Magazine

The Subprime Specter


On Mar. 13, Wall Street again gave in to fears that the subprime mortgage mess could take down the broader stock market and economy. With New Century Financial (NEWC) on insolvency's doorstep (its shares sank to 85 cents), H&R Block's (HRB) Option One arm in limbo, and the late-payment rate for subprime loans nationally at a four-year high, investors sold first and asked questions later. Bank stocks, brokers, homebuilders, retailers??hey all got hammered. Tuesday's 243-point plunge in the Dow was the second-largest since 2003 and came less than three weeks after a 416-point dive. A key volatility reading has jumped 80% in less than a month. On Mar. 14 the market gyrated to a 57-point gain.

With the subprime horse already hoofing it miles away from the barn, Congress is on the case??hreatening subpoenas and investigations. On the bright side: Fewer annoying mortgage pop-up ads and spam are clogging computers.

See "The Mounting Uncertainty Over Subprime"

During President George W. Bush's Mar. 8-14 swing through Latin America, he cultivated Brazilian President Luiz In??cio Lula da Silva as a moderate counterweight to Venezuela's Hugo Ch??vez, and trumpeted a new Central American trade pact in Guatemala. He also got an earful from political leaders who said that while trade and investment are well and good, immigration reform is crucial. Mexican President Felipe Calder??n told Bush on Mar. 13 that building a fence along the border was not a solution. Bush heard the message: "I'm going to keep repeating it while I'm here in Mexico??hat I know our country must have comprehensive immigration reform," he said. He pledged to push Congress to approve a guest-worker bill in August.

See "Immigration Reform: Bush's Big Promises"

More rumblings against Sarbanes-Oxley: On Mar. 12-13 business leaders including uber-investor Warren Buffett met with Vice-President Dick Cheney, Treasury Secretary Henry Paulson Jr., and other top officials to press for easing the pinch of post-Enron laws so that U.S. capital markets can regain competitiveness. On Mar. 12 a Chamber of Commerce report issued a similar clarion call for reforms.

Drugmaker Schering-Plough (SGP), once weakened by legal woes and limping sales, put an exclamation point on its recovery with a major purchase. On Mar. 12 it said it would pay $14.4 billion for Organon BioSciences, a unit of Netherlands-based Akzo Nobel. Organon will give Schering a strong footing in women's health, not to mention a pipeline of five experimental drugs.

See "Schering's Risky Growth Gambit"

Will Cadbury Schweppes (CSG) make a tasty morsel? Rumors that the candy and beverage maker could get eaten have abounded for months. On Mar. 13 the news that Nelson Peltz has amassed a 2.98% stake added new fizz to the speculation. Peltz's Trian Management has pressured Heinz to boost shareholder value, and expectations that he'll push for a split-up of Cadbury sent shares leaping 10%.

See "Cadbury Schwepps Soars on Peltz Stake"

Long a lightning rod in Washington, Halliburton (HAL) invited a new blast of criticism with its Mar. 11 announcement that it's setting up a headquarters in Dubai. Democrats, of course, pounced on the news, speculating that Vice-President Cheney's former employer wants to evade taxes. The oil services giant insisted it would remain a U.S. company with its headquarters in Houston and that it anticipates "absolutely no tax benefits." Still, congressional hearings are expected.

For all the handwringing over whether the subprime mess will curb consumers, there's one buyer hitting the aisles: Private equity firms. On Mar. 12, Dollar General (DG), a Tennessee-based discount chain, said it had agreed to be acquired for $7.3 billion by buyout firm Kohlberg Kravis Roberts. The sale follows similar deals for Linens 'n Things, Petco, and Sports Authority, all retailers that??ike Dollar General??ad stumbled and were quickly snapped up.

On Mar. 13, Viacom (VIA) filed suit in federal court in New York against Google (GOOG) and its online video unit, YouTube, charging that they "willfully infringe copyrights on a huge scale." $end

General Motors (GM) has shifted out of reverse and into first gear, showing a $2.2 billion operating profit last year. Throw in restructuring costs and other one-timers, and GM still lost $2 billion. That's a fine recovery from the $10.4 billion loss in 2005, but a lot of repair work lies ahead. Its long-suffering North American business lost $779 million last year. Meanwhile, crosstown rival Ford (F) sold its luxury Aston Martin division for a much-needed $848 million.

See "After Aston, Could Jaguar Be Next?" All charges against former Hewlett-Packard (HPQ) Chairman Patricia Dunn related to the company's boardroom-leak scandal were dropped by a California state court on Mar. 14. Three others??ormer HP attorney Kevin Hunsaker and private investigators Ronald DeLia and Matthew Depante??leaded no contest to one misdemeanor count of fraudulent wire communications. Those charges will be lifted after they serve 96 hours of community service. Each had faced four felony counts.

Has The Donald decided it's time to cash in his chips in Atlantic City? On Mar. 12, Trump Entertainment Resorts (TRMP) said it had hired Merrill Lynch (MER) to study strategic alternatives for the three hotel-casinos it operates. The company has lost nearly $100 million from continuing operations since emerging from bankruptcy in 2005.

Lord Conrad Black is getting his day in court. On Mar. 14 jury selection began in the Chicago trial of the newspaper magnate and ex-chief of Hollinger International, now called Sun-Times Media (SVN). He and three colleagues face federal charges, including racketeering, in the alleged whisking away of $84 million.

Harvey Weinstein apparently doesn't like being upstaged. The larger-than-life movie producer and co-chairman of Weinstein Co. on Mar. 12 joined with private equity firm Hilco Consumer Capital to buy the fabled Halston couture house for an undisclosed price. Weinstein, whose company produced the reality show Project Runway for Bravo, has quipped that he takes a back seat to his girlfriend, British designer Georgina Chapman, when the two venture into high-end fashion shows. Now, Weinstein intends to help turn around the 41-year-old house that made turtlenecks, pillbox hats, and Ultrasuede chic. Weinstein will sit on the board along with Jimmy Choo founder Tamara Mellon, who brought the idea to Weinstein and will serve as creative guru while Hilco operates the company until a CEO is named. Weinstein and his partner-brother Bob, who left their Miramax studio in 2005 after squabbling with owner Disney (DIS), figure they can spiff up Halston by marketing its garments in films and TV shows. The brothers' dream: to build a full-fledged media company.


Steve Ballmer, Power Forward
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