7 Stocks That Pay Dad Back
By Selena Maranjian June 13, 2008 Comments (0)
1 Recommendation
Forget the golf clubs! We have some great investment ideas Foolishly wrapped up in this special series for Father’s Day.
Dad, remember way back when you and mom paid me an allowance? I loved watching my money grow ... and occasionally spending it on a $3.99 LP at Korvette's or a magazine. Now I think it's time I returned the favor. I'm offering you several stocks that will pay you an allowance.
You'll get that money in the form of dividends, which both of us increasingly appreciate. Years ago, we were entranced by high-flying stocks that often landed with a thud. But with healthy dividend payers, we can not only enjoy a steady (and often increasing) stream of income, but also expect some stock-price appreciation, as well. It's a tantalizing combination.
Indeed, as my colleague Rich Greifner has pointed out in his article, "The Secret of Dividends," more than 40% of the S&P 500's total return over the past 80 years has come not from rising share prices, but from dividend payments.
Dividends for DadHere are a few companies you might want to consider as investments:
Company
Recent dividend yield
3-year dividend growth rate
Recent P/E ratio
5-year average P/E ratio
General Electric (NYSE: GE)
4.1%
11.9%
13.4
19.8
Wells Fargo (NYSE: WFC)
4.8%
8.3%
11.2
14.2
United Parcel Service (NYSE: UPS)
2.6%
14.5%
151.5
23.5
Johnson & Johnson (NYSE: JNJ)
2.6%
14.0%
16.4
19.8
Kimberly-Clark (NYSE: KMB)
3.6%
9.8%
15.0
18.5
Procter & Gamble (NYSE: PG)
2.2%
11.1%
19.6
23.8
Paychex (Nasdaq: PAYX)
3.7%
18.9%
21.9
36.9
Data from Morningstar.
Who wouldn't want to hold General Electric shares? Despite its massive size, the company's revenue still rose nearly 6% last year. According to Yahoo! Finance, its net profit margin tops 12%, and its return on equity (ROE) is 19%. It also offers quite a bit of diversification, since it's involved in everything from jet engines to financial services to alternative energy. (And water processing, and broadcast television, and medical equipment, and....)
How much safer can a company seem than Procter & Gamble? Its brands, including Tide, Crest, Gillette, and more, are well-known worldwide. And while many financial giants are struggling these days, Wells Fargo is going strong, with even Warren Buffett investing in it. Its annual revenue is up about 35% over the past two years.
UPS might be a harder sell right now, with our economy sputtering and fuel costs soaring. But the company is enjoying solid growth in revenue from international operations, and the U.S. economy will pick up one of these days, too.
Johnson & Johnson needs little introduction, sporting a net profit margin of more than 18%, and ROE topping 25%. Its own investor relations department has noted the company's "75 consecutive years of sales increases; 24 consecutive years of adjusted earnings increases; and 46 consecutive years of dividend increases." Over the last 10 years, Johnson & Johnson stock generated an annualized return of almost 8% for investors, compared to just 3.5% for the S&P 500.
Kimberly-Clark may be less well-known for many investors, but it shouldn't be. Its net profit margin is almost 10%, and its ROE tops 30%. Revenue rose 9% last year for its stable of familiar brands, including Kleenex, Kotex, and Huggies.
Finally, Paychex is unknown to many, but it processes payroll and performs many other critical tasks for thousands of companies (perhaps including your own employer). Its revenue has risen 30% over the past two years, while its net margin tops 25% and its ROE tops 35%.
Dad, you can learn more about successful investing and about dividend payers in these articles:
How to Shoot Dividend Ducks in a Barrel
How to Survive This Crazy Market
Stocks That Pay You Back
Friday, June 13, 2008
Wednesday, June 11, 2008
Lampert Puts Money On Housing Rebound
Lampert Puts Money On Housing Rebound
Stakes Being Taken In Battered Builders, Lenders and Retailer
By GARY MCWILLIAMSJune 12, 2008
Billionaire hedge-fund manager Edward S. Lampert is placing new bets on a U.S. housing recovery, buying stakes in beaten-up home builders, mortgage lenders and a home-improvement retailer.
Mr. Lampert's ESL Investments Inc., which owns half of department-store giant Sears Holdings Corp. and 40% of car retailer AutoNation Inc., has previously focused with mixed success on retail and bank stocks.
Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.
ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.
Mr. Lampert's purchases come as some analysts think the housing market's decline may be nearing an end. Investment adviser Sanford C. Bernstein & Co. this week estimated the housing correction will "begin to bottom within the next several months, which should lead to declining inventories and, eventually, stabilizing prices."
In another bet on a housing turnaround, Mr. Lampert this spring increased his stake in home-improvement retailer Home Depot Inc. ESL holds about 22.7 million shares valued at $590 million, up from 16.7 million shares last year.
Earlier this decade, Mr. Lampert acquired car-parts retailer AutoZone Inc. and discount chain Kmart Corp., turning the two around for big gains. He has been less successful with a big investment in Citigroup Inc. that came before the full force of the subprime-loan debacle. His purchases of Home Depot also have looked premature. He acquired his initial shares last this past fall when the stock was trading at between $32 and $37 a share; shares currently trade around $26. Meanwhile, the total value of his equity portfolio has tumbled to about $10.04 billion from about $11.6 billion reported at the end of the first quarter.
ESL acquired its shares in mortgage company PHH in September and only recently disclosed the investment. ESL is one of a handful of companies that have permission from the SEC to temporarily delay releasing details of some investments.
The housing investments are true to Mr. Lampert's interest in out-of-favor companies and industries and reflect his propensity to acquire shares in companies that have seen their shares tumble after buyouts collapsed.
Stakes Being Taken In Battered Builders, Lenders and Retailer
By GARY MCWILLIAMSJune 12, 2008
Billionaire hedge-fund manager Edward S. Lampert is placing new bets on a U.S. housing recovery, buying stakes in beaten-up home builders, mortgage lenders and a home-improvement retailer.
Mr. Lampert's ESL Investments Inc., which owns half of department-store giant Sears Holdings Corp. and 40% of car retailer AutoNation Inc., has previously focused with mixed success on retail and bank stocks.
Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.
ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.
Mr. Lampert's purchases come as some analysts think the housing market's decline may be nearing an end. Investment adviser Sanford C. Bernstein & Co. this week estimated the housing correction will "begin to bottom within the next several months, which should lead to declining inventories and, eventually, stabilizing prices."
In another bet on a housing turnaround, Mr. Lampert this spring increased his stake in home-improvement retailer Home Depot Inc. ESL holds about 22.7 million shares valued at $590 million, up from 16.7 million shares last year.
Earlier this decade, Mr. Lampert acquired car-parts retailer AutoZone Inc. and discount chain Kmart Corp., turning the two around for big gains. He has been less successful with a big investment in Citigroup Inc. that came before the full force of the subprime-loan debacle. His purchases of Home Depot also have looked premature. He acquired his initial shares last this past fall when the stock was trading at between $32 and $37 a share; shares currently trade around $26. Meanwhile, the total value of his equity portfolio has tumbled to about $10.04 billion from about $11.6 billion reported at the end of the first quarter.
ESL acquired its shares in mortgage company PHH in September and only recently disclosed the investment. ESL is one of a handful of companies that have permission from the SEC to temporarily delay releasing details of some investments.
The housing investments are true to Mr. Lampert's interest in out-of-favor companies and industries and reflect his propensity to acquire shares in companies that have seen their shares tumble after buyouts collapsed.
