout to escape U.S. Treasury Department- imposed pay restrictions as the government prepares to sell its remaining stake in the company to recover the rest. The shares are down 49 percent this year. The three banks were told by California in Sept. 21 engagement letters that they were expected to “perform at the highest level to assist this office in achieving a successful sale at the lowest borrowing costs.” The sales syndicate also included Bank of America Corp.’s Merrill Lynch & Co., Siebert Brandford Shank & Co., Wells Fargo & Co. and about 30 other banks and brokers that made $13.4 million on the deal, for a total of $25.8 million in fees. Before selling the long-term bonds, Lockyer shored up the state’s finances by borrowing $8.8 billion through one-year cash-flow notes, a routine move used to pay expenses while awaiting anticipated tax revenue. Record Demand That Sept. 23 offering, run by JPMorgan, attracted twice as much demand from individual investors as from mutual funds and other institutions. So-called retail orders totaling $6.64 billion, about 75 percent of the sale, was the most ever for a municipal issue, Lockyer’s office said, citing underwriters’ data. California paid as much as 1.5 percent on the debt, more than twice New Jersey’s cost for similar securities in August. The yield was in the low range of what had been advertised beforehand, and individual demand allowed the state to turn away $430 million in orders from institutions. “Investors clearly know a good deal when they see one, and California taxpayers will benefit as a result,” Lockyer said after the sale. That same day, Citigroup told Lockyer that the state would get a “vigorous pre-sale marketing effort” to “the broadest possible audience of potential investors” and “greater retail participation” for October’s long-term debt sale if he agreed to a negotiated deal, according to a letter from Chris Mukai, a director for the bank in Los Angeles. ‘Very Little Incentive’ When banks have to bid for bonds, they “have very little incentive” to find investors beforehand because they don’t know if they’ll “have the bonds to sell,” Mukai said. Underwriters in negotiated offerings “market the state’s transaction for at least a week in advance,” his letter said. “As a result of these efforts, Citi and the other underwriters will acquire accurate information as to the depth of buying interest, which is invaluable in the pricing of the issue and in securing the lowest possible borrowing costs.” Mukai reminded Lockyer that Citigroup had helped JPMorgan sell September’s short-term debt to individuals, “saving the state millions of dollars,” and had implemented California’s “Enhanced Retail Marketing Plan” in June 2007. “We believe all the retail marketing efforts in these past few negotiated sales have achieved tremendous success for the state,” leading to more than $8.1 billion in general-obligation bond sales to individuals, or 46 percent of new issues, Mukai wrote. ‘Buzz’ Memo Goldman and JPMorgan offered Lockyer similar assurances in a joint Oct. 6 memo outlining how they would help draft an offering document, design a sales presentation and perform “pre-marketing and price-discovery activities” to help structure the issue at the cheapest yield. “This process will generate a ‘buzz’ around the transaction, ultimately generating maximum investor participation in the sale, which we believe will translate into lower borrowing costs,” wrote Tim Romer , a Goldman managing director in Los Angeles, and JPMorgan’s Fernandez, who had been the state’s finance director from 2002 to 2006. The two firms “strongly believe that proceeding with a negotiated sale” of the bonds “will result in a more cost- effective sale than a competitively bid transaction,” they wrote. Lowest Since ‘67 Investors, including Envision Capital’s Cohen, predicted the October sale would go well, given the popularity of Build America Bonds, securities created by President Barack Obama’s economic stimulus package, which covers 35 percent of their interest costs. As of Oct. 1, state and local governments had sold at least $36.9 billion of the debt, about 14 percent of year-to-date borrowing. The bonds attracted buyers to the municipal market and reduced tax-exempt supply, helping drive down average yields to 3.94 percent, the lowest since 1967, from 4.92 percent on April 2, the Bond Buyer’s index shows. “There seems to be a voracious appetite for the BABs bonds no matter who the issuer is,” Cohen said in an interview the day before the sale. As for the $1.3 billion tax-exempt portion, “they should have a relatively easy time selling it because it’s not so huge,” she said. Increasing Supply In the weeks before the bond sale, Lockyer’s staff watched yields slide as state and local authorities kept issuing more debt to lock in low rates. Borrowers were benefiting from the recovery following the financial meltdown that had spurred a rush to the perceived safety of Treasuries after the collapse of Lehman Brothers Holdings Inc. a year earlier. About $270 billion in new municipal bonds had been issued from Jan. 1 to early October, 16 percent more than at that point in 2008. California’s 2009 tax-backed bond and note sales totaled $23.4 billion by Sept. 30, up from $4.6 billion and $10.6 billion in the first three quarters of 2008 and 2007, respectively. Demand might wane “because we are at lows in terms of absolute yield levels,” said Peter Hayes , who oversees $106 billion in municipal bonds for BlackRock Inc., on Oct. 6. California officials said they knew the bonds would be a harder sell than the September notes. To keep debt payments low, Lockyer loaded the tax-exempt portion with maturities longer than what individual investors typically buy. ‘We Got Spoiled’ “We are so used to getting 50 percent, 60-plus percent, 80 percent retail,” said Dresslar, the Lockyer spokesman, referring to how much individuals bought of an offering. “We got spoiled,” he said. “We were fully cognizant that this was not going to be a walk in the park.” Deputy Treasurer Katie Carroll and Public Finance Director Blake Fowler flew to New York to monitor the sale, accompanied by Dresslar. Fowler, 43, has spent most of his career in municipal bonds. A year ago, Carroll, 53, gave a talk on “ways to maximize demand ” from individuals to the National Association of State Treasurers. Then in Fowler’s job, Carroll emphasized the value of advertising on radio and giving retail buyers a two-day “priority period” for placing orders. Day One The bankers went into the sale telling investors California would pay tax-exempt yields from 2.87 percent for the 2015 maturity to 4.63 percent for bonds due in 2029. The 20-year was 23 basis points lower than indicated at the time by a Bloomberg index designed to gauge the fair value of similar bonds. The estimate for yields on taxable securities available to individuals ranged from 3.5 percent to 3.75 percent. On Oct. 6, the first day of retail sales, the three California officials sat in a conference room in Barclays Capital’s New York headquarters on Seventh Avenue. As they talked to credit-rating companies about another bond issue, they monitored orders for the current one, which the London-based bank helped sell. They phoned in updates to Lockyer. With Municipal Market Advisors data showing yields already starting to rise, individuals bought 28 percent of the tax-exempt bonds and 25 percent of the taxable debt, less than half the demand seen on the first day of the September sale. The underwriters “told us before the deal not to expect the level of retail that we had been getting,” Dresslar said. By the time of the sale, they painted an even gloomier picture of concessions that investors wanted “to get the deal done at least close to the size” California wanted, he said. “Some of the numbers that were coming out were startling.” Day Two The following morning, the three officials and their financial advisers were ushered into a conference room in Goldman’s 85 Broad St. headquarters. Fueled by coffee, pastries and sandwiches over a 10-hour day, they decided to raise yields by as much as 4 basis points on tax-exempt bonds to attract more orders. The market’s response “may reflect some anxieties with the retail investors in buying anything that’s longer” than one- year notes, Lockyer said on Bloomberg Television that day. “It may be pricing. It’s hard to tell.” By the end of the second day, retail buyers had placed orders for $427.7 million, or 33 percent, of the $1.31 billion tax-exempt portion and $77.5 million of the $250 million of taxable bonds available to individuals. All together, retail sales amounted to 11 percent of the $4.5 billion the state wanted to borrow. Day Three The next morning, the California officials moved to Citigroup’s offices to finish the offering with sales to pension plans, hedge funds, nonprofit groups and other professional buyers. “We’re depending on the institutional investors to make this work,” Lockyer had said on TV. In a room off the trading floor, the officials decided to cut the sale to $4.14 billion — $1.31 billion in tax-exempts, $1.75 billion in Build America Bonds and $1.07 billion in other taxable bonds. They also increased some yields again as institutions grew more wary of the state’s finances. Tax-exempt rates ended up 8 to 37 basis points higher than estimated, including the 20-year, which was boosted to 5 percent from 4.66 percent. Debt due in 2025 went to 4.69 percent from 4.42 percent. Four taxable issues, including the Build America Bonds, cost the state 12.5 to 25 basis points more than the low end of estimated ranges. Two priced at the high end, and two were above it. Extra Interest The yields, averaging almost a quarter-point more than estimated, will result in California paying $8.1 million a year more in interest than it would have at the lower rates. If the bonds all are outstanding at maturity, the extra interest would total $123.5 million, data compiled by Bloomberg show. “It’s justified for Cal to be paying a little higher price in order to sell its debt, given its credit issues,” Deutsche Bank’s Pollack said in an interview that day. “Their budget was not as tight and strong as I think a lot of people would have liked it to be.” The sale’s biggest maturity, $1.75 billion of 30-year Build America Bonds, was priced to yield 7.23 percent, 95 basis points more than comparable corporate bonds and 325 basis points more than Treasuries with similar maturities. With the subsidy, California’s net cost is about 4.7 percent. Ten-year Burlington Northern Santa Fe Corp. bonds with the same Moody’s ratings as California traded at 122 basis points more than Treasuries that same week. ‘Best Shot’ “They just got a little aggressive in where they wanted to price it,” said David Blair , a Pimco analyst in Newport Beach, California, the day after the sale. “Most people still recognize that there’s budget deficits the state is trying to deal with,” said Blair, whose company oversees $20 billion in municipal bonds. Lockyer’s spokesman portrayed the sale as a success. “To say that the market conditions were not as favorable as they had been doesn’t mean that you go in conceding hundreds of millions of dollars; you go in and give it your best shot because there’s a lot at stake,” Dresslar said. “Given the cold market and the inhospitable attitude of investors, to pull off a $4.1 billion deal, we believe, is an impressive achievement,” Dresslar said. “We would have been derelict in our duty to taxpayers if we sold a bond of this size through a competitive sale. We would have gotten hosed.” Highest Rate By Oct. 15, 20-year yields had risen 0.38 percentage point to 4.32 percent from its previous low, the biggest two-week increase in 10 months, the Bond Buyer index shows. California has since sold $7.3 billion in debt. On Oct. 22, it paid 8.361 percent on $250 million of lower-rated Build America Bonds — then the highest coupon rate for a $100 million-plus issue since the program began. A week later, the state was able to cut estimated yields as much as 0.15 percentage point on $3.5 billion in better-rated tax-exempt bonds when individuals placed orders for almost 72 percent, including debt due in 2022 that cost the state 4.85 percent, up from 4.47 percent in the early October sale. California sold $908 million in Build America Bonds on Nov. 3, pricing the 30-year securities to yield 7.26 percent, or 3 percentage points more than Treasuries, down from October’s 3.25-point spread. Lockyer has said the state may issue more debt before the fiscal year ends on June 30 without specifying how much. “Everybody thinks there’s still an appetite for California bonds,” the treasurer said in the Oct. 9 interview. “If the market is inhospitable, we won’t go,” he said. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.” Tom Dalpiaz , who helps Advisors Asset Management oversee $3.3 billion in Melville, New York, said California and its bankers had flooded a glutted municipal bond market with too much supply. The sale gave investors “sticker-shock syndrome,” said Dalpiaz. “It was a very large bond issue to digest.” To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net .

