Archive for July 29th, 2009

NEW YORK: California may have a budget, but that doesn’t mean it has the money to cash the 1.1 billion in IOUs sent out this month.The state Controller’s Office, which has issued nearly 220,000 IOUs to residents, government agencies and contractors, likely won’t know until the end of next week when it can start trading the IOUs for cash. First it must review the new budget to determine when there will be enough funds in the state coffers.Gov. Arnold Schwarzenegger signed a contentious budget agreement Tuesday that closes a 24 billion deficit in large part by slashing 15 billion in spending. The governor vetoed another 489 million in spending, mainly from health and human services, after lawmakers rejected a plan to tap local governments’ gas taxes and allow new offshore oil drilling.The state Finance Department is expected to send the agreement to the controller next week. It will then take the Controller’s Office three or four days to crunch the numbers.”We will develop the cash flows so we can determine when the state will have sufficient funds to pay all its bills and repay all the IOUs already issued,” said Hallye Jordan, a controller spokeswoman.Controller John Chiang started mailing IOUs on July 2 to preserve enough cash to cover debt payments and fund education. The state was facing a 400 million shortage for July. The figure was revised downward from nearly 3 billion after June cash flow figures were calculated.0:00
/2:26States face budget disastersIt was the first time the state issued IOUs since 1992, though it did delay payments in February during another cash crunch.The IOUs went mainly to residents and companies owed tax refunds, as well as social service agencies and state vendors. They were told they could redeem the paper on Oct. 2 or when the state has enough money in the bank, whichever came first. They will be paid an interest rate of 3.75%.At least some are not pleased that they have to wait to see their money.Carol Gillis, an Anaheim mother of five grown children, was depending on a 958 tax refund to help cover the rent and motor vehicle fees after her husband’s pay was cut. Instead, they got an IOU.”I feel that it is my money and I should never have had to wait in the first place,” said Gillis, an accounting clerk. “To wait even longer just makes me angrier.”How has President Obama’s 787 billion stimulus program affected you or your community? Are you seeing a benefit from the Making Work Pay tax cuts or the additional 25 in unemployment benefits? Are you seeing construction jobs or other stimulus-funded work in your neighborhood? Do you still have a job because of stimulus funds? We want to hear your experiences. E-mail your story to realstories@cnnmoney.com or send in an iReport and you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here.

Source:CNN

NEW YORK (Fortune) — Don’t look now, but the government has actually strung a couple modest victories together in its dealings with big banks. American Express (AXP, Fortune 500), the New York-based credit card giant, said Wednesday it paid the Treasury Department 340 million to repurchase the warrants the bank issued in January after borrowing 3.4 billion under the Troubled Asset Relief Program. AmEx was among 10 banks that repaid their TARP loans last month.The government accepted the warrants, which confer the right to buy shares later at a specified price, to compensate taxpayers for the risks they took on in the bailout of the financial system. The AmEx deal is the second-biggest payment the government has received for the warrants. Last week, investment bank Goldman Sachs (GS, Fortune 500) wrote a 1.1 billion check to buy back its warrants. What’s more, the AmEx repayment, like the Goldman one before it, appears to offer fair value to taxpayers — unlike earlier warrant-repurchase deals with BB&T (BBT, Fortune 500), U.S. Bancorp (USB, Fortune 500) and numerous smaller banks. “It seems that congressional pressure has significantly stiffened the negotiation stance of the U.S. Treasury,” said Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette. “I hope that the TARP warrant repurchase prices of Goldman Sachs and American Express are a trend of things to come.” Scrutiny of the warrant repayment process has risen along with the price of bank shares. Though the warrants represent but a fraction of the 700 billion allocated to TARP, they have become a minor cause clbre because they offer a rare opportunity for the government to recoup some of the costs of the multitrillion-dollar bailout. 0:00
/5:54Worried about TARP warrants”Because the warrants that accompanied TARP assistance represent the only opportunity for the taxpayer to participate directly in the increase in the share prices of banks made possible by public money, the price at which the warrants are sold is critical,” Elizabeth Warren’s Congressional Oversight Panel said in its July 10 report to Congress. Congress held a hearing last week on Treasury’s handling of the warrants, and legislation introduced this month in the House would force Treasury to adopt a more open process. Under current procedure, the government negotiates in private with banks over the price they will pay to repurchase the warrants. This has led some to snicker that Treasury is attempting another giveaway to bankers. It has also prompted calls for Treasury to move to an auction format, which should remove much of the guesswork about how to value the warrants. The skepticism stems in part from the terms Treasury set for the warrants last fall, which were advantageous to banks. Wilson notes that though Goldman paid fair value for its warrants, taxpayers still made less than half the return of private investors in similar securities over the same period.Of course, making money wasn’t Treasury’s primary motivation behind the TARP loans, as Congressional Oversight Panel member Richard Neiman noted this month. “The total benefit to the American taxpayer has to take into account the non-financial as well as the financial returns,” Neiman wrote in an appendix to the July 10 report. He cited TARP’s role in “stabilizing and reviving the financial system during a very difficult period of time.” Still, watchdogs are cajoling Treasury to reveal more about its approach to the warrant deals, in the name of protecting taxpayer interests. “While Treasury has provided some limited information about the valuation process, it has yet to provide the level of transparency at the transaction level that would begin to address such questions,” the Government Accountability Office said this month in a report to Congress. The Treasury Department issued a press release last month saying it “will begin publishing additional information on each warrant that is repurchased,” including the details of negotiations and internal valuation models. But so far, the government has published no such data on the Goldman or American Express warrants. Asked Wednesday when taxpayers might start seeing the additional information, a Treasury spokesman replied, “Soon.”

