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‘NO MORE DEBT’: Municipal Bond Issuance Down By Half This Year

by on June 3, 2011

Huffington Post…

NEW YORK — As cities and states struggle with historic budget shortfalls, governments have put one item squarely in the cross-hairs: their debt. Restricting the debt burden has proven to be a politically feasible way for a local government to address its larger fiscal problems — or at least to give the impression it’s doing so. While local politicians clash over pension reform, tax increases and other divisive issues, debt-reduction has emerged as a relatively popular measure. Issuance of long-term municipal bonds dropped by 51 percent during the first five months of the year, compared to the same period a year ago, the Bond Buyer reported, citing data from Thomson Reuters. Limiting bond sales constricts governments’ ability to pave roads, repair bridges and build hospitals and parks. And while the budget relief won from this austerity isn’t large, even for the governments that pay the most interest to bondholders, it sends a message to taxpayers and investors that a government is at least attempting to get its house in order. “I just don’t think people are in the mood to have governments issuing debt at this time, when they’re making service cuts,” said Howard Cure, director of municipal research at Evercore Wealth Management. “The optics of issuing debt,” he said, do not “play very well.” The first five months of the year saw about $83.7 billion of new municipal debt, less than half of the $170 billion that came to market during the same period last year, the Bond Buyer noted, adding that the volume so far this year is the lowest it’s been since 2000. This restricted supply has helped boost the value of bonds. It’s been a difficult several months for municipal bonds, as predictions of widespread defaults have roiled markets, and investors have steadily pulled money from municipal mutual funds. But limited issuance has helped curb adverse effects, the Wall Street Journal reported last month. Municipal yields have fallen this year as the value of bonds has risen, making it cheaper for governments borrow money. The difference, or spread, between yields on an index of municipal bonds and equivalent Treasury bonds was 0.85 of a percentage point at Thursday’s close, down from a January high of 1.04 percentage points, data from Bloomberg show. The states with the most bond issuance saw dramatic year-over-year drops. Issuance in New York, California and Illinois — the top three states for issuance this year and last — dropped, respectively, 38 percent, 70 percent and 48 percent, the Bond Buyer noted. In Illinois, the state legislature voted down a sale of more than $6 billion in bonds on Sunday, and there’s no new bond issuance planned for the coming fiscal year, said Illinois Treasury spokesman Matt Butterfield. For the state that bears the second-lowest credit rating of all 50 states from Standard & Poor’s, borrowing is costly. “Any bonding that is not done here, it’s because it’s expensive,” Butterfield said. “We’re paying a premium because of the credit rating we’re suffering from.” In Illinois, as elsewhere, debt has been painted as an enemy. “Some policy makers want to continue to spend more dollars than the state brings in. Some are advocating long-term, significant borrowing which will spread the state’s challenges into the future. I respectfully disagree,” Illinois Treasurer Dan Rutherford said in a recent release entitled “NO MORE DEBT.” In California, the strategy is similar. S&P has given California the single lowest rating of all 50 states, prompting investors to demand higher yield from the state and also from its local governments. No bonds have been sold at the state level so far this year, when typically there would have been a spring sale, said Tom Dresslar, a California Treasury spokesman. As a portion of the budget, debt payments are dwarfed by spending on services such as education, corrections and health care. But debt has nevertheless been targeted for reduction. “It’s not the biggest by any means, but it’s been growing,” Dresslar said. “Every dollar that you have to pay in debt service is a dollar that you cannot spend on schools, public safety, health care — the whole gamut of public services.” Yields on the state’s debt have indeed fallen. As of May 27, California’s 10-year paper was yielding 3.60 percent in the secondary market, compared to 4.01 percent that time last year, according to data provided by the state Treasury. Restricting bond issuance, though, limits a government’s ability to spend. California will not be able to start some new infrastructure projects it had planned for this year, Dresslar said. But as long as the state sells bonds this fall, the projects that are already in the works will be funded, and new ones will eventually commence, he added. “Whenever you defer capital improvements you’re going to have a bigger problem later on,” said Cure, of Evercore. “Inevitably [bond] issuance will bounce back because infrastructure is in bad shape in this country, but right now the more immediate issue is balancing the budget.”

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‘NO MORE DEBT’: Municipal Bond Issuance Down By Half This Year

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Bryce Covert: Debt Collection Agencies Gone Wild

by on June 2, 2011

Huffington Post…

As Elizabeth Warren says , “Nothing will ever replace the role of personal responsibility.” Just as the FDA doesn’t prevent overdoses, the point of consumer protection regulations isn’t to come to the rescue of people who simply don’t want to pay back the money they owe. But debt collection agencies have started using outrageous tactics to get payments on debt. These companies buy up bad debt from lenders — credit card companies, phone companies, health care providers, you name it — for cheap and then hunt down the money owed in order to turn a profit. And in doing so, some act more like organized crime than private businesses. They harass consumers with threats and obscenities. Complaints about debt collectors filed with the Federal Trade Commission, the agency tasked with regulating these operations, rose by about 17% in 2010, which is nearly three times the number of complaints filed in 2002. They account for 27% of all those lodged with the FTC. And of the 54,147 consumers complaining to state level authorities in South Carolina, 4,182 said debt collectors had threatened violence. In 2005, 8,000 consumers told the FTC that debt collectors had used obscene or profane language, according to ” Up To Our Eyeballs .” But it’s not always just about outright harassment. It’s also a mind game. A former debt collector has anonymously blogged about some of the tactics he used, describing how he would “sound educated enough to perform some sort of legal action” by dropping four important phrases: office, file, client, and flat refusal to pay. This careful use of language was often enough to scare consumers into coughing up some money. Debt collectors put people in jail . The Minneapolis StarTribune reported that “the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009.” The Wall Street Journal found similar numbers: More than a third of all U.S. states allow borrowers who can’t or won’t pay to be jailed. Judges have signed off on more than 5,000 such warrants since the start of 2010 in nine counties with a total population of 13.6 million people, according to a tally by The Wall Street Journal of filings in those counties. This has resulted in people being jailed for owing as little as $85, while the rising number of cases has clogged law enforcement computer systems, making it harder for police to work on hard crimes. And in a sign of the times, debt collection agencies have started using social media as a weapon. One man reported that he checked in at a restaurant on foursquare, tipping the debt collectors off to his location, and they repossessed his car while he ate. They also sign up for accounts on Facebook and friend debtors — and while Brad Klein, president of the Arizona Collector’s Association, points out that they can’t misrepresent themselves or send messages or comments without violating laws, they use it to find phone numbers and home addresses. Meanwhile, they can send emails without violating the Fair Debt Collection Practices Act . Why is the industry deploying such aggressive, quasi-legal tactics to hunt down debt? Because it’s a very lucrative business. The industry as a whole made $11.7 billion in revenue last year. Portfolio Recovery Associates, a debt buyer, alone made $44 million on $281 million in revenue, a 16% net margin. This is because that company pays about 2.5 cents for every dollar of bad debt it purchases, but it makes back about 7.5 cents. That profit has jumped from $402,000 in 1998, mostly because so many more lenders are selling bad debt in order to write it off. Even the business community sees this as a golden opportunity: in the third quarter of 2005, private equity firms and venture capitalists invested $1.6 billion in it. Those who take out loans and lines of credit are responsible for paying back what they owe. But the debt collection industry has run amok in the practices it deploys to get repaid. We need some cops on the beat to rein them in. Cross-posted from New Deal 2.0 .

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Bryce Covert: Debt Collection Agencies Gone Wild

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Stock Tumble Amid Fears Of A Stagnating Recovery

June 1, 2011

Boom goes the recovery. On Wednesday, U.S. stocks tumbled roughly two percent, bringing the Dow Jones Industrial Average down by 2.2 percent, or nearly 280 points below its starting day position, and the S&P down by 2.3 percent, or 30.6 points, according to CNBC . The Dow and S&P haven’t experienced a drop that large since August of last year. The stock market drop came on the same day ADP Employers Services, a payrolls processor, released their May jobs report , which estimated that the U.S. added only 38,000 private-sector jobs in May, compared to the 180,000 expected by most analysts. Combined with the troubling housing market, the numbers look troubling for long-term economic growth prospects in the U.S, according to chief economist for Capital Economics Paul Ashworth . “It looks like this recovery has hit a second ‘soft patch,’ which for a recovery that is less than two years old is troubling,” Ashworth said, according to Forbes . JPMorgan , in its second revision to its forecasts of the U.S. economy in as many weeks, downgraded its economic growth forecast for the second quarter of the year, the Wall Street Journal reports. Both JPMorgan and Bank of American saw their stock prices fall 3.42 percent and 4.26 percent, respectively, according to CNBC . It’s unclear exactly what led to such the private-sector hiring snag in May, but in Forbes , chief U.S. economist for High Frequency Economics Ian Shepherdson says to look at energy prices. “As far as we can tell, employers have hugely overreacted to the surge in oil prices, which has slowed but not killed consumption,” Shepherdson said. Declining stock prices can also be attributed in part to car sales taking a hit and growth in the manufacturing sector slowing to a pace not seen in 20 months. Treasury bonds fell to their lowest yield since last December, WSJ reports.

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IMF Braces For Possible Hack Attack

June 1, 2011

The International Monetary Fund is ready to be hacked. According to the Wall Street Journal , an IMF spokesperson confirms that it is taking measures to safeguard against a possible hack attack from cybervigilante group Anonymous. “We are aware of the threat, and have taken appropriate action,” an IMF spokesman told the WSJ. Anonymous posted a tweet on Wednesday urging followers to set their sights on the IMF website. “#OperationGreece: Target: http://www.imf.org,” the tweet read. The time of the attack is still ” TBA .” IMF, currently in negotiations to help stabilize Greece’s suffering economy, recently approved a $40 billion dollar loan as a part of a $140 billion bailout package. Anonymous released a missive on May 25 condemning the Greek Government and the IMF for accepting the loan without letting citizens vote on the agreement, and for subjecting the people of the country to “prolonged poverty and a dramatic decrease in their standards of living.” “The people of Greece have been left with no other option than to take to the streets in a peaceful revolution against the economic tyrants that are the IMF,” Anonymous wrote.

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Randal O’Toole: Transportation: From the Top Down or Bottom Up?

May 25, 2011

Should transportation be funded and planned from the top down or bottom up? Top-down advocates, such as the Brookings Institution’s Robert Puentes (writing in the May 23 , 2011 Wall Street Journal ) argue that only central planners can have a “clear-cut vision for transportation” that will allow them to target spending “to make sure all those billions of dollars help achieve our economic and environmental goals.” Advocates of bottom-up funding, such as the Cato Institute , Reason Foundation and Heritage Foundation , respond that public and private transportation providers better serve our needs when they are responsive to the fees people pay for various forms of transportation. In fact, most of the problems with transportation today, from an antiquated air-traffic control system to deteriorating bridges to empty transit buses, are due to top-down planning. Fifty years ago, America’s transportation system was almost entirely funded from the bottom up. Airlines, railroads and most transit systems were private and funded out of fares and fees. Airports and highways were public but funded out of user fees such as ticket fees and gas taxes; highway managers knew bridges to nowhere would not generate any fees, so they had no incentive to waste money on unnecessary projects. Transportation deregulation in the late 1970s and early 1980s further improved this system by making airlines, freight railroads and, most recently, intercity buses more innovative and responsive to user needs. The bottom-up paradigm began to break down in 1964, when Congress started funding urban transit. In 1973, Congress allowed cities to use federal gas taxes for transit projects for the first time, and in 1982 Congress dedicated a share of those gas taxes — initially 11.1 percent, now 15.5 percent — to transit. By the 1990s, the whole idea of a user-fee-driven system was forgotten as Congress used transportation earmarks, which didn’t exist before 1982, to divert billions of dollars of gas taxes to politically favored projects — which often had nothing to do with transportation — and dedicated increasing shares of the remainder to non-highway programs. The results of this increasingly top-down system have been huge increases in congestion and massive waste as cities and states today focus scarce transportation funds on urban monuments rather than improvements aimed at increasing mobility. According to the Texas Transportation Institute , congestion today costs the average commuter five times as much as it did in 1982, the year Congress first dedicated gas taxes to transit. Motivated by a “we-know-better-than-you” mentality, growing numbers of cities are just letting congestion get worse in the hope that a few people will stop driving their cars. Rather than relieving congestion, the mantra is giving people “transportation choices” in the form of expensive rail transit. Central planners’ fascination with trains is a wonder to behold. A group called Reconnecting America laments that only 14 million American jobs — about 10 percent — are located within a quarter mile of transit, by which they mean rail transit. The group advocates spending a quarter of a trillion dollars to increase this to 17.5 million jobs, or 12.5 percent. Simply putting transit close to jobs, however, doesn’t mean people will ride it. The Brookings Institution recently ranked San Jose as the second-most transit-accessible urban area in America, while Chicago was ranked 46th. Yet the Census Bureau says only 3.4 percent of San Jose commuters use transit, compared with 13.2 percent in Chicago. Since 1970, taxpayers have spent some $500 billion subsidizing transit, including building rail transit lines in more than twenty different urban areas. Yet the number of transit trips taken by the average urban resident has remained virtually unchanged even as per capita urban driving has more than doubled. No matter how well intentioned, top-down transportation planning quickly turns into a combination of social engineering and pork barrel. It is time to return to a bottom-up funding system that rewards transport agencies and companies for reducing costs and increasing mobility. One way would be to have states take over federal gas taxes as proposed by New Jersey Representative Scott Garrett. To the extent that the federal government distributes any transportation funds to states at all, it should use formulas, not grants, because formulas are much harder to politically manipulate. Ideally, the formulas should give heavy weight to the user fees collected by each state to reinforce, rather than distract from, the bottom-up process. Top-down planners waste tens of billions of dollars a year on barely used transportation projects that do little to relieve congestion, save energy or reduce auto emissions. A bottom-up, user-fee-funded transportation system will save taxpayers money and increase mobility, which should be the real goals of any transportation policy. Randal O’Toole ( rot@cato.org ) is a senior fellow with the Cato Institute and author of Gridlock : Why We’re Stuck in Traffic and What to Do About It.