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California’s Bonds Fail on Wall Street Advice Bill Lockyer Couldn’t Refuse

December 17, 2009

By Michael B. Marois Dec. 17 (Bloomberg) — For California Treasurer Bill Lockyer , the offer from Goldman Sachs Group Inc. , JPMorgan Chase & Co. and Citigroup Inc. was too good to refuse. If California were willing to forgo competitive bidding for a $4.5 billion bond offering, the banks promised more orders from individuals and a lower bill to the taxpayers. The firms insisted that by negotiating with them, the state would benefit from its special relationship with the Wall Street troika and wind up with what two underwriters called a salutary “buzz” to boost demand for the debt. When the October offering failed to sell as planned, California was forced to accept 8 percent less money than it needed and to pay as much as $123 million more in interest than the banks said was sufficient for the market. And the threesome made $12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout. “Just because someone earns a big wad of money doesn’t mean that they can do what they say they can do,” said Marilyn Cohen , who watched the sale unfold from Los Angeles as president of Envision Capital Management, which oversees $250 million in bonds for individuals. “And shame on the state if they were drinking that Kool-Aid.” The California sale helped send the municipal-bond market to its worst month in a year. It ended a rally that had pushed borrowing costs for cities and states to a 42-year low, as measured by the Bond Buyer’s index of 20-year general obligation bonds. Familiarity Over Price California, with a bigger economy than Russia’s , seeks bids for everything from building roads and schools to buying portable toilets and fire extinguishers. When the state with the worst credit rating sells municipal bonds, it usually chooses bankers through a negotiation process that lets experience and familiarity trump price. For the October deal, state Treasurer Lockyer picked the world’s most profitable investment bank and the nation’s two biggest bond underwriters, which together have sold $31 billion of debt for California since he took office in 2007. The U.S. municipal bond market’s largest borrower has sold tax-backed debt nine times this year, for a total of about $37 billion, more than four times second-place New York’s total, data compiled by Bloomberg show. ‘Conflicts’ The state’s former public finance director, Juan Fernandez , worked on the sale as JPMorgan’s executive director in San Francisco. Goldman’s bankers included Kathleen Brown , a former state treasurer. She’s the daughter of one past governor, Pat Brown , and the sister of another, current Attorney General Jerry Brown . “The whole business is full of conflicts, and that’s a gigantic problem,” Cohen said. Goldman, JPMorgan and Citigroup declined to comment, as did Fernandez. Kathleen Brown didn’t respond to phone and e-mail messages. The $2.8 trillion market for state and local government bonds used to be more competitive. In 1970, 73 percent of municipal offerings were sold at auctions, the General Accounting Office said in a 1983 report. In such deals, the bank that offers the lowest interest cost via the highest bid, or price, buys the securities and tries to sell them for more. This year, 16 percent of $368 billion in new fixed-rate issues were sold that way, Bloomberg data show. The rest were negotiated offerings, in which underwriters are selected before the sale based on assurances they’ll deliver cheaper rates by lining up investors. ‘Bad Week’ When the New York banks’ promises to California proved unreliable, Lockyer, 68, not his underwriters, tried to explain the miscalculation to taxpayers. “It turned into a bad week for bonds,” the treasurer said in an Oct. 9 interview. “This seemed to be a very hard week with some headwinds for issuers.” The underwriters left Lockyer “standing on the platform alone,” said Christopher Taylor , former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia, a self-regulatory organization. Taxpayers “probably didn’t get their money’s worth because California only got someone taking orders,” he said. “They didn’t get somebody out there that had any really strong incentive to sell.” Banks don’t want “any unsold bonds hanging around,” so they prefer to help states set rates and see if the bonds sell, as happens in negotiated deals, Taylor said. If demand falls short, the dealers say, “Listen, we can’t sell this” without higher yields, he said. “It’s a wonderful world that the dealer community has created — just fees, no risk.” Saving a ‘Boatload’ Lockyer has no regrets about using a no-bid process because an auction would have led to even higher interest costs, said Tom Dresslar , his spokesman. While auctions may be effective for smaller issues, multibillion-dollar sales of both taxable and tax-exempt bonds like this one require advance marketing that banks will deliver only if they are hired beforehand, he said. “We have saved taxpayers a boatload of money through negotiated bond sales,” Dresslar said, citing an analysis in the winter 2008 issue of the Municipal Finance Journal that was funded by the Securities Industry and Financial Markets Association. The authors concluded that competitive sales have “no general advantage” and criticized past studies that found interest costs on negotiated sales were as much as 70 basis points, or 0.7 percentage point, higher. True Interest Cost California’s estimate of the so-called true interest cost on the tax-exempt portion of the October sale indicates it spent more the last time it sold competitively. Including fees, the $1.3 billion negotiated sale cost 33 basis points less than the national average for 20-year general- obligation bonds at the time, excluding a risk premium of almost 1 percentage point the state paid after approaching insolvency, Bloomberg data show. When the state sold $1.1 billion in tax- free securities at auction on Feb. 14, 2007, the cost was 13 basis points over the average. “Even though they couldn’t sell as much as they wanted, and even though they sold at yields at higher levels than what they wanted,” the deal “went well from California’s point of view,” said Gary Pollack , who oversees $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “They were able to borrow $4.1 billion at relatively historically low yields.” After the sale, several states scaled back borrowing plans as municipal bond yields climbed the most in two weeks since December. ‘Litmus Test’ Maryland sold $200 million of debt on Oct. 21, about 25 percent of what it had wanted to offer, Bloomberg data show. Minnesota issued $576 million of bonds, or 64 percent of its planned total. Hawaii and Washington took similar steps after rising yields erased projected savings from refinancing. “California’s large offering proved to be a litmus test for investors’ tolerance for new supply at relatively low yields,” said Chris Holmes , a fixed-income strategist at JPMorgan in New York, in a note to clients after the sale. It “set a tepid tone for subsequent large offerings by other issuers,” he said. Municipal yields rose almost half a percentage point from their 3.94 percent low following the sale and were a quarter- point above that mark as of Dec. 10, the weekly Bond Buyer index shows. Unemployment California is strapped for cash amid the worst global recession since World War II. The most-populous state’s personal income tax revenue fell 33.4 percent in the second quarter, compared with a 27.5 percent national average, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. Unemployment in California was 12.5 percent in October, the worst since at least 1976. Nationwide joblessness was 10.2 percent in October, a 26-year high, and 10 percent in November. The October sale was California’s first long-term debt offering since Republican Governor Arnold Schwarzenegger and the Democratic Legislature settled a three-month impasse over how to erase a $24 billion deficit in July. The stalemate, which put the state on the brink of insolvency for the second time this year, ended with the approval of an $85 billion budget. California has cut spending by $32 billion, raised taxes by $12.5 billion and papered over $6 billion in shortages with borrowing and what Pacific Investment Management Co.’s Bill Gross has called “accounting tricks that couldn’t fool a grade-schooler .” Imminent Downgrade The July compromise prompted credit-rating companies to remove California from lists of borrowers facing imminent downgrades. The state’s general obligation bonds are graded BBB by Fitch Ratings, Baa1 by Moody’s Investors Service and A by Standard & Poor’s. Public Resources Advisory Group, a financial consultant for the state since 1991, recommended a negotiated sale instead of a competitive one, a memo obtained through California’s Public Records Act shows. In past auctions, winning underwriters couldn’t line up enough buyers ahead of time, so “they bear more risk and the price they are willing to pay the state for the bonds will likely be lower,” increasing taxpayers’ interest costs, the New York firm wrote. If the consultant “had not recommended a negotiated sale, had they recommended a competitive sale to get the best deal for taxpayers, that’s what we would have done,” said Dresslar, the treasurer’s spokesman. Taylor, the former MSRB official, said financial advisers rarely recommend auctions. ‘Blackballed’ “The FA has no incentive to irritate the underwriter community by pushing the risk on them,” he said. “Any FA that pushes a competitive sale is going to get ‘blackballed.’” Lockyer’s staff advised him on Aug. 24 to hire Goldman and JPMorgan to manage a $3.2 billion mix of taxable debt, including federally subsidized Build America Bonds, and Citigroup to lead the simultaneous sale $1.3 billion of tax-exempt securities. Goldman, which accepted $10 billion in bailout money last year and repaid it eight months later, produced a $3.44 billion profit in the second quarter, a record for a U.S. investment bank. Its shares have almost doubled this year. JPMorgan, which has repaid its $25 billion bailout, is this year’s top U.S. bond underwriter, according to Bloomberg data that excludes municipal issues. Its shares are up 31 percent. JPMorgan’s investment bank and Goldman will set aside an unprecedented $32.1 billion for compensation this year, according to an estimate by David Trone , a Macquarie Securities Group analyst. That will produce record bonuses totaling $19.3 billion, based on New York pay consultant Options Group’s estimate that year-end awards usually account for 60 percent of compensation costs. ‘Lowest Borrowing Costs’ Second-ranked underwriter Citigroup is repaying $20 billion of its $45 billion bailout to escape U.S. Treasury Department- imposed pay restrictions as the government prepares to sell its remaining stake in the company to recover the rest. The shares are down 49 percent this year. The three banks were told by California in Sept. 21 engagement letters that they were expected to “perform at the highest level to assist this office in achieving a successful sale at the lowest borrowing costs.” The sales syndicate also included Bank of America Corp.’s Merrill Lynch & Co., Siebert Brandford Shank & Co., Wells Fargo & Co. and about 30 other banks and brokers that made $13.4 million on the deal, for a total of $25.8 million in fees. Before selling the long-term bonds, Lockyer shored up the state’s finances by borrowing $8.8 billion through one-year cash-flow notes, a routine move used to pay expenses while awaiting anticipated tax revenue. Record Demand That Sept. 23 offering, run by JPMorgan, attracted twice as much demand from individual investors as from mutual funds and other institutions. So-called retail orders totaling $6.64 billion, about 75 percent of the sale, was the most ever for a municipal issue, Lockyer’s office said, citing underwriters’ data. California paid as