Archive for June 16th, 2009

WASHINGTON: President Obama on Wednesday will finally lift the curtain on his long-anticipated plan to reorder how banks and other firms are regulated in the hope of preventing another financial collapse.Those plans will include getting rid of the Office of Thrift Supervision, merging it with the Office of the Comptroller of the Currency and renaming that regulator the “National Bank Supervisor,” a senior administration official said Tuesday evening. The OTS has been on the hot seat for months for its role as the overseer in charge of American International Group (AIG, Fortune 500) and failed lenders IndyMac and Washington Mutual. The comptroller’s office is a Treasury Department bureau that regulates national banks.The administration will also call for the creation of a council of regulators to work alongside the Federal Reserve to monitor risk in the financial system, the official said. The Treasury secretary would chair the council.In addition, Obama will propose the establishment of a new watchdog agency that would aim to protect consumers from deceptive or dangerous mortgages, credit cards and other financial products. The new consumer agency would take on some powers that currently reside with other regulators like the Fed. It will also have the power to make rules and enact them, as well as the ability to inspect “banking and nonbanking” firms, the official said.Obama is expected to spell out the full plan on Wednesday.Most of the proposals must first be approved by Congress, which has its own ideas about reforming the financial regulatory structure. Lawmakers have begun hearings on the issue, but final legislative passage could be a lengthy process, veteran Hill watchers say.

Source:CNN

NEW YORK (Fortune) — Can reinvigorated financial watchdogs take a bite out of surging oil prices? President Obama is scheduled to outline a regulatory reform program Wednesday that will, among other things, call for strong federal oversight of derivatives — side bets on changes in asset values or interest rates. The reform push is being driven by the past year’s financial-system tremors, which were intensified by derivatives such as credit default swaps, or wagers on a bond issuer’s health. The administration aims to defang that demon by moving derivatives trading out of the shadows to reduce uncertainty. But this year’s surge in the price of oil is turning Washington’s attention back to another derivatives debate: whether speculation in the futures markets is responsible for wild swings in the prices for crude oil and other commodities. Crude oil recently fetched around 70 a barrel, more than double its December lows. The run-up has been taken in some quarters as a sign of the revival of global demand. But the price surge has raised eyebrows because it comes at a time when economies around the globe remain weak. In the United States, oil supplies are at two-decade highs while demand is at a 10-year low. Some observers blame the price rise on investment funds plowing money into commodity futures contracts. “What we’re seeing is the assetization of commodities,” said Dan Dicker, a longtime oil trader on the New York Mercantile Exchange who is writing a book about the phenomenon. “This isn’t a nefarious group at work, but the oil market is following stocks almost in lockstep now.” Not everyone agrees that investors are so innocent. The concept got an airing last year, as oil headed toward its all-time high at 147 a barrel, after hedge fund manager Michael Masters testified before Congress on the role of these funds — which he dubbed index speculators. Masters testified again earlier this month before the Senate Agriculture committee. He called for regulators to impose limits on futures-contract purchases by those not involved in the physical production or consumption of commodities. Any substantive changes in regulation will need congressional action.That’s a change that Obama’s top commodities regulator, Gary Gensler of the Commodities and Futures Trading Commission, seems to embrace. The goal: insulate commodity producers and consumers from the influence of investors who are betting on rising prices. “I intend to pay particular attention to using current authorities and obtaining much needed new ones, including aggregate position limit authority, to protect farmers, merchants, consumers, and small businesses from the burdens of excessive speculation,” Gensler said last month at his swearing-in ceremony.0:00
/3:53Behind oil’s steady riseBut Scott Irwin, an agricultural economist at the University of Illinois, says there is little evidence to support the notion that index fund buying is playing a substantial role in the level of commodity prices. “The academic work to date finds no evidence that the massive runup of commodity prices can be traced to the index funds,” he said. Irwin said a recent study of dynamics in the corn market, where prices spiked last year as well, shows that the rise in futures buying by index funds and other long hedgers was met with increased selling by large commercial interests — the entities that these markets were created to serve. Irwin adds that were the administration to expand CFTC control of position limits to all commodities, the “costs would far outweigh the benefits.” He proposes instead that regulators eliminate position limits except during delivery periods, when the markets are vulnerable to manipulative trading. Whatever is behind higher oil prices, it’s easy to see how they could impede an economic recovery — a turn of events that could draw much interest in Washington. Sen. Bernie Sanders, I-Vt., this month introduced legislation to force the CFTC to invoke emergency powers to stop speculation, saying Wall Street was being allowed to “jack up oil prices through price manipulation and outright fraud.” Dicker said that should oil prices continue to rise, the drumbeat for action will continue to get louder. He said he could even envision regulators forcing all futures traders to liquidate their contracts when they expire, rather than rolling them over into the next month — which is how regulators responded when the Hunt brothers tried to corner the silver market 30 years ago. “If the screaming gets loud enough,” he said, “you could see some pretty draconian measures.”