Source:CNN

(breakingviews.com) — The porous divide between Wall Street and Washington is getting grayer and messier. Look no further than the unfolding tale of Charles Millard, the former head of the U.S. Pension Benefit Guaranty Corporation.BlackRock (BLK, Fortune 500) and Goldman Sachs (GS, Fortune 500) in particular lobbied him for lucrative asset management gigs, perhaps too eagerly. He sought their help, perhaps too freely — including in looking for a job after he left office.The PBGC concluded in May that Millard had inappropriate contact with the two firms, and with JPMorgan (JPM, Fortune 500) also, at a time when the agency was in the process of selecting them to manage money on its behalf (PBGC has since revoked the contracts). Whether or not he actually stepped across legal lines, Millard seems to have shown poor judgment.On the other hand, it’s a fair bet President Bush’s team picked him for the job hoping he would, up to a point, take advantage of his financial background and Wall Street contacts. After all, that back and forth can be helpful if it genuinely keeps both sides better informed. Drawing that line is difficult for any official.It doesn’t help that Washington and Wall Street share a revolving door. Perhaps the least edifying of the emails recently unearthed by the New York Times involve Millard apparently using his contacts to tout himself around for a financial sector job in anticipation of leaving office. He hasn’t taken one yet, and he isn’t allowed to join a firm he helped select as a government contractor for at least a year.Overall, it’s not a pretty story. But change the names, organizations and even the country, and it’s easy to imagine similar interplay between business and government the world over. The U.S. and other places have rules designed to block the worst excesses. But even the best rules can’t outlaw human nature or substitute for sound judgment.

Source:CNN

NEW YORK: Ruth Madoff, wife of imprisoned Ponzi schemer Bernard Madoff, was sued Wednesday by a court-appointed trustee seeking 45 million in funds to compensate victims.0:00
/1:17Madoff gets the maxLast month, federal authorities seized the Madoffs’ assets but left Ruth Madoff with 2.5 million — an amount they could not tie to her husband’s massive and long-running Ponzi scheme.But Irving Pickard, the trustee appointed by U.S. Bankruptcy Court in New York, said that Ruth received 44.8 million in “fraudulent” transfers during the six years leading up to the bankruptcy of her husband’s investment firm.”While Madoff’s crimes have left many investors impoverished and some charities decimated, Mrs. Madoff remains a person of substantial means,” Pickard wrote in the suit. “The inequity between Mrs. Madoff’s continuing financial advantages and the economic distress of Madoff’s customers compels the trustee to bring this action.”Ruth Madoff’s lawyer described the trustee’s lawsuit as “perplexing” and unwarranted.”[T]he trustee is alleging that she should have to give up her remaining money even if she was completely unaware of her husband’s crimes,” Peter Chavkin of the firm Mintz Levin said in a statement. Ruth Madoff has not been charged with a crime, unlike her husband of 49 years, who pleaded guilty on March 12 to 11 federal counts for running a decades-long Ponzi scheme that is believed to have run into the billions of dollars. In fact, Bernard Madoff has been forced to forfeit property to comply with a 170 billion legal judgment. That figure is based on the amount of money the government says was handled by his firm since its founding in the 1960s.Bernard Madoff, 71, was sentenced to 150 years on June 29. He is incarcerated at the medium security Federal Correctional Institution Butner in North Carolina, north of Raleigh. His release date is Nov. 14, 2139.Judge Denny Chin of the U.S. District Court in Manhattan said he based the maximum sentence on the damage that Madoff inflicted on his thousands of victims. As in a classic Ponzi scheme, Madoff accepted funds from his investors and stole instead of investing it. He used fresh funds to make payments to other investors.

