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OCTOBER 29, 2007
Edited by Harry Maurer & Cristin The Mother of All Bailout Funds Prodded by Treasury Secretary Henry Paulson, the top three U.S. banks—Citigroup (C ), Bank of America (BAC ), and JPMorgan Chase (JPM )—on Oct. 15 set up an $80 billion entity that will serve as a buyer of last resort for some 30 "structured investment vehicles," or SIVs. Many of these off-the-books bank creations, which issue short-term notes, are struggling because of soured subprime investments. On the same day, Citi revealed grim earnings, down 57%, largely because of $5.9 billion in write-offs. The stock sank to levels just below where it was when CEO Charles "Chuck" Prince took over four years ago, fanning speculation about how long he can hold on to his job. Nomura Pulls a Plug They're feeling subprime pain on the other side of the Pacific, too. On Oct. 15, Japan's top brokerage, Nomura Holdings (NMR ), said it will flee the home loan business in the U.S. after writing off an additional $621 million in bad debt during the July-September quarter. The company's U.S. mortgage losses now stand at $1.2 billion since January—far exceeding the modest hits at other Japanese firms. Nomura will lay off 400 employees, or nearly a third of its 1,300 New York staff. Top U.S. mortgage lender Countrywide (CFC ) is cutting 12,000 jobs, or 20% of its staff, and CEO Angelo Mozilo is under investigation by the SEC for stock sales before the subprime crash.   The Bankruptcy Squeeze If housing didn't already have enough problems, here's one more: A tougher bankruptcy law makes it harder for struggling families to stay in their homes. The 2005 law is designed to pressure Americans to pay more of their credit-card and other consumer debt, rather than simply writing it off. That means they'll have less money to pay mortgages, and there's more chance they'll face foreclosure. Congress is pondering legislation that would allow judges to adjust unaffordable mortgages downward for bankrupt households. A Biotech in Play The latest target for Carl Icahn: Biogen Idec (BIIB ), one of the most successful biotechs. The activist billionaire got the ball rolling on Oct. 12 when he made an unsolicited offer of $23 billion, forcing Biogen's board to say it would be open to other bids. The price could be steep, given that Biogen stock has more than doubled since mid-April to around $82 a share on takeover speculation. Plus, the partners on two of its biggest drugs, Genentech (DNA ) on Rituxan and Elan Pharmaceuticals (ELN ) on Tysabri, have the right to buy out Biogen's share in the event of an acquisition. Fox Business Debuts Ivanka Trump was on hand to hawk her new line of diamond jewelry at the New York bar that's the set for Happy Hour, the Fox (NWS ) Business Network's after-market show. Rupert Murdoch's populist brand of business channel, aimed at expanding coverage to the young and to Middle America, launched on Oct. 15 with the anticipated assault on incumbent CNBC. "Finally a second opinion," the on-air promos blared. The channel opened in just over 30 million TV households—one-third CNBC's coverage—but has classic Fox attitude. "Friend" of the Court Sure, creating a page on a social networking site like MySpace or Facebook is a cool way to keep in touch and chronicle your latest exploits. It might also be used against you—in court. Lawyers are finding that the sites offer troves of evidence for use in everything from matrimonial disputes to homicide cases. Photos that defendants have posted of themselves while drunk or brandishing firearms haven't worked in their favor at sentencings, for example. (The National Law Journal, Oct. 15) The Economics Nobel What the heck is "mechanism design theory"? It's the reason that, on Oct. 15, the 2007 Nobel Prize in Economics was awarded to Leonid Hurwicz, Eric Maskin, and Roger Myerson. Hurwicz pioneered the theory, which underpins the design of auctions such as those for use of the airwaves and the right to emit carbon dioxide. It also relates to a much wider range of economic issues, including setting up the best tax system and health insurance reform. See "Father of Mechanism Design Wins Nobel" Oil Prices Spike Up Wars, and rumors of wars, have helped push crude to new heights—before factoring in inflation, that is. Futures closed in New York at a record $87.61 per barrel on Oct. 16. One fear pushing prices: an attack by Turkey on Kurdish areas of Iraq. Also, inventories are tightening, world demand remains intense, and OPEC is opening the spigot only a bit. See "Next Stop: $100 Oil?" 