much as 1.5 percent on the debt, more than twice New Jersey’s cost for similar securities in August. The yield was in the low range of what had been advertised beforehand, and individual demand allowed the state to turn away $430 million in orders from institutions. “Investors clearly know a good deal when they see one, and California taxpayers will benefit as a result,” Lockyer said after the sale. That same day, Citigroup told Lockyer that the state would get a “vigorous pre-sale marketing effort” to “the broadest possible audience of potential investors” and “greater retail participation” for October’s long-term debt sale if he agreed to a negotiated deal, according to a letter from Chris Mukai, a director for the bank in Los Angeles. ‘Very Little Incentive’ When banks have to bid for bonds, they “have very little incentive” to find investors beforehand because they don’t know if they’ll “have the bonds to sell,” Mukai said. Underwriters in negotiated offerings “market the state’s transaction for at least a week in advance,” his letter said. “As a result of these efforts, Citi and the other underwriters will acquire accurate information as to the depth of buying interest, which is invaluable in the pricing of the issue and in securing the lowest possible borrowing costs.” Mukai reminded Lockyer that Citigroup had helped JPMorgan sell September’s short-term debt to individuals, “saving the state millions of dollars,” and had implemented California’s “Enhanced Retail Marketing Plan” in June 2007. “We believe all the retail marketing efforts in these past few negotiated sales have achieved tremendous success for the state,” leading to more than $8.1 billion in general-obligation bond sales to individuals, or 46 percent of new issues, Mukai wrote. ‘Buzz’ Memo Goldman and JPMorgan offered Lockyer similar assurances in a joint Oct. 6 memo outlining how they would help draft an offering document, design a sales presentation and perform “pre-marketing and price-discovery activities” to help structure the issue at the cheapest yield. “This process will generate a ‘buzz’ around the transaction, ultimately generating maximum investor participation in the sale, which we believe will translate into lower borrowing costs,” wrote Tim Romer , a Goldman managing director in Los Angeles, and JPMorgan’s Fernandez, who had been the state’s finance director from 2002 to 2006. The two firms “strongly believe that proceeding with a negotiated sale” of the bonds “will result in a more cost- effective sale than a competitively bid transaction,” they wrote. Lowest Since ‘67 Investors, including Envision Capital’s Cohen, predicted the October sale would go well, given the popularity of Build America Bonds, securities created by President Barack Obama’s economic stimulus package, which covers 35 percent of their interest costs. As of Oct. 1, state and local governments had sold at least $36.9 billion of the debt, about 14 percent of year-to-date borrowing. The bonds attracted buyers to the municipal market and reduced tax-exempt supply, helping drive down average yields to 3.94 percent, the lowest since 1967, from 4.92 percent on April 2, the Bond Buyer’s index shows. “There seems to be a voracious appetite for the BABs bonds no matter who the issuer is,” Cohen said in an interview the day before the sale. As for the $1.3 billion tax-exempt portion, “they should have a relatively easy time selling it because it’s not so huge,” she said. Increasing Supply In the weeks before the bond sale, Lockyer’s staff watched yields slide as state and local authorities kept issuing more debt to lock in low rates. Borrowers were benefiting from the recovery following the financial meltdown that had spurred a rush to the perceived safety of Treasuries after the collapse of Lehman Brothers Holdings Inc. a year earlier. About $270 billion in new municipal bonds had been issued from Jan. 1 to early October, 16 percent more than at that point in 2008. California’s 2009 tax-backed bond and note sales totaled $23.4 billion by Sept. 30, up from $4.6 billion and $10.6 billion in the first three quarters of 2008 and 2007, respectively. Demand might wane “because we are at lows in terms of absolute yield levels,” said Peter Hayes , who oversees $106 billion in municipal bonds for BlackRock Inc., on Oct. 6. California officials said they knew the bonds would be a harder sell than the September notes. To keep debt payments low, Lockyer loaded the tax-exempt portion with maturities longer than what individual investors typically buy. ‘We Got Spoiled’ “We are so used to getting 50 percent, 60-plus percent, 80 percent retail,” said Dresslar, the Lockyer spokesman, referring to how much individuals bought of an offering. “We got spoiled,” he said. “We were fully cognizant that this was not going to be a walk in the park.” Deputy Treasurer Katie Carroll and Public Finance Director Blake Fowler flew to New York to monitor the sale, accompanied by Dresslar. Fowler, 43, has spent most of his career in municipal bonds. A year ago, Carroll, 53, gave a talk on “ways to maximize demand ” from individuals to the National Association of State Treasurers. Then in Fowler’s job, Carroll emphasized the value of advertising on radio and giving retail buyers a two-day “priority period” for placing orders. Day One The bankers went into the sale telling investors California would pay tax-exempt yields from 2.87 percent for the 2015 maturity to 4.63 percent for bonds due in 2029. The 20-year was 23 basis points lower than indicated at the time by a Bloomberg index designed to gauge the fair value of similar bonds. The estimate for yields on taxable securities available to individuals ranged from 3.5 percent to 3.75 percent. On Oct. 6, the first day of retail sales, the three California officials sat in a conference room in Barclays Capital’s New York headquarters on Seventh Avenue. As they talked to credit-rating companies about another bond issue, they monitored orders for the current one, which the London-based bank helped sell. They phoned in updates to Lockyer. With Municipal Market Advisors data showing yields already starting to rise, individuals bought 28 percent of the tax-exempt bonds and 25 percent of the taxable debt, less than half the demand seen on the first day of the September sale. The underwriters “told us before the deal not to expect the level of retail that we had been getting,” Dresslar said. By the time of the sale, they painted an even gloomier picture of concessions that investors wanted “to get the deal done at least close to the size” California wanted, he said. “Some of the numbers that were coming out were startling.” Day Two The following morning, the three officials and their financial advisers were ushered into a conference room in Goldman’s 85 Broad St. headquarters. Fueled by coffee, pastries and sandwiches over a 10-hour day, they decided to raise yields by as much as 4 basis points on tax-exempt bonds to attract more orders. The market’s response “may reflect some anxieties with the retail investors in buying anything that’s longer” than one- year notes, Lockyer said on Bloomberg Television that day. “It may be pricing. It’s hard to tell.” By the end of the second day, retail buyers had placed orders for $427.7 million, or 33 percent, of the $1.31 billion tax-exempt portion and $77.5 million of the $250 million of taxable bonds available to individuals. All together, retail sales amounted to 11 percent of the $4.5 billion the state wanted to borrow. Day Three The next morning, the California officials moved to Citigroup’s offices to finish the offering with sales to pension plans, hedge funds, nonprofit groups and other professional buyers. “We’re depending on the institutional investors to make this work,” Lockyer had said on TV. In a room off the trading floor, the officials decided to cut the sale to $4.14 billion — $1.31 billion in tax-exempts, $1.75 billion in Build America Bonds and $1.07 billion in other taxable bonds. They also increased some yields again as institutions grew more wary of the state’s finances. Tax-exempt rates ended up 8 to 37 basis points higher than estimated, including the 20-year, which was boosted to 5 percent from 4.66 percent. Debt due in 2025 went to 4.69 percent from 4.42 percent. Four taxable issues, including the Build America Bonds, cost the state 12.5 to 25 basis points more than the low end of estimated ranges. Two priced at the high end, and two were above it. Extra Interest The yields, averaging almost a quarter-point more than estimated, will result in California paying $8.1 million a year more in interest than it would have at the lower rates. If the bonds all are outstanding at maturity, the extra interest would total $123.5 million, data compiled by Bloomberg show. “It’s justified for Cal to be paying a little higher price in order to sell its debt, given its credit issues,” Deutsche Bank’s Pollack said in an interview that day. “Their budget was not as tight and strong as I think a lot of people would have liked it to be.” The sale’s biggest maturity, $1.75 billion of 30-year Build America Bonds, was priced to yield 7.23 percent, 95 basis points more than comparable corporate bonds and 325 basis points more than Treasuries with similar maturities. With the subsidy, California’s net cost is about 4.7 percent. Ten-year Burlington Northern Santa Fe Corp. bonds with the same Moody’s ratings as California traded at 122 basis points more than Treasuries that same week. ‘Best Shot’ “They just got a little aggressive in where they wanted to price it,” said David Blair , a Pimco analyst in Newport Beach, California, the day after the sale. “Most people still recognize that there’s budget deficits the state is trying to deal with,” said Blair, whose company oversees $20 billion in municipal bonds. Lockyer’s spokesman portrayed the sale as a success. “To say that the market conditions were not as favorable as they had been doesn’t mean that you go in conceding hundreds of millions of dollars; you go in and give it your best shot because there’s a lot at stake,” Dresslar said. “Given the cold market and the inhospitable attitude of investors, to pull off a $4.1 billion deal, we believe, is an impressive achievement,” Dresslar said. “We would have been derelict in our duty to taxpayers if we sold a bond of this size through a competitive sale. We would have gotten hosed.” Highest Rate By Oct. 15, 20-year yields had risen 0.38 percentage point to 4.32 percent from its previous low, the biggest two-week increase in 10 months, the Bond Buyer index shows. California has since sold $7.3 billion in debt. On Oct. 22, it paid 8.361 percent on $250 million of lower-rated Build America Bonds — then the highest coupon rate for a $100 million-plus issue since the program began. A week later, the state was able to cut estimated yields as much as 0.15 percentage point on $3.5 billion in better-rated tax-exempt bonds when individuals placed orders for almost 72 percent, including debt due in 2022 that cost the state 4.85 percent, up from 4.47 percent in the early October sale. California sold $908 million in Build America Bonds on Nov. 3, pricing the 30-year securities to yield 7.26 percent, or 3 percentage points more than Treasuries, down from October’s 3.25-point spread. Lockyer has said the state may issue more debt before the fiscal year ends on June 30 without specifying how much. “Everybody thinks there’s still an appetite for California bonds,” the treasurer said in the Oct. 9 interview. “If the market is inhospitable, we won’t go,” he said. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.” Tom Dalpiaz , who helps Advisors Asset Management oversee $3.3 billion in Melville, New York, said California and its bankers had flooded a glutted municipal bond market with too much supply. The sale gave investors “sticker-shock syndrome,” said Dalpiaz. “It was a very large bond issue to digest.” To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net .