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Robert Scheer: Access Journalism: The Movie

May 25, 2011

It is not true, as a Wall Street Journal reviewer claimed, that the HBO movie version of Andrew Sorkin’s book Too Big to Fail was “Too Boring to Watch.” On the contrary, the problem with the film, featuring excellent acting and taut direction, as with the richly anecdotal book, is that it is all too effectively misleading. Fortunately, if viewers have already watched Inside Job , the spot-on Academy Award winner, they will not be led too far astray by this film’s adulation of the likes of Henry Paulson and Timothy Geithner. Paulson is portrayed as an eminently decent man, troubled by the imperfections of the TARP bailout, and when he throws up off camera in one scene it is not at all suggested that perhaps he could be disgusted that the misery he brought to the world had left him a billionaire. When he resigned his position as head of Goldman Sachs to become treasury secretary, he cashed in $485 million in Goldman stock and was saved from a $100 million tax liability because he was entering government “service.” The film barely mentioned that Paulson was the head of Goldman Sachs when his company deceptively packaged and sold the collateralized debt obligations (CDOs) based on the subprime and Alt A mortgages that proved so toxic. As Paulson concedes in his memoir, after George W. Bush appointed him treasury secretary, the president asked plaintively as the economy was crumbling: “How did this happen?” In Sorkin’s book, it is stated that the treasurer “disregarded the question, knowing that the answer would be way too long.” But in his memoir, Paulson provides a clearer insight: “It was a humbling question for someone from the financial sector to be asked — after all, we were the ones responsible.” No such honesty has yet emerged from Geithner, who was an undersecretary of the treasury during the Clinton years, when he worked closely with his bosses, first Robert Rubin and then Lawrence Summers, to pass the radical deregulation hinted at but never fully explained in either the Sorkin book or the film. There is scant reference to the obliteration of the Glass-Steagall Act, a repeal that permitted the too-big-to-fail merger of companies such as Travelers and Citicorp, which became Citigroup — a company that had to be bailed out with $50 billion in taxpayer money. Nor is there any reference in the film to the fact that Rubin, mentor to both Summers and Geithner, went on to help run that new megabank at a salary of $15 million a year. Geithner, who later became head of the New York Fed, a job obtained with the effusive recommendations of both Rubin and Summers, worked to salvage Citigroup from the mess its packaging of toxic mortgages had created. Geithner is lionized in both Sorkin’s book and the film version. As Nancy deWolf Smith put it in the Wall Street Journal : “Some viewers who remember the book may be galled again by the portrayal of certain characters. For instance, Timothy Geithner (Billy Crudup), then president of the Federal Reserve Bank of New York, still comes across as a blameless saint and Wunderkind with a compassionate finger on the pulse of the victimized ordinary man.” The fawning in the book is embarrassing, as in the description of Summers and his treasury assistant in the Clinton years going off to tennis camp, with Sorkin noting, “Geithner, with his six-pack abs, had a game that matched his policy-making prowess.” Not to be overlooked is “his usual firm, athletic handshake.” That policy prowess must extend to the destructive CDO deregulation that Geithner and Summers pushed through Congress and that, in an image in the movie, we see Bill Clinton signing into law. That legislation, not specifically referenced in Sorkin’s book, was called the Commodity Futures Modernization Act (CFMA). It banned the application of any existing regulation or regulatory agency authority to the emerging market in CDOs that turned out to be disastrous. These were the same CDOs that AIG backed with phony insurance “swaps,” resulting in the Geithner-led $170 billion bailout of the company with the money passed through to Goldman and the other banks covered by AIG. Neither the CFMA nor the heroic and incredibly prescient Brooksley Born, then chief of the Commodity Futures Trading Commission, whose dire warnings about the new financial gimmicks were effectively silenced by the CFMA, are mentioned in the index of Sorkin’s book. At the end of HBO’s film about how skillfully Henry Paulson, Ben Bernanke and Timothy Geithner managed to force the top banks to accept $700 billion in bailout money, the question is posed as to whether the banks so saved would turn around and lend money to save the homes of ordinary folks. The outcome was quite the opposite. The economy remains in deep trouble thanks in considerable measure to the “bankers-first” priorities that Geithner and Summers brought with them to the Barack Obama presidency. The housing industry is deeply depressed, new home construction starts this year are expected to match the lowest point since records first were kept in 1963, housing values are predicted to decline at least 5 percent more this year, and without an improvement in housing there will be no significant increase in consumption or jobs. Further, on the day HBO premiered the film, the New York Times reported that the top banks now have an inventory of foreclosed homes that is twice as high as when the crisis began four years ago, and, “In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.” The film and the book, by centering on TARP, make that bailout the big deal, and when the bailout money was paid back to free the bankers’ bonuses from regulation, it was celebrated by Geithner as “the most effective government program in recent memory.” Rubbish! As Paul Atkins and two other members of the Congressional Oversight Panel on TARP wrote in a blistering WSJ column exposing the TARP settlement: “It hides the full story of the government’s financial crisis effort, of which TARP is but a minor part”; the major part being the $1.1 trillion in toxic mortgages that the Fed purchased from the banks, the $380 billion bailout of Fannie Mae and Freddy Mac, and the loan guarantees of “other Fed and FDIC programs [that] added another $2 trillion of taxpayer money at risk to the 19 stress tested banks alone.” And then there is the 50 percent run-up in the national debt, thanks to the banks’ savaging of the economy that will haunt us for decades to come. Perhaps the main value of the book and film is the instruction they provide on the limits of mainstream journalism in the decade that led up to the meltdown. Sorkin, who rose to be a business editor at the Times , covered Wall Street deal-making in exquisite detail, relying on an access journalism that has often proved deeply flawed in traditional business news coverage. What was largely ignored as it was unfolding was the story of the unbridled power of Wall Street financiers over the political process that caused this tragedy for so many tens of millions who have lost jobs and homes.

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SEC Probing Whether Banks Overcharged Customers For Trades

May 24, 2011

The Securities and Exchange Commission (SEC) is probing whether two major banks made proper representations to pension-fund clients about how their currency trades would be handled and priced, the Wall Street Journal reported, citing a person familiar with the matter. The Journal said the probe is examining the currency trading activities of the two of the world’s largest custody banks, State Street Corp and Bank of New York Mellon, and whether the banks misrepresented how they intended to carry out the foreign exchange trades. Foreign exchange traditionally has been a rich source of revenue for U.S. banks, particularly custodial banks, which not only profit from buying international stocks and bonds for pension funds and other investors, but also on trading dollars into other currencies. Foreign exchange overall is a huge business, with average daily volume of $4 trillion. Earlier in May, State Street revealed in a quarterly filing it was under investigation by the SEC and also disclosed that two clients began litigation against it seeking unspecified damages, on behalf of all custodial clients that executed foreign exchange transactions through State Street. However, the regulatory authority’s investigation of BNY Mellon wasn’t previously known. Both the banks were not immediately available for comment. (Reporting by Siddharth Cavale in Bangalore; Editing by Kim Coghill) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Steve Cohen’s SAC Capital Investigated For Possible Insider Trading

May 21, 2011

(Reuters) – SAC Capital Advisors LLP is under investigation by a powerful Republican Senator for 20 possible instances of insider trading, the Wall Street Journal reported on Saturday, citing unnamed sources familiar with the situation. Charles Grassley, who heads the Senate Judiciary Committee, last month asked the Financial industry Regulatory Authority for details on any suspicious trading by Steven Cohen’s $13 billion hedge fund. Last week Finra provided Grassley with about 20 instances where SAC’s trades took place ahead of market-moving news or were otherwise suspicious enough to merit referral to the Securities and Exchange Commission’s enforcement staff, the Wall Street Journal said. It was not clear if the trades had been referred to the SEC, and authorities have not alleged wrongdoing by SAC or Cohen, the report said. SAC representatives and Congressional investigators met in Washington on May 10 to discuss the matter, the report said. At the meeting, SAC representatives suggested the investigators go easy on the hedge fund, saying it has internal procedures to track down and prevent illegal trading, according to the report. Also at the meeting, Washington-based SAC Capital in-house lobbyist Michael Sullivan cited Cohen’s “civic-minded interest” in purchasing a stake in the New York Mets baseball team. Spokesmen from SAC and Grassley’s office were not immediately available to comment to Reuters. (Reporting by Ann Saphir with reporting by Matt Goldstein) Copyright 2010 Thomson Reuters. Click for Restrictions .

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White House: No Alternative To Raising Debt Ceiling

May 18, 2011

WASHINGTON — The White House said on Wednesday that there is no “Plan B” if Congress does not vote to increase the debt limit by August. The debt limit, which is currently set at $14.29 trillion, was reached on Monday, but Treasury Secretary Timothy Geithner told Congress the government can continue to pay its debts until about Aug. 2 by using “extraordinary measures.” If Congress does not raise the debt ceiling by then, there is no plan in place for dealing with the resulting defaults, a senior administration official said in a briefing with reporters. “There is no alternative to raising the debt limit. It has to be raised,” the official, who spoke to the reporters on background, said. “There’s really no way around it.” The White House is pushing back against a few Republicans — including Sen. Pat Toomey (R-Penn.) and Rep. Paul Ryan (R-Wisc.) — who hinted this week the government could default on its debts for a short time in pursuit of a broader deal to cut the deficit. Republicans have overall agreed that the debt ceiling needs to be raised but have said they will not vote to raise the ceiling unless it is paired with major spending cuts and long-term debt reduction. But some fear that talks to reach that deal, which are being facilitated by Vice President Joe Biden, will last beyond the Aug. 2 deadline for increasing the debt limit. A few Republicans have said extending talks beyond that deadline could be done without serious harm to the markets as long as a deal was eventually reached to raise the debt ceiling. Toomey, speaking on Wednesday at the conservative American Enterprise Institute, pointed to a weekend interview in the Wall Street Journal with investor Stanley Druckenmiller, who said he would accept late payments on U.S. debts if it meant overall progress on the long-term deficit. Sen. Jon Kyl (R-Ariz.), who is representing Senate Republicans in the White House debt limit talks, also referenced the editorial when speaking with reporters on Tuesday. Ryan made a similar remark Tuesday, telling CNBC the investors he speaks to would be willing to accept late payments “for a day or two or three or four.” The White House firmly rejected such an idea in the Wednesday briefing, saying even short-term default would harm the government’s credit and its reputation in the markets. “That’s not a plan; that’s default,” the official said. As lawmakers continue to push for a deal on the debt, the Treasury will continue to function by taking steps to “buy head room” within the current deficit, said a senior administration official. Earlier this month, the Treasury stopped providing State and Local Government Series Treasury securities, which help state and local governments to manage their debt. After reaching the debt limit Monday, the Treasury began using additional measures to avoid default. Geithner declared a “debt issuance suspension period” on Monday to borrow from the Civil Service Retirement and Disability Fund. The fund will be made whole after the debt limit increase is enacted, according to law. The Treasury will continue some business as usual, including maintaining its auction schedule to issue new bonds. The administration rejected the idea of selling off assets to buy time for the debt ceiling deal, arguing it would amount to a “fire sale” where assets would likely be sold for less than their true value. “The idea of dumping gold on the market would be extremely damaging,” a senior official said, while another official added that most assets do not have enough value to buy the government much time. Despite rhetoric over raising the debt ceiling by some lawmakers, Geithner is confident the debt limit will eventually be increased, an official said. “They always seem extremely challenging, but they seem to get there,” an official said.

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Nearly Half Of Americans Oppose Raising The Debt Ceiling: Gallup Poll

May 13, 2011

Despite warnings that America must raise the debt ceiling in order to avoid potentially catastrophic economic consequences, nearly half of Americans just don’t like that idea very much, a new poll says. According to new data from Gallup , 47 percent of Americans say they want their Congressman to vote against raising the debt ceiling. Only 19 percent say they would like to increase the debt limit. The U.S. government will hit the $14.3 trillion debt ceiling on Monday, May 16, but Treasury Secretary Timothy Geithner has said he can and will use “extraordinary measures” to delay until August 2 what would be the first-ever default on U.S. bonds. The U.S. debt ceiling, defined as the country’s maximum level of borrowing power, is set by the government itself, but with both parties taking advantage of the moment to debate the federal deficit, it’s safe to say the issue has been usurped. No one political party supports raising the debt ceiling, Gallup finds, but Democrats get closest with 33 percent in support of raising the debt ceiling. Of Republicans, 70 percent say they oppose increasing the country’s borrowing power. Notably, over one in three Americans say they don’t well-enough understand the issue to take a stand, either way. But many other Americans say they are tuned into the issue. 57 percent of the 1,018 adults surveyed say they are very closely or somewhat closely following “discussions to raise the U.S. debt ceiling, the maximum amount of money the U.S. government can borrow by law.” 32 percent of Republicans say they are following the issue “very closely,” compared to 16 percent of Democrats. Not raising the debt limit would be extremely damaging to the U.S. economy, experts have warned. In early January, Treasury Secretary Geithner wrote in a letter to congressional leaders that no extension could cause “catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.” The business community agrees. Just this week, 62 business groups collectively warned congress of what not extending the debt limit could mean for the economic recovery. “Raising the statutory debt limit is critical to ensuring global investors’ confidence in the creditworthiness of the United States,” the groups wrote, according to the Wall Street Journal . “With economic growth slowly picking up we cannot afford to jeopardize that growth with the massive spike in borrowing costs that would result if we defaulted on our obligations.

