U.S. to Buy Stakes in Nation’s Largest Banks
Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI
WASHINGTON — The U.S. government is expected to take stakes in nine of the nation’s top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government’s guarantee behind the basic plumbing of financial markets.
To kick off Tuesday’s expected announcement, the government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. — including the soon-to-be acquired Merrill Lynch — Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Treasury Secretary Henry Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government’s response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Other elements of the plan, which will be announced Tuesday morning, include: equity investments in possibly thousands of other banks; lifting the cap on deposit insurance for certain bank accounts, such as those used by small businesses; and guaranteeing certain types of bank lending. It builds on an earlier plan to buy up rotten assets dragging down banks, which failed to calm investor fears, and follows similar moves by major European countries.
Formulated jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., these moves are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government’s involvement come certain restrictions, such as caps on executive pay. For example, firms can’t write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the recently approved $700 billion bailout plan.
Treasury will buy $25 billion in preferred stock in Bank of America — including Merrill Lynch — as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don’t come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government’s stake, a person familiar with the discussions said.
Among the other key components of the plan: The FDIC is expected to offer to temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also expected to temporarily offer banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC’s central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency’s power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.”President Bush in a joint statement with Prime Minister Berlusconi of Italy
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury’s main goal is to attract private capital. To make sure private investors aren’t scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
The government’s new focus is raising questions about why it didn’t adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn’t participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.
Senior executives and advisers to some of the nation’s leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.
House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury’s decision to inject capital into the banking system.
"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn’t have the authority to make such a comprehensive move until Congress passed the bailout bill. The government’s various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government’s hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won’t come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC’s role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.
William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury’s initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.
But Treasury’s new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.
"Investors need to be confident that the banks they’re dealing with are unquestionably solvent, and it’s in the interest of banks to assure investors that that’s the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."
Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic — the fear that has kept banks and investors from making even the most prudent loans. "I think we’re through the worst on that," he said. "Maybe I’ll be proven wrong, but it really was at an extreme last week."
Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don’t want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.
One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn’t enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."
Read the story here.
House Designers Don Hard Hats
Architect-Contractors Gain High-End Following
By SARA LIN
Despite the financial crisis and the housing slump, the phone is still ringing in Peter Gluck’s office. "We’re OK for now," says Mr. Gluck, whose office of 50 architects specializes in high-end residences costing $5 million and up.
That may be explained by the fact that Mr. Gluck and his associates aren’t just the architects for their homes. They’re the general contractors as well, unlocking gates in the morning and stepping onto scaffolds to direct construction.
This architect-as-contractor model, called design-build, had already been gaining new traction at the highest echelons of the housing market, as clients seek ways to execute cutting-edge designs without the headaches often associated with such construction. Membership in the American Institute of Architects’ design-build community has nearly tripled over the past five years, and teachers at several architecture programs across the Midwest report that enrollment in design-build classes has doubled.
And while critics argue that allowing one firm to handle both design and construction duties could result in out-of-control costs, advocates argue the opposite, saying double-duty firms are faring better in tough times because it’s easier for them to keep costs in check. "The design-build process may be as close to a fixed cost contract that an owner can expect in today’s construction world," writes Barry B. LePatner, a prominent construction lawyer, in his "Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry."
In some cases, the savings have been significant. In midtown Manhattan, a client hired Mr. Gluck’s firm to tear down an old brownstone and replace it with one with a loft-like interior. Four months away from completion, the townhouse boasts stone counters, a four-story bookcase, glass stair railings, an elevator, a double-height dining room, a roof deck and an all-glass back façade. The cost: $1.95 million. At $550 per square foot, the townhouse costs nearly half of what experienced builders say it would cost to tear down and rebuild a townhouse with lesser-quality finishes.
Of course, the vast majority of buildings are still built the conventional way, with an architect drawing up plans that the client bids out to general contractors. And for many years, the idea of marrying architects to contractors was viewed with deep suspicion. The American Institute of Architects banned its members from doing design-build from its founding in 1857 until 1979.
Some skeptics still believe the practice is unethical, saying it is a conflict of interest for designers to determine a building’s budget. "In theory clients like it because it sort of simplifies their life. But they’re paying with one less level of protection and oversight," says New York architect Richard Dattner. "There’s either a conflict or an appearance of a conflict."
And not all architects are anxious to change their roles. Taking out a second insurance policy to cover architects as general contractors isn’t cheap. Some architects dislike the less glamorous parts of the job: scaling ladders, negotiating labor contracts, dealing with inclement weather and occasionally hauling trash to a dump.