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Bear Stearns Casualty Begleiter Earns $1.6 Million at Poker World Series

November 9, 2009

By Erik Matuszewski Nov. 9 (Bloomberg) — Steven Begleiter cracked a smile of resignation when his luck ran out at the World Series of Poker . The 47-year-old former Bear Stearns Cos. executive two days ago was in position to double his $22 million in chips with a pair of queens showing to his opponent’s ace-queen combination. When the dealer flipped over an ace on the final community card, Begleiter’s run was over at the No-Limit Texas Hold ‘Em world championship in Las Vegas. While he fell short of the $8.55 million top prize, his sixth-place finish earned $1.59 million for Begleiter, who was head of corporate strategy at Bear Stearns before it collapsed and was bought by JPMorgan Chase & Co. in 2008. It was his second time playing in the $10,000 buy-in main event. “I had so much good fortune over the course of the tournament, it was hard to complain,” Begleiter said in a telephone interview. “For so many guys, a hand like that happens on Day 1 and you never hear about them. I was fortunate to avoid it.” After 15 hours of play over the weekend, the nine-man final table is down to two: 21-year-old professional poker player Joe Cada, who’s seeking to become the youngest main-event champion, and 46-year-old Darvin Moon, a self-employed logger from Maryland. Cada has $136 million in chips — having recovered from being down to $2 million at one point two days ago — to $59 million held by Moon. The two will go head-to-head for the championship at the Rio All-Suite Hotel and Casino. Play begins at 10 p.m. local time in Las Vegas. Begleiter’s Run Begleiter spent 24 years at Bear Stearns and was a member of the bank’s management and compensation committees. The firm fell apart in March 2008, brought down by excessive leverage and large bets on subprime mortgage bonds. Two months later, Begleiter took winnings from his hometown poker club in Chappaqua, New York, and headed to the World Series of Poker. He lasted three days last year, finishing just outside the money. This year, during eight days in July, he and eight others emerged from the field of 6,494 to reach the final table. He was third in chips among the final nine, with $29.9 million. After 13 hours of play at the final table, he went all-in with his remaining $22 million and the pair of queens. He was beaten when professional gambler Eric Buchman paired the ace in his hand “on the river,” the last of the five cards shared by all players in Texas Hold ‘Em . ‘Wasn’t Meant to Be’ “Going out that way makes it easier,” said Begleiter, who’s now a senior principal at the private-equity firm Flexpoint Ford LLC in New York. “I had to make the play. It wasn’t meant to be. I walk away with my head held high.” Begleiter was supported by members of his Chappaqua poker club who made the trip to Las Vegas and chanted “Begs! Begs! Begs!” whenever he won a big hand. Among those he beat out was professional poker player Phil Ivey, who finished seventh, and he’s already planning on making a return trip in 2010. “I’m going to chase the rainbow for as long as I have my marbles,” Begleiter said. To contact the reporter on this story: Erik Matuszewski in New York at matuszewski@bloomberg.net