Source:CNN

NEW YORK (Reuters) — American Express Co. paid the U.S. Treasury Department 340 million Wednesday to redeem warrants to buy its stock, allowing it to fully escape the government’s bank bailout program.The New York-based credit card and travel services company joins Goldman Sachs Group Inc. (GS, Fortune 500), U.S. Bancorp (USB, Fortune 500), BB&T Corp. (BBT, Fortune 500) and State Street Corp. (STT, Fortune 500) among large financial companies to buy back their warrants, which were issued under the federal Troubled Asset Relief Program.JPMorgan Chase & Co. (JPM, Fortune 500) decided to let the government auction its warrants rather than pay an inflated price for them.American Express (AXP, Fortune 500) last month bought back 3.39 billion of preferred shares it had issued to the government under TARP.It said the cost of buying back the government’s warrants to buy 24.3 million shares, together with the 74.4 million of dividend payments it made on the preferred shares, gave the government an annualized 26% return on its investment.Many companies initially welcomed the infusions but later viewed them as a stigma that suggested weakness. Some have also chafed at TARP restrictions, including on executive pay.American Express said the cost to buy back the warrants in part reflects the company’s rising share price, which traded in the teens and low-20s in January.The shares were up 20 cents at 27.88 in Wednesday afternoon trading on the New York Stock Exchange. American Express is part of the Dow Jones industrial average.

Source:CNN

NEW YORK (Reuters) — The dollar rose broadly Wednesday, as a sell-off in Shanghai’s stock market and a weaker-than-expected U.S. durable goods report revived safe-haven demand for the greenback.Falls in U.S. equities and a 5% slide in China’s benchmark stock market, the Shanghai Composite Index, cut investors’ appetite for risk. That helped the dollar recover from its lowest level of 2009 and pushed the euro to a two-week low near 1.40.”There’s an awful lot of focus on what’s happened in China overnight in terms of equities being lower due to some new restrictions, which looks like may limit some growth potential,” said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.”We’ve had a tremendous run across many asset classes. I think the market is taking a healthy breather,” she added.In midday trading in New York, the dollar index, which measures its performance against a basket of currencies, rose 0.8% to 79.487, rebounding from a 2009 low of 78.315 set the previous day.The euro dropped 1% against the dollar to 1.4036 after hitting 1.4016, its lowest since July 15. On Tuesday, the single currency rose as high as 1.4303, its highest since early June, according to Reuters data.Adding to the dollar’s strength was a government report showing new orders for long-lasting U.S. manufactured goods fell more sharply than expected in June, which further weighed on risk sentiment.”This has translated into a weak equity market and a pullback from dollar shorts in the currency markets with the risk-off scenario playing out,” said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago.The euro was last down 0.3% at ¥133.54, while the dollar rose 0.6% to ¥95.12.Beige Book aheadThe Commerce Department earlier said U.S. durable goods orders fell 2.5% in June, the largest drop since January. This was worse than market expectations for a 0.6% decline.Growing optimism about the global economic outlook had pressured the U.S. currency in recent weeks and fueled a rally in stocks, commodities and higher-yielding currencies.But hopes the global economy was recovering were dented on Tuesday after data showed a drop in U.S. consumer confidence, while a sharp drop in oil prices weighed on commodity-linked currencies such as the Australian and Canadian dollars.The Australian currency fell 1.4% against the dollar to US0.8158, while the New Zealand dollar declined 0.6% to US0.6539.The Canadian dollar, which is particularly sensitive to oil prices, also fell with the U.S. dollar up 0.8% at C1.0884.Investors awaited the Federal Reserve’s release of its Beige Book, an anecdotal report on economic conditions, later on Wednesday, while this week’s focus remains on U.S. second-quarter gross domestic product figures on Friday.The market also awaited the results of a Treasury auction of 39 billion in five-year notes later on Wednesday as part of a record 115 billion of issuance this week. This follows Tuesday’s auction of 42 billion of two-year notes which did not meet strong demand.