Sunday, May 18, 2008
股神的「雜貨店經營學」巴菲特用3000萬換13.5億的智慧
一個13歲的毛孩子，把爺爺當年經營雜貨店的精髓，一點一滴，運用在公司的經營上面，不但延續了家族企業的經營火種，更創造驚人績效，締造出舉世聞名的波克夏王國，這位有神奇魔力的小男孩，就是當今股神與全球首富——巴菲特。這是一位七十七歲的智慧老人，照著十三歲時腦中的圖像，一點一滴，完成爺爺當初未竟夢想的故事。「……十三歲時，我在祖父的雜貨店中住了四個月，就睡在堆滿《讀者文摘》的小房間中……他當時計畫出一本《如何經營雜貨店》的小書，就要我這個廉價勞工，把他所有的想法，用舊的計帳本背後空白的部分，全部記下……」這是巴菲特（Warren Buffett）今年為他表弟比爾．巴菲特（Bill Buffett）的新書《食物饗宴》（Foods You Will Enjoy）中，寫的一段話，記錄當年在祖父奧尼斯（Ernest Buffett）雜貨鋪中學到的種種。雖然爺爺的出書計畫最後失敗，但這四個月的朝夕相處，埋下了華倫．巴菲特成為一代偉大投資家的種子；祖父經營雜貨鋪的哲學，更成為波克夏在四十年間，能從即將倒閉的紡織廠，壯大成為兆元帝國的基礎。winwin_20080515_1210819216_0.jpgleft -->
第一堂課現金流入大的商品就是寶
經營雜貨店的人都知道，本小、利多、周轉率高的產品，是生存的不二法寶。以後見之明來看，波克夏購併公司的標準及條件，竟和當年巴菲特家族經營雜貨鋪選擇上架貨品的條件，如出一轍，找的對象都是一些投資小，但現金流入大的公司。因此，當初躺在雜貨店貨架上的熱門商品，卡夫卡奶油、OREO餅乾、麥斯威爾咖啡、箭牌口香糖、Milky巧克力棒，甚至連當初製造雜貨店外送車隊的馬門（Marmon）集團，在過去一年中，陸續投入波克夏懷抱。巴菲特家族的雜貨店不是奧瑪哈最早成立的雜貨店，卻是當地活得最長的鋪子之一，在孫子華倫．巴菲特還未成為資本市場的一方之霸時，老巴菲特早就已經是奧瑪哈零售業講話擲地有聲的意見領袖。他常掛在嘴邊的話就是：「成功的雜貨店老闆得帶著腦子上工！」（The master merchant must use his head）。
第二堂課設定安全邊際就能存活
他說，雜貨店經營要能存活，最重要的是如何應付生意清淡的日子。周六生意一定好，周日及周五就算差一點，也不至於差太遠，最重要的是如何應付清淡的星期一、星期三及星期四，「每一個工作天都有不同的計畫，如此，開了張，錢才會跑進來」。錢進來之後，更重要的是如何運用它，「如何把錢安全地投資在對的地方，比賺錢進來難太多了！」這樣「沒想成功、先想敗」的經營邏輯，與巴菲特及其恩師葛拉漢的投資理論核心「安全邊際」（Margin of Safety），幾乎沒有二致。有了安全邊際的概念，巴菲特在集團擴張時，信心就多了三分，即使價錢稍貴一些，只要時機掌握得對、企業價值看得準，其他都不是問題。不論是收購卡夫食品八．六％股權，或是與Ｍ&Ｍ巧克力集團，共同買下箭牌口香糖集團（Wrigley's），價錢都比市場估計得高，特別是箭牌集團的買進溢價高達三○％以上，連巴菲特在今年股東會上都承認：「價錢其實不是這麼便宜，但我確定它們絕對不在高檔，價錢雖不低??但我就是愛這種牌子老、經營穩的大食品廠，它們的地位非常難被扳倒??我情願用高一點的價格，買下一家績優公司，也不願用低價買一家爛公司！」
第三堂課品牌優，小本也能滾大利
老先覺當然有他自己的邏輯，在今年巴菲特給股東的信中，巴菲特特別以喜思巧克力（See's）為例，談到了這個品牌食品廠，如何小兵立大功，帶來日後十三．五億美元的現金流入，一點一滴幫助他打造波克夏江山。股神的算盤是這樣撥的。波克夏在一九七二年以二五○○萬美元，買下喜思巧克力，當時營收約三千萬美元、獲利只有五百萬美元，每年所需營運資本約為八百萬美元；三十五年間，喜思靠著品牌及小本經營，營收及獲利連年成長，至去年為止，獲利已經超過八一○○萬美元，若把這三十五年間淨利加總起來，金額更高達十三．五億美元，比當年的五百萬美元，整整膨脹了二七○倍。這樣的巨幅成長，營運資本只較當年小小增加了四倍，至四千萬美元。換句話說，喜思只要保留不到四千萬美元的資金，就可以把賺到的十三多億美元資金，全部「繳庫」給母公司，再由波克夏做進一步的投資運用，巴菲特喜歡的就是這種品牌食品公司「本小利大」的媚力。把這個邏輯釐清之後，巴菲特投資這兩個品牌大廠的道理就越來越清楚了。以卡夫食品來說，旗下擁有的品牌包括：OREO巧克力夾心、麥斯威爾咖啡、RITZ餅乾、Milky巧克力，都是卡夫食品旗下的重要品牌...
第一堂課現金流入大的商品就是寶
經營雜貨店的人都知道，本小、利多、周轉率高的產品，是生存的不二法寶。以後見之明來看，波克夏購併公司的標準及條件，竟和當年巴菲特家族經營雜貨鋪選擇上架貨品的條件，如出一轍，找的對象都是一些投資小，但現金流入大的公司。因此，當初躺在雜貨店貨架上的熱門商品，卡夫卡奶油、OREO餅乾、麥斯威爾咖啡、箭牌口香糖、Milky巧克力棒，甚至連當初製造雜貨店外送車隊的馬門（Marmon）集團，在過去一年中，陸續投入波克夏懷抱。巴菲特家族的雜貨店不是奧瑪哈最早成立的雜貨店，卻是當地活得最長的鋪子之一，在孫子華倫．巴菲特還未成為資本市場的一方之霸時，老巴菲特早就已經是奧瑪哈零售業講話擲地有聲的意見領袖。他常掛在嘴邊的話就是：「成功的雜貨店老闆得帶著腦子上工！」（The master merchant must use his head）。
第二堂課設定安全邊際就能存活
他說，雜貨店經營要能存活，最重要的是如何應付生意清淡的日子。周六生意一定好，周日及周五就算差一點，也不至於差太遠，最重要的是如何應付清淡的星期一、星期三及星期四，「每一個工作天都有不同的計畫，如此，開了張，錢才會跑進來」。錢進來之後，更重要的是如何運用它，「如何把錢安全地投資在對的地方，比賺錢進來難太多了！」這樣「沒想成功、先想敗」的經營邏輯，與巴菲特及其恩師葛拉漢的投資理論核心「安全邊際」（Margin of Safety），幾乎沒有二致。有了安全邊際的概念，巴菲特在集團擴張時，信心就多了三分，即使價錢稍貴一些，只要時機掌握得對、企業價值看得準，其他都不是問題。不論是收購卡夫食品八．六％股權，或是與Ｍ&Ｍ巧克力集團，共同買下箭牌口香糖集團（Wrigley's），價錢都比市場估計得高，特別是箭牌集團的買進溢價高達三○％以上，連巴菲特在今年股東會上都承認：「價錢其實不是這麼便宜，但我確定它們絕對不在高檔，價錢雖不低??但我就是愛這種牌子老、經營穩的大食品廠，它們的地位非常難被扳倒??我情願用高一點的價格，買下一家績優公司，也不願用低價買一家爛公司！」
第三堂課品牌優，小本也能滾大利
老先覺當然有他自己的邏輯，在今年巴菲特給股東的信中，巴菲特特別以喜思巧克力（See's）為例，談到了這個品牌食品廠，如何小兵立大功，帶來日後十三．五億美元的現金流入，一點一滴幫助他打造波克夏江山。股神的算盤是這樣撥的。波克夏在一九七二年以二五○○萬美元，買下喜思巧克力，當時營收約三千萬美元、獲利只有五百萬美元，每年所需營運資本約為八百萬美元；三十五年間，喜思靠著品牌及小本經營，營收及獲利連年成長，至去年為止，獲利已經超過八一○○萬美元，若把這三十五年間淨利加總起來，金額更高達十三．五億美元，比當年的五百萬美元，整整膨脹了二七○倍。這樣的巨幅成長，營運資本只較當年小小增加了四倍，至四千萬美元。換句話說，喜思只要保留不到四千萬美元的資金，就可以把賺到的十三多億美元資金，全部「繳庫」給母公司，再由波克夏做進一步的投資運用，巴菲特喜歡的就是這種品牌食品公司「本小利大」的媚力。把這個邏輯釐清之後，巴菲特投資這兩個品牌大廠的道理就越來越清楚了。以卡夫食品來說，旗下擁有的品牌包括：OREO巧克力夾心、麥斯威爾咖啡、RITZ餅乾、Milky巧克力，都是卡夫食品旗下的重要品牌...