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Industrial Output Gain in U.S. Beats Estimates; Consumer Confidence Slips

October 16, 2009

By Shobhana Chandra Oct. 16 (Bloomberg) — Industrial production in the U.S. rose more than anticipated in September, putting manufacturing at the forefront of the emerging economic recovery. The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August and 0.9 percent in July, Federal Reserve figures showed today. Another report showed consumer sentiment dropped more than projected this month. The recent burst of activity on factory floors, spurred in part by a rebound at automakers, will likely give way to more moderate and sustainable gains in coming months as companies rebuild inventories and exports grow. The improvement has yet to generate jobs, one reason consumers remain anxious and underscoring why Fed policy makers say they will keep interest rates low for a long time. “Manufacturing is turning around from deep recession to strong growth in a very short time,” said Dean Maki , chief U.S. economist at Barclays Capital Inc. in New York. “It’s going to be one of the important supports to growth.” The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.4 from 73.5 in September, which was the highest in more than a year, the group reported today. Measures of expectations for six months ahead and current conditions both fell. Stocks Fall Stocks dropped, depressed by disappointing results at General Electric Co. and Bank of America Corp. The Standard & Poor’s 500 Index fell 1.1 percent to 1,084.50 at 12:51 p.m. in New York. Treasury securities rose. Industrial production was forecast to increase 0.2 percent after a previously reported 0.8 percent gain in August, according to the median estimate of 77 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.5 percent to a drop of 0.5 percent. Manufacturing accounts for about 12 percent of the U.S. economy. The jump in production over the past three months was the biggest since late 2005. Capacity use climbed to 70.5 percent last month from 69.9 in August, the report showed. It was estimated to rise to 69.8 percent, according to the Bloomberg survey median. Economists track plant operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher. Factory Production Factory output, which accounts for about four-fifths of industrial production, increased 0.9 percent after a 1.2 percent gain the prior month. Motor vehicle and parts production climbed 8.1 percent following a 6.1 percent increase the prior month. “Cash for clunkers,” which offered incentives of as much as $4,500 for consumers to trade in old cars for more fuel- efficient ones, helped automakers trim stockpiles as sales climbed in July and August. Industry data showed sales plunged in September after the plan expired on Aug. 24. General Motors Co. and Toyota Motor Corp. have predicted sales gains for the fourth quarter. GM on Oct. 7 said it plans to boost output to 655,000 vehicles in North America during this quarter to match increasing demand. The increases in output last month were widespread. Factory production excluding motor vehicles increased 0.5 percent, and the diffusion index gauging the number of categories advancing was 56.9 in September, exceeding the 50 breakeven level for a second month. October Gains Regional reports yesterday showed gains in manufacturing extending into October. The New York Fed’s Empire State index soared to the highest level since mid-2004, while the Philadelphia Fed’s gauge eased off September’s two-year high. Winnebago Industries Inc. , the motor-home maker, yesterday reported a fiscal fourth-quarter loss that was smaller than analysts had estimated. The Forest City, Iowa-based company said it’s seeing a pickup in demand. “Dealer inventory is very close to reaching the bottom, and our dealer partners will need to start to replenish soon to satisfy retail demand going forward,” Chief Executive Officer Bob Olson said in a statement. Inventories at businesses fell 1.5 percent in August, the biggest drop this year, bringing the value of goods on hand down to $1.31 trillion, the least since December 2005, according to Commerce Department data this week. American factories may also get a boost as more than $2 trillion in government stimulus programs worldwide are reviving demand from Asia to Europe. Exports climbed in August for a fourth consecutive month to reach the highest level of the year, according to Commerce Department figures. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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Industrial Production in U.S. Increased More-Than-Forecast 0.7% Last Month

October 16, 2009

By Shobhana Chandra Oct. 16 (Bloomberg) — Industrial production in the U.S. rose more than three times as much as anticipated in September, putting manufacturing at the forefront of the emerging economic recovery. The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August and 0.9 percent in July, Federal Reserve figures showed today. Capacity utilization, which measures the proportion of plants in use, climbed to the highest level in seven months. The recent burst of activity on factory floors, spurred in part by a rebound at automakers, will likely give way to more moderate and sustainable gains in coming months as companies rebuild inventories and exports grow. The improvement has yet to generate jobs, underscoring why Fed policy makers say they will keep interest rates low for a long time. “Manufacturing is turning around from deep recession to strong growth in a very sort time,” said Dean Maki , chief U.S. economist at Barclays Capital Inc. in New York. “It’s going to be one of the important supports to growth.” Industrial production was forecast to increase 0.2 percent after a previously reported 0.8 percent gain in August, according to the median estimate of 77 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.5 percent to a drop of 0.5 percent. Stocks Hold Losses Stocks were down after the report, depressed by disappointing results at General Electric Co. and Bank of America Corp. The Standard & Poor’s 500 Index was down 0.9 percent to 1,087.03 at 9:33 a.m. in New York. Treasury securities rose, pushing the yield on the 10-year note down to 3.42 percent from 3.46 percent late yesterday. Manufacturing accounts for about 12 percent of the U.S. economy. The jump in production over the past three months was the biggest since late 2005. Capacity use climbed to 70.5 percent last month from 69.9 in August, the report showed. It was estimated to rise to 69.8 percent, according to the Bloomberg survey median. Economists track plant operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher. Factory output, which accounts for about four-fifths of industrial production, increased 0.9 percent after a 1.2 percent gain the prior month. Other Components Utility production dropped 0.7 percent and mining output, which includes oil drilling, increased 0.7 percent. Motor vehicle and parts production climbed 8.1 percent following a 6.1 percent increase the prior month. “Cash for clunkers,” which offered incentives of as much as $4,500 for consumers to trade in old cars for more fuel- efficient ones, helped automakers trim stockpiles as sales climbed in July and August. Industry data showed sales plunged in September after the plan expired on Aug. 24. General Motors Co. and Toyota Motor Corp. have predicted sales gains for the fourth quarter. GM on Oct. 7 said it plans to boost output to 655,000 vehicles in North America during this quarter to match increasing demand. The increases in output last month were widespread. Factory production excluding motor vehicles increased 0.5 percent, and the diffusion index gauging the number of categories advancing was 56.9 in September, exceeding the 50 breakeven level for a second month. October Expansion Regional reports yesterday showed gains in manufacturing extending into October. The New York Fed’s Empire State index soared to the highest level since mid-2004, while the Philadelphia Fed’s gauge eased off September’s two-year high. Minutes of the Fed’s September meeting, released this week, showed policy makers believed “overall economic activity was beginning to pick up,” and noted the improvement in factory output, particularly motor vehicle production. Winnebago Industries Inc. , the motor-home maker, yesterday reported a fiscal fourth-quarter loss that was smaller than analysts had estimated. The Forest City, Iowa-based company said it’s seeing a pickup in demand. “Dealer inventory is very close to reaching the bottom, and our dealer partners will need to start to replenish soon to satisfy retail demand going forward,” Chief Executive Officer Bob Olson said in a statement. Fewer Stockpiles Inventories at businesses fell 1.5 percent in August, the biggest drop this year, bringing the value of goods on hand down to $1.31 trillion, the least since December 2005, according to Commerce Department data this week. American factories may also get a boost as more than $2 trillion in government stimulus programs worldwide are reviving demand from Asia to Europe. Exports climbed in August for a fourth consecutive month to reach the highest level of the year, according to Commerce Department figures. Inventories at businesses fell 1.5 percent in August, the biggest drop this year, bringing the value of goods on hand down to $1.31 trillion, the least since December 2005, according to Commerce Department data this week. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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Abramovich, Paltrow Go Browsing as Buyers Haggle at London’s Frieze Fair

