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August 10, 2009 Issue Posted July 29, 2009, 4:55PM EST

Executive Summary

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Homebuilding in Denver: Prices indicate that housing may have hit bottom Rick Wilking/Reuters

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Derivative Risks

In the wake of the financial smashup, the Financial Accounting Standards Board decided it might be a good idea to have companies disclose their exposure to derivatives. The first quarter of 2009 marked the first time they had to do that, and the results are in. The possibly worrisome news: Exposure is extremely concentrated. A Fitch Ratings study of 100 companies shows that some 80% of the derivative assets and liabilities carried on the companies' balance sheets belonged to just five financial outfits: Bank of America, Citigroup, Goldman Sachs (GS), JPMorgan Chase, and Morgan Stanley (MS). What's more, those firms hold 96% of credit derivatives. (CFO.com)

—Edited by Harry Maurer & Cristina Linblad

Why Joblessness Is Proving So Stubborn

To the long list of casualties of this recession, you can add Okun's Law. Back in the 1960s, Arthur Okun, an economic adviser to President Lyndon Johnson, posited a mathematical relationship between output and unemployment, under which for every percentage-point decrease in gross domestic product, the jobless rate would rise by half a percentage point. This rule of thumb held up pretty well for about half a century—and then the Big R came along.

Financial writer Roger Lowenstein, in the July 26 issue of The New York Times Magazine, points out that joblessness, now at 9.5%, is running at least 1.5 percentage points higher than Okun's Law would predict. Lowenstein says one key reason may be that companies are not engaging in what economists call labor hoarding, a common practice during downturns. Instead of holding on to most of their workers in anticipation of a recovery, companies slashed payrolls swiftly and savagely. Some say managers panicked and cut more than necessary. Others say companies know what they're doing; many simply don't see business picking up anytime soon. If the latter is true, the U.S. may be heading into a slow-growth—and jobless—recovery. (The New York Times Magazine)

—Edited by Harry Maurer & Cristina Linblad

Delphi's Rebirth

After four long years, auto-parts giant Delphi (DPHIQ) is emerging from bankruptcy—but the exit didn't go exactly as Washington had hoped. The Obama Administration was eager for General Motors and California private-equity house Platinum Equity to grab Delphi as part of the Detroit makeover. But Delphi's lenders squawked and in the end won the auction by agreeing to forgive $3.4 billion in debt. Still, Delphi's new lease on life is a big relief for former parent GM, which relies on the company for billions of dollars' worth of parts. GM will take back some Delphi plants as part of the deal.

—Edited by Harry Maurer & Cristina Linblad

Microsoft Maneuvers

The often slow-moving software behemoth seems to be back on Internet time. In a major concession, Microsoft (MSFT) offered on July 24 to let European owners of PCs choose a browser other than its own Internet Explorer. If regulators approve, they may drop an antitrust suit and clear the way for Microsoft to offer the other browsers soon after the Oct. 22 launch of the Windows 7 operating system. Then, on July 29, Microsoft formed a long-rumored partnership with Yahoo! (YHOO) that makes the Bing search engine the standard on all Yahoo sites. That would treble Microsoft's search share and make it a powerful counterweight to Google (GOOG) with online advertisers. But since Google and Microsoft would then have around 90% of the market, they may need concessions from U.S. antitrust guardians this time.

—Edited by Harry Maurer & Cristina Linblad

Silverman Bows Out

Rule No. 1 for a network suit: Create hits. Ben Silverman didn't do enough of that, so after an up-and-down, two-year reign as NBC Entertainment's co-chairman, he's escaping to join Barry Diller, whose IAC (IACI) powerhouse will create a company with Silverman to make content for the Web and TV. The idea isn't fully cooked, but part of the plan is to involve advertisers in making shows that will feature their products and then, presumably, stream them on Match.com, CollegeHumor.com, or one of the 50 or so other IAC sites. Diller once backed former talent agent Silverman's TV production company Reveille, which brought British import The Office and other shows to NBC. The magic seemed to end once Silverman started green-lighting losers such as Crusoe for the Peacock. Jeff Gaspin, formerly head of NBC's profit-spinning cable unit, now will run the entire TV operation.

See "Diller, Silverman: Expect the Unexpected"

—Edited by Harry Maurer & Cristina Linblad

Lebanese Muscle

Lebanon tends to swim against the tide, according to the cover story in the July/August issue of BusinessWeek's Arabic edition. While the Middle East was savoring the economic boom of recent years, the nation was consumed with seemingly intractable strife. But now, as the Gulf states reel from the effects of a real estate bust and credit crunch, the Lebanese economy is showing remarkable resilience. Growth is expected to hit 6% this year. Bank deposits have jumped 50% over the past 12 months, and the real estate market is healthy, with a 6% uptick in transactions during the first half of the year. Tourism, meanwhile, is enjoying a renaissance, boosted by an improved security situation and a rising number of flights to Beirut.

—Edited by Harry Maurer & Cristina Linblad

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