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Rajaratnam Conviction Serves As Powerful Warning Shot On Wall Street

May 11, 2011

NEW YORK — The conviction of billionaire hedge fund manger Raj Rajaratnam on all 14 counts in a sprawling, unprecedented insider trading case will serve as a powerful warning shot to Wall Street, legal and financial experts say. The case against Rajaratnam, formerly the head of the Galleon Group, centered on an extensive network of tips he received over the course of at least six years, giving his hedge fund unauthorized insight into pending mergers and acquisitions, upcoming quarterly earnings at other companies and other transactions. The government estimated that Rajaratnam’s firm, once one of Wall Street’s biggest hedge funds, netted more than $63 million in gains and avoided losses over the time period. Experts said that Rajaratnam’s offense was so egregious that his conviction doesn’t represent a shift in how the law defines insider trading, but rather, the government’s willingness and ability to go after and convict such offenses. “This was the least gray case I’ve ever seen. There was overwhelming evidence,” said John C. Coffee, Law Professor at Columbia University and director of its Center on Corporate Governance. Rajaratnam plans to appeal the case because evidence was obtained through wire-taps and not, Coffee points out, because of the content of the charges themselves. “The definition of insider trading is not really involved with this case,” he said. “It is a case about whether or not the evidence was lawfully obtained.” The billion dollar question for investors and analysts is whether the conviction will cause hedge funds — particularly those that use expert networks to help determine investing decisions — to fundamentally reassess the way they operate? “For well-counseled hedge funds, that reassessment began many many months ago,” said Joseph A. Grundfest, a Professor of Law and Business at Standford University who previously served as a commissioner of the Securities and Exchange Commission. Grundfest said hedge funds he does business with began increasing transparency and scrutinizing the use of expert networks when Rajaratnam was arrested and charged with more than a dozen securities fraud and conspiracy to commit securities in October, 2009. At that time, the U.S. Attorney’s Office called the case “the largest hedge fund insider trading case in history.” The case also marked the first time that wiretaps were used as part of a major insider trading investigation. More than 40 recordings collected over the years figured heavily into the case against Rajaratnam, including a tape showing that he had received information about an expected quarterly loss at Goldman Sachs from Goldman board member Rajat Gupta. Some of the most significant testimony in the trial came from Anil Kumar, a former McKinsey & Co. consultant who pleaded guilty to conspiracy and securities fraud and later agreed to cooperate with the government in the case. According to the Wall Street Journal : Mr. Kumar’s four days of testimony provided the cornerstone of the government’s case, including damaging testimony from the consultant that he was paid $500,000 a year by Mr. Rajaratnam through an offshore account to an account in his housekeeper’s name in exchange for insider tips. One such tip, involving the acquisition of ATI Technologies Inc. by Advanced Micro Devices Inc. in 2006, generated Galleon profits of nearly $23 million. The strength of the conviction on all counts serves, Grundfest says, as a game-changer and a powerful bargaining tool for the government in all future cases of insider trading. “Now, the U.S. attorney will be able to sit down with the defendant and say [two] word[s]: Raj Rajaratnam. And that changes the complexion of the conversation. The government has now demonstrated that in situations that it has wiretaps and cooperating witnesses, they can convict.” Not everyone is convinced of the verdict’s power on Wall Street. Charles Ferguson, director of the Academy Award-winning Inside Job , said that the focus on Rajaratnam’s trial is misguided. “The total amounts of money and the consequences in insider trading are trivial,” says Ferguson, according to The New York Times , “compared to the damage caused by the behavior that caused the financial crisis[.]” But many argue that the deterrence factor of a criminal conviction — Rajaratnam faces a minimum of 15-1/2 years — is symbolically huge. “The one thing we do know is that finance professionals are uniquely susceptible to general deterrents,” said Coffee. “The street criminal may have very little alternative — it’s either sell drugs or stay poor — but the person running a hedge fund sees the high risks involved that this case dramatically communicates. Looking at this case, he learns that expert networks that continue for a while have a good chance of getting revealed.” Rajaratnam is only one of 26 people charged in the Galleon case so far, and a second trial of three former securities traders, including a former Galleon hedge employee, is scheduled to start next week. Coffee expects that we will see more convictions in the coming months. As for whether there are hedge fund managers feeling anxious about the morning’s news, Coffee put it simply: “This is good news for honest expert network firms, bad news for those that were crossing the line. Good news for hedge funds not seeking insider information, bad news for those that were,” Coffee said. “Professionals learn what is lawful based on who goes to prison and for what. This is a vivid message that you can go to prison for insider trading even if you are a sophicsticated business professional.” After the financial crisis, Bernie Madoff, years of slow economic growth and high unemployment, this is a message that will be likely welcomed by many, both on Wall Street and off. “We’ve just been bombarded with a whole seiries of ponzi schemes, meltdowns and people making an enormous amount of money,” said David Larcker, professor of accounting at the Stanford Graduate School of Business and author of Corporate Governance Matters. “The government is saying here ‘look, let’s pull it back to the middle here and show the population that we are serious about this — that you can’t just do anything you want.’”

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Merton and Joan Bernstein: Feldstein’s Folly

May 10, 2011

Professor Martin Feldstein’s recent Wall Street Journal article , “Private Accounts Can Save Social Security,” raises a false alarm. He declares: There are now three employees paying Social Security taxes to finance the benefits of each retiree. That number will fall over the next three decades to only two employees per retiree. That would require either a 50% rise in the Social Security tax to maintain the existing benefit rules or a one-third cut in projected benefits. Yes, those projected ratios of employees to beneficiary numbers are (very) roughly correct. The consequences he attributes to them are not. He reaches them by ignoring other crucial variables — notably marvelously improved employee productivity, which in turn generates higher pay, which translates into higher Social Security program revenue per employee. Professor Feldstein focuses solely on those remitting payroll taxes under the Federal Insurance Contributions Act (FICA), omitting to mention that Social Security has two other dedicated revenue streams: income tax on half the Social Security benefits of high earners and interest on the trillions the Social Security Trust fund lends to the U.S. Treasury. Those data are not hard to find; the Social Security trustees’ annual reports describe them under “Highlights.” To reach his conclusions, FICA contributions, which are determined as a specified percentage of each employee’s pay, would have to stall over the next three decade. But economic data show otherwise. Each successive wave of workers produces more and earns more per capita because employers constantly respond to pressure to provide improved technology, enabling employees to generate more goods and services and earn more. Just as one example, the non-stop computer revolutions (yes, plural) repeatedly multiply what the average employee produce and earns, generating larger and larger FICA contributions. As recently as May 4, Intel announced yet a new advance — chips that will be as much as 37 percent faster and require half the power. So future workers will generate more goods and services for all of us to share, more FICA per capita and at lower cost. The 2011 Statistical Abstract of the United States (Table 641) shows that between 1990 and 2000, non-farm employee output per hour increased by over 20 points (using 100 in the early 1990s as the base) and manufacturing per hour output expanded more than 45 points while real (adjusted for inflation) per hour compensation expanded by about 15 points. These crucial elements continued to expand until the 2008 onset of the recession. Even then hourly output in 2008 and 2009 was about double that in 1990. Bottom line: the 2009 employees generated almost 30% higher per capita income than their 1990 counterparts. But there’s more. Social Security FICA income has exceeded benefit payout since 1983 until this past year, building its reserves to about $2.4 trillion (and growing); trust fund resources enabled the payment of full benefits. Current actuarial projections indicate that trust fund reserves can make such contributions to benefits in the amounts needed until 2037. But the cap placed on earnings subject to FICA, in effect, exempts high income from FICA, putting a brake on more ample trust fund accumulations. Removing the cap and crediting the additional earnings for benefits would almost offset the entire projected funding shortfall. Even the co-chairs of the Fiscal Commission advocate raising the cap (although they would use a slower boat and not go as far). Alternatively, raising the FICA rate by one percentage point for both employees and employers would offset most of the shortfall by itself. Projected earnings would improve by a greater amount, making such an increase completely affordable. Much the same effect would be achieved by raising the employee and employer FICA rate by 1/20th of one percentage point cumulatively over twenty years. Both removing the cap and boosting the FICA rate as described would make possible benefit improvements — which are highly desirable given that other sources of retiree income have declined, proven unreliable and tend to shrink with age. Professor Feldstein makes it sound as if Social Security is doomed to failure by demographic changes. But that’s far from the case. Modest changes like those described, which have wide support, would assure Social Security’s future — without trimming benefits. Instead, he plumps for private accounts, omitting that they would incur substantial non-benefit costs. In a 2004 paper, Austan Goolsbee, then a University of Chicago economics professor, using analyses by the Congressional Budget Office and the Government Accountability Office, concluded that the George W. Bush version of private accounts “would lead to a massive increase in payments of financial fees to private financial management companies.” His estimate of the net present value of such payments — $940 billion. Dr. Feldstein asserts that the private accounts he advocates are like those proposed by President George W. Bush. Perhaps that’s all we need to know. But, as I heard one Republican U.S. Senator declare when he and I were on a public panel: “Social Security private accounts are like taking the mortgage money to bet on the races.” Not a great idea. In sum: Dr. Feldstein in Wall Street Journal – mode is no more reliable a guide to Social Security than Dick Cheney is a safe hunting companion.

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Reports Of Mortgage Fraud Rose To Record Level Last Year

May 10, 2011

After the housing market crashed, reports of suspected mortgage fraud soared. As lenders, homeowners and brokers rushed to close deals, the process during the boom years was tainted by fakery, according to reports later submitted to the Financial Crimes Enforcement Network, an agency of the Treasury Department. The number of reports of suspected mortgage fraud rose to its highest level on record last year, as 70,472 reports were submitted to the government agency, according to a new release from the LexisNexis Mortgage Asset Research Institute. That’s nearly double the number of cases reported in 2006 when the market was at its peak, and it’s nearly 22 times the number of cases reported in 2000. From the LexisNexis release: Fraudsters thrive on inadequacies within lengthy loan-related processes and a lack of consistency across organizations and/or industries that help them hide their true motives. Technology has enabled faster loan production through automation, ease of processing, and analytics. Industry professionals have keen knowledge of those processes, which makes it much easier to manipulate protocols in place to thwart adverse activities. The number of verified cases of mortgage fraud declined from 2009 to 2010, but that’s partially attributable to a decline in the number of new loans, the LexisNexis report says. Reports of suspected fraud increased nearly 5 percent during that period. Homeowners and investors have filed numerous lawsuits against mortgage companies, claiming that crucial mortgage documents were misplaced or even forged. Some of these suits have been successful, bolstered by testimony from bank employees. In a widely cited example, an employee of the lender now owned by Bank of America testified in a New Jersey court in 2009 that her company regularly held onto mortgage notes even as the loans were sold to investors, contradicting what contracts usually require. Without a note, a bank cannot prove it has a right to foreclose on a home; homeowners have used the absence of a note to contest foreclosures. Likewise, a missing note compromises the legal rights of an investor in a mortgage security, a situation that has prompted some investors to sue the banks that sold them the securities. But it’s not just the banks who have been accused of fraud. The Wall Street Journal describes a practice some brokers allegedly used, in which they would get artificially low valuations of distressed homes, and then help a buyer sell those homes for a profit. Homeowners, too, have been accused of misstating their income on mortgage documents. One borrower is now serving a 21-month prison sentence for mortgage fraud, the New York Times reported. The chiefs of the lenders that helped fuel this boom, meanwhile, have largely escaped punishment. Examples of alleged fraud extend to the foreclosure process as well. When it came out last fall that employees at foreclosure processing companies would sign thousands of foreclosure documents daily without even reading them, some of the county’s biggest lenders temporarily halted their foreclosures. The nation’s five biggest mortgage lenders — Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and Ally Financial — have been accused of wrongfully foreclosing on homeowners and improperly handling mortgages. All 50 state attorneys general along with the Obama administration are working to reach a settlement deal. Fines could reach $30 billion , The Huffington Post reported.

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Google Set To Launch New Music Service

May 10, 2011

According to the Wall Street Journal , Google will be announcing an online music service at its I/O 2011 event . The Journal’s “people familiar with the matter” suggest it will be similar to Amazon’s Cloud Drive , which launched earlier this year and is more like a Web-based hard drive than a subscription service like Spotify or Rdio. Launching as an invite-only beta today, Google’s simply titled ‘Music Beta By Google’ service will reportedly function as an online music locker that can store 20,000 songs for free — Amazon only offers 1,000 songs. Reports suggest Google had trouble negotiating with record labels, and is pushing ahead without a music store or the ability for users to share songs. Google’s Jamie Rosenberg told All Things D’s Peter Kafka , “Unfortunately, a couple of the major labels were less focused on the innovative vision that we put forward, and more interested in in an unreasonable and unsustainable set of business terms.” Much like Amazon’s Cloud Drive, the service is likely to let users upload music, and then stream it over the Web to their desktop, Android phone, tablet, or any other device that supports Flash. This, of course, will probably leave iPad and iPhone users out at launch. All Google users in the U.S. should have access to the service “within weeks,” and The New York Times reports that invites for the service will go first to Motorola Xoom users, leaving everyone else to sign up at music.google.com . See our guide to Google’s I/O conference here .

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Dr. Sasha Galbraith: The Wage Gap Plot Thickens

May 9, 2011

A recent article in the Wall Street Journal blatantly states that there is “no male-female wage gap.” Among other things, the author, Carrie Lukas (executive director of the conservative Independent Women’s Forum ), points out that women work an average of 8.01 hours per day on the job, versus men, who work 44.4 minutes longer each day. This difference, she says, explains over one third of that wage gap. Really? This just goes to show, statistics can be misleading. While often useful, they are also great at hiding a multitude of evils, as well as giving us nonsense. Take, for example, the fact that rich families spend more on groceries than poor families. So what? I guess then, the extra hours that women put in at home in unpaid family, elder and household care count for nothing in that wage gap. In fact, Lukas cites one group of people — single, childless urban female workers between the ages of 22 and 30 — who earn 8 percent more than similar men. And that’s my point exactly! According to a University of Michigan study of U.S. families, married women with three kids or more logged an average of 28 hours of housework per week. Compare that to the 10 hours per week put in by their spouses. In fact, getting married creates seven hours per week more (unpaid) work for the wife. Fine, you say, most married women with loads of kids don’t work full-time outside the home. True. According to the Bureau of Labor Statistics , 43 percent of married mothers work full-time outside the home, about half the ratio of married fathers. But among married fathers and mothers who work, women spend twice as much time on housework (two hours per day) than men. Why should we care if people work for no pay? Because ignoring unpaid work distorts our Gross Domestic Product and the assessment of our national living standards. If a mother goes into the paid workforce, she has to arrange for someone to take care of the kids. In some cases, it might be a relative who probably will do this work for free, or it might be a childcare center for which she has to pay. Similarly, the family will probably have to pay someone else to clean the house and cook meals (restaurants and take-out services). While all those paid services count toward the GDP, they also overstate the implied benefits to our standard of living — which is usually assumed to track with the rise of GDP. Why should we care if women are paid less than men for doing exactly the same job? Because women invest their earnings differently than do men. According to a UNICEF report , women spend more money on the education, health and welfare of their families. This, in turn, benefits the economic well-being of the country as a whole. If women were paid the same as men, the U.S. GDP would be 9 percent higher (and Europe’s would increase by 13 percent, according to a UN report ). I’ve often wondered what would happen if all the women in the world decided not to do any of their unpaid work for a day. Oh wait, I think that’s called Mother’s Day. Happy Mother’s Day, ladies. Crossposted from Forbes.com .