But design-build advocates argue the conventional method is problematic. When builders run into situations that aren’t explained in the drawings, they wait for the architects’ office to resolve the issue or they engineer a solution themselves, even if their fix doesn’t mesh with the architect’s original design. In either case, the homeowner is saddled with change orders, delays or a compromised design. And when things go wrong, as they often will, architects and general contractors often blame each other.
"People hire an architect they don’t know and hire builders who gave them the lowest bid and they sit there and pray," says New York developer Jeffrey M. Brown.
When Richard Yulman hired an architect to design a copper-clad guesthouse next to his vacation home in Lake George, N.Y., he steeled himself for months of headache. After all, his experience with an architect 15 years earlier had been fraught with disagreements between the designer and contractor and finger-pointing afterward when his new glass roof leaked. "It was a terrible experience," recalls Mr. Yulman, the 63-year-old retired chairman of mattress maker Serta International.
Mr. Yulman hired Mr. Gluck in 2005. "When I’m not happy, there’s one phone call I make," he says.
Skip Paul remodeled and restored three architectural homes, each time hiring separate designers and builders. Last year, the entertainment executive hired Marmol Radziner + Associates to design a Modernist home in Beverly Hills, Calif., with terrazzo flooring, stack-stone fireplaces and an open kitchen-living-dining space enclosed by a glass facade offering views of Los Angeles. Although the firm usually builds its own projects, Mr. Paul still wanted a general contractor. "I didn’t want a bunch of architects to build my house," he says.
But over time, Mr. Paul became impressed with how the architects used their construction knowledge to push the design, so he asked them to bid on the entire project. The firm came up with an amount similar to general contractors, and after watching the contractors leaf through the drawings and puzzle over complex features like the three different roofs that appear to float atop the house, Mr. Paul decided to stick with the architects. "I will end up with the house I wanted for less money," says Mr. Paul.
Many architects became their own contractors out of frustration. After doing architectural restorations of several leaky houses designed by Frank Gehry, Leo Marmol and Ron Radziner became convinced that traditional building methods wouldn’t work on daring architecture. About a dozen of their former staffers have left over the years to start up their own firms, building their own designs. (Mr. Gehry could not be reached to comment on these projects.)
In Omaha, Neb., architect Randy Brown was tired of spending extra hours helping his clients’ general contractors find subcontractors willing to build the warped walls or custom millwork he had designed. "We were doing all the work of the general contractor and not getting paid for it," recalls Mr. Brown, who took on his first house as an architect-contractor in 1998.
To keep subcontractors’ estimates on budget early on, Mr. Gluck uses extremely detailed drawings. Rather than giving the subcontractors one giant roll of drawings to thumb through to determine their estimates, Mr. Gluck puts together an individual set of drawings for each trade. It’s a lot of extra work — as many as 30 different sets of drawings for one project — but it eliminates guesswork and costly change orders. The drawings get into such mundane details as where to place screws and caulking.
To assure his clients that they’re not being taken for a ride, Mr. Gluck keeps his payrolls transparent. His clients have online access to his ledgers through a secure server. Subcontractors’ bids, payments, daily work orders and pictures from the jobsite are uploaded daily.
Beyond homeowners, Mr. Gluck says the architect-as-contractor model goes a long way towards making architecture affordable for nonprofits and schools, which make up about half of his portfolio. That said, Mr. Gluck doesn’t expect to be entirely immune from the current economic climate. "Nobody’s canceling projects, but that’s probably because lot of ours are in construction. We can’t just stop those," he says.
He hopes that he’ll have enough work to keep his office busy through the downturn, but he does note he hasn’t signed any new residential clients in the last month.
Read the story here.
World Leaders Take Big Steps Against Credit Crunch
Government leaders in the U.S. and abroad took big steps this weekend to battle the financial ‘flu’ that has spread across the globe.
In an effort to thaw the credit crunch, Europe’s euro-backed countries decided Sunday to guarantee bank refinancing through the end of 2009 and took measures to prevent more banks from failing. Fifteen European leaders met in an emergency meeting in Paris on Sunday to address the crisis, aiming to help bolster banks’ confidence in lending with one another and get credit flowing once again.
While no sum was given on how much the efforts would cost, French President and summit host Nicolas Sarkozy said each nation would determine how much to spend and implement the measures.
"I want to tell our compatriots in all the countries of Europe that they can and should have confidence," he said.
At the same time, the World Bank announced Sunday it will work to develop and strengthen the economies of developing countries. At a joint news conference with Dominique Strauss-Kahn, head of the International Monetary Fund, World Bank President Robert Zoellick said Sunday that any extended contraction of credit could cause further turmoil in developing countries’ ability to provide for their citizens, who already face high energy and food prices.
Zoellick called for a revamping of the global economic system to ensure that a financial crisis of this level “never happens again.”
