A Sharper Eye on Pay
Financial initiatives and rumors of initiatives flew thick and fast in Washington this week. On June 9, Treasury gave 10 big banks a green light to pay back $68 billion in federal TARP funds. The move came as a testament to the banks' apparently improving health—and also got them out from under pay rules Congress had imposed. But the next day, Treasury Secretary Timothy Geithner announced the principles underlying the Obama Administration's drive to reform financial-industry pay practices generally. While the plan skipped salary caps at firms receiving bailouts, Geithner called for more transparency and for closer links between pay and long-term performance. He promised to back legislation letting the SEC get tougher with corporate compensation committees and give shareholders more of a say on pay. On another front, Citigroup (C) put the finishing touches on its plan to recapitalize with $58 billion in common stock, diluting current shareholders by 75% and leaving Washington owning about 36% of the company.
Judge, Recuse Thyself
Beware the taint of money. That was the message the Supreme Court sent to elected state court judges who hear cases involving their campaign supporters. On June 8 the court ruled on a case in which a $50 million fraud verdict against Massey Energy (MEE) had twice been thrown out by 3-2 decisions of the West Virginia Supreme Court. West Virginia Chief Justice Brent Benjamin, who voted with the majority each time, should have disqualified himself, the high court said, since Massey's CEO spent $3 million to help elect him. The issue of money in judicial campaigns has heated up as both businesses and plaintiffs' lawyers shovel dollars to favored candidates.
Bonanza in China
In their rush to raise cash, U.S. banks and private equity shops are paring back their holdings in China's banks. And with Chinese stocks up 55% this year, they're not having to settle for fire-sale prices. Goldman Sachs (GS) bagged $1.9 billion on June 2 when it sold less than 1% of ICBC, while Bank of America (BAC) pocketed $7.3 billion last month for 5.6% of China Construction Bank. Next in line to cash in is Newbridge Capital, the Asian arm of private equity house TPG, which is in talks to sell part of its 17% stake in Shenzhen Development Bank, now worth $1.5 billion—roughly 10 times what Newbridge paid in 2004. The bonanza for foreigners may not sit well with Beijing higher-ups, who have watched the value of China's stakes in Wall Street firms shrivel.
See "Foreign Banks Reap Handsome Profits Cashing Out of Chinese Banks"
Pain at the Pump
Maybe Americans will stay interested in small cars after all. Despite the worldwide slump, oil prices have doubled since December, with futures topping $70 a barrel on June 9. Gasoline, meanwhile, hit an average of more than $2.60 a gallon in the U.S., further stressing consumers. Experts are scratching their heads to come up with a reason for oil's ascent since global demand remains tepid. Many blame a return of investors to commodity markets. Goldman Sachs (GS) recently raised its price forecast to $85 a barrel by the end of this year and $95 next. The investment bank cited OPEC cuts and skimpy output from non-OPEC nations.
The Next Default Wave
Commercial mortgages appear to be the proverbial second shoe of the real estate bust—and the shoe is about to drop with a thud. A new report pegs the U.S. default rate on commercial mortgages held by banks at 2.25% in the first quarter of 2009, a 15-year high. That's likely to worsen even if the economy begins to recover at the end of this year, because many lenders are beating a retreat from commercial real estate, while others are tightening loan terms so even creditworthy borrowers are having trouble refinancing. Look for default rates to peak at 5.3% in 2011. With banks holding some $1 trillion of these loans (never mind the derivatives and securities created off of them), balance sheets seem certain to remain under pressure for years. (Real Estate Econometrics)
Chrysler: Done Deal
The Supreme Court didn't dither over this one. After briefly alarming the Obama Administration by issuing a stay delaying Chrysler's sale to Fiat (FIATY), the court two days later spurned a bid by three Indiana pension funds to block the deal. The funds hoped to recoup more of their Chrysler debt, but on June 11 the court overruled them. Fiat CEO Sergio Marchionne immediately took over at Chrysler. Across Motown, bankrupt General Motors (GM) was getting its own top-level overhaul, as retired AT&T (T) CEO Edward Whitacre was named chairman of the board. Treasury and the company also swept out six directors and will replace them within six weeks as Washington pushes for more accountability. Meanwhile, over in Europe, yet another major carmaker may be headed for a shakeup: The Persian Gulf state of Qatar said it is negotiating to acquire a stake in Porsche that would help it reignite a stalled-out takeover of Volkswagen (VLKAY).