Ellison Strikes Again When Oracle's Larry Ellison isn't trying to win things—like the America's Cup, which he failed to nab this summer—he's trying to buy things. On Oct. 12 he kept it up with a $6.7 billion hostile offer for rival software maker BEA Systems (BEAS ). BEA's board sniffed that the bid isn't rich enough, even though it represents a 25% premium over the recent trading price. So far no other contenders have shown up. If Ellison lands this fish, he will have spent more than $31 billion on 35 takeovers in three years. See "Bagging BEA Systems Won't Be Easy" Yahoo! Wows the Street Co-founder-turned-CEO Jerry Yang either has the gift of gab—or the numbers simply did the trick. In an Oct. 16 earnings call he outlined a multiyear plan to reverse Yahoo's declining fortunes. Yahoo! (YHOO ) will innovate around its home page, mail service, search site, and other popular properties from which users start surfing. And then there were the third-quarter results: profits down 4.6%, but revenues up 12%. The stock jumped almost 8% on Oct. 17. Intel (INTC ) earnings also shone, leaping 43% for the quarter. See "Yahoo Searches—for Profitability" Heart Gizmo Glitches It seems to be the season for recalls, but this one involved no lead-painted accessory for Barbie dolls. On Oct. 15, Medtronic (MDT ) called in thousands of wires that help power its defibrillators—implantable devices that regulate the delicate rhythms of the heart. Turns out some of the wires were fracturing, causing them to deliver shocks or to break down. The company tied five deaths to the faulty component. Medtronic officers say the recall could cost $250 million in lost revenues this quarter. And patients are none too happy: One liability suit has already been filed in Minnesota. The A380 Hits the Runway Finally, a real live Airbus A380 has made an appearance. The company delivered its first megajet, delayed two years by snafus, to first customer Singapore Airlines. The carrier showed off the plane's snazzy interior, including private bedrooms with Givenchy furnishings, at an Oct. 15 ceremony in Toulouse, France. The aircraft is set for its maiden commercial flight on Oct. 25, from Singapore to Sydney. The doubledecker is still a drag on profits, though. Airbus has logged only 165 orders, fewer than half the 420 it says are needed to break even. See Airbus A380: In Business at Last" Moving the Metal Led Zeppelin is hunting for a new stairway to sales heaven. Warner Music (WMG ) said on Oct. 15 that the British superband's entire oeuvre would be available commercially for download starting in November. That came less than a week after another Brit band, Radiohead, put its latest album online and let fans decide how much to pay for it. With music CD sales down 14% this year alone, the industry continues to seek a catchier business-model groove. (www.telegraph.co.uk) Advertise? What for? Think about it: Google (GOOG ) is one of the hottest stocks because it figured out how to turn Internet search into an advertising bonanza. But can you recall an ad for Google itself? Probably not, and that's because the company relies largely on word of mouth and obsessive media attention. Google laid out just $188 million on advertising and promotion in 2006, about what Microsoft (MSFT ) spends every two months. That very dearth of ads helps keep Google cool—and makes it, according to one consulting firm, the most valuable brand on the planet. (Associated Press, Oct. 14) Bulls Stampede in China Mainland investors are taking irrational exuberance to new heights. On Oct. 15 the Shanghai Stock Index blasted through the 6,000-point mark and closed at 6337 on Oct. 17, up a dizzying 125% since the beginning of the year. The broader CSI 300 index of top Shanghai and Shenzhen-listed companies is up 185%. Meanwhile, a Beijing official has confirmed that state-owned China Citic Group is seeking to take an unspecified stake in Bear Stearns (BSC ). See "No Bounds for China's Stock Frenzy" 