International efforts to stem the credit crisis reached a peak on Wednesday, as central banks made an unprecedented decision to take a coordinated interest rate cut. The move came during a week in which global markets suffered some of their worst losses on record.
As finance leaders from the Group of Seven (or G7) met Friday to come up with a unified plan to battle the credit crunch, Treasury Secretary Henry Paulson announced that the U.S. government will buy an ownership stake in some of the nation’s private financial institutions – a move not seen since the Great Depression.
“This is a period like none of us has ever seen before,” Paulson said in a news conference late Friday.
Read the story here.
World Is United To Tackle Financial Crisis, IMF Says
WASHINGTON — Financial policymakers from 180 nations around the world are united in their resolve to tackle the financial crisis, Youssef Boutros-Ghali, head of the International Monetary Fund’s policy committee, said Saturday. The International Monetary Fund endorsed the plan of action released Friday by the Group of Seven nations, he said. "The crisis is global, so the solution has to be global," he said. "No tools will be spared." Later Saturday, a smaller group of the 20 most important economies will meet to hammer out more details of what each country can do to restore confidence in markets. "No one is going to let an important financial institution fail," IMF Managing Director Dominique Strauss-Kahn said.
Read the article here.
Stocks In Focus For Friday
SAN FRANCISCO — Among the companies whose shares are expected to see active trade in Friday’s session are General Electric Co., Host Hotels & Resorts Inc., and Infosys Technologies Ltd.
General Electric Co. (GE: 19.01, -1.64, -7.94%) is expected to report third-quarter earnings of 46 cents a share, according to analysts surveyed by FactSet Research.
Host Hotels & Resorts Inc. (HST: 7.85, -1.91, -19.56%) is forecast to post earnings of 28 cents a share in the third-quarter, according to analysts surveyed by Thomson Reuters.
Infosys Technologies Ltd. (INFY: 25.02, -0.50, -1.95%) is estimated to report a profit of 56 cents a U.S. share in the fiscal second quarter, according to analysts surveyed by FactSet Research.
After Thursday’s closing bell, Citigroup Inc. (C: 12.93, -1.47, -10.20%) said it reached no agreement with Wells Fargo & Co. (WFC: 27.25, -4.65, -14.57%) over Wachovia Corp. (WB: 3.60, -1.46, -28.85%) "The dramatic differences in the parties’ transaction structures and their views of the risks involved made it impossible to reach a mutually acceptable agreement," Citigroup said in a statement. The bank said it will pursue damages against Wachovia and Wells Fargo, but will not seek to block the combination. See full story.
Watch list
American Axle & Manufacturing Holdings Inc. (AXL: 3.46, -0.35, -9.18%) had its ratings lowered to B from B+ by Standard & Poor’s, which then placed them on review for a possible further downgrade. Earlier in the day, S&P put the ratings of General Motors Corp. (GM: 4.76, -2.15, -31.11%) , a major American Axle customer, on review for a possible downgrade.
Home builder Centex Corp. (CTX: 10.17, -1.68, -14.17%) said its board suspended the company’s quarterly dividend of 4 cents a share because of economic conditions. Centex said it "will continue to weigh alternatives for returning cash to shareholders as economic conditions improve."
Chevron Corp. (CVX: 64.00, -9.10, -12.44%) forecasted that its third-quarter earnings will be higher than second quarter on the back of strong improvement in downstream results while upstream earnings are expected to decline due to the effect of hurricanes and lower commodity prices. The company also expects net after-tax charges of $250 million and $300 million in the quarter.
Ford Motor Co. (F: 2.08, -0.58, -21.80%) had its B- long-term corporate credit rating put on CreditWatch with negative implications, by Standard & Poor’s. "The CreditWatch placement reflects the rapidly weakening state of most global automotive markets along with capital market conditions that will remain a major challenge for the foreseeable future," said Robert Schulz, an S&P credit analyst. S&P believes Ford has adequate liquidity for at least the rest of 2008 but the accelerating deterioration of industry fundamentals will be a serious challenge in 2009. The ratings agency also placed Ford Motor Credit Co. on negative CreditWatch.
Longs Drug Stores Corp. (LDG: 68.93, -2.75, -3.83%) said September sales at stores open for at least a year fell 1.7% from a year ago. Analysts surveyed by Thomson Reuters expected a same-store sales decline of 1%. Total September sales at Longs were flat at $447 million.
