Sputtering Toward an Auto Deal
Car czar. You have to admit it's catchy, even if it does have a faint ring of—dare we say it?—nationalization. On Dec. 10, after weeks of wrangling in Washington, the House approved a deal to help Detroit. It would give Chrysler and General Motors (GM) $14 billion in loans (Ford (F) says it doesn't need the cash just yet) to carry them into the New Year, when Barack Obama takes over the Presidency. The car czar would dole out the cash or withhold it if certain restructuring targets aren't met. Democrats wanted the Big Three to halt lawsuits challenging proposed California legislation that would set fuel-economy targets higher than existing federal mandates, but they dropped that condition to win an accord. Still, some Republicans in the Senate threatened a filibuster, and it wasn't clear the leadership had the 60 votes needed to drive a bill through, so lobbyists were working the phones.
Jobs Up in Smoke
Even chronically dismal economists were rocked by this one. On Dec. 5 the Labor Dept. reported the worst job showing in more than 30 years as employers shed 533,000 positions and the unemployment rate rose to 6.7% from 6.5%. It's easy to see where some of those losses are coming from: Among the major companies announcing massive layoffs this week were DuPont (DD), 5,000 staff positions and 6,000 contract workers; AT&T (T), 12,000 positions; Sony (SNE), 8,000; Office Depot (ODP), 2,200. President-elect Obama responded by unveiling highlights of a stimulus plan that some say could carry a pricetag of $700 billion or more. He promised to create jobs and save tax dollars by modernizing schools, making federal buildings more energy-efficient, and improving roads, bridges, and other infrastructure.
Many a banker will find something missing this holiday season—that fat bonus check. The deprived include Wall Street titans such as Merrill Lynch (MER) Chairman John Thain, who may win the Blooper of the Year award for suggesting to his board of directors that he receive $5 million to $10 million. Thain oversaw the timely sale of his floundering firm to Bank of America, (BAC) but he got a $15 million signing bonus when he joined Merrill last December. The hullabaloo that ensued when his bonus request hit the news presumably led him to withdraw it on Dec. 8. Also going without: Morgan Stanley's (MS) John Mack, Goldman Sachs' (GS) Lloyd Blankfein, and Wachovia's (WB) Robert Steel. Bloomberg reports that Merrill will chop bonuses for investment bankers by half, and Morgan is slashing compensation for top brass.
Less Than Zero
In calmer times, the Fed's interest rate announcement on Dec. 16 would be headline news. Now the financial panic has driven short-term rates so low that the federal funds rate target (1%) is irrelevant. The effective funds rate—at which trades actually occur—fell on Dec. 10 to a mere 0.06%. Even weirder, yields on one-month T-bills in the aftermarket were slightly negative. Investors readying their yearend books are so risk-averse that they're willing to lock in a small loss in exchange for the certainty that Uncle Sam won't default.
GMAC in a Bind
As if Detroit didn't have enough problems, GMAC Financial Services (GM) on Dec. 10 said it's having trouble changing its spots. The lender, 51% owned by private equity giant Cerberus Capital Management and the rest by General Motors, has applied for a bank charter, which would allow it to tap new funds from the Fed's discount window. But to land the charter, GMAC needs $30 billion in so-called regulatory capital. It has asked investors to trade some of its debt for new debt at a discount, but so far only one-third of the bondholders needed to make the plan work have stepped forward. GMAC extended the deadline until Dec. 12. If its maneuver fails, it'll be hard-pressed to make loans.
A Governor in Trouble...
In the latest chapter of Illinois' corruption-studded history, Governor Rod Blagojevich, a Democrat, was arrested by federal agents Dec. 9 in Chicago on charges that he tried to sell Barack Obama's vacant Senate seat. Blagojevich is also charged with withholding funding for a children's hospital until he was paid $50,000 and with trying to intimidate the local press into firing editorial writers who had criticized him. Obama joined several state legislators calling on Blagojevich to resign.