You've Got…a Pink Slip AOL (TWX ) continues to play the incredible shrinking Internet portal. The Time Warner (TWX ) unit confirmed on Oct. 15 that it'll ax 2,000 more workers, cutting its once-hefty 18,000 workforce to 8,000. The 20% chop comes as AOL slowly morphs into an ad-supported site. Revenue is down 32% in 2007, as nearly 7 million subscribers have logged off in the past year. Apple, Phone Home Bowing to a legion of eager geeks, CEO Steve Jobs on Oct. 17 said Apple (AAPL ) will open its iPhone to software developers in February, confirming a story first reported the day before on BusinessWeek.com. But popular as the move is, the iPhone is going to have more competition. Skype, the eBay (EBAY )-owned Internet calling concern, is hooking up with British wireless carrier 3 on a handset that will make calls for free to other Skypers—and much cheaper calls to overseas numbers than on regular cell phones. See "Will Apple Open the iPhone?" Branson to the Rescue Richard Branson, white knight. Has a nice ring, no? The entrepreneur wants to save a bank in distress: British mortgage lender Northern Rock. On Oct. 12 a Virgin-led consortium of financial stalwarts submitted a proposal to inject up to $2 billion in new capital into Northern Rock in exchange for a controlling stake in the business. It'll then be combined with Branson's online financial services firm, Virgin Money. Branson wants to build Virgin Money into a consumer finance powerhouse. Boeing Reshuffle A six-month delay is simply too long when you've bet the farm on a fuel-sipping new plane. So CEO Jim McNerney took about six days after getting the bad news to reassign Mike Bair, who had led the 787 Dreamliner program from its inception but failed to deliver on time. His replacement: Pat Shanahan, no stranger to troubled operations. He fixed Boeing's (BA ) wobbly rotorcraft division and fired up the much-maligned missile defense systems. Ericsson: Ouch! Shares in the Swedish telecom equipment maker (ERIC ) took an historic drubbing on Oct. 16, flopping nearly 25% after it warned of slow revenue growth and a surprise 36% slide in profits. CEO Carl-Henric Svanberg blamed the shortfall on late-quarter delays in key contracts and a higher proportion of less profitable sales in the developing world. Analysts felt blindsided and downgraded the stock en masse. See "Ericsson's Surprise Nosedive" Washington Loses One It's chop those cotton subsidies—or else, according to the World Trade Organization. On Oct.15, officials said that the global trade court had upheld an earlier decision that the U.S. hasn't gone far enough in cutting off as much as $4 billion in aid to its cotton farmers. It's a triumph for Brazil, which brought the case, and by extension for African growers that want to export to the U.S. Washington can still appeal. What, No Haggling? Most automobile dealers have scoffed at the idea of selling cars without negotiating. But Lithia Automotive Group (LAD ), a chain with more than 100 dealerships, is switching all its stores to fixed-price selling over three years. A few independents have done it, too. Lots of dealers hate the idea, but with 65% of car buyers saying they prefer fixed prices, more may make the switch. A New Driver at UPS Scott Davis, chief financial officer of United Parcel Service (UPS ) for the past six years, will take the wheel next January from the retiring Mike Eskew. At tradition-bound UPS, where most management trainees must first pay their dues running actual routes, Davis, 55, comes close to being an outsider, having joined UPS in 1986 when it acquired II Morrow, a maker of tracking technology that he headed. Analysts think the Davis pick could presage a big acquisition by UPS, maybe in Asia. That region has delivered most of UPS's growth lately. Saying No to the Dolans The chances of the controlling Dolan family taking Cablevision (CVC ) private seem to be sinking faster than its New York Knicks usually pile up losses. Claiming that shareholders wouldn't be "adequately compensated" by the $10.6 billion buyout, the cable company's largest shareholder, ClearBridge Advisors, joined dissident owners T. Rowe Price (TROW ) and Mario Gabelli in saying it would vote against the deal on Oct. 24. That could doom the Dolans' third try to take the company private. In other media news, Morgan Stanley (MS ) on Oct. 17 dumped its 7.9% stake in the parent of The New York Times. Morgan hasn't been shy about criticizing management. Public Offerings Galore The Istanbul stock exchange will see a rash of initial public offerings in 2008, reports the Oct. 7-20 issue of BusinessWeek Turkey. As many as 50 Turkish companies, including biggies such as Turk Telekom and chocolate maker Ulker Cikolata, plan to list next year. Businesses are eager to hitch a ride on the bull market. The main index on the Istanbul exchange is up more than 48% so far this year, powered in part by rising foreign investment. And international investors now account for nearly three-quarters of trading volume. Fed Chairman Ben Bernanke referring to the complex mortgage securities that some major banks are looking to unload into a special rescue fund, in an Oct. 15 speech in New York City. 
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