Morgan Stanley (MS: 12.45, -4.35, -25.89%) said it is the target of a class action lawsuit related to its involvement as an underwriter of a preferred share offering for Lehman Bros. earlier this year. "The complaint alleges that the offering documents for this offering contained material misstatements and missions and asserts claims against the company under Section 11 of the Securities Act of 1933, as amended," Morgan Stanley said in quarterly report filed with the SEC on Thursday. The company also said that although it believes it has raised all the capital it needs through the end of the year, that, "to the extent we are not able to access the debt markets on acceptable terms in the future, we may increase our use of deposit funding and other funding sources generally available to a financial holding company, and/or may seek to raise funding and capital through equity issuance."
Read the story here.
Facing Steeper Health-insurance Costs? Here Are Tips For Saving
NEW YORK — If you’re an employee or small business owner, you’re feeling the health-care pain, big time.
Employee premium costs — the portion workers pay for employer-provided coverage — rose to an average of $3,354 annually according to a just-released Kaiser Family Foundation survey. See full story.
Ouch. That’s a lot to kick in for an employee benefit. Doesn’t stop there, either. People are facing higher co-payments, co-insurance (the percentage you pay for "covered" medical events), prescription drugs, dental care — on and on.
So, what to do about it? That is the big question, and now’s the time to ask it as open enrollment approaches. I checked in with Betsy Sell, a spokeswoman with health insurer Aetna. What she said didn’t surprise me: "Now more than ever, it’s time to shop health care, to kick the tires, not just before but also after the sale." Aetna and other insurers offer tools to help shop and save after the coverage choice is made.
Here’s the deal: You’ve got to make some time to shop the choices, to find the best deal for you and your family. It’s just like buying any other big-ticket item.
Tips for saving
Check out high-deductible plans. As employee out-of-pocket costs rise, high-deductible health plans (HDHP) may make more sense for some people. You pay a lower premium, and then fund the deductible through a health savings account (HSA). Many HDHPs pay for physicals and other preventive health benefits, potentially helping to lower costs even more. See related story on financial risks of some plans. Shop for prescription drugs. It’s easy to have prescriptions filled at the corner grocery or pharmacy. But it’s expensive, too. Many insurers offer their own mail-order services that can help you save one-third to one-half each year on costs for regular prescriptions. And don’t forget to look for special membership programs that reduce costs, offered by various pharmacies, such as Wal-Mart’s $4 prescription program. See Wal-Mart’s list of covered drugs (PDF). Model total cost. You’ll have a lot of choices on today’s open enrollment menu. It’s worth the time to model the total cost of a plan, given your family’s health history and profile. It’s like modeling total cost of ownership for a new car. Aetna offers tools, including a trial tool for non-members, to help. See Aetna’s tool. Geography makes a difference. The "medical tourism" idea – traveling to cheaper places for expensive procedures – is growing. You don’t need to go to Mexico, Singapore or India to save. Even in the U.S. there are now cheaper places. It may not always justify the trip, but sometimes it will. Suppose you live in northern California and have relatives in Cincinnati, Ohio. Aetna’s tool shows that an in-network cholesterol screening is $21 in Cincinnati vs. $61 in California. An arthroscopic knee or shoulder surgery is $6,308 vs. $7,156. The savings make a difference, especially if on a high-deductible plan. International medical tourism is gaining traction, too. A pilot program managed by Aetna for one employer promises to send policyholders to Singapore for common major surgery items such as knee replacements, which cost $9,000 there vs. $40,000-plus here. They pay travel costs for you and a companion. Meanwhile, I suggest checking to see whether it makes financial sense for you in your situation. A colleague will soon save $600 (after travel costs) to have some dental work done in Tijuana. I’ll let you know how that comes out.
Read the story here.
Stocks In Focus For Thursday
SAN FRANCISCO — Among the companies whose shares are expected to see active trade in Thursday’s session are International Speedway Corp., RPM International Inc., and Chevron Corp.
International Speedway Corp. (ISCA: 31.51, -1.64, -4.94%) is forecast to post earnings of 71 cents a share in the third quarter, according to analysts surveyed by FactSet Research.
RPM International Inc. (RPM: 15.60, +0.08, +0.51%) is expected to report fiscal first-quarter earnings of 52 cents a share, according to analysts surveyed by FactSet Research.
Chevron Corp. (CVX: 73.10, -0.25, -0.34%) is scheduled to announce an interim update to the quarter.
After Tuesday’s closing bell, International Business Machines (IBM: 90.55, -5.10, -5.33%) said it expects to post third quarter earnings of $2.05 a share on revenue of $25.3 billion. For the year, the company reaffirmed its earnings a share target of at least $8.75. Analysts surveyed by FactSet Research expect earnings of $2.01 a share on revenue of $26.5 billion for the quarter, and $8.98 a share for the year. See full story
Watch list
Aeropostale Inc. (ARO: 27.26, +0.70, +2.63%) said that September sales in stores open for at least a year rose 5% from a year ago. Analysts surveyed by Thomson Reuters estimated same-store sales to rise 4.7%. Total sales for the five-week period ended Oct. 6 rose 15% to $146.7 million from $127.9 million a year ago. Aeropostale also reiterated its third-quarter earnings outlook of 59 cents to 61 cents a share. Analysts surveyed by FactSet Research estimate third-quarter earnings of 61 cents a share.