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Nearly Half Of Detroit Is Functionally Illiterate, Report Finds

May 7, 2011

Detroit’s population fell by 25 percent in the last decade. And of those that stuck around, nearly half of them are functionally illiterate, a new report finds. According to estimates by The National Institute for Literacy , roughly 47 percent of adults in Detroit, Michigan — 200,000 total — are “functionally illiterate,” meaning they have trouble with reading, speaking, writing and computational skills. Even more surprisingly, the Detroit Regional Workforce finds half of that illiterate population has obtained a high school degree. The DRWF report places particular focus on the lack of resources available to those hoping to better educate themselves, with fewer than 10 percent of those in need of help actually receiving it. Only 18 percent of the programs surveyed serve English-language learners, despite 10 percent of the adult population of Detroit speaking English “less than very well.” Additionally, the report finds, one in three workers in the state of Michigan lack the skills or credentials to pursue additional education beyond high school. In March, the Detroit unemployment rate hit 11.8 percent, one of the highest in the nation, the U.S. Bureau of Labor Statistics reported last month. There is a glimmer of hope, however: Detroit’s unemployment rate dropped by 3.3 percent in the last year alone. Detroit Mayor Dave Bing and Michigan Governor Rick Snyder have been aggressively attempting to reinvent the once-great Motor City. Last year, the Wall Street Journal reported that then newly-elected Mayor Bing planned to tear down 10,000 of the city’s 90,000 abandoned properties.

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Japan Central Bank: Economy To Shrink Through June

April 23, 2011

(Reuters) – Bank of Japan Governor Masaaki Shirakawa said the country’s economy will likely shrink in the first half of 2011 due mainly to stalled output in the wake of Japan’s March 11 earthquake and tsunami, the Wall Street Journal reported on Saturday. “We are now expecting production and GDP will decline in the first quarter and the second quarter,” Shirakawa said in the interview conducted on Friday, echoing the views of most private-sector economists who also see a first half contraction. The focus is now on how quickly the Japanese economy will return to growth. This largely depends on when supply chain disruptions will ease and to what degree power shortages could affect factory output during the peak summer period. Shirakawa was quoted as saying supply constraints would likely continue at least until August before recovering. “Once supply capacity is recovered, then the Japanese economy is moving back to the original growth path,” Shirakawa said in the interview. The BOJ is expected to hold off on any further easing of monetary policy next week but will likely reiterate its readiness to act if the quake’s damage threatens Japan’s return to a moderate economic recovery. In a twice-yearly outlook report to be issued at next week’s rate review, the BOJ will cut its economic forecast for the current fiscal year, which began on April 1, from its January projection of 1.6 percent growth to reflect the impact of the quake, sources familiar with the BOJ’s thinking have told Reuters. But many in the bank agree with the dominant market view that Japan will avoid a contraction for the full fiscal year as growth is expected to pick up from around autumn. (Reporting by Leika Kihara; Editing by Nathan Layne) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Dan Solin: An Outsider’s Look at Insider Trading

April 20, 2011

I am fascinated by all trading (since little of it makes sense to me), but insider trading really intrigues me. Some recent cases are worthy of special attention. In one, a hedge fund manager in FrontPoint Partners is alleged to have sold a huge block of shares in a biotech company after he got a tip that one of the company’s drugs was in trouble. The sale allegedly avoided $30 million in losses. According to an article in the Wall Street Journal , FrontPoint, which was previously owned by Morgan Stanley, agreed to a settlement with the SEC involving payment of $33 million. Criminal charges are pending against the fund manager. The fund manager, who earned a medical degree from Yale, allegedly paid cash to a French doctor who gave him the inside tip. On one occasion, he allegedly slipped $10,000 in cash in an envelope to the doctor while they were both at a bar in Milan. The French doctor has admitted his complicity in this scheme. I have to give credit to his lawyer, David Zornow, who noted that: “Dr. Benhamou’s conduct in this instance must fairly be considered in the overall context of his extraordinary contributions to his patients and to medical science.” How those contributions should factor into his illegal conduct is beyond me, but I thought the effort to conflate the two was very creative. The founder of the Galleon Group, Raj Rajaratnam, is currently on trial for insider trading, as part of a broad crackdown by the U.S. Attorney Office. By some accounts, 47 people affiliated with hedge funds in the last 18 months have been charged with insider trading. Here’s what fascinates me. These are not rinky dink outfits. Galleon Group managed over $3 billion in assets. It had significant resources which — you would think — would permit it to do all the research necessary to uncover mispriced stocks and secure outsized returns for its wealthy investors. Clearly, these giants of Wall Street know something they aren’t telling their clients: It’s really hard to be a successful stock picker. In fact, I am unaware of any research validating this skill and reams of data showing that stocks are fairly priced, incorporating all available information instantaneously. As successful insider trading indicates, it’s tomorrow’s news that affects stock prices. When FrontPoint got tipped off about non-public information, it was able to profit. Essentially, it learned about tomorrow’s news before that news was public. Insider trading validates index based investing. The hedge fund managers who engage in this activity understand they are unlikely to “beat the markets,” without violating the law. As noted author and market theorist William Bernstein said: ” It turns out for all practical purposes there is no such thing as stock picking skill.” Confronted with that reality, some managers have resorted to illegal conduct. There is a much better alternative. It will permit you to outperform 95% of all professionally managed money. Invest in a globally diversified portfolio of low management fee stock and bond index funds in an asset allocation suitable for you. Keep your cash out of envelopes. Keep yourself out of prison. That’s my outsider’s look at insider trading. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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Insider Trading: ‘I Didn’t Think Anyone Would Notice’

April 16, 2011

LONG BEACH, N.Y.–Kenneth T. Robinson knew he should walk away. But in an interview with The Wall Street Journal, he says he just couldn’t stop trafficking in insider-trading tips.

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Insider Trading: ‘I Didn’t Think Anyone Would Notice’

April 16, 2011

LONG BEACH, N.Y.–Kenneth T. Robinson knew he should walk away. But in an interview with The Wall Street Journal, he says he just couldn’t stop trafficking in insider-trading tips.

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Regulators Investigate Whether Banks Formed Cartel To Manipulate Interest Rates

April 14, 2011

U.S. regulators are probing whether some major banks colluded to manipulate a global benchmark interest rate before and during the financial crisis, the Wall Street Journal reported, citing people familiar with the situation. In March, Reuters reported that regulators are probing whether a handful of major banks manipulated the global benchmark interest rate — known as Libor — to tart up their credit quality, citing a person familiar with the matter. The Journal said the investigators are now looking into whether the banks formed a global cartel and coordinated how to report borrowing costs between 2006 and 2008. U.S. regulators are focusing on Bank of America, Citigroup and UBS, among others, and have sent subpoenas to those banks, the WSJ report said. The three banks declined to comment to the Journal. The Securities and Exchange Commission and the banks could not immediately be reached by Reuters for comment outside regular U.S. business hours. (Reporting by Sakthi Prasad in Bangalore; Editing by Vinu Pilakkott) Copyright 2011 Thomson Reuters. Click for Restrictions .

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BACKDOOR IPOs: SEC May Make It Easier For Startups To Raise Cash

April 8, 2011

U.S. securities regulators may ease constraints on share issues by private companies, making it easier for start-ups to raise money, the Wall Street Journal reported. The steps under consideration would help privately held companies like Facebook Inc, Twitter Inc and Zynga Inc to raise more money without going through increased reporting and other requirements of becoming a public company, the report said. Currently, companies can issue shares privately without incurring onerous reporting obligations if they have fewer than 500 shareholders. The U.S. Securities and Exchange Commission (SEC) is considering raising that limit, though it is unclear by how much, the Journal said. The move could potentially delay or derail initial public offerings by technology companies that want to grow but would rather avoid having to disclose vast amounts of information, the report said citing an SEC letter to a lawmaker. It could also shut out many ordinary investors from one of the fastest-growing market sectors, since shares in private companies are generally available only to investors whose individual net worth is at least $1 million. The SEC could not be reached for comment outside of business hours. (Reporting by Sweta Singh in Bangalore; Editing by Gopakumar Warrier) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Video: Covert Says Dish Network Can Become Netflix Competitor

April 6, 2011

April 6 (Bloomberg) — Kevin Covert, founder and president of Covert & Co., talks about Dish Network Corp.’s proposed acquisition of Blockbuster Inc. Covert also discusses the Wall Street Journal’s report that Google Inc.’s YouTube may be planning to spend as much as $100 million on original content for about 20 premium channels. He speaks with Emily Chang on Bloomberg Television’s “Bloomberg West.” (Source: Bloomberg)

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Google’s New CEO Takes Over: What Will Change?

April 4, 2011

Google co-founder Larry Page ‘s return to the role of chief executive has fueled speculation that the Internet giant is gearing up for a reinvention of sorts. His ascension may mark the most significant return of a company’s prodigal co-founder since Steve Jobs returned to Apple in 1997. But will he be able to jumpstart Google the way Jobs did Apple? Analysts question whether Page will be able to successfully recapture the startup spirit that jolted the industry a decade ago, or whether Google, which has swelled to roughly 24,000 employees, has simply become too big to readily adapt. Despite Google’s many successes, the company has also experienced a number of high-profile failures, such as the shutdown of Google Wave and the privacy debacle involving Google Buzz. As Facebook socializes the web, Google has felt Mark Zuckerberg’s company closing in on its lead. And what was once seen as a scrappy engineer’s playland has morphed into an entity that feels closer to Microsoft in corporate ethos than, say, Twitter or Foursquare. Some industry observers are bullish, citing what they describe as Page’s unique spark and vision, perhaps in contrast to longtime Google CEO Eric Schmidt. “The thing about Larry that really stands out is that he’s always been ambitious,” said Steven Levy, author of the forthcoming book In the Plex: How Google Thinks, Works, and Shapes Our Lives . “We’ll see audacious new products, particularly when other people think it’ll be difficult or even impossible — it’s not always about what people need right now, but what people need in 10 years.” In a recent Fast Company article, Page is described as both data-driven introvert and childlike prankster — an engineer with deep faith in the numbers as well as a Montessori-reared creative with an ability to find unusual solutions and propose impossible quests. Schmidt, insiders have suggested, managed to quell some of Page’s wackier notions. But with Page in charge, forward-thinking projects may get put on the fast track. “It may very well be that Google will just push the button rather than delay on new projects,” said Levy. “It’s the freedom to let people do what they want — Larry feels very strongly that if you want to make it happen, you should do it.” Early reports suggest that Page is already shaking things up around the Googleplex. The Wall Street Journal wrote that he has asked product and engineering managers to email him brief pitches that describe what they’re working on, while he has also directed executives to work in public areas each afternoon so that company employees can access them more easily. So what will the Page era look like? Google Books, a controversial attempt to digitize the whole of the available written word, is a favorite of Page’s, as is the company’s ambitious translation project. Both were initially met with doubt, and both have gone far beyond first expectations. “When people come to Larry with ideas, he always wants it bigger,” an ex-Googler told Wired . “His whole point is that only Google has the kind of resources to make big bets. The asset that Larry brings is to say, ‘Let’s go and make big things happen.’ ” So Page thinks big, and there’s some indication that Page also thinks social. From its recent introduction of +1 to changes in the feel of the user profile and a whole slew of experiments in social networking capabilities, many Google watchers believe the company is trying to get a grip on social media and keep Facebook from monopolizing the field. “His interest in social projects is skyrocketing, he’s really on top of that,” Levy said. The question may not be so much whether Page can take a company of 24,000 people and make it feel like a company of 20, or if his presence alone will really spark a mindset shift in Google’s employees, but whether his predilection for ambitious projects and data reliance will shift the direction of the company’s future. How do you think Google will change under Page — if at all? Weigh in below.

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What Larry Page Must Tackle As Google CEO

April 4, 2011

As Google’s Larry Page becomes CEO for a second time on Monday, analysts say the co-founder must help the Silicon Valley giant, which has been hit by lawsuits, government inquiries, and failed acquisition attempts, regain its lost luster and startup speed in order to fend off increasingly powerful rivals. Pointing to some of the company’s more recent public flops, such as social media services Google Wave and Google Buzz , analysts say the company has stumbled during Eric Schmidt’s tenure as CEO and is failing to compete with social networking sites like Facebook, which recently overtook Google as the most popular website in the U.S. One of the biggest challenges Page will face as CEO is helping the company streamline its development process and regain a startup feel in order to better compete with more nimble rivals, even as it grapples with over 20,000 employees in more than 40 different countries. “There’s a sense that they’re turned into fast followers instead of innovators,” said Greg Sterling, Internet analyst at Opus Research, adding that many recent innovations seemed like “me too” products lagging behind social networking sites like Facebook and Twitter. “With Google failing to buy Yelp , then creating Yelp-like products, with Google failing to buy Groupon , and now testing a Groupon-like offers product, maybe ideas coming out of Google are not quite as innovative as they once were.” In addition to these “me too” offerings, Google has also become home to a host of products that overlap and the new CEO will have to distinguish between the solutions that can thrive in the market–and deserve added investment and development–from the ones that duplicate efforts. “When you think about just the location solutions from Google, they have Latitude, Hotpot, Places and Maps. Is that a good use of resources when you have three or four solutions focused on one market?” said Kerry Rice, an analyst at Wedbush Securities. Analysts concur that Page must trim the fat when it comes to Google’s ever-increasing number of products. In addition, one of Larry Page’s key challenges as the new CEO will be to prioritize the company’s efforts, separating what Google does well from what the company can’t do at all, and focusing on the former. “Close to 60 percent of the research and development projects at Google could be shut down,” said Trip Chowdhry, senior analyst at Global Equities Research, arguing that many of the projects in development were no closer to fruition, and were not contributing to revenue. “Many stupid, hobby-type projects are getting the management attention and the resources, and the problem was the old CEO never took a hard look at these projects.” Even as it struggles to compete with and out-innovate its rivals, Google also faces a host of regulatory challenges in the U.S. and overseas. Last month, Google agreed to a landmark settlement with the Federal Trade Commission over charges that the company used “deceptive tactics” and violated user privacy when it launched Google Buzz in 2010. Google was again buffeted in Europe when Microsoft accused the company of being an Internet bully that abuses its dominance of online search and advertising, in an attempt to encourage the European Commission to dig deeper into an investigation opened four months ago into Google’s business practices. The Wall Street Journal reported there are signs that Page is already planning to respond to these challenges, actively reviewing the number of projects in development, and refocusing efforts on the more lucrative Google products and services, like online advertising, YouTube and Android software.

