Magazine

A Sigh of Relief on the Street


The Fed handed the markets some candy on Oct. 31, cutting its benchmark rate by a quarter point, to 4.5%. But investors who count on a December gift might be disappointed. Fed governors are anxious about inflation, and they're hoping the economy can fight off the housing slump without more monetary stimulus. The rate-setting committee said that after this cut, "the upside risks to inflation roughly balance the downside risks to growth." Although growth clocked a zippy rate of 3.9% in the third quarter, many economists think the next quarter will be hard put to generate 2%.

See "A Halloween Treat from the Fed"

Mess up big-time on Wall Street, and you can still walk away with a pile of money—make that a mountain. Stanley O'Neal may not like the way Merrill Lynch's (MER) board showed him the door on Oct. 30, soon after the firm took a $7.9 billion hit on its exposure to bonds backed by subprime mortgages, but he's leaving with $161 million in restricted stock, options, and retirement benefits. O'Neal worked for Merrill for 21 years and was the first African American to head a major Wall Street firm. The hunt is on for a successor who can turn things around.

See "What Merrill Needs in a New CEO"

Have oil prices and the greenback entered a vicious circle? Crude futures shot to yet another record, $94.74 per barrel, on Oct. 31, as the dollar touched a new low of $1.4504 against the euro. Analysts speculate that oil producers, once dollar stalwarts, are moving bigger chunks of their ever-fatter surpluses into euros, sterling, and other currencies.

See "$93 Oil: Coming to a Gas Pump Near You"

Creditors are putting pressure on consumers to pay debts forgiven by bankruptcy courts, BusinessWeek reveals. Major banks often fail to update credit reports to reflect the canceled debt. The abuse is fueled by the growing secondary market for bankruptcy debt, where banks are selling extinguished obligations that should have no value.

Folks who live in apartments may soon get the same dizzying array of TV choices as everyone else. The FCC on Oct. 31 voted to ban contracts that landlords routinely sign with cable companies, effectively offering apartment dwellers no choice among cable, satellite, and telecom outfits that might deliver their TV signals. FCC Chairman Kevin Martin wants to invite more competition to cut cable prices for minorities and the poor, who often live in apartments. Building owners argue that if they lack leverage to demand lower bulk rates, renters' TV bills could actually rise.

More on the ballyhooed Google (GOOG) phone, which BusinessWeek described in its Oct. 8 issue. The Wall Street Journal said on Oct. 30 that Google is primed to release details in the next two weeks and is seeking partnerships with carriers such as Verizon Wireless, T-Mobile USA, and France Telecom's (FTE) Orange. The idea would be to make the phone's software, including its operating system, open to developers, allowing them access to the tools needed to build features. Such an opening would be a breakthrough in a system long closed to anyone but the big carriers.

Move over, Carlos, you're no longer the wealthiest mogul on the planet. On Oct. 30 the title passed to Indian industrialist Mukesh Ambani, thanks to the bull run on the Bombay stock exchange. Ambani, the top shareholder in Reliance Industries, Reliance Petroleum, and Reliance Industrial Infrastructure, now boasts a net worth of $63.2 billion. Mexican tycoon Carlos Slim and Bill Gates find themselves relegated to second and third place, respectively, with about $62.3 billion each. (business-standard.com)

Top mortgage lender Countrywide Financial (CFC) on Oct. 26 reported its first quarterly loss in 25 years, $1.2 billion, and CEO Angelo Mozilo confirmed that the SEC is probing his stock sales. The share price promptly soared 32%. Say what? Apparently Mozilo's prediction of modest profits in the fourth quarter and for 2008 gave investors hope that the worst might be over.

See "Countrywide

Rebounds Despite Big Losses"

Two down, one to go. The United Auto Workers rank and file narrowly ratified the deal with Chrysler that calls for the union to take over management of its own health care. Having already settled with General Motors (GM), the UAW now squares off with Ford (F), the most banged-up of American carmakers. Ford wants the same health-care package, plus freedom to close more U.S. factories in favor of offshore plants. Ford's annual U.S. sales are 1.3 million units below what they were at the start of the decade—equivalent to the output of five plants.

The carnage on Wall Street—to date, more than $35 billion in writedowns and $220 billion in lost stock value—may be spreading to a more obscure corner: bond insurers with dangerous exposure to collateralized debt obligations, or CDOs. Anxiety is focusing on two firms, MBIA (MBI) and ACA Capital (ACA). It also appears that Citigroup (C), already trying to sustain mortgage-linked pools known as SIVs, is holding an additional $20 billion batch of potentially rotting CDOs.

The numbers didn't come as a surprise, because the Zurich bank (UBS) had already cautioned investors and fired its head of investment banking, Huw Jenkins. On Oct. 30 it reported a $716 million third-quarter operating loss due to $3.6 billion in red ink at the fixed-income division, largely from mortgage-backed securities gone sour. What did shock investors was a warning that more pain from deteriorating securities may come later this year.

Oracle (ORCL) has run into a bit of bother on its shopping spree: a "No sale" sign. BEA Systems (BEAS) rebuffed Oracle's $6.7 billion buyout bid and let an Oct. 28 deadline pass, saying it wants $8.2 billion. That enrages activist investor Carl Icahn, who filed an Oct. 26 lawsuit to try to force a BEA shareholder meeting on a sell-off. For now, Oracle has walked away, but analysts and bankers say it could return to the table. The uncertainty could also cause BEA customers to rein in spending and erode its value.