American Eagle Outfitters Inc. (AEO: 11.27, -1.24, -9.91%) said that September sales at stores open at least a year fell 6% from a year ago. Analysts surveyed by Thomson Reuters estimated a drop of 5%. Total sales for the five weeks ended Oct. 4 increased 3% to $229.2 million from $222.8 million in the year-ago period. American Eagle narrowed its third-quarter earnings estimate range to 31 cents to 34 cents a share, compared with a previous range of 31 cents to 36 cents a share. Analysts surveyed by FactSet Research estimate 33 cents a share.
American International Group Inc. (AIG: 3.19, -0.32, -9.11%) will get an additional $37.8 billion loan from the Federal Reserve, which is invoking its emergency powers to combat financial market stress. AIG already has an $85 billion line of credit with the Fed. As of last week, AIG had used $60 billion of this loan, according to Fed data. This new program will allow AIG to replenish liquidity, the Fed said.
Hot Topic Inc. (HOTT: 4.92, -0.45, -8.37%) said sales at stores open at least one year slid 1.8% in September, compared with a fall of 2.9% in September 2007. Analysts, on average, had expected the same-store sales to drop 4.3%, according to Thomson Reuters. Net sales for the five weeks ended Oct. 4 increased 2.5% to $60.8 million.
InBev (000379310) said David Peacock will become president of Anheuser-Busch upon the closing of Inbev’s acquisition of Anheuser-Busch Cos. (BUD: 62.92, +0.07, +0.11%) . Peacock will manage all U.S. operations for the combined company, including the brand management of Budweiser and Bud Light, Inbev said. Inbev also named Luiz Fernando Edmond North America zone president of the combined company.
Limited Brands Inc. (LTD: 14.11, -0.66, -4.46%) said that September sales in stores open at least a year fell 6% from a year ago. Analysts surveyed by Thomson Reuters estimated same-store sales to fall 5.4% Total sales for the five weeks ended Oct. 4 fell to $673.4 million from $713.2 million last year.
Men’s Wearhouse Inc. (MW: 17.64, +0.07, +0.39%) lowered its third-quarter earnings outlook to 22 cents to 26 cents a share from 34 cents to 38 cents a share previously. The men’s clothing retailer also cut its adjusted earnings view to a range of 24 cents to 28 cents a share from 36 cents to 40 cents a share. Analysts surveyed by FactSet are projecting the company to earn, on average, 36 cents a share in the third quarter.
MetLife Inc. (MET: 27.00, -9.87, -26.76%) said it priced a secondary offering of 75 million shares at $26.50 a share, or about $2 billion. Underwriters will get an option for just under 11.3 million shares to cover over-allotments. MetLife expects to use the capital for general corporate purposes and potential strategic initiatives.
Walgreen Co. (WAG: 26.18, -0.56, -2.09%) said it withdrew its $75-a-share bid for Longs Drug Stores Corp. (LDG: 71.68, -0.08, -0.11%) Longs’ board declined the offer in favor of CVS Caremark Corp.’s (CVS: 29.84,+0.71, +2.43%) $71.50 a share offer. "While we believe we made a compelling proposal for Longs, we do not believe it would be in the best interests of Walgreens shareholders, customers or employees to allow this situation to remain unresolved for an extended period of time," said Jeffrey Rein, Walgreen chairman and chief executive, in a statement. See full story
Zumiez Inc.’s (ZUMZ: 13.82, -0.73, -5.01%) same-store sales slumped 9% in September, compared with an increase of 13.9% in September 2007, said the specialty apparel retailer late Wednesday. Analysts, on average, had expected same-store sales to fall 4.3%, according to Thomson Reuters. Total net sales for the five-week period ended Oct. 4 rose 4.8% to $33.6 million.
Read the complete story here.
Central Banks Cut Rates World-Wide
By SUDEEP REDDY and JOELLEN PERRY
With unprecedented global coordination, six central banks including the Federal Reserve and European Central Bank cut interest rates sharply Wednesday in an emergency move designed to offset the economic damage from a deepening financial shock.
The half-point rate cut, which includes action by central banks in the U.K., Canada, Sweden and Switzerland, came as stock markets around the world tumbled and troubles in the U.S. continued to infect foreign economies. The global move, after more than a week of speculation, came alongside separate rate cuts by central banks in China, Hong Kong and Australia over the past day.