Source:CNN

NEW YORK: The smartphone wars are heating up with recent launches of the Apple iPhone 3GS and Palm Pre, and Research In Motion is determined to stay in the game.BlackBerry maker RIM announced Tuesday it would launch the new BlackBerry Tour for Verizon and Sprint customers this summer, aimed at international travelers.The Tour allows users to transition between different mobile network standards as they travel outside of North America. Verizon and Sprint transmit their wireless service on a standard that essentially only exists in North America, so their customers need phones that work on multiple standards if they travel abroad.Currently, the only BlackBerry on the Verizon (VZ, Fortune 500) and Sprint (S, Fortune 500) networks that lets users move seamlessly between networks is the BlackBerry 8830 World Edition, which is more than two-years old. The Tour will give Verizon and Sprint an updated competitor to the BlackBerry Bold and BlackBerry Curve 8900, which are only available in the United States through AT&T (T, Fortune 500) and T-Mobile. Both of those mobile networks use standard that is much more common across the globe, while Verizon (VZ, Fortune 500) and Sprint (S, Fortune 500) offer CDMA service, which is limited primarily to North America.”Many current [Verizon and Sprint] BlackBerry clients wanted a device like the Bold, which has a better operating system than the old global phone,” said Ryan Reith, senior research analyst at IDC. “The Tour gives RIM the opportunity to market a phone to those customers.”0:00
/4:27No surprises, just a new iPhoneLike BlackBerry’s Bold and Curve models, the Tour includes GPS, a 3.2 megapixel camera and BlackBerry App World access.RIM believes the phone will sell well to businesses, like the Bold, but will also be popular with consumers, like Curve. The company did not set an exact release date for the new phone.”The new BlackBerry Tour will offer a compelling choice for the growing number of wireless customers looking to upgrade their existing cell phone to a smartphone,” said Mike Lazaridis, co-chief executive of Research In Motion, in a statement.Earlier this month, RIM competitors Apple (AAPL, Fortune 500) and Palm (PALM) unveiled the new iPhone and Pre smartphones. After the touch screen BlackBerry Storm received largely negative reviews in November, 2008, RIM is expected to unveil a touch screen BlackBerry with a physical keyboard, much like the Pre, in the coming months.Shares of RIM (RIMM) were unchanged Tuesday.

Source:CNN

NEW YORK: Starbucks is recalling about 530,000 coffee grinders because of a laceration hazard, a government agency said Tuesday.Starbucks, (SBUX, Fortune 500) based in Seattle, said consumers should immediately stop using the Starbucks Barista Blade Grinder and Seattle’s Best Coffee Blade Grinder, and contact the company to receive a free replacement. The U.S. Consumer Product Safety Commission announced the recall after Starbucks received 176 reports of grinders that failed to turn off or that turned on unexpectedly.There were three reports of injuries that occurred when the grinders, which were made in China, turned on unexpectedly during cleaning.The affected appliances were sold in Starbucks and Seattle’s Best Coffee stores from March 2002 through March 2009, for about 30.Customers can contact Starbucks at (866) 276-2950 or visit the www.starbucks.com website for more information about model numbers and serial numbers of the recalled coffee grinders.

