Monday PM October 6th, 2008
by: Ed Mayberry, October 6, 2008 12:10:59 pm
Reliant Energy is looking for a buyer amid turmoil in the credit markets and a violent storm season that cost the company millions. Reliant said it's exploring “strategic alternatives in a thorough and systematic manner.” The company’s president and CEO says no options are off the table when it comes to the company’s future path. The Board of Directors cautions “there can be no assurance that the strategic alternatives process will result in any transactions.” Just a week ago, the energy retailer cut its profit forecast and said had to raise $1 billion because of damage from Hurricane Ike and a new credit arrangement. Reliant said then it couldn't meet existing credit conditions set by Merrill Lynch, and had to raise new capital through the sale of preferred stock and a costlier credit facility.
Citigroup has filed a complaint in New York Supreme Court against Wachovia, Wells Fargo and the directors of both companies seeking more than $60 billion in damages for interfering with the bank's planned takeover of Wachovia's banking operations. The complaint seeks more than $20 billion in compensatory damages and more than $40 billion in punitive damages from Wells Fargo for interference. Citigroup also seeks relief from Wachovia for its bad faith breach of the banks' contract. Citigroup and Wachovia are battling a separate case in federal court. Meanwhile, Federal Reserve officials have been in talks with Wells Fargo and Citigroup in the hope of getting the parties to come to some sort of agreement, according to a person with knowledge of the talks.
President Bush says the $700 billion plan to save the teetering U.S. economy will take some time to work. After meeting with small-business owners at an old-fashioned soda shop in San Antonio, the president sought patience from a jittery country. Congress last week approved a massive plan of federal intervention that allows the government to buy up devalued assets from financial companies in hopes of unlocking frozen credit lines. Bush said he signed the bill last week, but that “it's going to take awhile” to get the program working fully and effectively. He called it a big step toward solving the problem. The treasury on Monday put out guidelines for selecting the financial asset management firms that will run the program. The government also released guidelines that will be used to guard against conflicts of interest in running the program.
The president's top economic advisers are pledging to work with their counterparts around the world to restore confidence and stability to financial markets. The President's Working Group on Financial Markets said it planned to quickly implement the expanded authorities granted to federal regulators by the $700 billion rescue package passed on Friday. The working group was formed after the 1987 stock market crash. The group, which includes Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, said it planned to move “with substantial force on a number of fronts.”
British Treasury Chief Alistair Darling says European countries must work together to tackle problems in the banking system. Darling told lawmakers that it is essential the continent coordinates its response to the world's financial turmoil. His comments follow unilateral moves by Ireland, Iceland, Germany, Austria and Greece to guarantee bank deposits. But European Union Competition Chief Neelie Kroes says that those decisions pose competition concerns and could hamper efforts to stabilize banks. Darling urged better cooperation between European allies in a statement to the House of Commons. But he says Britain is ready to do “whatever is necessary” to protect banks and depositors. The statement comes as leaders of the EU's 27 member countries have pledged to take “all necessary measures to ensure the stability of the financial system.” A statement from the EU president in France says the measures could include liquidity from the central banks, targeted measures for individual banks or a reinforcement of bank deposit guarantees. The statement stresses the “necessity of close coordination and Cooperation” between EU members. France currently holds the rotating EU presidency. In Copenhagen, the economy ministry said commercial lenders had agreed to contribute up to $6.4 billion over two years to a fund that will help insure account holders from losses. In Sweden, the government said it would raise the limit for deposit insurance to $71,000 from $35,500. The decisions come after Germany enhanced a rescue plan for Hypo Real Estate and guaranteeing private bank accounts.
Russia's benchmark stock exchange has suffered its biggest-ever one-day loss. Shares went to a free fall on the back of falling oil prices and deepening fears about the global economy despite the passage of a $700 billion U.S. bank bailout. Trading on the country's largest index--was shut down three times, closing down 18.6 per cent. The benchmark RTS--where trading was halted twice--crashed to its lowest point since August 2005, falling by 19.1 per cent. It is the most the RTS has fallen in one day. In September, growing financial turmoil in the U.S. and a wave of margin calls sent the Russian stock markets into their biggest downward spiral since 1998. The MICEX lost 25 per cent in just three days, and prompted regulators to shut down the markets to stem the decline. Russia's stock market had boomed in recent years amid high prices for oil and natural gas.
The Federal Reserve has granted approval for Japan's largest bank to purchase a stake in U.S. investment giant Morgan Stanley. The Fed issued an order saying that it had approved the request of Mitsubishi UFJ Financial Group to acquire up to 24.9 per cent of the voting shares of Morgan Stanley. Both Morgan Stanley and Goldman Sachs, the last two major independent investment banks in the United States, won approval last month from the Fed to convert to bank holding companies in an effort to withstand the severe financial storms raking Wall Street.