Markets opened lower on the news but recovered a bit and were trading slightly higher. (See related article.)
The Fed’s reduction brought its interest-rate target down to 1.5%, ahead of its regularly scheduled meeting October 28-29, as the U.S. economy faces the prospect of deteriorating significantly in the coming months due to credit-market turmoil. Until recent weeks, Fed officials had resisted further easing due to worries about aggravating inflation risks after watching volatile swings in commodity prices throughout the past year.
The action also marks a sharp turnaround for the European Central Bank, which had held its key rate target steady at 4.25% due to inflation concerns.
The ECB’s single mandate is keeping euro-zone prices steady, and annual inflation across the bloc was 3.6% in September, nearly double the ECB’s target of just below 2%.
But ECB president Jean-Claude Trichet, in a press conference following the bank’s decision to keep its key rate steady last Thursday, said policymakers had discussed a cut in the face of market turmoil that looked increasingly likely to damp growth and inflation. Wednesday’s move takes the ECB’s key rate to 3.75% and many economists say the central bank is likely to follow Wednesday’s move with another cut at its scheduled meeting November 6.
The ECB has acted in tandem with the Fed just once before — in the aftermath of the September, 11, 2001 terrorist attacks, when both central banks also lowered their key rates by a half percentage-point.
The Bank of England’s half percentage-point cut, which brings its key rate to 4.5%, comes one day before its scheduled meeting in London.
The central banks said in a joint statement that inflationary pressures "have started to moderate" due to declines in commodity prices. "The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the statement said. "Some easing of global monetary conditions is therefore warranted." (Read the Fed’s statement.)
Since the credit crisis started in August 2007, central bank officials have taken joint actions repeatedly to ease pressure in short-term money markets. They’ve stepped up efforts in recent weeks as conditions deteriorated further.
Finance ministers and central bankers meet this weekend in Washington and could discuss other options to address the worsening global crisis.
Fed officials fear the turmoil in credit markets will further damage the U.S. economy, which has already been hit by a troubled housing sector and high energy prices. As banks tighten credit, preventing consumers and businesses from getting loans, consumer spending and the overall U.S. economy are likely to contract in the current quarter.
The Federal Open Market Committee voted 10-0 to cut its rate target.
"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months," the Fed said in a statement Wednesday morning. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."
"Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation," the Fed’s statement said.
The Fed and other central banks also lowered their direct-lending rates. Financial institutions borrowing from the U.S. central bank’s discount window will now pay 1.75%, down half a percentage point.
"Given central banks are increasingly taking on the role of lender of last resort it will lower borrowing costs," ING economist James Knightley said in a note to clients. "It is also clearly boosting market confidence as can be seen in market moves."
But that confidence boost will be "temporary" and the rate cut "will not even be enough to offset the rise in market interest rates over the last few weeks," said Julian Jessop, chief international economist at Capital Economics Ltd. "The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become." He said Wednesday’s cuts would be "the first in a series" bringing rates lower around the world in coming months.
Other economists said the size of the cut suggested policymakers hoped to influence asset-price developments. Central banks are "adjusting the fundamental risk-free rate in the economy," said Julian Callow, economist with Barclays Capital in London. "If you do that, you’re affecting the price of all financial assets. So this about trying to shore up asset prices, which have been collapsing. That’s fundamentally what this is about."
Read the story here.
Fed Will Lend Directly to Corporations
Fed to Lend Directly to Companies for First Time Since Great Depression, Hints at a Rate Cut; Stocks Fall as Dow Hits 5-Year Low
By JON HILSENRATH, DIYA GULLAPALLI and RANDALL SMITH
The Federal Reserve said it will bypass ailing banks and lend directly to American corporations for the first time since the Great Depression, and it hinted strongly at further interest-rate cuts — a cocktail of unconventional and conventional remedies for an economy whose prognosis is deteriorating rapidly.
The historic and potentially risky move of lending to nonfinancial corporations, the latest in a string of extraordinary steps taken by the Fed over the past month, carries the government deeper into the role of propping up private markets. Investors remain unconvinced any of it will work.
Stocks continued their relentless decline on Tuesday amid fresh concerns about the health of financial institutions. The Dow Jones Industrial Average fell 508.39 points, or 5.11%, to 9447.11, its lowest closing in five years. Shares of Morgan Stanley fell 21%, and American International Group Inc., which already received a government bailout, saw its shares drop 9.3%. Over the past year, the U.S. stock market has lost $7.2 trillion in market value, as measured by the Dow Jones Wilshire 5000 index, which includes almost all U.S. companies.
Fed Chairman Ben Bernanke, in a speech Tuesday to the National Association for Business Economics, said that history showed that the financial crisis would "take a heavy toll on the broader economy, if left unchecked."