Wednesday, May 14, 2008
China Earthquake Exposes A Widening Wealth Gap
China Earthquake Exposes A Widening Wealth Gap
By LORETTA CHAO and JASON LEOW in Pengzhou, China, JAMES T. AREDDY in Shanghai and GORDON FAIRCLOUGH in ShifangMay 14, 2008; Page A1
With the death toll from China's earthquake mounting, the disaster is throwing a harsh spotlight on the widening gap between the nation's rich and poor.
Soldiers and paramilitary police rushed to dig victims out from collapsed schools, homes and hospitals. As the grim work continues, it is increasingly clear that the quake inflicted its greatest destruction on rural areas and on the smaller towns and cities that have mushroomed from farm fields in recent years as part of China's rapid urbanization.
Loretta Chao/WSJ
Standing at the side of a highway between Mianzhu and Chengdu, the capital of Sichuan province, among the rubble that used to be a line of stores, a woman pointed to the place where her concrete house once stood. Click to see more photos from the Journal reporters' drive through Sichuan.
Such areas have far less stringent building-safety practices than China's relatively wealthy big cities, construction experts say. As a result, some citizens were more vulnerable than others when disaster struck.
Rescue and relief workers struggled Tuesday to reach victims in remote areas most damaged by the magnitude-7.9 quake in the southwestern province of Sichuan. Deaths in Sichuan alone had exceeded 12,000 as of Tuesday evening, with more than 26,000 injured and at least 9,400 buried in debris, the state-run Xinhua news agency said, quoting a senior provincial official.
On Wednesday morning, a local official who had just returned from Beichuan County -- one of the worst hit areas of Sichuan -- described a scene of widespread devastation. A town of 20,000 was crushed when mountains surrounding it collapsed. More than half of the town's residents are still missing. He said there is not even a place to land a helicopter for supplies or rescue missions.
Rescuers have pulled out 2,000 bodies so far, but they are still finding some survivors, he said. He saw one man pulled out with an injured arm and leg. "They revived him, and then he just started to cry," the official said. They have opened up the road to about six miles away from the town, and rescuers are having to hike the rest of the way.
Tens of thousands are still missing as the rescue effort continues in China following the country's worst earthquake in three decades. Officials warn that more aftershocks and mudslides could add to the toll. Video courtesy of Reuters.
On the outskirts of the small city of Shifang, east of the epicenter, Fang Haiying, a 40-year-old rice farmer, said more than 10 members of her village remained buried in the rubble of their houses. She and her extended family were wearing surgical masks to protect themselves from a chemical leak at a damaged ammonia plant a few miles away. "We've been waiting but no one from the government has come. We have nothing to eat," she said.
Nearly every house in Yinhua village on Shifang's western edge was destroyed. Boulders loosed by Monday's quake, some as big as vans, littered the main road in the area, along with the vehicles they knocked over or crushed.
Survivors of the chaos walked down the narrow mountain roads to Yinhua in search of transportation out of the quake-stricken area. Two 15-year-old boys said they had hiked three hours from their village in the mountains to get to Yinhua. The pair, Chen Shi and Zheng Jia, said their middle school, like so many others, had collapsed within seconds. About 100 of their schoolmates died, they said.
Roughly 55 miles away, the disparity of damage was striking. The glitzy new office towers and hotels of Chengdu, Sichuan's bustling capital of nearly 10 million people, were still standing and largely intact. The city suffered relatively little in Monday's quake, despite its proximity to the epicenter.
In Beichuan, about 100 miles from the epicenter, nearly 1,000 paramilitary police were searching frantically Tuesday for survivors in a school that collapsed, burying at least 1,000 students and teachers. The Beichuan Middle School's main building, formerly seven stories tall, had been reduced to a pile of rubble about 7 feet high, the official Xinhua news agency said. One teenage victim was pulled out with no legs, Xinhua said. Authorities have estimated the death toll at 5,000.
See details on the earthquake's impact nationwide, and see how the aftershocks took place.
Natural disasters often wreak their worst havoc on the disadvantaged, people who tend to live in subpar housing. This was the case with Hurricane Katrina in the U.S.
Widening Wealth Gap
Now, the issue is especially thorny for China's government: President Hu Jintao and Premier Wen Jiabao have based much of the public legitimacy of their administration on trying to address a widening wealth gap resulting from decades of capitalist reforms. Part of their overall plan, for example, has called for improving rural health care and education.
China's booming economy has lifted the financial fortunes of most of its citizens, but some have gained far more than others. Economists say the country, still nominally socialist, is now among the most unequal major economies in the world. Much of this imbalance is seen in the contrast between residents of the big, wealthy cities, and those of small, poorer towns and rural areas. The disparity is a growing concern to leaders worried about social instability.
Associated Press
Eight-month-pregnant Zhang Xiaoyan, 34, was pulled alive from a partially collapsed apartment Wednesday in Dujiangyan.
Incomes in rural areas, for example, averaged 4,140 yuan a person last year, or about $590 at current exchange rates. That represents an increase of 91% from a decade earlier, not adjusted for inflation. Urban disposable incomes, by comparison, rose by 150% during the same period, to an average of 13,786 yuan last year.
China's leaders have become increasingly concerned about the widening income gap, particularly in rural areas because rural residents still comprise more than 60% of China's 1.3 billion residents.
Mr. Wen, who flew to the disaster zone within hours of the quake, spent Tuesday touring affected areas and reassuring the public that Beijing would help those most affected. "We will try our best to send milk powder to parents and ensure that children do not go hungry," Mr. Wen told victims after learning of shortages of food, drinking water and tents, the Xinhua agency reported.
On the ground, authorities scrambled to rescue survivors. China's defense ministry said that as of Tuesday afternoon, nearly 20,000 soldiers and paramilitary police had arrived in quake-hit areas, with an additional 30,000 en route in planes, trains and trucks, or on foot. Repeated aftershocks complicated efforts and prompted thousands to seek refuge outside in makeshift tents scattered across the region.
The epicenter of the quake, Wenchuan County, has remained largely cut off from help. Because of bad weather, officials scrapped plans to fly relief supplies in by helicopter, then canceled a second plan to send in rescuers by parachute. Finally, about 1,300 military doctors and soldiers reached Wenchuan by foot -- nearly 24 hours after the quake struck.
China's building code has long required that new structures be able to withstand earthquakes, according to Huang Shimin, an earthquake engineering expert at the China Academy of Building Research in Beijing. But standards from region to region remain inconsistent. Throughout Sichuan, the specification is grade seven on a scale of up to 10. The same level applies in Shanghai. But in Beijing, the standard requirement is a grade of eight -- reflecting the capital's close proximity to the epicenter of a 1976 earthquake that killed at least 240,000.
Uncertain Issues
"Based on China's codes for earthquake-resistance in building designs, if there is no problem in specific design and construction, China's capability to resist the earthquake should be strong," said Mr. Huang. "But there are many uncertain issues related to the earthquake, so it's still a complicated issue."
ColorChina Photo / NewsCom
RESCUE OPERATIONS: A woman cries before a group of soldiers preparing to search for victims at a collapsed school in Dujiangyan on Tuesday.
Architects said the quake's discrimination could be partly attributable to the variation of tremors from one area to the next. But they also cited widespread differences in construction materials and technical skills between wealthy Chengdu and the poorer towns around it, as well as often patchy enforcement of building codes.
"There are a lot of holes," said a Shanghai-based architect who often works in Sichuan province.
Adding to the pressure is that thousands of little-known cities are literally sprouting up from pastureland in China. China's urbanization push is bringing up to 15 million people into cities annually. All of them need shelter, often as cheaply and quickly as possible.
The trend has helped make the world's most populous country the world's largest construction zone. China built about 1.80 billion square meters, or more than 19 billion square feet, of property in 2006. At the time, an additional 4.10 billion square meters was also under construction, according to government statistics.
Such rapid urbanization is transforming Sichuan, one of China's biggest provinces with a population of about 82 million -- roughly equal to that of Germany. The mountainous province ranked fifth out of China's provinces for the amount of floor space it laid down in 2006, almost twice as much property as completed in Beijing.
Rubble crushes a car in Dujiangyan.
In hastily built towns around Pengzhou, about 40 miles southeast of the epicenter area, local people acknowledged the construction of their now-destroyed homes was shoddy, with little consideration given to safety. Often property is built by individuals, but is legally subject to inspections, which often don't happen. The government's oversight of building regulations has tended to be scant.