The head of the Federal Deposit Insurance Corporation says the new increase in federal deposit insurance limits will not solve all banking industry ills but will bolster public confidence in banks' safety. Sheila Bair, the chairman of the FDIC, spoke today after last week's enactment of the $700 billion bailout that temporarily increases the insurance limits to $250,000 from $100,000 per individual account. If the FDIC had to borrow from the treasury to cover the increased limit, the money would be repaid by insurance premiums charged to U.S. banks and thrifts, Bair said in a speech to an economists' group.
The Federal Reserve says it will begin paying interest on commercial banks' reserves and will expand its loan program to squeezed banks, fresh steps to help ease a painful credit crisis. In the $700 billion bailout bill President Bush signed on Friday, Congress gave the Fed the power to pay interest on those reserves for the first time. The law accelerated the effective date to October 1st of this year versus 2011. The move was seen as another way to expand the Fed's resources to battle the worst credit crisis in decades. It will encourage banks to keep more resources at the central bank.
Richard Fuld says he feels “horrible” about what happened at the company he headed, Lehman Brothers. A house panel heard that just days before the company's bankruptcy filing--the biggest in U.S. history--Lehman Brothers was steering millions of dollars to executives who were on their way out. According to documents cited at the hearing, company officials who feared for their bonuses were told not to worry. The hearing is the first into what caused the nation's financial markets to collapse last month. Fuld, who was CEO at Lehman Brothers, told the committee that he takes “full responsibility” for the decisions he made. He defended his actions as “prudent and appropriate” based on the information he had. Committee chair Henry Waxman asked Fuld if it's true that he took home some $480 million in compensation since 2000. Fuld replied that his compensation was not quite that much--but that it totaled more than $300 million during that time. He also said the company's compensation committee made sure that “the interests of the executives and the employees were aligned with shareholders.” The government let Lehman go under last month, but bailed out insurance giant AIG the next day.
The Bank of America says about 30,000 Texas homeowners will qualify for a new program to ease the terms on mortgages issued by Countrywide Financial. Texas Attorney General Greg Abbott says the deal will “keep struggling homeowners out of foreclosure and in their homes.” The loan modification program will provide frozen or reduced interest rates, loan term extensions and conversions of adjustable-rate mortgages to fixed-rate mortgages. Bank of America faces a lawsuit over deceptive mortgage practices by Countrywide before the bank bought it in June. Under the settlement reached by Texas and ten other states, borrowers stuck with mortgages they can't afford could see their interest rates reduced or have the loan principal cut. Some might qualify for having to pay nothing but interest for a decade. Even people who can't afford to keep their homes even with such changes will be able to get help moving to a new home. If every state were to join, the settlement could provide $8.7 billion in relief to 400,000 borrowers.
A growing percentage of economists thinks the nation is in, or near, a recession. And they believe it will last roughly a year--longer than the last two, in 2001 and 1990-1991. A survey by the National Association for Business Economics finds 69 per cent of economists believe a recession has already begun, or will this year. That's up from 56 per cent in May. A spokesman for the group says the economists have become more negative because of the credit crunch and weak consumer spending. The group's members think growth this year will slow to 1.8 per cent. That would be down from two per cent last year. The group suspects growth will slip to 1.6 per cent next year. The survey was taken before President Bush signed the $700 billion bailout plan Friday.
Utility shutoffs are up in all or part of dozens of states thanks to rising prices and a shaky economy. Michigan, which has been especially hard-hit economically, is seeing a 22 per cent increase. In New York state, utilities are reporting 17 per cent more shutoffs than last year, affecting a total of more than 230,000 residential customers through August. Other states with increased shutoffs include Pennsylvania, Florida and California. With winter coming on and the economy still sinking, it's feared the problem will only get worse. People who rely on heating oil are pleading for relief from high fuel prices. Congress recently approved a measure to nearly double the federal money available to help poor people cope with home heating costs. But advocates say it's unlikely to be enough.
Experts say the turmoil in the financial markets could prompt some parents to cut back on spending in the holiday season. Consumers are already battling high food and gas costs and slumping job and housing markets. Analysts say they could be focusing this season on less-expensive toys and consider which toys will get the most use. The National Retail Federation predicts holiday sales overall will rise 2.2 per cent, the slowest growth since 2002. Experts predict the hottest toys will be items like the Bakugan trading card game popular with boys, interactive toys such as Elmo live and gaming consoles like the Nintendo Wii. In addition, there are five fewer shopping days between Thanksgiving and Christmas, compared to last year.