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Carl Davis: The Millionaire Migration Myth: Don’t Fall for This Anti-Tax Scare Tactic

April 1, 2011

Virtually every state in the country has a tax system that heavily favors the rich. Despite this fact, only a handful of states responded to the revenue slump brought on by the Great Recession with any sort of tax increase on this favored group. What gives? With so many states looking for ways to balance their budgets, why isn’t there more interest in finally making the rich pay their fair share? The answer lies partially in one of the most effective, yet most absurd anti-tax scare tactics to be used in recent memory: the so-called “millionaire migration” epidemic. State lawmakers across the country have heard again and again that wealthy taxpayers will pull up stakes and move in response to just about any progressive state tax increase. In most cases, however, even a cursory look at the facts shows that these fears are unjustified. With tax day nearly upon us once again, let’s take just a moment to make those facts known. In New York, it was a business-backed group called the Partnership for New York City that first began spreading misinformation about the state’s income tax surcharge on the rich. In a February report , the Partnership claimed that “New York’s high taxes risk pushing jobs, tax revenue, and talent to neighboring states. …Since the imposition of New York’s surcharge in 2009, there has been a 9.4% decrease in the state’s taxpayers who are worth $1 million or more, decreasing from 381,786 in 2007 to 345,892 in 2009.” That sounds pretty scary, but the same data used by the Partnership shows that every state in the country saw its millionaire population decline between 2007 and 2009, and that a whopping forty-three states experienced declines exceeding New York’s 9.4 percent drop. Apologies for stating the obvious, but these declines were a predictable result of the recent recession. Making matters worse, the original press release accompanying this data made very clear that the U.S. as a whole saw its millionaire population decline by nearly 14 percent between 2007 and 2009. It’s therefore a little strange, to say the least, that the Partnership would interpret New York’s 9.4 percent drop as providing any evidence whatsoever that could be useful in its crusade against taxing high-income earners. Oregonians also had to listen to their share of uninformed anti-tax nonsense during the course of the last few months — this time coming from pundits living clear on the other side of the country. In December of last year the Wall Street Journal ‘s editorial board suggested that a recent voter-approved income tax increase on upper-income families caused up to 10,000 Oregonians to pack their bags and head to Texas. Their “evidence” in support of this claim? 10,000 fewer taxpayers were affected by the tax increase than the state originally expected. Of course, there’s at least one other perfectly reasonable explanation for why fewer Oregonians would be affected: the recession lowered their incomes enough to bring them beneath the starting point for the new tax brackets (only taxpayers earning more than $125,000 – or $250,000 in the case of married couples — were affected by the tax increase). Unfortunately for the Journal , the data strongly suggest that this is the case. After just a quick glance at the data, my group — the Institute on Taxation and Economic Policy (ITEP) — found that while the state’s revenue estimators overestimated the size of Oregon’s “rich” population by roughly 34,000, it also underestimated its middle- and low-income population by more than 60,000. Simply put, some 26,000 more Oregonians filed tax returns than the state originally expected. They just earned less income than usual due to the weak economic climate. What makes this story especially troubling is that, as in New York, there was very clear evidence available refuting the Journal ‘s claims — had anyone there taken the time to look for it. Almost a full week before the Journal ‘s piece was published, the Oregon House Revenue Committee held a hearing in conjunction with the release of the new data at issue. As is usually the case, that hearing gave the state’s revenue estimators an opportunity to offer some very useful context , such as the fact that the 10,000 return discrepancy was due to taxpayers being “driven down the income distribution because [of lower than expected capital gains income], and they [moved] from the affected category to the unaffected categories.” No discussion of millionaire migration would be complete without a look back at the debacle in Maryland. Thanks in no small part to a pair of misleading editorials published by the Wall Street Journal , Maryland’s legislature failed to approve legislation early last year that would have extended its temporary tax bracket on incomes over $1 million. Since then, much of the hubbub surrounding the Maryland “millionaires’ tax” has died down, but the effect that the Journal ‘s misinformation campaign had on shaping the conventional wisdom on “millionaire migration” makes the issue worth revisiting. As in New York and Oregon, the question in Maryland revolved around whether high-income taxpayers were migrating or simply becoming less rich. When the Maryland Comptroller released data showing a roughly 30% drop in millionaire filers between 2007 and 2008 (the year Maryland’s “millionaires’ tax” first took effect), the Journal enthusiastically seized on this figure as proof that the “redistributionists” and “class warriors” had failed in their scheme to “soak the rich.” To its credit, the Journal did exercise a modicum of caution in its first two editorials by reminding its readers that much of this decline was due to the recession, though it continued to insist that the “millionaires’ tax” just had to have something to do with this drop as well. ITEP responded to the Journal in multiple reports and an unpublished letter to the editor explaining that more detailed data, provided by the Comptroller’s office upon request, indeed confirmed that the vast majority of “migrating” millionaires had simply moved to a lower tax bracket. Fast forward to last December when the Journal revived the Maryland migration myth in the context of Oregon. This time, the Journal threw caution to the wind and stated flatly that “one-third of [Maryland's] millionaire households vanished from the tax rolls after [tax] rates went up.” Of course, this flew in the face of its published claim from nine months earlier that: “one-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008.” But that was back before the Journal forgot about the recession. (For the record: even the “one-in-eight” figure was an exaggeration .) In all three of these states — New York, Oregon, and Maryland — the anti-tax crowd ignored a lot of fairly obvious evidence running counter to their claims. Unfortunately, that’s the way it’s been whenever the “millionaire migration” issue has made its way into statehouse debates. Any shred of “evidence,” no matter how meaningless or out of context, has been seized upon by those seeking to construct the anti-tax, vote-with-your-feet narrative they desperately wish was true. With so much bad information floating around, it’s not surprising that most states have been reluctant to eliminate the massive preferences for the wealthy built into their tax systems. But what lawmakers need to know — and what the Wall Street Journal and others have been refusing to tell them — is that once you scratch the surface of the millionaire migration issue, it becomes abundantly clear that the anti-tax side’s claims have no substance. It’s long past time to stop letting the millionaire migration myth get in the way of progressive tax reform.

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Sbarro Prepares To File For Bankruptcy

March 31, 2011

Fast-food pizza chain Sbarro Inc may file for Chapter 11 bankruptcy as soon as next week, the Wall Street Journal reported on Thursday, citing people familiar with the matter. Sbarro SBARO.UL is in talks with a group of hedge funds holding its senior debt to provide about $35 million in so-called debtor-in-possession financing to help keep the chain operating in bankruptcy, the Journal said. A Sbarro representative was not immediately available for comment. (Reporting by Dena Aubin; editing by Carol Bishopric) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Bryce Covert: The Return of the Debtor’s Prison

March 30, 2011

Judges have signed off on more than 5,000 warrants allowing borrowers who don’t pay to be jailed since the start of 2010. Portfolio Recovery Associates, a debt buyer, made $44 million last year on $281 million in revenue, a 16% net margin. You wouldn’t be crazy to think that debtor’s prisons are a thing of the past. Debtors have historically been treated pretty poorly: under Roman law, a debtor’s body could be chopped up and the pieces given to his creditors (although they were more likely to be turned into slaves). So debtor’s prisons, in comparison, might seem less harsh. But they were squalid and debtors weren’t given any provisions. No sentences were set; you were there until you paid up. Borrowers owing as little as 60 cents could be jailed indefinitely. They were officially abolished in the United States in 1883. But they’re now making a comeback in a modern form. As the debt-collection industry buys up bad debt and then seeks payment, it’s started relying on arrest warrants to get its way, throwing those who miss court appearances or don’t pay in jail. The Minneapolis StarTribune was one of the first to report on the resurgence : after analyzing court data it found “the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009.” The practice is inconsistent, varying state-by-state, and the actual punishment varies. But there have been some cases that stand out: In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man “to indefinite incarceration” until he came up with $300 toward a lumber yard debt. It’s impossible to say how widespread this is across the country as no national statistics are kept. But the Wall Street Journal recently reported on the same phenomenon: More than a third of all U.S. states allow borrowers who can’t or won’t pay to be jailed. Judges have signed off on more than 5,000 such warrants since the start of 2010 in nine counties with a total population of 13.6 million people, according to a tally by The Wall Street Journal of filings in those counties. In Minnesota, arrest warrants have been issued for debts totaling as little as $85. It’s not free to put people in jail, either, and taxpayer dollars cover the cost. Not to mention the distraction from pursuing violent offenders. Law enforcement “can’t quickly access arrest orders for dangerous criminals because their computer system is clogged with debt cases,” reports the WSJ . And there’s something else we’re being distracted from. In Joe Nocera’s weekend NYTimes column , he told the story of Charlie Engle, a marathoner who has been serving a 21-month sentence for mortgage fraud. Was he a lender who suckered borrowers into loans they couldn’t afford? A banker who sliced and diced mortgages into securities with AAA ratings? No. He’s a borrower who supposedly lied on two liar’s loans (although as Nocera reports, the evidence for that is pretty fuzzy). So while Angelo Mozilo walks free, making a nice profit for his company and himself, Engle goes to jail. Banks and debt collectors are making a tidy profit, while the customers they prey upon are being thrown in the slammer. “We have now imprisoned one generation of debtors after another,” Samuel Johnson observed in 1758, “but we do not find that their numbers lessen.” His words ring true today. Cross-posted from New Deal 2.0 .

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Microsoft Co-Founder Slams Bill Gates

March 30, 2011

Vanity Fair has reprinted a lengthy excerpt from Paul Allen’s controversial memoir, “Idea Man: A Memoir by the Co-founder of Microsoft,” and it does not paint a flattering portrait of Bill Gates, with whom Allen established Micro-Soft in 1975. The book begins in 1968, when tenth-grader Allen’s fascination with his school’s teletypewriter leads to his first meeting with Gates, “a gangly, freckle-faced eighth-grader” with a “scruffy-preppy look.” Allen describes his early relationship with Gates as somewhat fraternal, with Allen filling the role of the older brother Gates never had. Even as a schoolboy, Allen recalls, Gates had lofty goals and a fierce competitive streak. “He was 13 years old and already a budding entrepreneur,” writes Allen. Allen’s portrait of Gates starts to darken after 1974, when Gates convinced Allen to leave college and the two began programming round-the-clock together. Gates, he claims, had a tendency to micro-manage and downplay Allen’s contributions to their collaborations. Allen writes: I tried to put myself in his shoes and reconstruct his thinking, and I concluded that it was just this simple: What’s the most I can get? I’d been taught that a deal was a deal and your word was your bond. Bill was more flexible; he felt free to renegotiate agreements until they were signed and sealed. There’s a degree of elasticity in any business dealing, a range for what might seem fair, and Bill pushed within that range as hard and as far as he could. Allen describes Gates as growing increasingly harsh as Microsoft grew: “[H]e thrived on conflict and wasn’t shy about instigating it. A few of us cringed at the way he’d demean people and force them to defend their positions.” Allen goes on to accuse Gates of colluding with newly appointed CEO Steve Ballmer. The event takes place soon after Allen was diagnosed with early-stage Hodgkin’s lymphoma. Allen’s recollection reads: One evening in late December 1982, I heard Bill and Steve speaking heatedly in Bill’s office and paused outside to listen in. It was easy to get the gist of the conversation. They were bemoaning my recent lack of production and discussing how they might dilute my Microsoft equity by issuing options to themselves and other shareholders. It was clear that they’d been thinking about this for some time. I helped start the company and was still an active member of management, though limited by my illness, and now my partner and my colleague were scheming to rip me off. It was mercenary opportunism, plain and simple. Bill Gates, however, remembers the partnership differently. “While my recollection of many of these events may differ from Paul’s, I value his friendship and the important contributions he made to the world of technology and at Microsoft,” Gates said in a statement, posted on the Microsoft Blog . The Wall Street Journal elaborates, “The Messrs. Gates and Allen were widely thought by associates to have a warm relationship in the years since Mr. Allen, 58 years old, left Microsoft. Even Mr. Allen says Mr. Gates was one of his ‘most regular visitors’ when Mr. Allen was recovering from chemotherapy two years ago from non-Hodgkin’s lymphoma, describing him as ‘everything you’d want from a friend, caring and concerned.’” Carl Stork, a technical assistant to Gates at Microsoft told the Journal , “I am surprised that Paul would have felt that it helps his legacy to express dissatisfaction with the share of Microsoft he received While all of us considered Paul a friend and valued his contribution, there is no question that Bill had a far larger impact on the growth and success of Microsoft than did Paul.” Paul Allen’s memoir will be available on April 17. You can read an excerpt at Vanity Fair . The Wall Street Journal has more on the controversy.

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BJ Gallagher: Wal-Mart: What Do Women Want?