Liao Xiaoling said her brother-in-law was thrown from an upstairs window and her 86-year-old father crushed under a wall when the brick structure that was both their home and business toppled. "Our home is gone," she said.
Besides its collapsed schools, two hospitals also suffered damage in Sichuan. Some analysts say public funds often accumulate more slowly than new residents in fast-developing areas, and are often diverted to other uses, such as building lavish local government offices.
Government officials warned against drawing the conclusion that particular kinds of buildings were more vulnerable than others. Li Bingren, the spokesman at China's Ministry of Construction, said buildings in the disaster area were built to code, but the quake and its aftershocks were "stronger and higher than the designed resistance level." Schools, he said, tend to have larger rooms and be bigger than ordinary buildings, exacerbating the toll when they fail.
At least nine schools fell across the quake zone, trapping thousands of children in gruesome scenes that were repeated time and again. There was rising anger at authorities over the loss of so many young people, expressed both on the ground and on the Internet.
At the People's Hospital in Pengzhou, nurses estimated they had treated at least a thousand injured people. A lack of electricity prompted hospital officials to evacuate patients outside into blue tents in the hospital's parking lot and backyard.
'It's All Gone'
The hospital was starting to run out of water Tuesday afternoon. Many patients were frantic because they had been separated from their families and were unable to reach them because of downed phone networks. Some were told to go home, but said they had no homes to return to.
Zhou Yan, a 26-year-old farmer, was in a tent recovering from a head injury she sustained after bricks from the second floor of her home fell on her. Doctors said she was free to go but there was no way for her to get home. "I have no home to go back to. It's all gone," she said.
Ms. Zhou's husband is a migrant worker who makes furniture in Shenyang, far away in China's northeast. He managed to get in touch with her, but no buses were available for him to take home. She said she believes the parents of her niece, who was staying with her when the quake hit, are dead.
Ms. Zhou said her house, built over 10 years ago, was brick, which is common in this area. The couple never thought to build it to withstand earthquakes, especially of this magnitude. She estimated it will cost at least 100,000 yuan to rebuild it, money she said will be "impossible" to save. "There's just no way. I don't know what to do next, or who to ask."
By LORETTA CHAO and JASON LEOW in Pengzhou, China, JAMES T. AREDDY in Shanghai and GORDON FAIRCLOUGH in ShifangMay 14, 2008; Page A1
With the death toll from China's earthquake mounting, the disaster is throwing a harsh spotlight on the widening gap between the nation's rich and poor.
Soldiers and paramilitary police rushed to dig victims out from collapsed schools, homes and hospitals. As the grim work continues, it is increasingly clear that the quake inflicted its greatest destruction on rural areas and on the smaller towns and cities that have mushroomed from farm fields in recent years as part of China's rapid urbanization.
Loretta Chao/WSJ
Standing at the side of a highway between Mianzhu and Chengdu, the capital of Sichuan province, among the rubble that used to be a line of stores, a woman pointed to the place where her concrete house once stood. Click to see more photos from the Journal reporters' drive through Sichuan.
Such areas have far less stringent building-safety practices than China's relatively wealthy big cities, construction experts say. As a result, some citizens were more vulnerable than others when disaster struck.
Rescue and relief workers struggled Tuesday to reach victims in remote areas most damaged by the magnitude-7.9 quake in the southwestern province of Sichuan. Deaths in Sichuan alone had exceeded 12,000 as of Tuesday evening, with more than 26,000 injured and at least 9,400 buried in debris, the state-run Xinhua news agency said, quoting a senior provincial official.
On Wednesday morning, a local official who had just returned from Beichuan County -- one of the worst hit areas of Sichuan -- described a scene of widespread devastation. A town of 20,000 was crushed when mountains surrounding it collapsed. More than half of the town's residents are still missing. He said there is not even a place to land a helicopter for supplies or rescue missions.
Rescuers have pulled out 2,000 bodies so far, but they are still finding some survivors, he said. He saw one man pulled out with an injured arm and leg. "They revived him, and then he just started to cry," the official said. They have opened up the road to about six miles away from the town, and rescuers are having to hike the rest of the way.
Tens of thousands are still missing as the rescue effort continues in China following the country's worst earthquake in three decades. Officials warn that more aftershocks and mudslides could add to the toll. Video courtesy of Reuters.
On the outskirts of the small city of Shifang, east of the epicenter, Fang Haiying, a 40-year-old rice farmer, said more than 10 members of her village remained buried in the rubble of their houses. She and her extended family were wearing surgical masks to protect themselves from a chemical leak at a damaged ammonia plant a few miles away. "We've been waiting but no one from the government has come. We have nothing to eat," she said.
Nearly every house in Yinhua village on Shifang's western edge was destroyed. Boulders loosed by Monday's quake, some as big as vans, littered the main road in the area, along with the vehicles they knocked over or crushed.
Survivors of the chaos walked down the narrow mountain roads to Yinhua in search of transportation out of the quake-stricken area. Two 15-year-old boys said they had hiked three hours from their village in the mountains to get to Yinhua. The pair, Chen Shi and Zheng Jia, said their middle school, like so many others, had collapsed within seconds. About 100 of their schoolmates died, they said.
Roughly 55 miles away, the disparity of damage was striking. The glitzy new office towers and hotels of Chengdu, Sichuan's bustling capital of nearly 10 million people, were still standing and largely intact. The city suffered relatively little in Monday's quake, despite its proximity to the epicenter.
In Beichuan, about 100 miles from the epicenter, nearly 1,000 paramilitary police were searching frantically Tuesday for survivors in a school that collapsed, burying at least 1,000 students and teachers. The Beichuan Middle School's main building, formerly seven stories tall, had been reduced to a pile of rubble about 7 feet high, the official Xinhua news agency said. One teenage victim was pulled out with no legs, Xinhua said. Authorities have estimated the death toll at 5,000.
See details on the earthquake's impact nationwide, and see how the aftershocks took place.
Natural disasters often wreak their worst havoc on the disadvantaged, people who tend to live in subpar housing. This was the case with Hurricane Katrina in the U.S.
Widening Wealth Gap
Now, the issue is especially thorny for China's government: President Hu Jintao and Premier Wen Jiabao have based much of the public legitimacy of their administration on trying to address a widening wealth gap resulting from decades of capitalist reforms. Part of their overall plan, for example, has called for improving rural health care and education.
China's booming economy has lifted the financial fortunes of most of its citizens, but some have gained far more than others. Economists say the country, still nominally socialist, is now among the most unequal major economies in the world. Much of this imbalance is seen in the contrast between residents of the big, wealthy cities, and those of small, poorer towns and rural areas. The disparity is a growing concern to leaders worried about social instability.
Associated Press
Eight-month-pregnant Zhang Xiaoyan, 34, was pulled alive from a partially collapsed apartment Wednesday in Dujiangyan.
Incomes in rural areas, for example, averaged 4,140 yuan a person last year, or about $590 at current exchange rates. That represents an increase of 91% from a decade earlier, not adjusted for inflation. Urban disposable incomes, by comparison, rose by 150% during the same period, to an average of 13,786 yuan last year.
China's leaders have become increasingly concerned about the widening income gap, particularly in rural areas because rural residents still comprise more than 60% of China's 1.3 billion residents.
Mr. Wen, who flew to the disaster zone within hours of the quake, spent Tuesday touring affected areas and reassuring the public that Beijing would help those most affected. "We will try our best to send milk powder to parents and ensure that children do not go hungry," Mr. Wen told victims after learning of shortages of food, drinking water and tents, the Xinhua agency reported.
On the ground, authorities scrambled to rescue survivors. China's defense ministry said that as of Tuesday afternoon, nearly 20,000 soldiers and paramilitary police had arrived in quake-hit areas, with an additional 30,000 en route in planes, trains and trucks, or on foot. Repeated aftershocks complicated efforts and prompted thousands to seek refuge outside in makeshift tents scattered across the region.
The epicenter of the quake, Wenchuan County, has remained largely cut off from help. Because of bad weather, officials scrapped plans to fly relief supplies in by helicopter, then canceled a second plan to send in rescuers by parachute. Finally, about 1,300 military doctors and soldiers reached Wenchuan by foot -- nearly 24 hours after the quake struck.