Source:CNN

NEW YORK (Fortune) — The notion that real estate could be a safe haven may seem like investing lunacy right now. After all, the words “real estate” conjure nightmares of the nation’s decimated housing industry and the downward spiral of commercial real estate. And yet, as often happens, the wreckage of the sector is creating opportunities: a group of dependable real estate investment trusts (REITs) whose prices have been pummeled so badly that their yields are nearing double digits. Typically investors seek out REITs for their stable, predictable cash flows and strong dividend yields. By law REITs can avoid most corporate taxes as long as they distribute at least 90% of their taxable income as dividends. 0:00
/3:05Commercial real estate’s declineREITs currently offer dividend yields averaging 7%, according to the National Association of Real Estate Investment Trusts, compared with 2.6% for the stocks of the S&P 500 (all yields as of May 4). Certain segments of the REIT universe offer even gaudier payouts, such as industrial warehouse REITs, where yields average 8.7%, and commercial mortgage REITs, with 54.4%. Of course, the frothiest yields can mean danger. “A dividend that high indicates the market doesn’t believe that dividend is sustainable,” says Steven Marks, a managing director at Fitch Ratings. In the past six months about half of the country’s publicly traded REITs have cut their dividends, suspended them, or opted to pay a portion in stock, notes Richard Anderson, a senior analyst at BMO Capital Markets. The reason, in most cases: debt calls. (A few REITs have trimmed their payouts to hoard cash so that they can take advantage of buying opportunities later this year.) Analysts say debt is the biggest threat facing REITs. Consider General Growth Properties. The mall REIT was yielding 37% before slicing its dividend and then sliding into Chapter 11 bankruptcy in April. A key cause of its woes was heavy debt. That’s a crucial warning sign for investors, analysts caution. Be wary of REITs with debt levels exceeding 70% of their market capitalization and significant debt due in the next two years. “When you get to those levels, you have to question the company’s ability to continue to fund that [dividend],” says Tom Bohjalian, portfolio manager at Cohen & Steers. Between the real estate sector’s turmoil and meltdowns such as General Growth’s bankruptcy, REITs have been punished: Total returns for the group, including dividends, sank 37% in 2008 and have fallen another 6.2% so far in 2009, according to Nareit. But among the wreckage are REITs whose prices have been unfairly hammered. In general, Anderson argues, those that specialize in health-care facilities and apartments offer the safest bets, with average dividend yields of 7.8% and 8.5%, respectively. Healthcare REITs have endured as demand for medical care continues even in bad times. Anderson recommends HCP (HCP), Health Care REIT (HCN), and LTC Properties (LTC), with yields of 8.8%, 8.2%, and 8.6%, respectively. HCP and Health Care REIT are diversified; they own nursing homes, medical office buildings, senior housing, assisted-living facilities, and hospitals. That means the companies won’t collapse if one segment turns sour. LTC is less diversified, with about 50% of its business coming from nursing homes. Still, demand for senior housing, assisted living, and nursing homes is expected to surge as baby boomers cross into their golden years. Also, the company’s balance sheet is sound. Bohjalian is bullish on LTC as well as on Omega Healthcare Investors (OHI), which has a 7.9% yield. Omega focuses on nursing homes and assisted-living facilities. Apartment REITs are reaping the benefits of the battered housing market as foreclosed homeowners turn to rental units while fewer renters venture into home ownership until they’re certain the market has bottomed. Apartment REITs (and certain health-care REITs) can also tap cheap debt from mortgage giants Fannie Mae and Freddie Mac. “If you’ve got access to Fannie and Freddie and you’re an apartment company or a health-care company, you’re in pretty solid shape,” says Bohjalian. Anderson is bullish on Equity Residential (EQR), which generates a 9% yield. The company is considered a bellwether in the REIT world because of its size and national platform, and is chaired by real estate titan Sam Zell. Although rising unemployment has caused rents to fall during the past year, the company indicated in a recent conference call that they’ve held steady so far in 2009 and that occupancy is at 94%. Equity Residential has never trimmed or suspended its dividend since going public in 1993, Anderson notes, and CEO David Neithercut reiterated that commitment on the call. Bohjalian is bullish on Home Properties (HME) and AvalonBay Communities (AVB), which offer more conservative yields of 7.7% and 6.6%, respectively. Home Properties focuses on class B quality properties in high-growth markets in the Mid- Atlantic corridor, where demand for moderately priced apartments has increased. In the downturn of 2001–04, the company boasted the highest revenue growth among its peers. AvalonBay owns class A apartment properties in major high-growth cities, especially in coastal markets. Although it’s been hurt in the downturn, it has a strong balance sheet and a highly regarded management team, making now the REIT time to consider buying.