March 30, 2011

Judging by allegations in the class action suit being brought by their female employees, Wal-Mart executives and managers seem to have dog ears. You know how dogs’ hearing is attuned to certain frequencies? Well, Wal-Mart leaders have their own selective hearing: they can hear only voices in the lower register — male voices. But it’s not just a Wal-Mart problem. Countless women in businesses and organizations across the country report a common experience: Often when a woman in a business meeting suggests an idea, she is ignored. Ten minutes later, a male colleague suggests a remarkably similar idea and everyone jumps on board with a hearty chorus of “atta boy” and “great idea!” The woman feels confused, hurt, and angry. “What’s with that?” she fumes as she leaves the meeting. And it’s not just her spoken word that goes unheard in the world of business. Women fare no better with the written word. For the past five years I’ve been studying the Wall Street Journal business best-seller list. Among the top 15 titles every week, almost 100% are written by men. (Suze Orman is the notable exception). It’s disheartening to think that only men are seen experts in leadership, teamwork, customer service, motivation, communication, innovation, sales and marketing, finance, change management, career skills, project management and time management. The dearth of women business authors is especially startling in light of the fact that more new businesses formed were started by women than women in the last twenty-five years … and women business owners employ 35% more people than the Fortune 500 combined! I could put a positive spin on these book statistics and say that women are so busy DOING business that they don’t have time to write about it. But I don’t buy it … and neither do you. The real reason that business books by women never become best-sellers is the “dog ears” problem. No matter how the Wal-Mart women’s class action suit turns out, this historic legal action is already making waves throughout Corporate America. These women, whose voices were not acknowledged by their bosses, are now making their voices heard in the courts – as well as in the court of public opinion. If the women succeed in their suit, there may be many more corporate women with their own grievances waiting in the wings to file their own suits. And even if Wal-Mart management prevails, their margin of victory will probably be narrow. Businesses both large and small are nervously watching as the drama unfolds, wondering if this could happen to them. Business leaders need to take a good, hard look at how they treat these women who make up more than half their workforce. Can they really afford to ignore and overlook achievements and ambitions of women who aspire to climb the corporate ladder of success? In today’s hyper-competitive global business environment, can any organization afford to suppress the creativity and ideas of bright, talented, energetic females? Executives and managers who want their corporations to be profitable need to do right by the women who contribute to that profitability. Women are still paid less than 80% of what men in comparable jobs are paid . Women managers still have a better chance of being kidnapped by terrorists than of making to the executive suite. Working women still struggle with walking the tightrope of narrowly defined acceptable behavior for their gender – not too feminine, lest she be judged as “too soft,” and not too masculine, or she’s labeled a “bitch” (or worse). What do the women of Wal-Mart want? They want what working women everywhere want: to be heard, to have their talents and skills acknowledged, to be appreciated for their creativity and contributions, and to be rewarded for their results. Nothing says, “You’re valued,” like a paycheck. Corporate platitudes like “Our people are our most important resource” ring hollow in the face of inequitable pay, curtailed promotions, and dead-end careers. Talk is cheap. Show us the money! Listen up, guys! Are there any business leaders out there who don’t have dog ears? BJ Gallagher is coauthor of “A Peacock in the Land of Penguins: A Fable About Creativity and Courage,” about getting your voice heard by those who sing in a different key.

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Major Chicago Craft Brewer Bought By Anheuser-Busch

March 28, 2011

Anheuser-Busch announced Monday that it was spending nearly $40 million to buy Goose Island, one of the country’s pre-eminent craft brewers, in a play to capitalize on the success of that market. Goose Island’s 312 and Honkers Ale are among the lines that established its prominence in Chicago’s local market. And some Goose Island’s specialty beers garnered the company national attention: the Bourbon County Brand Coffee Stout was rated the top beer of 2010 by BeerAdvocate, and RateBeer called Goose Island the tenth-best brewery in the world that year. John Hall, the head of Goose Island, said that the company was quickly outgrowing its capacities , having to limit production of some of its most popular beers, and that the deal with Anheuser-Busch would help the company continue to expand. “This agreement helps us achieve our goals with an ideal partner who helped fuel our growth, appreciates our products and supports their success,” Hall said, in a statement on the buyout. Goose Island already uses Anheuser-Busch as its distribution partner, NBC Chicago reports . The corporate beer giant, which runs nearly half of the American beer industry with such brands as Budweiser, Busch and Michelob, bought the majority share in Fulton Street Brewery, owners of Goose Island, for $22.5 million. The remaining share, owned by the Craft Brewers Alliance, was purchased by AB for $16.3 million. As the Wall Street Journal points out , craft brewing has been an exceptionally solid performer in an otherwise unexceptional beer market in recent years. Craft beer sales were up 11 percent last year, while the broader industry was down one percent.

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Fannie Mae Internally Reported Foreclosure Abuses In 2006

March 25, 2011

Fannie Mae was warned in a 2006 internal report of abuses in the way lenders and their law firms handled foreclosures, The Wall Street Journal reported on Thursday. Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) have both been under investigation since September 2008 for their role in the mortgage crisis. The 2006 report said foreclosure attorneys in Florida had “routinely made” false statements in court in an effort to more quickly process foreclosures, The Wall Street Journal reported. The report said Fannie Mae officials “believe foreclosure counsel are sacrificing accuracy for speed” but did not name any firms, the Journal said. The internal document also raised questions about whether some mortgage servicers or another entity had the legal standing to foreclose, the newspaper said. The Fannie Mae report found no evidence that borrowers were improperly placed in foreclosure, The Wall Street Journal said. “Fannie Mae took the necessary steps to address the specific issues identified by the 2006 report and regularly evaluates and enhances oversight of its retained attorney network,” a spokeswoman for the government-controlled firm told the newspaper. The U.S. Treasury took control of Freddie Mac and Fannie Mae at the height of the financial crisis in September 2008 as losses mounted from mortgages gone bad. (Reporting by JoAnne Allen; Editing by Gary Hill) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Julian Block: Filing-Time Fantasies

March 24, 2011

Most myths are fairly short lived. Some, though, just refuse to die. Take, for example, the one that makes the rounds every filing season about how to lessen the likelihood of an audit. According to that fable, the IRS programs its computers to go after late filers, not early filers. Why does the IRS pay less attention to early returns? Supposedly, the agency expects people whose 1040s can’t stand a close look to delay submission of their forms until the last minute. The companion myth is to go the reverse route. The computers are less likely to kick out the 1040s of late filers because the feds are overwhelmed with all kind of returns around April 15. Actually, says the IRS, and knowledgeable tax professionals agree, it makes absolutely no difference whether returns reach the agency early, in between or barely make the due date. That’s because it’s not until much later in the year that all returns go through computers that look them over for arithmetic errors and also single out those most ripe for audit on the basis of top-secret computations that assign scores to various items–charitable contributions and interest expenses, for instance. High-scoring returns, along with some chosen purely at random, are then closely scrutinized by IRS agents to determine which ones should actually be examined. The odds against any return being audited are reassuringly long–better than 100 to one. Put another way, the IRS examines about one percent of all individual returns. That said, it should come as no surprise that those odds can shorten considerably, depending on such factors as the amount and type of income you declare and what you do for a living. Overall odds may not mean that much anyway. Some years, the tax enforcers zero in certain occupations–doctors, dentists, attorneys and accountants, to cite several of the high-visibility groups that are routinely favored for audits. Why is that? Because, among other reasons, these folks file returns that show high incomes, hefty personal deductions in relation to their incomes, and sizable gray-area write-offs for business, as well as losses on investments in questionable tax shelters or in sideline ventures that turn out to be “hobbies,” defined by the IRS as activities pursued without expectations of profits. Hobbyists in IRS cross hairs include persons who offset their full-time salaries and other sources of income with losses they incurred in breeding horses or dogs, collecting and selling coins and stamps, or painting, photography and writing, to note just a few of the many possibilities. But hobby expenses are allowable only up to the extent of hobby income. Moreover, as the IRS learned long ago, many professionals are persistently poor record keepers who are unable to substantiate their spending for business expenditures, mainly because of the strict record-keeping requirements for entertainment and travel expenses. HOW NOT TO DO BATTLE WITH THE IRS . An Illinois taxpayer charged the IRS with violating his civil rights by picking his return for audit, thereby requiring more supporting data from him than from the millions who escaped examination. The Tax Court was cold to his complaint. Then there was Dean M. Hicks, a Costa Mesa, Calif., engineer. Dean was successfully prosecuted by the feds on charges that he fired 13 mortar shells at an IRS Service Center in Fresno, and placed a truck bomb–discovered before it exploded–at the agency’s West Los Angeles office. His motive? Dean told of a telephone conversation, during which IRS staffers made rude remarks and joked about the disallowance of a contribution deduction. *** Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as “a leading tax professional” (New York Times), “an accomplished writer on taxes” (Wall Street Journal) and “an authority on tax planning” (Financial Planning Magazine). His books include Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers: Trim Taxes to the Legal Minimum.

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Banks’ ‘Principle’ Trades May Escape Volcker Rule

March 22, 2011

For at least one aspect of Goldman Sachs’ operations, it may be business as usual after the Dodd-Frank financial reform bill is implemented. Bank of America analyst Guy Moszkowski, who met with four Goldman executives in Hong Kong on Monday, published a note to investors saying Goldman will continue making “principle investments” — longer-term direct purchases of securities, companies and property assets — under the assumption that the practice is not in violation of the Volcker rule, a provision of the Dodd-Frank bill intended to limit the ability of taxpayer-backed banks to make trades with their own money, Bloomberg reports. The Volcker rule explicitly bans banks from short-term trading of securities on their own behalf, but the restrictions do not seem to apply to princple investments, which are made over longer terms. The principle investment loophole was first noted in November, when the Financial Times reported that American banks had found a way to continue betting their own money through certain types of trades. Volcker himself expressed concern about the practice at the time, the Wall Street Journal reported : Mr. Volcker’s concern, according to several people familiar with the matter, is that narrow or prescriptive rules would invite gamesmanship on the part of banks and could allow firms to evade the rule’s intent. Already, some banks and their lobbyists are seeking to sway regulators and encourage them to narrowly define certain types of trading activities, according to government officials. At a congressional hearing earlier this year, Mr. Volcker said regulators should adopt a Potter Stewart-like approach to determine what runs afoul of the law, referring to the former Supreme Court justice who said of pornography, “I know it when I see it.” Mr. Volcker’s version: “Bankers know what proprietary trading is and is not. Don’t let them tell you any different.” Since the Volcker rule was first proposed, Paul Volcker has been emphatic that his namesake rule be as airtight as possible. But even before financial reform passed, Volker was already “disappointed” by some of the compromises made, as The New Yorker ‘s John Cassidy reported last year. Read the full piece at Bloomberg here for more detail on Goldman’s investment.

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AT&T To Buy T-Mobile For $39 Billion

March 20, 2011

NEW YORK — AT&T Inc. said Sunday it will buy T-Mobile USA from Deutsche Telekom AG in a cash-and-stock deal valued at $39 billion that would make it the largest cellphone company in the U.S. The deal would reduce the number of wireless carriers with national coverage from four to three, and is sure to face close regulatory scrutiny. It also removes a potential partner for Sprint Nextel Corp., the struggling No. 3 carrier, which had been in talks to combine with T-Mobile USA, according to Wall Street Journal reports. AT&T is now the country’s second-largest wireless carrier and T-Mobile USA is the fourth largest. The acquisition would give AT&T 129 million subscribers, vaulting it past Verizon Wireless’ 102 million. The combined company would serve about 43 percent of U.S. cellphones. For T-Mobile USA’s 33.7 million subscribers, the news doesn’t immediately change anything. Because of the long regulatory process, AT&T expects the acquisition to take a year to close. But when and if it closes, T-Mobile USA customers would get access to AT&T’s phone line-up, including the iPhone. The effect of reduced competition in the cellphone industry is harder to fathom. Public interest group Public Knowledge said that eliminating one of the four national phone carriers would be “unthinkable.” “We know the results of arrangements like this – higher prices, fewer choices, less innovation,” said Public Knowledge president Gigi Sohn, in a statement. T-Mobile has relatively cheap service plans compared with AT&T, particularly when comparing the kind that don’t come with a two-year contract. AT&T CEO Randall Stephenson said one of the goals of the acquisition would be to move T-Mobile customers to smart phones, which have higher monthly fees. AT&T “will look hard” at keeping T-Mobile’s no-contract plans, he said. AT&T’s general counsel, Wayne Watts, said the cellphone business is “an incredibly competitive market,” with five or more carriers in most major cities. He pointed out that prices have declined in the past decade, even as the industry has consolidated. In the most recent mega-deal, Verizon Wireless bought No. 5 carrier Alltel for $5.9 billion in 2009. Stifel Nicolaus analyst Rebecca Arbogast said the deal will face a tough review by the Federal Communications Commission and the Justice Department. She expects them to look market-by-market at whether the deal will harm competition. Even if regulators approve the acquisition, she added, they are likely to require AT&T to sell off parts of its business or T-Mobile’s business. Verizon had to sell off substantial service areas to get clearance for the Alltel acquisition. To mollify regulators, AT&T said in a statement Sunday that it would spend an additional $8 billion to expand ultrafast wireless broadband into rural areas. Instead of covering about 80 percent of the U.S. population with its so-called Long Term Evolution, or LTE network, AT&T’s new goal would be 95 percent, it said. That means blanketing an additional area 4.5 times the size of Texas. The network is scheduled to go live in a few areas this summer, but the full build-out will take years. The offer would help the FCC and the Obama administration meet their stated goals of bringing high-speed Internet access to all Americans. They see wireless networks as critical to meeting that goal – particularly in rural areas where it does not make economic sense to build landline networks. AT&T said its customers would benefit from the cell towers and wireless spectrum the deal would bring. In some areas, it would add 30 percent more capacity, AT&T said. “It obviously will have a significant impact in terms of dropped calls and network performance,” Stephenson said. AT&T would pay about $25 billion in cash to Deutsche Telekom, Germany’s largest phone company, and stock that is equivalent to an 8 percent stake in AT&T. Deutsche Telekom would get one seat on AT&T’s board. Like Sprint, T-Mobile has been struggling to compete with much larger rivals AT&T and Verizon Wireless, and its revenue has been largely flat for three years. Bellevue, Wash.-based T-Mobile USA’s subscriber count has stalled at just under 34 million, though it posts consistent profits. Deutsche Telekom has been looking at radical moves to let it get more value out of its U.S. holding, including a possible combination with a U.S. partner. There was a big hurdle to a T-Mobile USA-Sprint deal: The two companies use incompatible network technologies. The same hurdle would apply in a Verizon Wireless-T-Mobile USA deal. But the networks of AT&T and T-Mobile use the same underlying technology, so to some large extent, AT&T phones can already use T-Mobile’s network, and vice versa. The deal has been approved by the boards of both companies. Dallas-based AT&T can increase its cash portion by up to $4.2 billion, with a reduction in the stock component, as long as Deutsche Telekom receives at least a 5 percent equity ownership interest in the buyer. The agreement doesn’t leave room for other buyers to jump in with a higher bid, AT&T said. AT&T would finance the cash part of the deal with new debt and cash on its balance sheet and will assume no debt from T-Mobile. ___ AP Technology Writer Joelle Tessler contributed to this report from Washington, D.C.