China's building code has long required that new structures be able to withstand earthquakes, according to Huang Shimin, an earthquake engineering expert at the China Academy of Building Research in Beijing. But standards from region to region remain inconsistent. Throughout Sichuan, the specification is grade seven on a scale of up to 10. The same level applies in Shanghai. But in Beijing, the standard requirement is a grade of eight -- reflecting the capital's close proximity to the epicenter of a 1976 earthquake that killed at least 240,000.
Uncertain Issues
"Based on China's codes for earthquake-resistance in building designs, if there is no problem in specific design and construction, China's capability to resist the earthquake should be strong," said Mr. Huang. "But there are many uncertain issues related to the earthquake, so it's still a complicated issue."
ColorChina Photo / NewsCom
RESCUE OPERATIONS: A woman cries before a group of soldiers preparing to search for victims at a collapsed school in Dujiangyan on Tuesday.
Architects said the quake's discrimination could be partly attributable to the variation of tremors from one area to the next. But they also cited widespread differences in construction materials and technical skills between wealthy Chengdu and the poorer towns around it, as well as often patchy enforcement of building codes.
"There are a lot of holes," said a Shanghai-based architect who often works in Sichuan province.
Adding to the pressure is that thousands of little-known cities are literally sprouting up from pastureland in China. China's urbanization push is bringing up to 15 million people into cities annually. All of them need shelter, often as cheaply and quickly as possible.
The trend has helped make the world's most populous country the world's largest construction zone. China built about 1.80 billion square meters, or more than 19 billion square feet, of property in 2006. At the time, an additional 4.10 billion square meters was also under construction, according to government statistics.
Such rapid urbanization is transforming Sichuan, one of China's biggest provinces with a population of about 82 million -- roughly equal to that of Germany. The mountainous province ranked fifth out of China's provinces for the amount of floor space it laid down in 2006, almost twice as much property as completed in Beijing.
Rubble crushes a car in Dujiangyan.
In hastily built towns around Pengzhou, about 40 miles southeast of the epicenter area, local people acknowledged the construction of their now-destroyed homes was shoddy, with little consideration given to safety. Often property is built by individuals, but is legally subject to inspections, which often don't happen. The government's oversight of building regulations has tended to be scant.
Liao Xiaoling said her brother-in-law was thrown from an upstairs window and her 86-year-old father crushed under a wall when the brick structure that was both their home and business toppled. "Our home is gone," she said.
Besides its collapsed schools, two hospitals also suffered damage in Sichuan. Some analysts say public funds often accumulate more slowly than new residents in fast-developing areas, and are often diverted to other uses, such as building lavish local government offices.
Government officials warned against drawing the conclusion that particular kinds of buildings were more vulnerable than others. Li Bingren, the spokesman at China's Ministry of Construction, said buildings in the disaster area were built to code, but the quake and its aftershocks were "stronger and higher than the designed resistance level." Schools, he said, tend to have larger rooms and be bigger than ordinary buildings, exacerbating the toll when they fail.
At least nine schools fell across the quake zone, trapping thousands of children in gruesome scenes that were repeated time and again. There was rising anger at authorities over the loss of so many young people, expressed both on the ground and on the Internet.
At the People's Hospital in Pengzhou, nurses estimated they had treated at least a thousand injured people. A lack of electricity prompted hospital officials to evacuate patients outside into blue tents in the hospital's parking lot and backyard.
'It's All Gone'
The hospital was starting to run out of water Tuesday afternoon. Many patients were frantic because they had been separated from their families and were unable to reach them because of downed phone networks. Some were told to go home, but said they had no homes to return to.
Zhou Yan, a 26-year-old farmer, was in a tent recovering from a head injury she sustained after bricks from the second floor of her home fell on her. Doctors said she was free to go but there was no way for her to get home. "I have no home to go back to. It's all gone," she said.
Ms. Zhou's husband is a migrant worker who makes furniture in Shenyang, far away in China's northeast. He managed to get in touch with her, but no buses were available for him to take home. She said she believes the parents of her niece, who was staying with her when the quake hit, are dead.
Ms. Zhou said her house, built over 10 years ago, was brick, which is common in this area. The couple never thought to build it to withstand earthquakes, especially of this magnitude. She estimated it will cost at least 100,000 yuan to rebuild it, money she said will be "impossible" to save. "There's just no way. I don't know what to do next, or who to ask."
Monday, May 12, 2008
JPMorgan Chase CEO: Recession is just beginning
JPMorgan Chase CEO: Recession is just beginningMonday May 12, 4:41 pm ET
JPMorgan CEO James Dimon says recession is just starting, even if market crisis is mostly over
NEW YORK (AP) -- JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning.
"Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started."
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"We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."
Also incomplete is JPMorgan's acquisition of Bear Stearns Cos., the toppling investment bank that JPMorgan offered to buy in March.
"I want to make it perfectly clear: Mission not accomplished," Dimon said. He warned investors that while he still believes the deal was a good decision, "we are bearing an awful lot of risk" by taking on Bear Stearns' assets.
Bear Stearns is expected to post 2009 earnings of $800 million to $1.13 billion, Dimon said.
JPMorgan has so far found positions for 40 percent of the 14,000 Bear Stearns employees and job opportunities outside the company for an additional 1,500 people, Dimon said.
Bear Stearns shareholders are scheduled to vote on the proposed acquisition on May 29.
JPMorgan shares rose 67 cents to $47.24. Bear Stearns shares rose 15 cents to $10.38.
JPMorgan CEO James Dimon says recession is just starting, even if market crisis is mostly over
NEW YORK (AP) -- JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning.
"Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started."
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window.yzq_d['rdltJdG_fzs-']='&U=13f6ttftu%2fN%3drdltJdG_fzs-%2fC%3d626899.12331415.12723508.1383221%2fD%3dLREC%2fB%3d5133107%2fV%3d1';
"We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."
Also incomplete is JPMorgan's acquisition of Bear Stearns Cos., the toppling investment bank that JPMorgan offered to buy in March.
"I want to make it perfectly clear: Mission not accomplished," Dimon said. He warned investors that while he still believes the deal was a good decision, "we are bearing an awful lot of risk" by taking on Bear Stearns' assets.
Bear Stearns is expected to post 2009 earnings of $800 million to $1.13 billion, Dimon said.
JPMorgan has so far found positions for 40 percent of the 14,000 Bear Stearns employees and job opportunities outside the company for an additional 1,500 people, Dimon said.
Bear Stearns shareholders are scheduled to vote on the proposed acquisition on May 29.
JPMorgan shares rose 67 cents to $47.24. Bear Stearns shares rose 15 cents to $10.38.
Sunday, May 11, 2008
Behind AIG's Nasty Surprise
Behind AIG's Nasty Surprise
The insurance giant's far larger-than-expected first-quarter loss rouses investor ire and renews fears the credit crisis may still have a way to go
by David Bogoslaw
American International Group's (AIG) financial results took a sharp turn for the worse in the first quarter and sent a shock wave through the equity markets, renewing concerns that there's likely to be more fallout from the credit crisis.
After the market close on May 8, the world's largest insurance company reported a net loss of $7.81 billion, or $3.09 per share, in the first quarter, vs. a profit of $4.13 billion, or $1.58 per share, in the year-earlier period. Excluding mark-to-market writedowns and other asset impairment charges, the company had an operating loss of $3.56 billion, or $1.41 per share, in the latest quarter, compared with adjusted net income of $4.39 billion, or $1.68 per share, a year ago.
The bulk of those writedowns was related to credit default swaps, the complex credit derivatives used either by debt owners to hedge against credit events or by speculators to bet on changes in credit spreads. New York-based AIG said the loss included the impact of successful hedging activities that didn't qualify for hedge accounting treatment or for which hedge accounting wasn't used, including related foreign exchange gains and losses.
Seeking Fresh Capital
AIG also said it plans to raise about $12.5 billion in capital to shore up its balance sheet and provide greater financial flexibility to be able to respond to future events in the turbulent financial markets. First, it will raise roughly $7.5 billion through a common stock offering and an equity-linked offering, to be followed later by an offering of hybrid securities made up of debt and equity.
The loss far surpassed the per-share loss of 76¢ that analysts had expected, prompting AIG shares to tumble 8.8% to close at 40.28 on May 9.