October 15, 2009

By Scott Reyburn Oct. 15 (Bloomberg) — Roman Abramovich and Gwyneth Paltrow were among those seen browsing at London’s Frieze Art Fair yesterday as buyers negotiated for discounts from the world’s leading dealers in contemporary art. The Russian billionaire and Hollywood actress separately visited the VIP preview, along with U.S. hedge fund manager David Ganek . A total of 165 gallery owners from 30 countries are hoping that international collectors and curators will lift the mood of uncertainty that has gripped the market since the collapse of Lehman Brothers Holdings Inc. in September 2008. “People are making more considered choices,” said the London-based dealer Stephen Friedman . “They’re buying less, they’re buying better quality and they’re expecting more for their money.” Though buyers had returned, they were taking longer to make decisions and haggling over prices, said dealers. The event, the seventh of its kind, runs through Oct. 18 in a 70,000-square-foot temporary structure in Regent’s Park. It is Europe’s biggest fair devoted to living artists. Demand for contemporary art has fallen over the last year. Volumes of auction sales shrank between 70 percent and 80 percent, and prices of some artists more than halved, said the London-based research company ArtTactic in an e-mail last month. Last year, some Frieze exhibitors reported reduced sales. Twenty-eight galleries that showed at the 2008 event have not come back. For the first time at the fair, Friedman has devoted his booth to a single installation. U.S. artist Jim Hodges’s “the dark gate,” consists of a darkened wooden room with an aperture made of sharpened steel spikes that has been dabbed with a bespoke fragrance. Museum Interest Hodges, 52, currently has an exhibition at the Pompidou Center in Paris. Within a few hours of the opening, the work attracted “serious interest” from a museum, said Friedman. “People want substance now,” Friedman said. “A lot of the energy is focused on artists with established reputations.” Chicago-based Stefan Edlis, Italian Jean Pigozzi and London-based David Roberts were also among collectors spotted during the early hours of the fair. Fashion designers Alexander McQueen and Valentino Garavani were also seen browsing. “Last year was so rough at Frieze,” said the New York- based dealer Marianne Boesky . “Now the feeling is positive. It’s real. There’s no hype or depression. We’re now selling to people who just love art.” Boesky sold 13 of a new series of 15 watercolors by U.S. artist Barnaby Furnas, showing the capture and execution of the Civil War abolitionist, John Brown. The watercolors, painted specially for Frieze by Furnas, 38, sold for prices between $25,000 and $30,000. Frieze Discount “We’ve kept the prices the same for Furnas over the last year,” said Boesky, “though we are offering buyers a 10 percent discount at Frieze.” Several works at the fair attracted multiple reserves as dealers negotiated with collectors at length to make sales. “It’s all about decency of transaction,” said Nicholas Logsdail, director of the London-based Lisson Gallery , which attracted three reserves on a new 4-foot-diameter Anish Kapoor gold mirror sculpture, “Turning the World Upside Down,” priced at 475,000 pounds ($759,000). “We’re waiting to get an agreement from one of the three at a fair price that makes everyone feel good,” said Logsdail. Kapoor, who has a one-man show at the Royal Academy of Arts , is one of the few contemporary artists whose gallery prices have increased over the last year, said Logsdail. “They’ve gone up about 10 percent,” he said. Neon Wall Abramovich was seen at the Lisson booth admiring Jonathan Monk’s 2009 neon wall inscription, “Do not pay more than $20,000,” which will increase in price $10,000 every day as the fair progresses. “We sold it at the opening of the fair for just under $20,000,” said Logsdail. The 7-foot-high painting “Country Produce II” by 35-year- old U.K. artist Nigel Cooke was reserved by two museums at 120,000 pounds at the booth of the London-based dealer Stuart Shave/Modern Art . Cook’s hallucinogenic paintings of gnome-like down-and-outs have been bought by several museums and private collectors such as David Roberts and Dallas-based Howard Rachofsky . “We haven’t increased Cooke’s prices over the last six months,” said Shave, “though museums do get a discount.” Yellow Suit “Everyone’s looking for discounts,” said Philip Hoffman , director of the London-based Fine Art Fund , wearing a bright yellow suit. “Prices aren’t as low as I was expecting, though I looked at one work priced at $1 million and the dealer said make me an offer of $600,000,” said Hoffman. “Prices are lower at this week’s auctions, but that’s not where the better things are.” London-based dealers Hauser & Wirth (who also have a branch in Zurich) sold Ida Applebroog’s 2009 painting “Mona Lisa” for $325,000 and three of the smaller versions of Subodh Gupta’s life-size bronze sculpture based on Marcel Duchamp’s mustachioed Mona Lisa, “L.H.O.O.Q.,” for 120,000 euros each. All three full-size versions of the Leonardo-inspired Gupta sculpture, on show at the company’s Old Bond Street gallery priced at 900,000 euros, have found buyers, said gallery founder Iwan Wirth . “People have stepped up for good things,” said Wirth. White Cube sold at least eight works during the first four hours of the fair, said gallery sales executive Graham Steele. One of six versions of Andreas Gursky’s 2007 photograph of medieval stained glass, “Kathedral I,” sold for $750,000. There were two reserves on Damien Hirst’s 2008 stainless steel cabinet filled with surgical instruments, “Night of the Long Knives,” priced at about $5 million, said Steele. “People want to see what’s available,” said the London- based adviser Tania Buckrell Pos , head of Arts & Management International . “Prices are particularly good now, and there’s no urgency,” said Pos. “Buyers have definitive numbers in their heads.” ( Scott Reyburn writes about the art market for Bloomberg News. Opinions expressed are his own.) To contact the writer on the story: Scott Reyburn in London at sreyburn@hotmail.com .

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Steve Parker: Ford recall now totals over 16 million for same problem

October 14, 2009

Amazingly, a serious safety problem which has plagued Ford vehicles for well over a decade has arisen again, this time involving 4.5 million vehicles, meaning a total of at least 16 million cars and trucks have been recalled over the years for this one specific problem. Stop me if you’ve heard this one before, but the recall is because of leaky cruise control switches that have been reported to cause vehicle fires. In addition, leaks from the cruise control switches into the anti-lock brake system have been determined to be a fire danger. Ford said in an Oct. 9 letter to U.S. regulators that Windstar minivans from 1995 to 2003 will be recalled for repairs following “a small number of reports” of switch fires. The Associated Press put the number of affected Windstars alone at 1.1 million. Ford Crown Victoria The letter, posted today by the National Highway Traffic Safety Administration, also said Ford would recall another 3.4 million vehicles with the cruise-control deactivation switch, according to the AP. The vehicles that “don’t seem to pose a safety risk,” according to the letter, are mostly pickups and SUVs, including the Excursion (diesel), F-Super Duty (diesel), Econoline, Explorer/Mountaineer, Ranger, and F53 Motorhome vehicles from model years 1992 to 2003. But that doesn’t mean you shouldn’t check the NHTSA.gov website and/or call your dealer to find out if your vehicle is involved. The switches, made by Texas Instruments, may leak internally and “overheat, smoke or burn,” the Ford letter said. In some Windstars, the switches may leak brake fluid into the anti-lock brake system, which also has led to reports of fires. Owners will be instructed to bring their vehicles to a Ford or Lincoln/Mercury dealer for installation of a fused wiring harness to eliminate the potential risk of fire. Ford plans to notify dealers this week and send notification letters to owners starting Oct. 26. Ford Explorer The cruise control problem first emerged in 1998, when the government investigated complaints of engine compartment fires. A year later, Ford recalled about 279,000 Ford Crown Victoria, Mercury Grand Marquis and Lincoln Town Car sedans built for the 1992 and 1993 model years, to replace cruise control switches. And yes, those recalls wreaked havoc with police fleets around the country which favor the Crown Vics. More complaints and investigations led to five more recalls in 2005, 2006 and 2007. Those recalls totaled more than 10 million cars and trucks built for the 1992-2004 model years. In 2008, 225,000 of the vehicles were recalled again, to redo the initial repair. F-series Super Duty The safety agency warned consumers to look out for warning signs including cruise control systems that stop working or can’t be activated, brake lights that stop working, and brake lights and ABS warning lights illuminating on the dash board. Before the cruise control issue escalated, Ford’s 1996 recall of 7.9 million vehicles for an ignition malfunction ranked as the industry’s biggest, according to NHTSA figures. Automotive News and the Associated Press contributed to this story.