See "BEA or

Ellison: Who Will Prevail?"

Three crash landings in two months. Makes you wonder about the plane, right? Scandinavian airline SAS finally grounded all its Canadian-built Bombardier Q400s after the latest incident, a landing gear failure in Denmark on Oct. 28. No one was injured, but it was the last straw for SAS, which began using Bombardiers in 2000. The carrier operates 27 of the planes, and there are more than 160 in service around the world. Bombardier says there's nothing wrong with the aircraft.

Beijing doesn't want you to think it's indifferent to the countless recalls that have dogged its products of late, from lead-painted toys to poisonous pet food. On Oct. 29 a government Web site announced that 774 people have been arrested over the past two months as part of a crackdown on makers and sellers of shoddy and counterfeit processed food, drugs, and farm products.

Yet another private equity deal down the tubes: Cerberus Capital Management on Oct. 30 officially canceled its $6.2 billion offer for outsourcer Affiliated Computer Services (ACS), citing "poor conditions in the debt markets." Cerberus' dear-John letter says that if a board committee charged with negotiating the deal hadn't dithered so long, it would have gone through. The Wall Street Journal reports that major shareholders are furious at the board.

The newest mega-players in global capital markets are civil servants who may have more on their minds than making money. So-called sovereign wealth funds such as state-owned China Investment Corp. already wield more cash than hedge funds and are moving into riskier assets such as emerging market stocks and private equity firms. U.S. policymakers such as SEC Chairman Christopher Cox fear that so much money—$2.8 trillion and rising by $1 trillion a year—in the hands of sometimes-authoritarian governments could be used to advance strategic interests.

Skeptics of global warming often complain about inaccurate climate models. Trouble is, those models have frequently erred on the rosy side. To wit, a recent report finds that since 2000, greenhouse gas levels have risen 35% higher than models predicted. The main culprits? Faster-than-anticipated industrialization in the developing world, and the worsening health of forest and ocean-based plant life, which hurts the earth's ability to absorb CO2. (Proceedings of the National Academy of Sciences)

Icelandic tycoon Jon Asegeir Johannesson wants to bag a bargain on Fifth Ave.: Saks Fifth Avenue (SKS), to be precise. The head of investment firm Baugur Group, with interests in retail, media, and property in Iceland, Britain, and Scandinavia, disclosed the group owns an 8.5% stake in Saks. Johannsesson intends to meet with Saks executives to discuss an offer, possibly teaming up with Dubai-based Landmark Group.

It doesn't exactly sound sexy, but the Markets in Financial Instruments Directive (MiFID) could heat up Europe's markets when it takes effect on Nov. 1. Almost three years in the making, the new rules will open bourses to cross-border competition and let financial outfits sell products anywhere in the European Union.

More fallout from the falling dollar, perhaps. Macquarie Infrastructure Partners, a U.S. fund run by Australia's Macquarie Group that has been plugging into various utility plays in the U.S., agreed on Oct. 26 to pay $7.4 billion to take Puget Energy (PSD) private. Puget powers 1 million homes in fast-growing Washington state. Macquarie and its partners, including Canadian, Australian, and U.S. investors, are paying shareholders a 25% premium.

The company kept up its remarkable run by releasing Leopard, the new version of its Mac OS X operating system, to huzzahs from critics and customers. Leopard went on sale at 6 p.m. on Oct. 26 for $129 as an upgrade, or $199 in a version licensed for up to five Macs in a household, and by the morning of Oct. 30, Apple (AAPL) said it had sold more than 2 million copies.

Remember the Exxon Valdez? Eighteen years after the tanker fouled Alaska's Prince William Sound with more than 11 million gallons of oil, the Supreme Court agreed on Oct. 29 to review a $2.5 billion punitive damage award against what is now Exxon Mobil (XOM). Rather than decide whether the amount—already cut in half by a federal appeals court—violates the Constitution, the justices said they will weigh whether it's appropriate under the Clean Water Act and maritime law. A variety of business groups urged the justices to take the case.

Affluent Chinese once stocked up on fine silks and porcelain. Today it's Italian leather handbags and premium cognac. If the economy keeps growing at its breakneck pace, China will soon surpass the U.S., Europe, and Japan to become the world's leading market for luxury goods, says Bernard Arnault, chairman of LVMH Moët Hennessy Louis Vuitton (LVMUY), in an interview with Women's Wear Daily. (wwd.com)

Alcatel-Lucent CEO Patricia Russo has now presided over three straight quarters of losses, but she's not the one who's leaving. The telecom-equipment maker on Oct. 31 said it lost $492 million in the third quarter, more than double what analysts expected. It will lay off 4,000 workers on top of the 12,500 layoffs announced in February, and CFO Jean-Pascal Beaufret will exit in a few weeks. The latest threat to Russo's turnaround effort: The fixed-line phone and broadband business, long a star, is getting pinched by slowing U.S. homebuilding. One small consolation is that Alcatel's rivals aren't doing much better.

See "Alcatel-Lucent: Troubles Remain"

Has Ford run into a dead end in Romania? That's the question posed in the Nov. 6 cover story of BusinessWeek Romania. In July the American carmaker successfully bid $57 million for the government's stake in an auto plant in Craiova. It also pledged to plow close to $1 billion into the operation over the next four years in order to capitalize on double-digit growth in auto sales. But the deal is on hold as the European Commission looks into allegations that the Romanian government agreed to erase hundreds of millions in debt in order to attract buyers for the plant.


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