Source:CNN

LONDON, England (CNN) — British Airways is asking thousands of its staff to work for free for up to four weeks, spokeswoman Kirsten Millard said Tuesday.In an e-mail to all its staff, the airline offered workers between one and four weeks of unpaid leave — but with the option to work during this period. British Airways employs just more than 40,000 people in the United Kingdom.Last month, the company posted a record annual loss of 400 million (656 million).Its chief executive declared at the time there were “absolutely no signs of recovery” in the industry.”I’m 30 years in this business and I’ve never seen anything like this. This is by far the biggest crisis the industry has ever faced,” said Willie Walsh, British Airways’ chief executive.0:00
/2:42Stimulus flies over airlinesA spokesman for one of Britain’s biggest unions said its workers could not afford to work for free for a month.”It’s all well and good for Willie Walsh to say he’s prepared to work for free when he earns four times in a month what they do in a year,” said Ciaran Naidoo, a spokesman for Unite.He pointed out that the airline was not ordering staff to work without pay.”It’s a request — you can take unpaid leave or you can work for free, and the chances of people working for free are very unlikely, but there might be some people who want to take unpaid leave.”Demand for the airline’s passenger seats and cargo holds fell during the last financial year, while its fuel bill rocketed to almost 3 billion (4.7 billion).Walsh said British Airways’ woes were inextricably linked to the downturn in the global economy and that there had been no sign of any “green shoots” of recovery.0:00
/1:29Unfriendly skies for airlinesLike its premium-class competitors, British Airways is losing customers to cheaper rivals.The airline’s premium passenger numbers fell 13% in the second half of last year, in line with the industry average.Total traffic fell 3.4% and while the airline carried 33.1 million passengers last year, it was a drop of 4.3% on the previous year.The dip in demand for British Airways’ flights has forced a switch in strategy at the airline.From the end of last year, it has been trying to tempt passengers with lower fares, sacrificing profit per seat for “bums on seats.”It plans to reduce capacity by 4% next winter by parking up to 16 aircraft.–CNN’s Alysen Miller contributed to this report.

Source:CNN

NEW YORK: Banks continue to write off credit card debt as consumers hurt by record high unemployment default at an increasing rate. Regulatory forms filed this week by some of the nation’s largest banks showed default rates on credit cards rose in May. The default rate is a measure of loans that the bank does not expect to be repaid. “Data from May showed continued signs of stress for card issuers, reflective of worsening unemployment trends and deteriorating macro [economic] conditions,” analysts at Bernstein Research said in a report Tuesday.Bank of America (BAC, Fortune 500), the nation’s largest bank, said its default rate jumped to 12.5% in May from 10.5% the month before. Other major banks, including Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Capital One (COF, Fortune 500), also reported increases in May default rates. However, delinquency rates, which reflect the number of borrowers who are at least 30 days late on a payment, decreases slightly in May. According to Bernstein Research, the average 30-day delinquency rate decreased in May to 1.57% from 1.71% the month before. It was the second month in a row that 30-day delinquency rates declined. 0:00
/2:12Don’t be fooled by teaser ratesDelinquency rates are considered an indicator of future credit losses, but analysts say default rates will probably remain high until a recovery in the labor market takes hold. “While this could clearly be a positive development, as we should now be past the typical seasonal improvements, it’s too early to call it a sustainable trend, particularly in light of the deteriorating unemployment picture,” Bernstein analysts wrote. The unemployment rate rose to a 26-year high in May, even as the number of jobs lost in the month decreased significantly, and analysts say the job market will remain weak for some time after the overall economy recovers.At the same time, analysts said the decrease in May delinquencies could be due to consumers taking advantage of one-time economic stimulus benefits, such as income tax cuts, to pay down debt. “The wild card is really unemployment, which is the main driver of delinquencies and defaults,” said Chris Deritis, an economist at Moody’s Economy.com.