Hank Greenberg, AIG's former chief executive, who has been very vocal in his public criticism of AIG's current management in recent months, told BusinessWeek that he was "stunned as a shareholder, and very disappointed and very upset" at the extent of the losses in the latest quarter.
He says he was surprised by the size of the impairment charges not only in AIG's Financial Products business but also in its partnership and equity investments, as well as how funds were allocated to various asset classes, which he wouldn't elaborate on. The increase in the expense ratio from about 19% a few years ago to the current 26% is also distressing to him.
Downbeat Assessment from Analysts
An AIG spokesperson wouldn't respond to Greenberg's remarks except to say that the motivation behind them should be considered given the multiple lawsuits Greenberg is facing. Among those, AIG is seeking to recover losses that resulted from writedowns and settlements due to accounting irregularities under Greenberg, and the insurer has also sued Greenberg and six other former AIG executives, claiming that after they left AIG in 2005 they illegally seized control of Starr International, an affiliated company that owns $20 billion in AIG shares.
Analyst Cathy Seifert at Standard & Poor's Equity Research said she expected to see weakness in AIG's "outsized" mortgage-related exposures but was "troubled by what we view as a pretty significant deterioration in a number of core insurance underwriting lines." She reaffirmed her hold rating on the stock and stuck to her 2008 earnings estimate of $2.50 per share, but said this forecast assumes underwriting results improve. She also said she believes the company is long overdue for a major restructuring. (Like BusinessWeek, S&P is a division of the The McGraw-Hill Companies (MHP).)
Tom Kersting, an analyst at Edward Jones in St. Louis, went as far as to say there needs to be a change in leadership at AIG, not limited to Martin Sullivan, the chief executive, but the entire management team. "They have come out time and time again on earnings calls and at analyst day [presentations] saying losses will only be this much, and they continue to go up and up," says Kersting. "At this point they have lost most of their credibility."
He lowered his rating on the stock to hold from buy on May 9 after assessing the latest results. "I'm not sure they had or have a complete handle on what's going on with some of their riskier investments," he says.
Dividend Hike Disappointment
The latest results were hurt by a pretax charge of about $9.11 billion for a net unrealized market valuation loss related to super senior credit default swaps held by AIG Financial Products Corp. Another weight on earnings stemmed from $6.09 billion in pretax net realized capital losses, mostly for other than temporary impairment charges in AIG's investment portfolio, which dwarfed $70 million in similar losses recorded in the first quarter of 2007.
Some analysts expressed dismay at the company's plan to raise its quarterly dividend by 10% to 22¢ per share at the same time that it's saying it needs to raise fresh capital. On the May 9 conference call with analysts and investors, Sullivan said the dividend hike reflects "the board and management's long-term view on the strength of AIG's business, earnings, and capital-generating power." The dividend increase will amount to about $200 million in annual expenses, small compared to the amount of capital AIG is trying to raise, the company said.
In a research note that Goldman Sachs (GS) put out on May 8, analyst Thomas Cholnoky said he expected the market to react negatively to the nearly 16% decline in book value and the need to raise capital, which is sure to dilute future earnings per share.
Reacting to Credit Ratings?
"The focus will be on the implications of the capital raise, especially given the company's belief that it has $2.5 billion to $7.5 billion of 'excess economic capital,'" Cholnoky wrote. (That's sharply lower than the $15 billion-$20 billion range prior to the onset of the credit crunch.)
He concluded that the capital-raising effort is primarily a defensive move prompted by Fitch Ratings' downgrade of AIG's claims-paying ability, S&P Ratings Service's downgrade of AIG's debt, and the possibility that AIG may now have to post collateral on its AIG Financial Products exposures. (Goldman Sachs has received compensation for investment banking services from AIG in the past 12 months.)
On the call, Steven Bensinger, AIG's chief financial officer, denied that the plan was directed by rating agencies and said management "felt this was the absolute right thing to do," and should be viewed as a proactive move to be prepared to respond to potential further turbulence in the financial market.
He conceded that the equity offerings would initially lower earnings per share, but said that over the longer term "it is something we hope we can offset by the use of net capital in very productive ways as opportunities manifest themselves over the course of the next few quarters."
The insurance giant's far larger-than-expected first-quarter loss rouses investor ire and renews fears the credit crisis may still have a way to go
by David Bogoslaw
American International Group's (AIG) financial results took a sharp turn for the worse in the first quarter and sent a shock wave through the equity markets, renewing concerns that there's likely to be more fallout from the credit crisis.
After the market close on May 8, the world's largest insurance company reported a net loss of $7.81 billion, or $3.09 per share, in the first quarter, vs. a profit of $4.13 billion, or $1.58 per share, in the year-earlier period. Excluding mark-to-market writedowns and other asset impairment charges, the company had an operating loss of $3.56 billion, or $1.41 per share, in the latest quarter, compared with adjusted net income of $4.39 billion, or $1.68 per share, a year ago.
The bulk of those writedowns was related to credit default swaps, the complex credit derivatives used either by debt owners to hedge against credit events or by speculators to bet on changes in credit spreads. New York-based AIG said the loss included the impact of successful hedging activities that didn't qualify for hedge accounting treatment or for which hedge accounting wasn't used, including related foreign exchange gains and losses.
Seeking Fresh Capital
AIG also said it plans to raise about $12.5 billion in capital to shore up its balance sheet and provide greater financial flexibility to be able to respond to future events in the turbulent financial markets. First, it will raise roughly $7.5 billion through a common stock offering and an equity-linked offering, to be followed later by an offering of hybrid securities made up of debt and equity.
The loss far surpassed the per-share loss of 76¢ that analysts had expected, prompting AIG shares to tumble 8.8% to close at 40.28 on May 9.
Hank Greenberg, AIG's former chief executive, who has been very vocal in his public criticism of AIG's current management in recent months, told BusinessWeek that he was "stunned as a shareholder, and very disappointed and very upset" at the extent of the losses in the latest quarter.
He says he was surprised by the size of the impairment charges not only in AIG's Financial Products business but also in its partnership and equity investments, as well as how funds were allocated to various asset classes, which he wouldn't elaborate on. The increase in the expense ratio from about 19% a few years ago to the current 26% is also distressing to him.
Downbeat Assessment from Analysts
An AIG spokesperson wouldn't respond to Greenberg's remarks except to say that the motivation behind them should be considered given the multiple lawsuits Greenberg is facing. Among those, AIG is seeking to recover losses that resulted from writedowns and settlements due to accounting irregularities under Greenberg, and the insurer has also sued Greenberg and six other former AIG executives, claiming that after they left AIG in 2005 they illegally seized control of Starr International, an affiliated company that owns $20 billion in AIG shares.
Analyst Cathy Seifert at Standard & Poor's Equity Research said she expected to see weakness in AIG's "outsized" mortgage-related exposures but was "troubled by what we view as a pretty significant deterioration in a number of core insurance underwriting lines." She reaffirmed her hold rating on the stock and stuck to her 2008 earnings estimate of $2.50 per share, but said this forecast assumes underwriting results improve. She also said she believes the company is long overdue for a major restructuring. (Like BusinessWeek, S&P is a division of the The McGraw-Hill Companies (MHP).)
Tom Kersting, an analyst at Edward Jones in St. Louis, went as far as to say there needs to be a change in leadership at AIG, not limited to Martin Sullivan, the chief executive, but the entire management team. "They have come out time and time again on earnings calls and at analyst day [presentations] saying losses will only be this much, and they continue to go up and up," says Kersting. "At this point they have lost most of their credibility."
He lowered his rating on the stock to hold from buy on May 9 after assessing the latest results. "I'm not sure they had or have a complete handle on what's going on with some of their riskier investments," he says.
Dividend Hike Disappointment
The latest results were hurt by a pretax charge of about $9.11 billion for a net unrealized market valuation loss related to super senior credit default swaps held by AIG Financial Products Corp. Another weight on earnings stemmed from $6.09 billion in pretax net realized capital losses, mostly for other than temporary impairment charges in AIG's investment portfolio, which dwarfed $70 million in similar losses recorded in the first quarter of 2007.
Some analysts expressed dismay at the company's plan to raise its quarterly dividend by 10% to 22¢ per share at the same time that it's saying it needs to raise fresh capital. On the May 9 conference call with analysts and investors, Sullivan said the dividend hike reflects "the board and management's long-term view on the strength of AIG's business, earnings, and capital-generating power." The dividend increase will amount to about $200 million in annual expenses, small compared to the amount of capital AIG is trying to raise, the company said.