Hurricane Ike had had the makings of an environmental nightmare unlike anything in U.S. history when it approached the upper Texas Gulf Coast's petrochemical complex. That didn't happen. Ike's storm surge was less severe than feared and floodwalls, levees and bulkheads built around the region's heavy industry generally held. Some hazardous material spilled, but nothing to cause the widespread environmental damage some feared. But many of the plants and refineries are protected by a 1960s-era, 15-foot-high levee system built by the Army Corps of Engineers. That levee system is strikingly similar to the one around New Orleans that failed catastrophically during Katrina. The shortcomings are plain to see. For example, Texas City is home to seven massive facilities run by industry giants like Dow Chemical, BP and Valero. It's surrounded by a ring levee system that includes earthen levees without erosion-control concrete, long stretches of floodwalls similar to those that failed during Katrina and a mishmash of levee heights. The Corps of Engineers says it's aware of the danger, but it says neither Congress nor local authorities have shown much interest in getting it to study building an improved system.
Oil prices have traded under $90 a barrel for the first time in eight months. Traders expect the widening financial crisis could drastically reduce global demand for energy. Oil prices have tumbled nearly 40 per cent since peaking in July. A significantly stronger dollar also weighed on prices. At the pump, AAA says the average price for regular unleaded is down to $3.50 a gallon. That is down 61 cents a gallon from the record seen in mid-July.
An advocacy group ranks California, Connecticut and Oregon at the top of a list of states improving energy efficiency to respond to high prices, energy security and global warming. A report rates Idaho as the most improved state in this category, moving from 25th two years ago to 13th. California, Connecticut and Oregon were followed in the top ten by Vermont, New York and Washington state. Also, Minnesota and Massachusetts were tied, and New Jersey made the top tier of states. The American Council for an Energy-Efficient Economy rated the states on “a wide range of the proven effective and readily available efficiency strategies.” Among areas examined were building codes, transportation and land-use policies, utilities' efficiency programs, financial incentives and support for research.
Houston-based ConocoPhillips and an Abu Dhabi company, Mubadala Development, have signed a deal with Kazakhstan's national oil company. Under the deal, the ConocoPhillips consortium can drill in a potentially lucrative oil and gas region in the Caspian Sea. The deal tentatively gives the consortium the right to 49 per cent of the hydrocarbons in a 3,130 square-mile zone near the Kazakh city of Aktau. No financial terms were released.
Texas moved up one place to seventh in the nation for its business-friendly tax system, according to the Tax Foundation. The Washington-based group’s annual State Business Tax Climate Index ranks Wyoming in first place, followed by South Dakota, Nevada, Alaska and Florida. New Jersey is at the bottom of the list, which measures account corporate tax, individual income tax, sales tax, unemployment tax and property taxes.
The U.S. Supreme Court let stand a $74 million judgment against Dish Network for violating a Tivo patent involving digital video recorders. The justices denied Englewood, Colorado-based Dish's appeal without comment. In January, the U.S. Court of Appeals for the federal circuit agreed with a lower court that DVRs distributed by Dish violated the software elements of Tivo's patent. The ruling overturned the Marshall federal court finding that Dish also infringed on the patent's hardware elements. Tivo pioneered digital video recorders that allow viewers to pause, rewind and fast forward live television shows. U.S. District Judge David Folsom of Texarkana had ordered Dish to shut down the three million digital video recorders used by its customers because they use Tivo's technology. That order was put on hold pending appeal. Dish Network has said that the ruling wouldn't affect its customers because the company had developed and distributed new DVR software that doesn't infringe on the Tivo patent. The case is Echostar Communications v. Tivo, 08 179.
European automakers have appealed to the European Union for a $55 billion package of low-cost loans. The request comes amid an economic downturn and pressure from new rules aimed at curbing greenhouse gas emissions. The European Automobile Manufacturers Association says it's concerned about shrinking consumer confidence. It has urged the EU to help “reinforce the momentum in consumer demand for fuel-efficient vehicles.” The association is also calling on the EU to grant “incentives” for car owners to scrap vehicles more than eight years old to accelerate the renewal of auto fleets. Monday's appeal came after the U.S. government approved a $25 billion loan package last week that aims to keep Detroit's downtrodden automakers afloat.
Ford Chief Executive Aalan Mulally says increased demand for small cars has led the automaker to revisit its decision not to bring the tiny European Ka model to the United States. Mulally said on a Detroit radio station that Ford is assessing the Ka now, and that a lot of people share the opinion that Ford should bring it to the U.S. A new version of the Ka was unveiled last week at the Paris Motor Show. It will be launched in major European markets by late this year or early 2009. The Ka is far smaller than the Focus, which currently is Detroit-based Ford's only U.S. compact car. Focus sales are up 24 per cent through September.
Ford will have a feature on many of its 2010 models that's sure to cause grumbling among many teenagers. It will let parents program the teenager's car key so they can drive no faster than 80 miles per hour. And the system can be made to chime if the teenager exceeds 45, 55, or 65 miles per hour. Ford says the feature, called “MyKey,” can also limit the volume of the audio system, and sound a six-second chime every minute if seat belts aren't fastened. “MyKey” will be standard on an unspecified number of 2010 Ford models, and will spread to the entire lineup as models are updated. Ford says its market research shows 75 per cent of parents like the speed and audio limits, but 67 per cent of teens don't.