Source:CNN

NEW YORK: A plea by the trade group for auto parts makers for 8 billion to 10 billion in additional federal loan guarantees was turned down by the administration’s auto task force last week.Neil De Koker, the CEO of the Original Equipment Suppliers Association, predicted that without the help there would be widespread bankruptcies throughout the sector because hundreds of suppliers are facing a cash crunch due to long shutdowns at Chrysler and General Motors. Because of suppliers’ lack of cash, De Koker is afraid that they won’t be able to ramp up production once Chrysler and GM start building vehicles again. He said the request for 8 billion to 10 billion in loan guarantees from Treasury was turned down by Ron Bloom, one of the key staff members of the auto task force, after two days of meetings in Washington last week.A statement from a Treasury spokesperson confirmed that the administration did not grant the request for additional help for the auto parts sector, but said it would continue to monitor the situation.Treasury helped structure the bankruptcies at GM and Chrysler so that their auto parts suppliers would be essentially paid in full for parts they had shipped to the companies. Normally during the bankruptcy process unsecured creditors do not receive this level of protection.Treasury also had approved up to 5 billion in federal guarantees in March for suppliers on money they were owed by GM and Chrysler. But that program was to a limited group of about 300 suppliers, and it only guaranteed money owed for parts already shipped. With extended shutdowns, some suppliers no longer qualify for that help because they are no longer owed money by the automakers.”There’s no questions Treasury has done a lot,” said De Koker. “This is not whining. We’re just very concerned there’s just no money available from the banks and there won’t be money for the suppliers to start production again when the (automakers) need parts.”Widespread bankruptcies and shutdowns at suppliers could affect not only efforts to restart assembly lines at GM (GMGMQ) and Chrysler, but could spread to Ford Motor (F, Fortune 500) and the North American plants of Asian rivals such as Toyota Motor (TM) and Honda (HMC), which also depend on those suppliers for their parts.It was the risk of widespread failures throughout the parts industry that prompted Treasury to agree to the 5 billion in loan guarantees for the industry in March.

Source:CNN

NEW YORK: Social networking site MySpace said Tuesday that it plans to slash nearly 30% of its workforce, leaving it with 1,000 employees.Once the world’s largest online social network, MySpace has struggled to compete with the rapid user growth of rivals Facebook and Twitter. Usership and average time spent on the Web site have decreased over the past several months.”Simply put, our staffing levels were bloated and hindered our ability to be an efficient and nimble team-oriented company,” said MySpace Chief Executive Owen Van Natta. “Our intent is to return to an environment of innovation that is centered on our user and our product.”0:00
/2:58Facebook struggles to grow upMySpace was purchased for 580 billion by media mogul Rupert Murdoch’s NewsCorp (NWS, Fortune 500) in 2005, when it was the leading social network. The company’s success and growth continued until last year. In April 2008, 73% of the total time spent on social networks was spent on MySpace, according to a recent Nielsen study. Social network users spent just 23% of their time on MySpace in April 2009, compared to nearly 66% for Facebook.”MySpace grew too big considering the realities of today’s marketplace,” said Jonathan Miller, News Corporation’s CEO of Digital Media. “I believe this restructuring will help MySpace operate much more effectively both structurally and financially moving forward.”A new leader. Facebook has taken over the social networking crown in recent months because it appeals to a broad age range and continues to unveil diverse applications for gaming, music and social interaction. MySpace, on the other hand, has a much younger audience and is the Internet leader in media downloads, including streaming movies and music.As a result, experts say MySpace may continue to pursue its niche, allowing Facebook to remain social networking leader for the time being.”MySpace is not currently in a situation where they feel they can win this social networking battle,” said Josh Bernoff, social networking analyst at Forrester Research. “It has become difficult to take the leader head on, so there’s less need for the number of developers they had.”