The Fed’s move on Tuesday aimed to unclog the market for "commercial paper," essentially IOUs issued by banks and companies. Companies ranging from AT&T Inc. to General Electric Co. to United Parcel Service Inc., along with many U.S. and European financial firms, tap this $1.6 trillion market for short-term loans to fund their day-to-day operations.
The central bank, with the backing of the U.S. Treasury, said it would make loans directly to companies in this market. The move potentially puts taxpayers on the hook for new losses. Many commercial-paper loans are not secured by collateral. Though the Fed took a variety of steps to minimize its exposure, including asking borrowers to pay upfront fees, the government could suffer losses if corporate defaults rise and those steps prove insufficient.
By hinting that it is also considering further rate cuts, the Fed appears to be setting aside the inflation worries that dominated many of its internal discussions earlier this year, and potentially setting its rate target, now at 2%, back toward levels last seen after the 2001 recession.
Rates are already heading lower elsewhere in the world. Australia’s central bank surprised investors Tuesday by slashing its key lending rate by a full percentage point. Some effort to coordinate interest-rate cuts among other central banks is a possibility, particularly with annual meetings of the International Monetary Fund approaching this weekend in Washington.
Fed officials hoped the latest moves would restore market confidence, which has virtually disappeared since the collapse of Lehman Brothers Holdings Inc. in mid-September. Lower interest rates could reduce the cost of funding for businesses and individuals at a time of great financial strain. And the government intervention in the commercial-paper market could send a signal to money-market funds that it is still safe to hold these instruments.
In his remarks Tuesday, the Fed chairman played down the risk of inflation, noting that oil prices and other commodity prices are off their peaks, and U.S. import prices show signs of decelerating. He said that inflation expectations have held steady or eased.
But cutting interest rates further in the U.S. raises new questions. With rates already at 2%, they don’t have much further to go before they hit zero. The last time the Fed pushed interest rates lower than they are now, after the 2001 recession, the move helped set off the housing frenzy that ultimately led to the current crisis. Another speculative frenzy, however, looks highly unlikely today, with so much stress in credit markets.
A bigger potential problem is that cuts could prove ineffective — Japan’s interest rates stood near zero for more than a decade without substantially reviving economic growth.
Commercial paper is short-term debt, from overnight to a few months in maturity. It is typically purchased by banks or institutional investors such as money-market funds. Using Depression-era powers that allow it to lend to anyone under "unusual and exigent" circumstances, the Fed will set up a facility called a special-purpose vehicle that will purchase three-month top-rated commercial paper, which represents about $1.3 trillion of the market. It hasn’t lent to nonfinancial institutions since the 1930s and 1940s, and back then, it was on a smaller scale.
It said the facility will be up and running soon, and would continue buying until April 30, 2009, although that could be extended. It said the U.S. Treasury would make a "special deposit" with the Fed in support of the facility. Details of that deposit were still being sorted out Tuesday. According to one person familiar with the matter, the Treasury could help to finance the program by issuing additional short-term government bills, which it can leave on deposit with the Fed.
Issuers will pay the Fed upfront fees, or will provide guarantees or collateral, to help insulate the central bank from losses. If the Fed loses money on the loans, something officials say they don’t expect, U.S. taxpayers would lose, since the Fed’s gains and losses are turned over to the U.S. Treasury.
The commercial-paper market has contracted by 10% since July, to $1.607 trillion, as investors flock to safer terrain. Conditions in the commercial-paper market improved slightly on Tuesday, but some traders said volumes were lower than usual and it took them more time to sell debt to investors. Other segments of the credit markets, such as junk bonds, remained highly stressed.
Money-market funds, by some estimates, hold more than 40% of U.S. commercial paper outstanding. Last month, the Reserve Primary money-market fund, managed by Reserve Management Company Inc., "broke the buck," meaning it fell below $1 per share after suffering losses on holdings of Lehman Brothers commercial paper holdings. That prompted a "bank run" — investors fled from so-called prime money funds that hold commercial paper and flocked to safer money funds that invest in government securities.
Prime funds have seen $500 billion in outflows since last month, while government money funds have grown by $380 billion, according to research firm iMoneyNet Inc. It is the largest flight to government funds in any four-week measure in history, according to AMG Data Services.
The wave of redemption requests from investors has forced prime money funds to sell billions of dollars in commercial paper to raise cash, driving up interest rates on these instruments.
The problems are making it more expensive for many big companies to borrow. Two-week commercial-paper issued by aluminum producer Alcoa Inc. was trading to yield close to 7% on Tuesday. It usually trades at between 3% to 4%.