Source:CNN

NEW YORK: Is the Chinese economy in the same state as the American economy was in the summer of 2007? In other words, all pumped up and ready to pop? If so, it might be time to learn how to say bubble in Mandarin. And that could be bad news for those hoping for a sustainable U.S. recovery.The Shanghai Composite Index plunged 5% Wednesday, while Hong Kong’s Hang Seng dipped nearly 2.4% on growing concerns that China’s robust period of growth could soon stall. The sell-off spilled over to shares of prominent Chinese companies listed in the United States, with sinking shares for firms ranging from oil producers CNOOC (CEO) and China Petroleum and Chemical (SNP) to Internet companies CDC (CHINA) and Baidu.com (BIDU).China’s economy is still growing rapidly. But some eerie similarities to the U.S. economy just before the credit markets started to unravel two years ago are starting to emerge.Consider this. Before Wednesday’s plunge, Chinese stocks had been racing higher — the Shanghai Composite was up 16% in July alone. Last week, China State Construction Engineering Corp. went public and surged 70% in its first day of trading. Now think back to July 2007 — the Dow closed above 14,000 for the first time (it would peak in October).Talkback: Do you view China as an economic ally for the U.S. or a growing threat? Leave your comments at the bottom of this story. Just as American banks once were, Chinese banks are being loose with credit. According to figures from the People’s Bank of China, China’s central bank, banks made 7.37 trillion yuan (1.1 trillion) in new loans during the first half this year. By way of comparison, Chinese banks issued 4.91 trillion yuan in new loans during all of 2008. China’s lending target for all of this year had been just 5 trillion yuan. As such, there are reports that China’s top banks may soon impose limits on new loans, which could lead to slower growth in China’s economy.The hefty loan volume is raising the specter of a potential bad loan bust in China, similar to the subprime nightmare that U.S. banks had to endure.”Lending from Chinese banks was high-powered stimulus, but the risk is that loans are being made in an environment where more of them are likely to go bad,” said Andrew Busch, global currency strategist with BMO Capital Markets in Chicago. “Non-performing loans may soar.”Why China mattersNow you might be wondering why this is a problem for the United States to worry about. Well, China just so happens to be the largest holder of U.S. Treasurys, holding more than 800 billion worth as of the end of May. Busch speculates that if Chinese banks are suddenly hit with a wave of loan losses, China could try and shore up their balance sheets by selling U.S. bonds. So far, China has continued to be a big buyer of U.S. debt. But Chinese officials have expressed increased signs of frustration about the mounting U.S. debt load. “The Chinese have been complaining since the beginning of the year about how the U.S is managing its fiscal house. They are very concerned that the U.S is going to issue and issue and issue more Treasury securities,” Busch said. At some point, China may move beyond just threatening talk and actually take action.A China-led sell-off could cause bond prices to fall and interest rates to shoot higher. That could have disastrous implications on the U.S. economy since higher rates could cripple chances for a sustained recovery.That’s going to make it all the more imperative for U.S. officials — most notably, Treasury Secretary Timothy Geithner — to assure China that the United States is not going to dig itself too deep a debt hole. Geithner held talks with Chinese officials in Washington earlier this week about various economic issues.0:00
/2:19China’s giant stimulus packageBoth Geithner and Chinese leaders said they are committed to global economic stability. That’s a good sign. “Talks were constructive. The best we could have hoped for is an agreement from China that the U.S. has done what it had to do and that we will get out of a deficit as fast as we can,” said Carl Weinberg, chief economist with High Frequency Economics, a research firm based in Valhalla, N.Y. What’s more, Chinese Vice Premier Wang Qishan said that China would try and do more to boost domestic consumption of goods made in China so that it does not have to rely as much on exports to the United States. That’s a good sign since it should help to quash speculation that the United States and China could be headed toward a trade war.”There were reassurances from China and the U.S. that they don’t support protectionism. That would be bad and ugly and hurts everyone. Both are on the same side,” Weinberg said.Still, Busch is worried that the United States may not be able to exert that much pressure on China to do what it can to narrow the trade gap given that China has significant leverage with its Treasury holdings. That means that the United States may have to put up with even more job losses in manufacturing to keep China happy. And that obviously poses its own problems for the U.S. economy.”Allowing a large trade partner to be more competitive is in essence telling the manufacturing sector to take a hike. It’s doing the opposite to encourage job creation,” Weinberg said.Weinberg argues though that China’s threat to sell Treasurys is just a threat and that is not in China’s best interests to do something that could lead to a prolonged U.S. economic slump. So he doesn’t think the United States needs to appease China. But at the same time, Weinberg said that it makes more sense for the United States to recognize that China is now a major part of the global economy. So the United States can not afford to have an antagonistic stance towards it.”The most important thing we are learning is that China is a nation whose interests have to be considered. That’s the new reality,” he said. Talkback: Do you view China as an economic ally for the U.S. or a growing threat?