In a research note that Goldman Sachs (GS) put out on May 8, analyst Thomas Cholnoky said he expected the market to react negatively to the nearly 16% decline in book value and the need to raise capital, which is sure to dilute future earnings per share.
Reacting to Credit Ratings?
"The focus will be on the implications of the capital raise, especially given the company's belief that it has $2.5 billion to $7.5 billion of 'excess economic capital,'" Cholnoky wrote. (That's sharply lower than the $15 billion-$20 billion range prior to the onset of the credit crunch.)
He concluded that the capital-raising effort is primarily a defensive move prompted by Fitch Ratings' downgrade of AIG's claims-paying ability, S&P Ratings Service's downgrade of AIG's debt, and the possibility that AIG may now have to post collateral on its AIG Financial Products exposures. (Goldman Sachs has received compensation for investment banking services from AIG in the past 12 months.)
On the call, Steven Bensinger, AIG's chief financial officer, denied that the plan was directed by rating agencies and said management "felt this was the absolute right thing to do," and should be viewed as a proactive move to be prepared to respond to potential further turbulence in the financial market.
He conceded that the equity offerings would initially lower earnings per share, but said that over the longer term "it is something we hope we can offset by the use of net capital in very productive ways as opportunities manifest themselves over the course of the next few quarters."
AIG's Tough Road Back
AIG's Tough Road Back
By Andrew Bary
Word Count: 552 Companies Featured in This Article: American International Group
WALL STREET IS LOSING PATIENCE with insurance giant American International Group and its CEO, Martin Sullivan.
AIG's surprisingly large first-quarter loss, reported Thursday, jolted its stock (ticker: AIG), which fell $3.87, to $40.28 a share, in heavy trading Friday, renewing speculation Sullivan may be booted. In 2005, the mild-mannered Englishman replaced the brilliant, imperious Hank Greenberg, who'd been forced out by an accounting scandal.
AIG, which is near a 10-year low of $38 set in March, might not slip much more because its earnings power in 2009 probably is at least $5.00 a share. But Citigroup analyst Joshua Shanker, who ...
By Andrew Bary
Word Count: 552 Companies Featured in This Article: American International Group
WALL STREET IS LOSING PATIENCE with insurance giant American International Group and its CEO, Martin Sullivan.
AIG's surprisingly large first-quarter loss, reported Thursday, jolted its stock (ticker: AIG), which fell $3.87, to $40.28 a share, in heavy trading Friday, renewing speculation Sullivan may be booted. In 2005, the mild-mannered Englishman replaced the brilliant, imperious Hank Greenberg, who'd been forced out by an accounting scandal.
AIG, which is near a 10-year low of $38 set in March, might not slip much more because its earnings power in 2009 probably is at least $5.00 a share. But Citigroup analyst Joshua Shanker, who ...
AIG Posts Record Loss, As Crisis Continues Taking Toll
AIG Posts Record Loss, As Crisis Continues Taking Toll
By LIAM PLEVENMay 9, 2008; Page A1
In a sign that crisis continues to reverberate through the financial sector, American International Group Inc. reported multibillion-dollar losses Thursday. The giant insurer also announced that it would raise $12.5 billion in capital to replenish its balance sheet.
AIG's results show that while the credit crunch may be easing on Wall Street, it appears to be tightening elsewhere. In the past week, U.S. regional banks have reported big losses and announced plans to raise fresh capital. Sovereign Bancorp, one of the nation's largest savings and loans, is looking to raise $1 billion after suffering rising loan delinquencies, people familiar with the situation said Thursday.
The AIG news comes even as some on Wall Street are saying the financial crisis, touched off last year by the fall in housing prices and rising foreclosures, is winding down. Earlier Thursday, James Dimon, chief executive of J.P. Morgan Chase & Co., said in a speech that the cleanup from the subprime-mortgage mess is 75% to 85% complete. "We know about most of the bad stuff now," he said.
Following the market's close Thursday, AIG reported its record $7.8 billion loss, eclipsing the $5.3 billion loss it recorded in the fourth quarter. AIG said credit-market woes, weakness in housing and stock-market volatility "had a substantial adverse effect" on its results. "The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," said AIG Chief Executive Martin Sullivan.
The New York-based insurance behemoth took a $9.1 billion write-down for the first quarter on credit derivatives designed to protect against losses on a variety of investments, including subprime mortgages. It booked an additional $6.1 billion in losses in its investment portfolio.
The results increase the pressure on Mr. Sullivan, who took over as CEO in 2005 after the departure of Maurice R. "Hank" Greenberg, who built AIG into a globe-spanning giant over four decades. The company's shares have fallen by just under 40% in the past year. After falling 2% Thursday to close at $44.15 on the New York Stock Exchange, shares fell a further 5% in after-hours trading, priced just above a 10-year low.
Strong-Willed Executives
As it sputters, AIG is looking increasingly like other huge businesses built by strong-willed executives. Sanford Weill's successor at Citigroup Inc., Charles Prince, struggled to manage the unwieldy company and was ultimately forced out because of huge losses on subprime mortgages. Asset manager Legg Mason posted its first loss ever earlier this week as its new CEO tries to manage a decentralized firm created by Raymond "Chip" Mason.
AIG said it was looking for a new chief financial officer to replace Steven Bensinger, who was named vice chairman of financial services. Some members of AIG's board have felt that Mr. Sullivan hasn't moved fast enough to hire better finance executives and get rid of weak executives, said a person familiar with the matter. An AIG spokesman said: "Under Steve Bensinger, AIG has made tremendous strides in bringing on board terrific financial talent."
AIG also disclosed a dispute with the Internal Revenue Service over a cross-border tax transaction. The matter has potentially far-reaching implications for the company and other firms on Wall Street that were involved in similar deals. The company said it had received a notice from the IRS asserting it owes $329 million in back taxes and penalties, a portion of which related to "the disallowance of foreign tax credits associated with cross-border financing transactions."
The financial results prompted ratings agency Standard & Poor's to downgrade AIG's credit rating by one notch. S&P cited the loss, but also pointed to weaker performance in several of the company's businesses. S&P also said it was lowering the credit rating of several AIG subsidiaries, including its airplane-leasing unit, International Lease Finance Corp.
The challenge to Mr. Sullivan, whose background is not in finance, is to run an immensely complicated company built by his dominant predecessor. So far investors have had patience with Mr. Sullivan, arguing that investment decisions that caused the losses were made before he took control. But as the struggles continue, the question will become whether Mr. Sullivan is the right person to navigate the crisis.
The AIG spokesman said Mr. Sullivan has already led the company through crisis, including the accounting problems that led to Mr. Greenberg's departure and a subsequent $1.6 billion settlement with authorities. "Any CEO of any corporation is always under pressure to perform," the AIG spokesman said.
AIG plans to raise $7.5 billion in capital through both a common-stock offering and "equity units" that combine contracts to make future stock purchases and junior debt. AIG said it expects to issue hybrid securities "at a later date" to raise an additional $5 billion.
"Just a few months ago, management seemed to think they had an excess capital position," said Cliff Gallant, an analyst at Keefe Bruyette & Woods, who owns shares of AIG and called the results "a very disappointing quarter." For the same quarter a year ago, AIG earned $4.1 billion.
One reason AIG could need capital is that the firm has to post collateral to banks under the credit-default swap agreements it wrote. That has forced AIG to fork over cash as the prices of their credit-default swaps fall.
The S&P downgrade could allow counterparties to demand that AIG post up to $1.8 billion in collateral, according to an SEC filing. AIG says it still has $2.5 billion to $7.5 billion in excess capital.
Raising Dividends
Also on Thursday, AIG said announced its 23rd consecutive year of dividend growth, saying it was raising its dividend by 10% to 22 cents a share. That's about half of the 20% annual dividend increases AIG said last year it planned "under ordinary circumstances."
In addition to the losses associated with derivatives and investments, Mr. Gallant said he was concerned by some of the results in AIG's main insurance businesses. For each dollar AIG brings in as premiums, it is paying out a greater amount on losses and expenses in its property and casualty operations. That percentage, known as the combined ratio, rose from 87.5% in the first quarter last year to 96.9% in the first quarter of this year.