General Electric commercial paper maturing in December, which in normal times would yield 2% to 3%, was trading above 5% on Tuesday, according to traders. GE’s finance arm, GE Capital, is one of the biggest issuers of commercial paper. GE recently had around $90 billion of commercial paper outstanding.
GE announced plans two weeks ago to reduce its dependence on the market by next year to 10% to 15% of its debt outstanding. A spokesman welcomed the Fed’s move, saying it was "an important development that will improve confidence in the market and facilitate more lending."
Another big problem has been that firms have only been able to borrow for a few days at a time, if that.
AT&T, which had $8.5 billion in commercial paper outstanding at the end of June, said that for a two-day period around Sept. 18, just after the bankruptcy court filing of Lehman Brothers Holdings Inc., it only did overnight commercial paper. Currently, the telecommunications company says it has access to a range of maturities as long as 30 days.
Fed data indicate that more than 80% of U.S. commercial paper outstanding in early October was due to mature in one to four days. In normal times, that proportion is between 40% and 50%.
Fed officials have been especially concerned about the inability of firms to issue commercial paper for longer durations. By being stuck with overnight financing, many companies have effectively been operating with guns to their heads — at any moment, their financing could dry up.
Many firms have been scrambling to pare their exposures. Bank of America Corp., the giant Charlotte, N.C., bank, said late Monday that it had reduced its total commercial paper and other short-term debt outstanding to $145.8 billion on Sept. 30, down 18% from $177.8 billion in June.
The Federal Reserve has already stepped in to support a kind of commercial paper called asset-backed commercial paper, or ABCP, which is backed by collateral such as mortgage-backed securities or bonds backed by car and credit-card loans. Since announcing the program a couple of weeks ago, the Fed has acquired roughly $150 billion of ABCP assets from money-market mutual funds.
Read the story here.
Market Slide Puts a Spotlight on Big Oil’s Cash Hoard
By RUSSELL GOLD
Rising fears of a global economic downturn are sinking crude oil prices and driving down the share prices of major oil companies despite the industry’s record profits of the last two years.
Exxon Mobil Corp., the largest U.S. company and largest Western oil company by market capitalization, has lost 17% of its share price since January, its worst showing since 1981. Its smaller peers are doing worse. The stock prices ofChevron Corp., BP PLC, Royal Dutch Shell PLC, Total SA and ConocoPhillips, the largest western oil companies, all hit new 52-week lows during the day on Monday.
The stock drops are driven by concerns that a world-wide recession will bring an end to the high oil prices that have been the primary driver behind these companies’ record earnings. The other main way Big Oil boosts its profit — oil and gas production — "has not been growing," notes Credit Suisse analyst Mark Flannery.
Historically, oil demand rises and falls with the economy. A global recession would slow or reverse demand growth and deflate prices, pressuring oil companies to take one or more steps to boost their share prices. Analysts say these include acquiring another company to boost growth, increasing share repurchases, or offering a significant dividend increase.
Several of these companies, however, say they won’t change course. A spokesman for Irving, Texas-based Exxon says it is continuing on its long-term strategy of building value. "Shares do what the shares do," he said. A spokesman for London-based BP said, "We don’t manage the company day-to-day based on what’s happening to the share price." BP shares are down nearly 38% in the last 52 weeks.
The companies maintain brawny balance sheets, thanks to months of $100-plus oil prices, have ample cash and are seen as good credit risks. Moreover, their investments have been made based on much lower oil price assumptions. Unlike many smaller energy companies, they aren’t compelled to shed assets or cut their capital budgets to manage their cash. But sitting still isn’t a permanent solution. Current, low interest rates can mean poor returns on capital.
One large oil company that may need to change direction is ConocoPhillips. The Houston company needs to deliver $5 billion this month to Australia’s Origin Energy Ltd. under terms of a joint venture it entered into last month to produce natural gas for export.
Mr. Flannery argues that Big Oil will need to put cash into acquisitions to restore the battered share prices. So far this year, Exxon has lost $108 billion in market capitalization since peaking at $512.65 billion in January. Others analysts contend that Exxon and its peers can wait for a fire sale by troubled companies.
Compared with many blue chips, Exxon, Chevron and other oil majors are cash-rich. Exxon has $39 billion in cash and has been buying back shares at an $8 billion-a-quarter clip. The value of the stock it has repurchased is about $218 billion, a shade less than the current value of General Electric Co.
One possibility mentioned by investors would be for Exxon and Chevron to increase their buybacks to improve earnings per share. Energy analysts at Goldman Sachs and Merrill Lynch see longer-term oil market prices as remaining strong, allowing oil companies to buy their own shares while those prices are low. But this strategy is risky as oil companies have become political targets in the presidential campaign for not doing enough to boost supplies of oil and gas.
Read the story here.
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