NEW YORK: Treasurys fell Wednesday, giving back earlier gains, after the government’s 39 billion auction of 5-year notes received lukewarm demand. The government said it took in 74.8 billion worth of bids for the 39 billion in 5-year notes offered, which made for a bid-to-cover ratio of 1.9. That compares with 2.58 at June’s auction of 5-year notes. A ratio below 2 is considered a sign of relatively weak demand. Tuesday’s auction came after the government sold 42 billion in 2-year notes and 27 billion in 52-week bills Tuesday. On Monday, the U.S. sold 6 billion in Treasury Inflation Protected Securities and 29.6 billion in 3-month bills. On Thursday, the Treasury will offer 28 billion in 7-year notes in the last phase of a record 200 billion weekly debt offering.Many analysts say the record amounts of debt being offered by the government each month could eventually overwhelm demand for Treasurys. Meanwhile, stocks tumbled as investors responded to news that Yahoo was partnering with Microsoft and mulled a weaker-than-expected reading on durable goods orders. Bond prices: The benchmark 10-year note was down 7/32 to 95-7/32 and yielded 3.72%, up from 3.71% Tuesday. Bond prices and yields move in different directions.The 30-year bond slid 14/32 to 95-1/32 and yielded 4.56%.The 5-year note fell 12/32 to 99-23/32 and its yield was 2.7%.The 2-year note dipped 15/32 to 99-19/32, and its yield was 1.21%.

(Fortune Small Business) — Want to build a better snorkel? Add a safety whistle. Need more eye-catching goggles? Try lime-green frames. Cindi Walters believes underwater gear should swim against the tide of traditional design. That’s good news for her 75-employee firm, C. Walters Intercoastal Corp. Last year CWIC’s revenues hit 25 million, up 14% over 2007. Walters projects a 12% boost this year. A surfer and scuba diver, Walters, 49, launched her company 13 years ago in Foothill Ranch, Calif. Since then she’s been licensing famous names like Body Glove and Disney (DIS, Fortune 500) to brand her innovative water gear, which she sells to retailers such as Sam’s Club, Sports Authority and Wal-Mart (WMT, Fortune 500). Big retailers are becoming harder to crack, says Matt Powell, an analyst for Charlotte, N.C.-based SportsOneSource. Shoes and golf equipment account for 35% of all sporting goods sales at these stores. Aquatic gear pulls in a measly 1%. “In this economy, retailers are hard-pressed to give shelf space to a small category,” Powell adds. Walters asserts that she’s ready to handle the shelf squeeze. Last year CWIC designed slimmed-down, stackable packaging for everything from snorkels to fins. Masks and goggles now nest inside one another to take up less space. Thanks to the makeover, Walters says, retailers can fit 40% more of her products on the same racks. Buyers are taking notice. “Some brands think they can stand out more by making their packaging bigger,” says August Portz, water-sports buyer for Sports Authority. “We have limited space, so we need packaging that sells itself. What she did is very creative.” Walters is keeping that creativity flowing. For 2010 she’s developing a line of canine aquatic gear, including goggles, fins and wet suits. Doggie diver down!