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Officials Overseeing Corporate Bonuses Might Need Some Themselves, Auditors Say

March 18, 2011

WASHINGTON — In an ironic twist, government auditors say the Treasury Department might need to award bonuses to its staff to finish efforts to recoup billions of bailout dollars. Bonuses became a flashpoint for public outrage during the financial crisis. Companies such as American International Group Inc. paid out millions just after they accepted billion-dollar rescue packages. That outrage extended to Capitol Hill, where lawmakers created tough new rules banning cash bonuses, retention payments and other pay practices by any company holding bailout money. Now, the officials who monitor those hundreds of companies might need some bonuses themselves, said Thomas McCool, director of applied research and methods with the Government Accountability Office, on Thursday. McCool monitors the bailout program for the GAO, one of three oversight bodies to do so. He said Treasury’s Office of Financial Stability might learn what private companies have been arguing for years: In a competitive job market, your best people might leave – and that can make it difficult to get the job done. The office also faces a wave of departures in the next two years, he said. Half of its employees were appointed to four-year terms. The terms are about to start running out. The amount of money at stake for government workers is far less – five figures, compared with six or seven in the financial industry. But the principle is the same: Employers believe a little extra pay can be a big help in holding the team together. Treasury spokesman Mark Paustenbach said the concern is overplayed. “Treasury has very strict criteria around bonuses and we have had no trouble finding excellent people who want to serve their country and help wind down” the bailouts, he said in a statement. Financial executives have railed against the pay limits imposed after many of them already had taken bailout money. Robert Benmosche, CEO of American International Group Inc., threatened to quit when negotiations with then-pay czar Kenneth Feinberg reached an impasse, The Wall Street Journal reported in June. In a memo to employees, Benmosche said he was struggling to “overcome this compensation barrier that stands in the way of restoring AIG’s value.” Under government rules, only officials with competing job offers can be paid bonuses. The amounts are capped at 25 percent of a person’s salary. Such amounts might not sway OFS leaders, many of whom took massive pay cuts to leave Wall Street for Washington. In addition, Treasury officials said, the office has a new staffing plan in final draft form, and it’s close to being adopted. McCool pointed out that the plan hasn’t been refreshed since March 2009. “We just want them to keep looking forward,” he said. Testifying before a House panel Wednesday, Treasury Secretary Timothy Geithner appeared ready to heed that advice. “We want to make sure that we’re . . . keeping talented people there as long as we need them for that period of time, so you have to manage these things carefully,” Geithner said. “We want to be very, very careful to make sure that we’re doing as good a job as we can for the taxpayer.”

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Bank Dividend Increases Would Give Wall Street Chiefs Millions

March 17, 2011

The Wall Street pay practice that has been described as a way to make banks safer is now set to enrich top executives. When banks are allowed to increase shareholder dividends, the New York Times reports today , chief executives who are paid in stock will see massive rewards. The nation’s biggest banks have enjoyed a remarkable recovery, even as key elements of the broader economy, including many small banks, still falter from the downturn. When results of the most recent bank “stress tests” are released to banks Monday, the big banks will likely get high marks, which would mean they’d be allowed to pay higher dividends to shareholders. Some chief executives, who receive large portions of their compensation as company stock, would get millions of dollars’ worth of payment.JPMorgan chief Jamie Dimon could eventually get nearly $6 million a year in dividends, and Capital One chief Richard Fairbank could get nearly $3 million yearly, the New York Times reports. Government officials scrutinized executive compensation in the wake of the financial crisis. Big bonuses for executives, which rewarded short-term gains and didn’t encourage chiefs to consider the long-term health of their institutions, led banks into reckless deals, experts say. To remedy this situation, lawmakers and regulators have pressured banks to pay executives in company stock. Executives would think like owners, the logic went, and they’d have a personal stake in making sure their company survived beyond the next quarter. Many institutions have re-structured executive compensation to include more stock. In some cases, executives’ base salaries increased, to offset smaller bonuses. Stock payments , moreover, haven’t actually caused banks to behave differently, concluded a report released late last year by the Council of Institutional Investors. The stock awards are so large, the report said, that executives don’t treat them with the delicacy regulators expected. Now, those amplified stock payments are expected to get even sweeter. After the financial crisis seemed to threaten the survival of Wall Street’s most profitable institutions, regulators have required banks to cut their dividend payments, to bolster their defenses against losses. But as bailout money gets repaid, and as banks post profits , the government has allowed them to increase the money they pay shareholders. The most recent “stress test,” which uses simulations to determine the financial health of the nation’s 19 largest banks, is concluding. A government seal of approval would open the door to big dividend payments. That would be a boon for shareholders, which often include investors like pension funds. It would be a larger boon for chief executives, who are often some of the biggest shareholders. Pay at Wall Street firms rose 5.7 percent to set a new record last year, the Wall Street Journal reported. Regulators haven’t finished writing rules that would govern bank executive pay . At a House hearing in September, officials from the Federal Reserve, the Securities and Exchange Commission and the Federal Deposit Insurance Corp. declined to identify what constituted “inordinately large” pay. “It’s very nuanced,” Federal Reserve general counsel Scott Alvarez said at the time. “There is no number.”

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Chase Tests $5 ATM Fee

March 17, 2011

Bank customers could face $5 ATM fees. In Illinois, JPMorgan Chase is testing $5 fees for non-customers, in Texas, it’s $4. If the trial runs make enough money, the fees could be rolled out nationwide, the Wall Street Journal reports. HSBC has already hiked rates, charging all non-customers $3 for using the banks’ machines. TD Bank, and PNC Bank are now charging their own own customers $2 for using out-of-network ATMs, unless they sign up for accounts with monthly fees as high as $25, the paper reports. Faced with losing billions of dollars in revenue once new regulations limiting debit card and overdraft charges kick in as part of the Dodd-Frank financial reform bill, banks are looking for new ways to make money. The same scramble led Chase to consider a $50 spending limit for debit cards. Banks are increasingly charging both for using their ATMs if you’re not a customer, and using another banks machines if you are. Banks made $7.1 billion from ATM fees last year, the WSJ reports, $3 billion from charging their own customers for using out-of-network ATMs. “It’s easy to compare debit cards by looking at the monthly fee, so banks are going to try to minimize the monthly fees and load you with fees in different ways — and ATM fees are going to become one of the most popular ways to do that,” Odysseas Papadimitriou, CEO of CardHub.com told CNNMoney . Banks justify charging you to get hold of your own money with claims that ATM networks are expensive to build and maintain. But, the WSJ reports, most of the 425,000 ATMs in the U.S. are not owned by banks, they’re owned by the companies who place terminals in delis, bars and casinos.

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Nuclear Safety Debate Hits Stock Prices

March 16, 2011

General Electric, which designed all six (and built three) of the reactors at the stricken Fukushima Daiichi nuclear power plant in Japan, has lost over $10 billion in market value since last Friday. The March 11 earthquake in Japan, and the devastating tsunamis which followed, critically damaged the nuclear power plant in Fukushima, 150 miles north of Tokyo, raising the threat of a meltdown. After radiation levels at the plant grew dangerously high on Wednesday, workers were temporarily evacuated. Shares in the companies like GE heavily involved in the design and construction of the power plant fell sharply as soon as news of the damage and radiation leaks broke. As the debate turned to the safety of nuclear power plants in the U.S., analysts, expecting construction delays at new plants, cut expectations for shares of companies that build and run American power plants, along with companies that mine the nuclear fuel uranium. GE saw the worst drop of all 30 companies in the Dow Jones industrial average, according to Bloomberg, with shares falling 3.7 percent to $19.61 between March 11 and March 15. Shares of Japanese firm Hitachi, which runs the stricken plant along with GE, fell 6.3 percent in trading on Monday, before recovering. GE’s nuclear power arm, represents a small fraction of the firm’s income, making up around $1 billion of GE’s $150 billion in revenue in 2010, Bloomberg reported. The firm also has no legal liability for the crisis in Japan. Toshiba, which was responsible for building another of the nuclear reactors at the Fukushima Daiichi plant, also fell 10 percent on Monday, Marketwatch reported. U.S. firms more involved in the nuclear power industry , are likely to take a harder hit as the crisis plays out, Marketwatch reported, with questions over the safety of nuclear power . Shares at energy firm Entergy, which runs 12 U.S. nuclear power plants, fell 2 percent on Tuesday, Businessweek reported. Citing concerns about the safety of American nuclear power plants, especially in earthquake-prone parts of the country, as well as possible delays to new construction and possible higher costs, Steve Fleishman, analyst at Bank Of America Merrill Lynch cut ratings for Entergy and Scama Corp, which is planning to build two nuclear reactors in South Carolina, according to the Wall Street Journal . Companies which mine uranium , an element used to power nuclear power plants, are also expected to suffer, while renewable energy stocks trade higher the WSJ reported.

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Jan Schakowsky Introduces Bill To Raise Taxes For Wealthiest Americans

March 16, 2011

WASHINGTON — Rep. Jan Schakowsky (D-Ill.) announced new legislation on Wednesday that would create new tax brackets for earners who make significantly more than the baseline for the current top income bracket. Currently, the top marginal tax rate of 35 percent applies to income starting at $373,650, and the tax code fails to distinguish between earners making a few hundred thousand dollars a year and those making a few hundred million dollars a year. “LeBron James and LeBron James’s dentist: same difference,” New Yorker financial columnist James Surowiecki quipped last year during early debate over the extension of the tax cuts enacted under former President George W. Bush. Meanwhile, income inequality continues to soar, as Schakowsky, one of the 18 members of President Barack Obama’s debt commission, noted on Wednesday. “In the United States today, the richest 1 percent owns 34 percent of our nation’s wealth — that’s more than the entire bottom 90 percent, who own just 29 percent of the country’s wealth,” she said during her prepared remarks at a press conference. “And the top one-hundredth of 1 percent now makes an average of $27 million per household per year. The average income for the bottom 90 percent of Americans? $31,244.” Schakowsky’s bill would create new tax brackets for earners making between $1 million and $1 billion annually, with tax rates starting at 45 percent with the millionth dollar and increasing on a sliding scale. The legislation would also tax capital gains and dividend income as ordinary income for those earning over $1 million in a given year. A full list of the new brackets appears below: $1-10 million: 45% $10-20 million: 46% $20-100 million: 47% $100 million to $1 billion: 48% $1 billion and over: 49% If enacted in 2011, Schakowsky’s Fairness in Taxation Act would raise an estimated $78.9 billion in its first year, according to Citizens for Tax Justice, a liberal lobbying group. CTJ was unable to provide further projections, however. Reps. Keith Ellison (D-Minn.) and Raul Grijalva (D-Ariz.), co-chairs of the Congressional Progressive Caucus, partnered with Democratic Reps. Jesse Jackson, Jr. (Ill.), Donna Edwards (Md.), Bob Filner (Calif.), Jerry Nadler (N.Y.), Steve Cohen (Tenn.), John Yarmuth (Ky.) and Peter DeFazio (Ore.) to cosponsor the bill. “The middle class is shrinking and deficits are rising because Republicans are giving a pass to special interests who aren’t paying their fair share,” Ellison said at the press conference. “This bill is part of a plan to level the playing field.” As the battle over the budget for the remainder of fiscal year 2011 continues to unfold on Capitol Hill, Schakowsky has been insisting that there are more progressive ways to reduce the country’s $13.7 trillion debt. She said she hopes her bill can broaden the focus of the debate, and Yarmuth offered similar sentiments in remarks to reporters Wednesday. “Yes, we have a spending problem,” said Yarmuth, “but we also have a revenue problem. We’re only asking that those of us who have done extremely well bear our fair share of the problem.” Yarmuth told reporters that a number of his Republican colleagues had told him in confidence that it would be difficult for them to vote against Schakowsky’s bill were it to come to a vote. “It will just be very interesting if we can get it up to a vote,” he said. A recent NBC News/ Wall Street Journal poll found that the most popular way to reduce the federal deficit was to place a surtax on federal income taxes for Americans making more than $1 million per year, with 81 percent of respondents agreeing with that statement. Katharine Myers, a Pennsylvania millionaire who made her fortune off the royalties from the Myers-Briggs personality test created by her mother-in-law, told reporters at Wednesday’s press conference that she believes the wealthy should pay substantially higher taxes — all of them. “Someone once said, ‘Why don’t you donate money to the government?’ Well that would be like putting a grain of sand in a beach,” Myers said. “It needs to apply to everybody.”