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Fed Said to Consider Clearing Banks, Facility to Drain Reserves With Repos

October 9, 2009

By Liz Capo McCormick and Craig Torres Oct. 9 (Bloomberg) — The Federal Reserve is considering accessing money market funds through clearing banks or creating a facility to drain the record amount of cash added to the financial system, according to people familiar with the plans. Those methods may help conserve the capital of the 18 primary dealers that act as counterparties for open market transactions as the Fed removes some of the more than $1 trillion the central bank pumped the economy, said the people, who declined to be identified because no decision has been made. Dealers would face constraints on capital if they were the sole counterparties on all the so-called reverse repurchase transactions while they’re still repairing balance sheets after booking losses and writedowns in the aftermath of the worst financial crisis since the Great Depression. In a reverse repo, the Fed sells securities for a set period, temporarily decreasing the amount of money available in the banking system. “One of the goals could be that the Fed is trying to distribute paper without encumbering dealers’ balance sheets while utilizing existing distribution channels” to expand the transactions to money markets, said George Goncalves, chief fixed-income rates strategist in New York at primary dealer Cantor Fitzgerald LP. Discussions on how to access a broader array of counterparties other than primary dealers are still developing, said one of the people with knowledge of the situation. Deborah Kilroe , a spokeswoman for the New York Fed, declined to comment. Needed Securities The Fed, after purchasing about $1.33 trillion in mortgage, government-housing agency and Treasury debt, would also be supplying short-term assets to the money markets at a time when corporate issuance has declined and following the expiration last month of a federal guarantee on money funds. Fed Chairman Ben S. Bernanke and fellow policy makers face the challenge of decreasing the cash without stunting the economy’s recovery and before it sparks inflation. The central bank’s balance sheet surged by $1.16 trillion in the 12 month period ending August, according to Fed data. Central bank officials have started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system through the use of reverse repos agreements, people familiar with the discussions said last month. At maturity, the securities, usually Treasury, mortgage- backed and agency debt, are returned to the Fed, and the cash to the dealers. Tri-Party Market The value of the transaction is listed as an asset on the dealer’s balance sheet, and stays there even if a dealer uses the so-called tri-party market to enter into an agreement with another firm for the security, reducing the amount of capital that can be allocated for other investments. In a tri-party arrangement, a third party known as a clearing bank functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. , both based in New York, are the only banks that serve in a trade-clearing capacity in the tri-party repo market. When dealers use repos to borrow money from institutional investors, it is through tri-party repo. “The Fed has used reverse repos with dealers in the past but it has never been on the scale that is being talked about here,” said Alex Roever , head of short-term debt strategy at primary dealer JPMorgan in New York. “Operationally, it would be much easier to use the primary dealers to arrange reverse repo with money funds, but capital considerations interfere here.” ‘Range’ of Counterparties Bernanke told Congress in July that the Fed may step beyond primary dealers and conduct the reverse repurchase agreements government-sponsored enterprises or a “range of other counterparties.” Fed Vice Chairman Donald Kohn said Sept. 30 that “draining reserves at some point also will be an aspect of exiting.” He added, in remarks at a conference sponsored by the Cato Institute and the Shadow Open Market Committee in Washington, that “we are developing new techniques for draining reserves, including reverse-repurchase agreements against mortgage-backed securities and time deposits for banks at the Federal Reserve.” The Fed created 10 emergency programs to support the financial markets since the collapse of the subprime mortgage market triggered a global credit squeeze, including the Term Asset-Backed Securities Loan Facility, or TALF, where investors receive loans from the Fed to buy asset-backed securities. “If we were to get additional supply from the Fed, that just adds to what’s been a dearth in supply and would be very much welcome,” said Debbie Cunningham, head of taxable money market funds at Pittsburgh-based Federated Investors Inc., the third-biggest manager of U.S. money funds. “The market has shrunk a lot for acceptable securities for purchase in money market land.” Commercial Paper Decline The amount of commercial paper outstanding has decreased 32 percent to $1.23 trillion since the collapse of Lehman Brothers Holdings Inc. in September 2008, Fed data shows. Commercial paper, used by companies to pay everyday expenses such as payroll and rent, typically matures in 270 days or less. The Treasury ended its insurance program for money market mutual funds on Sept. 18. The program was started last year as the credit market froze following the Sept. 16 collapse of the $62.5 billion Reserve Primary Fund, which lost money on debt issued by Lehman. The fund’s demise triggered a run on the industry. “A program that enables money market funds to aid the Federal Reserve is an intriguing idea,” said David Glocke, head of taxable money market investments at Vanguard Group Inc. in Valley Forge, Pennsylvania. “The Fed is a no-risk counterparty, and such a program could provide support for short-term yields.” Rate Outlook Central bankers are unlikely to drain cash out of the banking system until at least late 2010, said Ira Jersey , head of U.S. interest-rate strategy in New York at primary dealer RBC Capital Markets. The median forecast of 57 economists surveyed by Bloomberg News from Sept. 3 to Sept. 9 is for the first Fed rate increase to take place in the third quarter of 2010. “The Fed has many options available to change the composition of their liabilities and reduce the monetary base, with reverse repos being only one,” said Jersey. “The Fed may need alternative sources to drain liquidity.” —With assistance from Christopher Condon in Boston and Rebecca Christie in Washington. Editors: Dave Liedtka, Robert Burgess To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net

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Steve Parker: Biggest-ever Toyota Recall Announced; 3.8 Million Cars and Trucks

September 29, 2009

Toyota has announced the largest recall of vehicles in its US history. According to the Associated Press, “Toyota says it will recall 3.8 million vehicles in the United States to address problems with a removable floor mat that could interfere with the vehicle’s accelerator and cause a crash. The company says it will be the largest recall in its history. Owners could learn about the safety campaign as early as next week. 2004 Prius Toyota and the government warned owners of Toyota and Lexus vehicles about safety problems tied to the removable floor mats. They say the mats could interfere with the vehicle’s accelerator and cause a crash. The recall will affect 2007-2010 model year Toyota Camry, 2005-2010 Toyota Avalon, 2004-2009 Toyota Prius, 2005-2010 Tacoma, 2007-2010 Toyota Tundra, 2007-2010 Lexus ES350 and 2006-2010 Lexus IS250 and IS350. Owners should take out the floor mats on the driver’s side and not replace them. When Toyota develops a “fix” for the problem, the affected cars and trucks will be recalled to dealerships for replacement or retrofitted floor mats. Toyota’s previously largest recall was about 900,000 vehicles in 2005 to fix a steering issue.” (end AP quote) Lexus IS250 at the 2008 Paris Auto Show Automotive News also reported: “NHTSA said it issued the warning because of continued reports of vehicles accelerating rapidly after drivers released the accelerator. “This is an urgent matter,” U.S. Transportation Secretary Ray LaHood said in the statement. “We strongly urge owners of these vehicles to remove mats or other obstacles that could lead to unintended acceleration.” The reported acceleration problems appeared to be related to with unsecured mats, the configuration of the accelerator pedal and the process for shutting off engines in some vehicles that have keyless ignitions. Toyota recalled in September 2007 an all-weather floor mat from some 2007 and 2008 Lexus ES 350 and Toyota Camry vehicles because of similar problems, NHTSA said.” (end Automotive News quote) The Los Angeles Times reported: “Last month, a San Diego man and three passengers were killed in a high-speed crash that the driver, in a call to 911 prior to the accident, said was being caused by a floor mat wedged into the accelerator. “A stuck open accelerator pedal may result in very high vehicle speeds and make it difficult to stop the vehicle, which could cause a crash, serious injury or death,” the company said in a statement. Toyota said the vehicles would be recalled once it develops a remedy to the problem. Until then, the automaker said owners of the affected vehicles should take out any removable driver’s side floor mats and not replace them with any other floor mat.” (end LA Times quoute) It’s not clear when Toyota and Lexus dealers will replace or retrofit the removed floor mats. Lexus RX This recall comes on the heels of another large Toyota recall announced last month, when the company launched a voluntary Safety Recall with the National Highway Traffic Safety Administration (NHTSA) involving approximately 95,700 Toyota and Scion vehicles sold in the United State for a problem affecting vehicles in cold-weather parts of the country which could cause increased braking distances. Recalls are the bane of all carmakers; they are embarrassing, expensive and often remain in the public’s consciousness for a long time. In a recall done in concert with or at the order of the government, all owners of the affected vehicles must be contacted by the carmaker, an expensive proposition in itself, and all repair work must be done by authorized dealers at no cost whatsoever to the consumer. Carmakers often issue “TSBs” or Technical Service Bulletins to their dealer repair departments which list defects the manufacturer has found with vehicles, but which have not risen, at that point, to the level of necessitating an official recall. 2007 Toyota Camry These TSBs are sometimes called “secret recalls” because the manufacturer does not have to make the information available to all affected vehicle owners nor fix the problem for free when a vehicle with the problem comes in for service. Owners usually don’t know about these TSBs and the carmaker does not have to contact owners with TSB information. If an owner does not report the specific problem described in the TSB when bringing a vehicle in for service, the dealer does not have to inform the owner or make that specific repair. This floor mat recall is a bit unusual because owners are being asked to “make a fix” right away and on their own; this tell us the government considers the problem an immediate and important safety risk. Toyota and Lexus will recall the affected vehicles to dealers when a full repair is developed. In most instances of recalls, we recommend calling an authorized dealer to check on whether or not your car is part of the recall, and, if it is, to make an appointment with the dealer so the bug can be fixed in reasonably fast time. As with all recalls, the vehicle owner pays nothing for the service performed by the dealer and the dealer can not ask for any payment. Full recall and TSB information for all cars and trucks sold in the US is available at the National Highway Traffic Safety Administration’s website, www.NHTSA.gov.

