The Fed's New Tool Box
Neither snow, nor sleet—nor a whole lot of snow and sleet—could keep Ben Bernanke from laying out the mechanics of the Fed's plan to wean the U.S. economy from stimulus. With his Feb. 10 hearing before Congress canceled because of a winter storm, the central bank chief posted his prepared remarks on the Fed's Web site. Bernanke raised the possibility that the Fed might shift from using the federal funds rate—the rate banks charge each other for overnight borrowing—as its primary tool in monetary management. Instead, it would target the interest rate payable on deposits institutions hold in reserve with the central bank. By boosting the rate on reserves, banks would have more incentive to stash money at the Fed, a move that Bernanke said would, "put significant upward pressure on all short-term interest rates." He refrained, however, from setting a timetable for tightening.
Averting a Greek Tragedy
Markets around the globe see-sawed as investors took bets on whether the wealthier nations of Europe would come to the aid of their poorer relations. Facing the possibility that a debt default by Greece might drag down the euro, European leaders initially stood firm, saying Athens could get its act together on its own through spending cuts and tax hikes. But by Feb. 10, Germany was moving toward granting some kind of assistance—with stringent conditions. Prices of Greek, Portuguese, Spanish, and Irish bonds rose on the news.
Wealth of Nations
Bowing to calls for greater transparency, China's $300 billion sovereign wealth fund for the first time filed a quarterly report with the U.S. Securities & Exchange Commission detailing its U.S. holdings. The filing by China Investment Corp. for the period ended Dec. 31 reveals a move away from bets on individual stocks and toward commodity and sector funds. Such exchange-traded funds made up about 25% of the $9.63 billion in U.S. equity holdings reported by the Chinese. CIC, which was created in 2007, initially plowed billions into stakes in Wall Street firms Morgan Stanley (MS) and Blackstone Group, only to see the value of those holdings slump in the wake of the financial crisis.
Shakeup at SAP
Auf wiedersehen, Leo. Leo Apotheker, CEO of SAP (SAP), the German company that is the world's top maker of business management software, tendered his resignation on Feb. 7 after the board declined to extend his contract. In his nine months at the helm, Apotheker presided over the first major layoffs in the company's 38-year history and an 4% slide in profits in 2009. He will be succeeded by board member Bill McDermott and product development chief Jim Hagemann Snabe. The co-CEOs have difficult work ahead. Management acknowledges that customers are restive and employee morale is sagging. Also, SAP has been slow to adapt its software for the Web and mobile devices.
See "What SAP Needs After Apotheker"
Thain's Next Act
Lehman Brothers' Dick Fuld and Bear Stearns's Jimmy Cayne may be laying low, but another unemployed Wall Street banker has returned to a corner office. On Feb. 8, John Thain—former CEO of Merrill Lynch and the New York Stock Exchange (NYX)—was named to lead CIT Group (CIT), the commercial lender that emerged from bankruptcy in December. Under another Merrill man, former CEO Jeffrey Peek, CIT embarked on a disastrous foray into subprime lending. Thain must now steer the crippled firm, which makes loans primarily to small and medium-sized companies, back to health or into the arms of a buyer. He will receive an annual salary of $500,000, plus $5.5 million in shares.
Toyota in a Tailspin
Toyota Motor's (TM) reputation for quality and reliability suffered further damage on Feb. 9 when the Japanese automaker announced the recall of 437,000 cars, including its flagship Prius, to fix a brake problem. The move follows the recall of nearly 8 million Toyota vehicles globally because of problems linked to unintended acceleration. Congress plans to hold hearings to determine whether Toyota and the U.S. National Highway Traffic Safety Administration initially ignored consumer complaints about sticky gas pedals.
Americans have tightened their belts, but folks elsewhere continue to eat and drink merrily—good news for the likes of McDonald's (MCD) and Coca-Cola (KO). On Feb. 9 the companies reported that while sales fell in North America during the most recent period, overall revenue was up, thanks to higher sales abroad. Reporting a 4% rise in operating income for the fourth quarter, Coke noted that it sold 1% fewer cases of soft drinks in the U.S. and Canada but 29% more in China. At McDonald's, January same-store sales slipped 0.7% in the U.S., but increased 4.3% in Europe and Asia/Pacific.
Feel the Buzz
Confronted with the rapid rise of Facebook and Twitter, Google is taking another shot at owning a piece of the social Web. On Feb. 9, Google unveiled Buzz, a service for sharing short messages, images, videos, and links. While critics say Buzz merely duplicates many of the functions already available to Facebook's more than 400 million users, Google says its service will help users find the messages and multimedia most interesting and relevant to them. Also, in a direct challenge to phone companies, Google announced plans on Feb. 10 to test a high-speed broadband network to serve as many as 500,000 people.
See "Google Buzz Won't Weaken Facebook"
Disasters such as the earthquake in Haiti are capable of mobilizing a global community of aid donors. But relief efforts, no matter how well funded, are rarely enough to set impoverished countries on a path to prosperity.
To do that, policymakers must devise ways to unlock the entrepreneurial drive of the poor. That goal could be accomplished through the creation of charter cities, argues Paul Romer in an article in the January issue of Prospect, a British magazine. Romer, a development expert affiliated with Stanford University, envisions an arrangement between poor and developed countries under which the former cedes a patch of land and the latter is responsible for writing and enforcing the laws that govern commercial and other activities within the territory. There are precedents for such partnerships. Hong Kong flourished under British rule, and the island nation of Mauritius, where the British privy council is still the court of final appeal, boasts one of the highest standards of living in sub-Saharan Africa. "The credibility of rules developed over centuries by the British government was essential to attracting foreign investment, companies, and skilled workers" to Hong Kong, says Romer.
But there have also been failures. In the 1990s, Singapore tried to establish variants of charter cities in China and Indonesia but ran into dificulties because local authorities retained too many discretionary powers.
Romer's is a provocative idea—one that smacks of neocolonialism. Radical solutions may be needed, though, to pull countries like Haiti, which has defied conventional approaches, out of a downward spiral. (Prospect - "For Richer, For Poorer")
The Optimism Meter: Seven-Month Low
The Meter clocked in at 31 on Feb. 9, down from 45 the week before and the lowest reading since last July. Amid elevated stock market volatility, the share of Americans who believe the market will be lower 12 months from now rose by 22% from the prior week. Developed by Bloomberg BusinessWeek using data from pollster YouGov, the Meter is a proprietary measure of sentiment and expectations, economic statistics, and market forecasts. It evaluates shifts in outlook among individuals, professional investors, and economists in the areas of U.S. economic growth, jobs, equity markets, and real estate. (Calculated using consumer polling, economic forecasts, and financial markets data; 0=lowest and 100=highest)
Data: YouGov, Bloomberg BusinessWeek