See "Chrysler-Fiat Finalize Accord"
"A compassionate payment." That's what Royal Dutch Shell (RDS) called the $15.5 million it agreed to pay to settle a case brought in a New York court over the hanging of activist Ken Saro-Wiwa in Nigeria in 1995. A critic of Shell's environmental policy in the Niger Delta, Saro-Wiwa was executed along with eight others by the Nigerian regime. Saro-Wiwa's family and other plaintiffs filed a case charging that the company had sought government help in silencing the activist. One-third of the settlement, announced on June 8, will go to set up a trust fund to aid Saro-Wiwa's Ogoni tribe. Shell continues to deny guilt, but the case is likely to boost companies' fears that they may be pursued in U.S. courts for alleged wrongdoing in developing countries.
It's Tough Taking Over from a Legend
Ask pundits to pick the reigning rock star of management, and many will name Procter & Gamble's (PG) A.G. Lafley. For COO Robert McDonald, who will replace him as CEO on July 1, that means big shoes to fill as sales slip amid the recession. But in any circumstances, succeeding a management icon can be tough. The record on such high-profile transitions is mixed, from failures at Charles Schwab (SCHW) and Dell (DELL) to a rare success at IBM (IBM). The most immediate example: General Electric (GE), where Jeffrey Immelt, while respected, hasn't won Jack Welch-level accolades.
McDonald, who turns 56 this month, may be a skilled executor but he doesn't have Lafley's reputation as a visionary. Moreover, says Sanford C. Bernstein analyst Ali Dibadj, "P&G received a premium partly because of A.G.'s uncanny ability to communicate with investors." So what's a newcomer to do? McDonald mustn't lean too heavily on Lafley, who remains as chairman, but rather must use his team to complement his strengths while addressing his weaknesses. And he has to tread the line between forcing change and being deferential to Lafley's legacy. Michael Watkins, who counsels CEOs on transitions, says a classic mistake is to move too far in either direction: "They're sitting on a knife's edge, and it's a very hard place to be."
McDonald might want to take a cautionary look at the mistakes of Lafley's predecessor, Durk Jager, who replaced the popular John Pepper Jr. in 1999. He charged into the role with a blitzkrieg of disruptive changes—and lasted 18 months.
See "How to Succeed at Procter & Gamble"
There was no sign of CEO Steve Jobs, but Apple (AAPL) provided buzz aplenty at its Worldwide Developers Conference in San Francisco on June 8. The big star: a new iPhone, dubbed the 3GS. The S, Apple says, stands for speed—but it also sports a better camera for still pictures and for the first time shoots video. Apple dropped the price on the current model to $99, helping to send the stock price of Palm (PALM), which released its $199 Pre smartphone two days earlier, down 7%. Apple also unveiled new notebooks and said the next version of its Mac OS X operating system, known as Snow Leopard, will hit the market in September. It sports features that appear to signal a serious run for the business market.
China's PC Squeeze
Don't even think about making a PC without a Web filter. On June 8, Beijing told computer makers that all machines sold in the country as of July 1 must come equipped with software that would block "harmful" Web sites. This latest attempt to erect a Great Firewall predictably provoked screams of outrage from Internet users, and the government then tried to backpedal, claiming it is only aiming to protect children from exposure to pornography and violence online.
See "China Tries a New Censorship Strategy"
Will Zell Get Bounced?
Sam Zell, the real estate baron who called his heavily leveraged takeover of Tribune Co. a "mistake," may soon find insult added to injury: The Chicago Tribune reported on June 9 that he could lose control of the company in its bankruptcy reorganization. The paper says the basis for Zell's clout—a warrant that allows him to buy about 40% of the company for $500 million—may be wiped out in a plan where banks and investors take the reins. Then the lenders might oust him, or he might want out himself. A spokeswoman for the feisty CEO suggests otherwise, however. Zell and his senior managers remain "actively engaged" and committed to the company, she says. The statement echoes one by Tribune Co.
More Madoff Mess
Some of Bernard Madoff's ex-clients claim their losses are being understated. In a lawsuit filed in bankruptcy court in Manhattan on June 5, the investors, who are elderly and had invested with the fraudster for years, object to the way Irving Picard, the trustee overseeing the liquidation of Madoff's assets, is doing the calculations. Picard determines loss by figuring the difference between what an investor put in and what was withdrawn. But in their suit the investors say they should be given credit not just for what they put in but for the far higher amount Madoff told them they had in their accounts. The difference in methods may determine whether they qualify for up to $500,000 in compensation from the Securities Investor Protection Corp.—a huge amount, since some are broke.