Source:CNN

NEW YORK (Fortune) — Tomorrow President Obama will present his plan to fix the way the U.S. regulates finance. The “white paper” his Treasury Department will release at the same time will contain the specifics. But already the administration is publicizing its overarching themes, particularly through official if unnamed leaks to the Wall Street Journal and an opinion piece Monday in the Washington Post by Treasury Secretary Tim Geithner and White House economics chief Larry Summers.The details will be important, of course, as will the way Congress takes, re-shapes, and passes the plan in the form of legislation in coming months. There’s enough here, though, to begin debating whether Obama’s regulatory team is on track. The short version: There are some good ideas here. There’s also a whole lot that will make Wall Street howl in protest.0:00
/4:31Geithner:’Too unstable, fragile’Here, then, are some preliminary grades on a preliminary plan. The final exam is a long way off.Give government power, a “resolution mechanism” in the words of Geithner and Summers, to wind down systemically important players. This is good idea, if the manner in which this purportedly rare power is to be exercised is clearly spelled out to the affected companies. Last year there was considerable debate about whether the federal government had the authority to seize Lehman, an investment bank not regulated by the FDIC, instead of allowing it to collapse. These powers should be written down to avoid the embarrassing position the Bush and Obama administrations have found themselves in in the last year, exercising power that may or may not exist. (Grade: B+)Empower the Fed to oversee the biggest financial players, including imposing leverage restrictions (and liquidity and capital requirements) on the largest financial companies. This arguably is the only proposal that means anything at all. Limiting the use of leverage at institutions like Citigroup (C, Fortune 500) or AIG (AIG, Fortune 500) would have made all the difference in 2008. Then again, the same action would have eroded years of profits at Goldman Sachs (GS, Fortune 500). A leverage restriction for banks and nonbanks alike would go a long way to preventing another crisis. Exactly how the requirements are written, including if they are transparent to investors, will mean everything. (Grade: Incomplete. Too soon to know.)Create a super-regulator for consumer-oriented financial products, including mortgages and credit cards. It sounds good, but even Geithner and Summers refer to this as providing a “stronger framework” for regulation. Adding another regulator rather than eliminating them is a troubling development. (Grade: C)Eliminate the Office of Thrift Supervision. Oh, actually, Obama does plan to do away with one ineffectual agency. What’s not to like about eliminating the regulator that oversaw AIG, Countrywide and WaMu? The total number of regulators will stay the same. There should be more, not less, of this, but Beltway types say the White House doesn’t want to risk political fights with Congressional committee chairmen whose turf includes agencies that should go away. This isn’t change we can believe in, suffice it to say. (Grade: A on the specific action; D on the larger message.)Urge harmonization between the SEC and CFTC. It’s an open secret that the securities regulator and futures regulator step on each other’s toes. A March 2008 blueprint by former Treasury Secretary Hank Paulson suggested the agencies should be merged. That plan went nowhere. “Harmonization” is Washingtonspeak for “nothing will happen.” It’s sort of like forming a blue-ribbon commission. (Grade: F)Require hedge funds to register; regulate derivatives. Registration of hedge funds is harmless, and bringing the unregulated products they trade into the tent is a good idea. The problem is the language Geithner and Summers use to describe the result. “Regulators will be empowered to enforce rules against manipulation and abuse,” they wrote. Plenty of laws against manipulation and abuse already exist. This is more code language for going after “speculators,” also known as investors. It’s a slippery slope. (Grade: C-)Reduce reliance on ratings agencies and require the originator, sponsor or broker of securitized mortgages to retain a financial interest in loans. Whoa. This is a bombshell. Diminishing the roll of the agencies will be a fun one to watch. Requiring mortgaging originators to hold a portion of their loans will devastate the banks. This will be a bloody debate. (Grade: B-)Create a council of regulators to monitor systemic risk. This sounds like a Washington problem waiting to happen. A council could be helpful because its members will be powerful and motivated to spot problems. But it will be a political body in a political town. You’d have to see it in action to know if it works. (Grade: Incomplete.)Geithner and Summers concluded their op-ed by writing: “Now is the time to act.” Actually, March 2008, when Paulson suggested his blueprint, would have been a really good time to act. Now would be good too.

Source:CNN