...And a Lawyer, Too
When you're found in a conference room allegedly impersonating an official of the Ontario Teachers' Pension Fund with the aim of landing millions from asset manager Fortress Investment Group (FIG), you know something has gone gravely wrong with your legal career. On Dec. 2, Toronto authorities charged high-flying New York attorney Marc Dreier with the impersonation scam, and two days later federal prosecutors in Manhattan charged him with bilking a pair of hedge funds out of more than $100 million. Dreier LLP, the 250-person firm he founded a decade ago, is closing up shop.
Back to School? Nah
When times turn tough, the tough go to grad school. That, at least, has been the pattern during previous recessions, but it doesn't seem to be playing out this time. On Dec. 5 officials from Educational Testing Service revealed that the number of students taking the Graduate Record Examinations is poised to fall by nearly 2% in 2008, the first decline in years. Why? Educators point to the perception that student funding has dried up, along with people's unwillingness to give up their jobs amid rising unemployment. (insidehighered.com)
Euro Bourses: No Deal
What part of "no" don't Deutsche Börse investors understand? The operator of the Frankfurt Stock Exchange said on Dec. 7 that it ended merger talks with NYSE Euronext (NYX) after the two sides could not reach an agreement. Yet Deutsche Börse shares rose 14% through Dec. 9 as traders refused to buy the denial. A union seems unlikely for political reasons, never mind the lack of a compelling business rationale. Deutsche Börse's stock market value is double that of its Franco-American counterpart, but German dominance would probably be unacceptable in New York and Paris.
Welcome to the doghouse. On Dec. 8, Standard & Poor's dropped Russia's sovereign credit rating by a notch, to BBB/A-3, the nation's first debt downgrade in 10 years. S&P also stuck Russia on "negative outlook," meaning more downgrades may lie ahead. The move is a sign of the times: Until recently, few borrowers seemed more solid than oil-rich Russia. But as oil slumps and the financial crisis takes its toll, even Moscow's finances are looking shaky. S&P warns of fiscal and trade deficits and expects growth to slow "sharply" next year. In the third quarter, the economy grew at an annual rate of 6.2%, the lowest in three years.
See "The Financial Crisis Deepens in Russia"
In one year, Sam Zell went from being the real estate tycoon hell-bent on reshaping the newspaper industry to the architect of one of the most disastrous media deals ever. On Dec. 8, Tribune Co., which owns the Los Angeles Times, the Chicago Tribune, and the Chicago Cubs baseball team, among other properties, filed for Chapter 11 protection. Tribune thus achieved the dubious distinction of becoming the second-largest media bankruptcy in history, after cable operator Adelphia. The company was crippled by Zell's leveraged buyout, which left it weighed down by $12.9 billion in debt just before the economic slowdown dealt yet another blow to newspaper advertising.
One Hefner Exits
The cold winds of the economy are blowing all the way to the Playboy Mansion's famed hot-tub grotto. Playboy Enterprises (PLA) on Dec. 8 announced that Christie Hefner, 56, the longtime chief executive and daughter of founder Hugh Hefner, will step down in January. Hefner departs amidst sagging sales and growing losses. The stock price, as high as 11 a year ago, has fallen to 2. Playboy's sorrows mirror those of other traditional media outfits battling free content on the Web. The company let go 140 people, 17% of its workforce, this year. It is searching for Christie Hefner's successor.
Ready for Prime Time
By signing Jay Leno to a deal that will bring his shtick five nights a week to the 10 p.m. slot, NBC on Dec. 8 squelched rumors that the Tonight Show host would decamp for ABC. The rumors were floated, Leno said, "by a disgruntled employee—me." Leno had been expected to retire from his late night duties next year, making way for Conan O'Brien. Leno's new show will likely save the network a bundle, since it will cost roughly $2 million a week instead of the $15 million or so for the five prime-time shows it will replace. And lord knows NBC needs help, since it ranks firmly fourth in audience ratings among the four nets. But Leno is no lock to draw the kinds of audiences NBC pulls with shows such as the still-strong Law & Order: Special Victims Unit.