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Dan Solin: The Only Question That Matters for Investors

March 16, 2011

The financial media is whipped into a frenzy. There is so much uncertainty. Here’s a summary of recent developments: Bill Gross eliminated U.S. government debt from the Pimco’s Total Return Fund. Nouriel Roubini (“Dr. Doom”) predicts $100 billion in municipal bond defaults over five years. Ireland, Greece, Portugal and Spain remain in tenuous financial condition. The devastating earthquake in Japan has broad economic ramifications. Unrest in Libya and in the rest of the Middle East threatens oil prices. What does it all mean for investors? How fortunate we are to have so many “experts” who can make sense of these disturbing developments. Money manager Laszlo Birinyi advises “[]These kinds of strong beginnings lead to long and durable bull markets. Hedge fund manager Barton Biggs agrees. Over at The Wall Street Journal , they’re not so sure. Brett Arends listed ten reasons why investors should be worried. His sources are interesting. He relies on an unnamed “European hedge fund manager” who is “worried about China.” The source is not buying aggressively, and Arends find that significant. It’s quite remarkable what passes for responsible financial journalism at The Wall Street Journal these days. I get asked for my opinion on many of these issues by readers of my books and blogs, advisory clients and prospective clients. Many can’t hide their disappointment when I tell them I have no clue how these events will affect the markets. What’s more, neither does anyone else, including those who are so confident of their predictions and who dispense their advice so freely. What’s more, I don’t care and I don’t believe intelligent investors should either. Here’s why. Many studies confirm the relationship between loss of money and suicide. Ask most men what they fear most and they will tell you it is the loss of their money and homelessness. You would think their investing decisions would seek to minimize this possibility. Instead, they are more often focused on the short term consequences of current events. This makes no sense. The average sixty-year-old will live another twenty years or so. Here’s the only question she (and all other investors) should be asking her financial advisor: Can you financially engineer a portfolio for me, using long term (at least 50 years) data, that will maximize my returns for the amount of risk I will be taking, for the rest of my life, and will minimize the possibility that I will be destitute in my old age? The good news is that it is very easy to accomplish this goal. We have all the tools and data necessary to do so. The analysis can be based on sound academic, peer-reviewed research, used by savvy pension and trust fund administrators and high net worth individuals. Of course, it’s not predictive, but it’s far more reliable than relying on financial astrologers. I have rarely met an investor who had such a plan, or who understood that he could get one. You have a choice. You can listen to the musings of people who believe they can predict the future, or you can plan intelligently for your own future. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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Criminal Case Against Lehman Brothers Stalls

March 12, 2011

(Reuters) – A government probe into the fall of Lehman Brothers Holdings Inc has hit so many snags that enforcement officials fear they may never be able to bring civil or criminal charges against company executives, the Wall Street Journal reported on Saturday. According to the paper, Securities and Exchange Commission officials have begun to doubt they can prove that Lehman broke U.S. laws by moving nearly $50 billion in assets off its balance sheet to make it appear that the securities firm had lowered its debt burden. Quoting people familiar with the situation, the Journal said SEC officials are also worried they might not win any lawsuit against former Lehman Chief Executive Richard Fuld Jr accusing him of improperly accounting for the value of a large real estate portfolio acquired with the takeover of Archstone-Smith Trust, or to hide losses to investors related to that deal. If the SEC decides not to file charges against Lehman, the securities firm could escape criminal prosecution because the Justice Department often takes its lead from the SEC, the newspaper said. (Reporting by Julie Steenhuysen; Editing by Vicki Allen) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Carl Pope: The End of Incumbent Capitalism?

March 4, 2011

Santa Barbara — While the “Eco:nomics — Creating Environmental Capital” — conference is hosted by The Wall Street Journal , the anti-government bias that dominates the Journal ‘s editorial page was slammed by speaker after speaker, beginning with venture capitalist Vinod Khosla. Khosla went after what he called “incumbent capitalism,” in which government policy and incentives are designed not to encourage competition and innovation, but to protect entrenched incumbent interests, with coal, oil, nuclear, and utility monopolies being the most spectacular beneficiaries of this bias against innovation. Dow Chemical CEO Andrew Liveris, who would seem to represent a well-entrenched incumbent company, then piled on. Liveris, an Australian, has a new book called Make It In America: The Case for Re-Inventing The Economy, which makes the case for bringing America back as a manufacturing power. Liveris concedes that — for weird historical reasons — the term “industrial policy” is too politically toxic to use, but that’s what he’s talking about. Challenged by the Journal ‘s moderator on whether this won’t simply lead to the government wasting money, Liveris pushes back hard, citing China and Germany today and Japan in the 1960s and 70s as models for government intervention that’s essential for economic vibrancy. “Around the world, countries are acting more and more like companies: competing aggressively against one another for business and progress and wealth. Governments are boosting business, creating a climate that attracts and rewards investment, spurs innovation and job creation, and appeals to companies that are less bound by national borders than ever before.” Meanwhile, in the United States, we operate as if little has changed. Our faith in the wisdom of markets may be shaken, but not at a fundamental level. Liveris is not the only incumbent CEO here calling for massive restructuring of the American economy based on government support for innovation. Dupont’s Ellen Kullman warns skeptics that customer interest in the sustainability and greenness of products soared from 2005-2008, and surprisingly did not fall back with the economic crisis. William Clay Ford envisions a very different automobile market driven by electric vehicles. Clean tech entrepreneurs like Solyndra’s Brian Harrison or Suzlon’s Tulsi Tanti are blunt that unless the U.S. government provides stable policy signals for renewables, the supply chain will be driven overseas even more than it has been to date. The most cautious voice is probably AEP’s Mike Morris, but even he concedes that his current inventory of coal plants will not be added to, and that he will undoubtedly retire his units below 500MW. Even Rio Tinto, a mining company with historical coal roots, has shifted its U.S. portfolio to adjust to a low carbon economy they think is inevitable. Matt Rogers of McKinsey, who worked for two years at Department of Energy managing stimulus grants, says the program works: pace of research innovation in the energy sector is far higher than it was two years ago, but now these innovations face the challenge of working through the energy sector’s historically innovation-resistant supply chains. The sharpest edge to the tension between business and the Wall Street Journal ‘s laissez-faire editorial policies came when Kim Strassel repeated her oft-stated concern that if the federal government acted like a venture capitalist and supported research in a wide variety of important but risky innovations, the public would turn against the program because some innovations would fail to pan out. Ray Lane of Kleiner Perkins shot back: “the American people would be fine with it, if you would write about what’s really happening. It’s the media, not the public, that is the problem.” It would have been most instructive for the new members of Congress to spend the day here, listening — because it is very clear that the mainstream business community and clean tech innovators alike are terrified that the Tea Party’s hostility towards the national government constitutes a serious threat to the American economy and the American future. But wonderful as the conference was, I somehow don’t expect its lessons to make their way to the Tea Party caucus in Congress via the WSJ ‘s editorial pages. Indeed, the Journal greeted the last day of the conference by giving the business leaders assembled here an anti-government raspberry, leading with an editorial attack on EPA’s proposed new regulations to clean up emissions from industrial boilers . Business may be getting it. But reactionary ideologues are not.

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Banks Receive Proposals on Troubled Mortgages

March 4, 2011

U.S. banks received a proposal from state attorneys general and several federal agencies that could require them to reduce loan balances of troubled mortgage borrowers, the Wall Street Journal said, citing people familiar with the matter. The 27-page document, sent to the nation’s largest mortgage lenders, does not specify penalties or fines but instead represents a detailed code of conduct for how they must treat borrowers throughout the loan modification process, the sources told the paper. The proposed code of conduct would require banks to first consider reducing loan balances of mortgage borrowers in certain instances before modifications or foreclosure, the paper said.

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Goldman CEO Will Testify For Insider Trading Case

March 4, 2011

(Reuters) – Goldman Sachs Group (GS.N) Chief Executive Lloyd Blankfein has agreed to testify for the U.S. government at the upcoming trial of Galleon hedge fund founder Raj Rajaratnam, the Wall Street Journal reported, citing people familiar with the matter. The criminal trial of the Sri Lankan-born Rajaratnam, 53, is scheduled to start on March 8 in Manhattan federal court, part of what U.S. prosecutors call the biggest probe of insider trading at hedge funds. The long-running case took a new turn two days ago when the U.S. Securities and Exchange Commission charged former Goldman director Rajat Gupta with providing inside information to Rajaratnam. Gupta called the charges baseless. The U.S. government would use Blankfein to establish evidence linking information about Goldman that was shared among board members and executives with Gupta, the Journal said. Blankfein’s testimony would be used as a bridge establishing the origin of the tip allegedly provided by Gupta to Rajaratnam, who the government says traded on the information, the paper said. Goldman representatives were not immediately available for comment outside U.S. business hours. (Reporting by Soyoung Kim; Editing by Muralikumar Anantharaman) Copyright 2011 Thomson Reuters. Click for Restrictions .

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States Mull Bets On Online Gambling

March 3, 2011

Cash-starved states may roll the dice on online gambling. Allowing casinos legally offer online poker to residents could reroute some of the the billions American players currently spend on offshore gambling sites to empty state coffers, industry supporters argue. New Jersey Governor Chris Christie on Thursday vetoed a bill that would have made New Jersey the first state to offer online gambling. Citing public concerns, he said legislators could instead pass the bill by asking New Jersey residents to vote on it in a referendum , the Wall Street Journal reports. The bill to allow Atlantic City casinos to offer online gambling passed through both houses of legislature in New Jersey, with popular support from both Democrats and Republicans, the WSJ reported. The Department of Justice considers almost all forms of online gambling illegal , but states can skirt the federal ban by limiting access to residents, known as intrastate gambling. Lawmakers in states like Pennsylvania, for example, have previously argued that casinos bring in desperately needed revenue, which last year led to the opening of the SugarHouse Casino in Philadelphia. States are now pushing to expand gambling offerings. Last week, Iowa lawmakers introduced a bill that would make online gambling legal for state residents. “Based on the existing tax structure, the state could make $30 to $35 million, just from online gambling run by casinos,” said Kirk Uhler, vice president of government affairs for Beverly Hills, California-based U.S. Digital Gaming, which is in the running to operate Iowa’s online gambling network if the bill passes. “Extrapolating from the number of people already playing poker online, there could be 150,000 people in Iowa playing every year,” he said. “It’s regulating, rather than legalizing.” The same calculations are being made around the country . Nick Iarossi, a Tallahassee, Florida-based gambling lobbyist said his state has an estimated 500,000 online poker players, who could bring in between $20 million and $60 million in tax revenue. He expects a proposal to be placed in front of Florida legislators within weeks. Boosters in California estimated the state could bring in $100 million in tax revenue from the state’s 500,000 online poker fans, and that the new industry could lead to 3,000 new jobs , according ABC News. Lawmakers in the District of Columbia are also considering making games like online poker legal for their residents. Illinois and New York are looking at allowing state lotteries to offer games of chance online, said Anthony Cabot, head of gaming law practice at Las Vegas-based law firm Lewis and Roca. “With the state lotteries, every dollar would go directly into state coffers.” Online gambling is a $12 billion industry globally, said Cabot. Half of that comes directly from the U.S., he added.

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The Hollow Cry Of ‘Broke’: New York Times Editorial

March 3, 2011

“We’re broke! We’re broke!” Speaker John Boehner said on Sunday. “We’re broke in this state,” Gov. Scott Walker of Wisconsin said a few days ago. “New Jersey’s broke,” Gov. Chris Christie has said repeatedly. The United States faces a “looming bankruptcy,” Charles Koch, the billionaire industrialist, wrote in The Wall Street Journal on Tuesday.

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Bank of America Website Down?

March 1, 2011

Bank of America’s website has been slow or completely down for some users since Monday afternoon, according to the Wall Street Journal and several other media outlets. There is no indication, though, that the slowdown is the result of a cyber-attack. Spokeswoman Tara Burke told the Wall Street Journal that “routine” upgrades are instead to blame. According to the Washington Post , Bank of America customers reported technical issues ranging from slowdown to complete shutdown on Tuesday. The bank’s site had a similar issue in January, according to multiple reports. Bank of America has been marred in a number of online controversies lately. In October 2009, WikiLeaks founder Julian Assange claimed he had “5 GB from Bank of America, one of the executive’s hard drives,” leading the company to refuse to process any WikiLeaks payments. Assange has since suggested the revelations may not be all that exciting. In response to the shutting out WikiLeaks payments, the cyber-group Anonymous has pledged to launch “Operation BOA Constrictor.”

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3M Chief Executive: ‘Obama Is Robin Hood-Esque’

February 28, 2011

The CEO of industrial giant 3M has blasted Obama as “anti-business,” joining the ranks of executives who accused the White House of not understanding “what it takes to create jobs.” George Buckley, chief executive of the Maplewood, Minn. company which makes everything from Post-Its to respirators, said U.S. companies could leave the country for Canada or Mexico, the Financial Times reported. “I judge people by their feet, not their mouth,” Buckley said, according to the FT . Speaking about President Barack Obama, he told the FT : “We know what his instincts are – they are Robin Hood-esque. He is anti-business,” he added. Executives have previously compared the President to Hitler and Mussolini. “There is a sense among companies that this is a difficult place to do business,” Buckley told the FT . “It is about regulation, taxation, seemingly anti-business policies in Washington, attitudes towards science,” he added. In January, 3M’s fourth-quarter results revealed management didn’t expect the U.S. market to improve until the unemployment rate, now 9 percent, fell significantly: “”There’s still a lot of smoke without fire,” CEO George Buckley about economic conditions in the U.S. 3M’s U.S. sales rose 8 percent in the fourth quarter. But that was half the rate at which worldwide sales picked up. Sales in Asia, which have been driving 3M’s growth, jumped 35 percent from a year ago. Buckley said mild improvements in unemployment and retail sales data are positive signs, but he advocates a cautious approach in the U.S.” In an attempt to embrace criticism from executives, and to convince U.S. companies to start spending the $1.93 trillion in cash and liquid assets they are currently sitting on, last month, the administration announced the Council on Jobs and Competitiveness. The President named General Electric’s chief executive, Jeffrey Immelt head of the council. Immelt was one of the executives who criticized the Obama administration, telling an investors meeting in Rome last year: “We [the US] are a pathetic exporter… we have to become an industrial powerhouse again but you don’t do this when government and entrepreneurs are not in sync.” In the run up to November’s mid-term elections, the Obama administration faced scathing criticism from leading CEOs. “I think this group does not understand what it takes to create jobs,” said Intel CEO Paul Otellini, last year,

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The Widening Gap Between Company Productivity And Workers Wages ‘Redolent Of Scrooge’ [CHART]

February 26, 2011

As corporate America picks up steam — The Economist described the current profit-reporting season as “shaping up to be one of the best ever” — when will employee compensation catch up? If the history of the last several decades is any indicator, it could be a while. On Friday, the Bureau of Labor Statistics released a disheartening chart illustrating the widening gap between growth of productivity for companies and real hourly compensation for workers over the 30 plus years. From the BLS: Real hourly compensation growth failed to keep pace with accelerating productivity growth over the past three decades, and the gap between productivity growth and compensation growth widened. Over the 2000-09 period, growth in productivity averaged 2.5 percent; growth in real compensation averaged 1.1 percent over the same period. The relationship between productivity and worker compensation illuminates the extent to which the employed benefit from economic growth. As Princeton Economist Alan Blinder wrote in the Wall Street Journal last December: When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that’s right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

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