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Obama Administration To Triple Workers In Cash For Clunkers: AP

August 17, 2009

WASHINGTON — The Obama administration is tripling the number of workers processing Cash for Clunkers transactions as some dealers complain the government has been slow to reimburse them for the car incentives of up to $4,500 per vehicle. An administration official said Monday the Transportation Department hoped to have 1,100 public and private sector workers processing the vouchers by the end of the week, up from a work force of about 350 through the end of last week. Employees at a department service center in Oklahoma City have taken the lead in processing the vouchers, the official said, and workers have responded to calls for voluntary overtime to process the forms. The official was not authorized to discuss the work force issues publicly and spoke on the condition of anonymity. Dealers have reported submitting tens of thousands of dollars – in some cases more – worth of rebates to the federal government for repayment that are still outstanding. Many report they have been repaid for only a small fraction of the deals they made under the program, creating strain on cash flows at dealers nationwide. Rick DeSilva, who owns Hyundai and Subaru dealerships in northern New Jersey, said an inspector from the National Highway Traffic Safety Administration, which is overseeing the program, visited his offices Monday to review his dealerships’ paperwork. Until now, none of the 70 Cash for Clunkers deals DeSilva made have been reimbursed. “Every car that goes out, you are $4,000 behind the 8-ball,” said DeSilva, who is still owed about $280,000. The National Automobile Dealers Association applauded the boost in staff reviewing the dealer claims. “Anything that will speed up the dealer reimbursement process is welcome news,” NADA spokesman Charles Cyrill said. The government said Monday that dealers have submitted requests for rebates that total $1.6 billion – more than half of the money provided to the program – through the online system set up to process and pay the claims. The program has led to more than 390,000 vehicle sales. Rep. Joe Sestak, D-Pa., who is challenging Pennsylvania Sen. Arlen Specter in the state’s Democratic primary, urged President Barack Obama to increase staffing levels in a letter Sunday. Sestak wrote that many dealers face a loss on each transaction until the government reimburses them. “Carrying a loss for an extended period will put them out of business – meaning more lost jobs,” Sestak wrote. With the increased staffing, the government’s work force is much larger than originally anticipated. A week before Cash for Clunkers formally began July 27, NHTSA estimated it would need just 30 new hires and 200 contractor workers to handle the program over a six month period, according to the guidelines drafted by the agency. But dealers flooded the online reimbursement system shortly after the program began, overwhelming the computer system and staff set up to process the deals. That led to big delays for dealers trying to file the paperwork they needed to get paid back for the rebates. Under the program, car buyers are eligible for vouchers of $3,500 or $4,500 depending on the fuel efficiency of the vehicles they trade in and buy. Dealers subtract the rebate from the sales price, and then submit paperwork to the government certifying the sale with the assurance that the trade-in will be scrapped. NHTSA has told dealers they can expect to wait 10 days to be repaid if their paperwork is in order and the deal is approved. But if there is a problem, dealers must resubmit their claim, leading to another potential waiting period. Dealers typically borrow money to put new cars on their lots and must repay lenders within a few days of a sale. Government officials have said some of the submitted paperwork has been incomplete or inaccurate, leading to delays.

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Car Buyers Warned by U.S. Not to Sign Contingency Agreements With Dealers

August 13, 2009

By Jeff Plungis Aug. 13 (Bloomberg) — The U.S. Department of Transportation is advising consumers taking advantage of the “Cash for Clunkers” program not to sign contingency agreements promising to pay back up to $4,500 if dealers don’t receive payment from the government. No contingency agreement is required to participate in the $3 billion program, the Transportation Department said on its Web site . The Minnesota Automobile Dealers Association has a form on its Web site that members can use as part of a new-car closing. By signing the form, the buyer agrees to reimburse the dealership the incentive amount if the dealer is unable to obtain the credit from the government “for any reason.” The consumer can also return the car to the dealership and pay “a reasonable charge” for use of the new vehicle. Consumers signing the form also acknowledge their trade-in vehicle may have been destroyed and can’t be returned. Auto dealers promoting the clunkers rebate program are improperly threatening consumers with repossessing their new cars or reporting them stolen, two California consumer groups are expected to say at a news conference later today. The clunkers program is intended to spur new car sales and help revive the ailing auto industry. The program’s initial $1 billion was exhausted about a week after it formally began. Lawmakers had expected the program to generate about 250,000 vehicle sales and to have enough money to last until about Nov. 1. To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net .

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Taxpayers Lose as Flippers Profit in New Municipal Bonds: Chart of the Day

August 10, 2009

By Joe Mysak Aug. 10 (Bloomberg) — Almost all secondary market sales of new municipal issues occur within the first 30 days of pricing, with a network of buyers reselling the bonds to make quick profits getting them into the hands of individual investors. The CHART OF THE DAY, taken from the Municipal Securities Rulemaking Board’s 2008 Fact Book, depicts this pattern of new municipal bond trades. Underwriters sell the bonds in large blocks or amounts to so-called favored institutional investors, such as mutual funds, who in turn sell them to other buyers, who sell them to individuals, the “retail” crowd. Traders, money managers, bond issuers and the former head of the Municipal Securities Rulemaking Board have all commented on how intermediate buyers profit by marking up bonds and reselling, or “flipping” them to individuals. Municipal bonds are not well-placed to final investors by this system, said Christopher “Kit” Taylor , who for almost 30 years was executive director of the MSRB , the market’s self- regulatory organization. “There is an unhealthy relationship between the bond funds and the dealer community,” said Taylor, now a consultant based in Alexandria, Virginia. “I have long suspected that dealers throw money at the funds by selling them new-issue securities in blocks and then slowly buying them back at up-prices for sale to retail.” James C. Cusser , a former portfolio manager and municipal bond analyst for 30 years, who recently completed his masters degree in education at Harvard University, observed, “The biggest/best buyers take advantage of the nature of the illiquid muni market with the help of their best friends in the world.” The same happens in the taxable bond market, Cusser, previously a fund manager at Waddell & Reed Inc., in Overland Park, Kansas, said. “But the price differences are slimmer and the potential profit is less certain.” To contact the reporter on this story: Joe Mysak in New York at jmysakjr@bloomberg.net .

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Commercial Property Lending Gets Jumpstart With $3 Billion in TALF Deals

July 29, 2009

By Hui-yong Yu and Sarah Mulholland July 29 (Bloomberg) — Commercial property companies may sell about $3 billion of mortgage-backed bonds starting in September as part of the government’s program to revive lending for shopping malls, skyscrapers and hotels. More than a dozen real estate investment trusts are likely to participate in the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, said Steven Wechsler , chief executive officer of the National Association of Real Estate Investment Trusts

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Nomura Securities Is Named Primary Dealer by Fed in Year’s Third Addition

July 27, 2009

By Daniel Kruger July 27 (Bloomberg) — The Federal Reserve Bank of New York named Nomura Securities International a primary dealer, making it the third firm to join the network of securities firms that underwrite the government’s debt this year, the most since 1988.

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Cash for Clunkers Success May Depend on Buyers’ Auto Negotiation Skills

July 22, 2009

By Jeff Plungis July 22 (Bloomberg) — President Barack Obama ’s “cash-for- clunkers” program expected to begin July 24 to jump-start new- car sales may depend as much on consumers’ negotiating skills as meeting the rules to qualify for a rebate. The initiative gives consumers a $3,500 or $4,500 credit at an auto dealership toward the purchase of a new vehicle when they turn in a low-gas mileage vehicle to be scrapped. The program is intended to replace older cars and trucks with newer, greener models, and the trade-in vehicle has to meet minimum requirements, including not being more than 25 years old and its replacement can’t cost more than $45,000

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Obama Auto Task Force Comes Out Against Dealer Plan

July 21, 2009

WASHINGTON (AP) — The Obama administration urged Congress Tuesday not to intervene in the closings of hundreds of General Motors and Chrysler dealerships, warning it could undermine the U.S. automakers’ ability to rebound. Ron Bloom, the leader of the White House’s auto task force, told a House Judiciary subcommittee that a plan approved by the House to restore dealerships would set a “dangerous precedent” and could jeopardize the taxpayers’ recovery of billions in federal aid to GM and Chrysler as they emerge from bankruptcy. “By all measures, these companies had far too many dealers relative to the number of cars they were selling,” said Bloom, who told skeptical lawmakers that the average Toyota dealer sells four times as many vehicles as an average Chevrolet dealer.

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