Source:CNN

NEW YORK: “Microhoo” is finally a done deal, but will it really be able to make a dent in Google’s enormous search market lead?It’s a difficult feat for sure. Google maintains 65% of the U.S. search market, compared to a combined 28% for Microsoft and Yahoo. But the newly partnered tech giants are hoping that one plus one equals more than two. “This deal is really about scale,” said Yahoo (YHOO, Fortune 500) Chief Executive Carol Bartz on a conference call. “By combining the … technology of both companies, we can create a real, viable alternative for advertisers.”In other words, size really matters to advertisers in the search market. More data means more relevant searches and ads, which means more money can be charged to advertisers.It’s a fact that Microsoft (MSFT, Fortune 500) CEO Steve Ballmer said unfairly benefits Google (GOOG, Fortune 500), as many ad companies were less willing to deal with Microsoft or Yahoo because each maintained a tiny fraction of the market compared to the search leader. But Ballmer said a combined effort “provides consumers and advertisers … with a real No. 2 advertiser in search.”"It’s reasonable logic that two is better than three,” said David Smith, analyst at Gartner. “The big picture is reaching a critical mass — the way advertising works is through a positive feedback loop, where the bigger you get, the better you get.”Smith said that Google has carved out such a dominant share of the market that there’s nowhere to go but down if competition ramps up from its biggest rivals.Not No. 1, but strong No. 2. Even if Microhoo doesn’t make a run at the top of the search market, some argue that the deal is good for both firms, advertisers and consumers. “Overall, the deal makes sense,” said Shar VanBoskirk, search market analyst at Forrester Research. “It potentially creates synergies between the two firms — each had a gap the other one could fill — to create another one-stop-shop and a stronger second-place player.”VanBoskirk said the consumer experience on Yahoo.com and Bing.com will improve, because data sharing will help Microsoft and Yahoo better customize content for each user. And with more relevant ads, advertisers will get more clicks and a better return on their investment.Furthermore, VanBoskirk said the partnership will free up development talent to improve Bing’s “decision engine” technology, which provide information on when airline prices will increase, what hotels to book and what to shop for.”Google is a great search engine, but the next wave of search will be more than just finding Web sites,” she said. “Both Bing and Yahoo try to do that, and the partnership will help them develop the online concierge experience that they offer.”In the end, VanBoskirk said the combined Microsoft and Yahoo search engine could cut Google’s 37-point market share lead to just 15 points.Nothing to see here? Some analysts aren’t convinced that the deal will really make a difference.”The amazing thing about this deal is how little impact it has,” said Carl Howe, analyst at Yankee Group. “Search rankings won’t change, advertising rates will continue in a downward spiral and the regulatory hassles involved will benefit the very beast they’re hoping to bring down: Google.” Howe argued that Google is so massive, that all a combined deal would do is create a singular, distant No. 2 search company (Microhoo) rather than a distant No. 2 (Yahoo), and an even farther-away No. 3 (Microsoft). 0:00
/4:54Yahoo searches for itselfFurthermore, all three companies have said that advertisers are paying less and less per click as the Internet becomes saturated with advertisements. If that trend continues, which Howe believes it will, then the deal doesn’t do much to help either Microsoft or Yahoo.And, as both Microsoft and Yahoo expected, the antitrust battle has already begun. Senate Antitrust Subcommittee Chairman Herb Kohl, D-Wis., said Wednesday that his panel will closely review the proposed deal.”The deal between Yahoo and Microsoft — industry giants and direct competitors in Internet advertising and search markets — warrants our careful scrutiny,” said Kohl. He said the deal has “potentially far-reaching consequences for consumers and advertisers,” including “dampening the innovation” in the tech industry. Google didn’t offer much insight into its thoughts on the deal. “There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We’re interested to learn more about the deal,” the company said in an emailed statement.