The tax dispute between AIG and the IRS involves cross-border financing transactions that were popular for years on Wall Street. In general, such transactions have permitted U.S. companies to shift assets overseas, pay foreign taxes and then split credit for paying those taxes with lenders that in turn will lower their financing costs.
Such transactions were the subject of testimony by former IRS Commissioner Mark Everson in 2006, who called them "abusive." The IRS issued proposed regulations last year that have effectively shut down new transactions, according to a person who has worked on such deals.
The IRS challenged transactions dating from 1997 to 1999. AIG indicated in its SEC filing that it expects the IRS to challenge similar transactions from later years, although it gave no indication of the potential size of those disputes. The company said it plans to contest the notice. While AIG may soon be writing a large check to the government, the company said it believes that it "is adequately reserved for any liability that could result from the IRS actions."
By LIAM PLEVENMay 9, 2008; Page A1
In a sign that crisis continues to reverberate through the financial sector, American International Group Inc. reported multibillion-dollar losses Thursday. The giant insurer also announced that it would raise $12.5 billion in capital to replenish its balance sheet.
AIG's results show that while the credit crunch may be easing on Wall Street, it appears to be tightening elsewhere. In the past week, U.S. regional banks have reported big losses and announced plans to raise fresh capital. Sovereign Bancorp, one of the nation's largest savings and loans, is looking to raise $1 billion after suffering rising loan delinquencies, people familiar with the situation said Thursday.
The AIG news comes even as some on Wall Street are saying the financial crisis, touched off last year by the fall in housing prices and rising foreclosures, is winding down. Earlier Thursday, James Dimon, chief executive of J.P. Morgan Chase & Co., said in a speech that the cleanup from the subprime-mortgage mess is 75% to 85% complete. "We know about most of the bad stuff now," he said.
Following the market's close Thursday, AIG reported its record $7.8 billion loss, eclipsing the $5.3 billion loss it recorded in the fourth quarter. AIG said credit-market woes, weakness in housing and stock-market volatility "had a substantial adverse effect" on its results. "The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," said AIG Chief Executive Martin Sullivan.
The New York-based insurance behemoth took a $9.1 billion write-down for the first quarter on credit derivatives designed to protect against losses on a variety of investments, including subprime mortgages. It booked an additional $6.1 billion in losses in its investment portfolio.
The results increase the pressure on Mr. Sullivan, who took over as CEO in 2005 after the departure of Maurice R. "Hank" Greenberg, who built AIG into a globe-spanning giant over four decades. The company's shares have fallen by just under 40% in the past year. After falling 2% Thursday to close at $44.15 on the New York Stock Exchange, shares fell a further 5% in after-hours trading, priced just above a 10-year low.
Strong-Willed Executives
As it sputters, AIG is looking increasingly like other huge businesses built by strong-willed executives. Sanford Weill's successor at Citigroup Inc., Charles Prince, struggled to manage the unwieldy company and was ultimately forced out because of huge losses on subprime mortgages. Asset manager Legg Mason posted its first loss ever earlier this week as its new CEO tries to manage a decentralized firm created by Raymond "Chip" Mason.
AIG said it was looking for a new chief financial officer to replace Steven Bensinger, who was named vice chairman of financial services. Some members of AIG's board have felt that Mr. Sullivan hasn't moved fast enough to hire better finance executives and get rid of weak executives, said a person familiar with the matter. An AIG spokesman said: "Under Steve Bensinger, AIG has made tremendous strides in bringing on board terrific financial talent."
AIG also disclosed a dispute with the Internal Revenue Service over a cross-border tax transaction. The matter has potentially far-reaching implications for the company and other firms on Wall Street that were involved in similar deals. The company said it had received a notice from the IRS asserting it owes $329 million in back taxes and penalties, a portion of which related to "the disallowance of foreign tax credits associated with cross-border financing transactions."
The financial results prompted ratings agency Standard & Poor's to downgrade AIG's credit rating by one notch. S&P cited the loss, but also pointed to weaker performance in several of the company's businesses. S&P also said it was lowering the credit rating of several AIG subsidiaries, including its airplane-leasing unit, International Lease Finance Corp.
The challenge to Mr. Sullivan, whose background is not in finance, is to run an immensely complicated company built by his dominant predecessor. So far investors have had patience with Mr. Sullivan, arguing that investment decisions that caused the losses were made before he took control. But as the struggles continue, the question will become whether Mr. Sullivan is the right person to navigate the crisis.
The AIG spokesman said Mr. Sullivan has already led the company through crisis, including the accounting problems that led to Mr. Greenberg's departure and a subsequent $1.6 billion settlement with authorities. "Any CEO of any corporation is always under pressure to perform," the AIG spokesman said.
AIG plans to raise $7.5 billion in capital through both a common-stock offering and "equity units" that combine contracts to make future stock purchases and junior debt. AIG said it expects to issue hybrid securities "at a later date" to raise an additional $5 billion.
"Just a few months ago, management seemed to think they had an excess capital position," said Cliff Gallant, an analyst at Keefe Bruyette & Woods, who owns shares of AIG and called the results "a very disappointing quarter." For the same quarter a year ago, AIG earned $4.1 billion.
One reason AIG could need capital is that the firm has to post collateral to banks under the credit-default swap agreements it wrote. That has forced AIG to fork over cash as the prices of their credit-default swaps fall.
The S&P downgrade could allow counterparties to demand that AIG post up to $1.8 billion in collateral, according to an SEC filing. AIG says it still has $2.5 billion to $7.5 billion in excess capital.
Raising Dividends
Also on Thursday, AIG said announced its 23rd consecutive year of dividend growth, saying it was raising its dividend by 10% to 22 cents a share. That's about half of the 20% annual dividend increases AIG said last year it planned "under ordinary circumstances."
In addition to the losses associated with derivatives and investments, Mr. Gallant said he was concerned by some of the results in AIG's main insurance businesses. For each dollar AIG brings in as premiums, it is paying out a greater amount on losses and expenses in its property and casualty operations. That percentage, known as the combined ratio, rose from 87.5% in the first quarter last year to 96.9% in the first quarter of this year.
The tax dispute between AIG and the IRS involves cross-border financing transactions that were popular for years on Wall Street. In general, such transactions have permitted U.S. companies to shift assets overseas, pay foreign taxes and then split credit for paying those taxes with lenders that in turn will lower their financing costs.
Such transactions were the subject of testimony by former IRS Commissioner Mark Everson in 2006, who called them "abusive." The IRS issued proposed regulations last year that have effectively shut down new transactions, according to a person who has worked on such deals.
The IRS challenged transactions dating from 1997 to 1999. AIG indicated in its SEC filing that it expects the IRS to challenge similar transactions from later years, although it gave no indication of the potential size of those disputes. The company said it plans to contest the notice. While AIG may soon be writing a large check to the government, the company said it believes that it "is adequately reserved for any liability that could result from the IRS actions."
Citigroup Looks to Slim Down, Shed Over $400 Billion in Assets
Citigroup Looks to Slim Down, Shed Over $400 Billion in Assets
By KEVIN KINGSBURYMay 9, 2008 11:47 a.m.
Citigroup Inc. plans to wind down more than $400 billion in assets over the next two to three years as the financial-services giant moves to slim down under new Chief Executive Vikram Pandit.
The disclosure is part of the company's presentation at its annual investor & analyst day.
Citi has recorded some $40 billion in write-downs the past three quarters amid the fallout from the credit crunch and seen credit costs surge amid increased delinquencies and charge-offs. As a result, the company has raised roughly $40 billion in new capital in recent months, including some $12 billion the past several weeks.
Citi said it had nearly $500 billion in so-called legacy assets as of the first quarter, nearly half of which being low-return. Nearly two-thirds is in consumer banking and one-third in securities and banking segment. The company plans to shed all those assets from securities and banking -- excluding alternative investments -- and more than 50% at consumer banking. The company plans to cut the amount to under $100 billion in two to three years.
Beyond reducing legacy assets, Mr. Pandit's plan calls for focusing on returns, increasing asset productivity, managing risk and re-engineering the company's cost base. Citi has long been criticized for having a bloated cost structure, as expenses long surpassed revenue growth under former CEO Chuck Prince.
The company is also targeting annual revenue growth of about 9% a year, annual earnings of at least $20 billion and return on equity -- an important measure of profitability at financial-services firms -- of 16% to 18%.
Mr. Pandit said he envisions the bank's return to profitability will last through three phases, during which he says Citi must "get fit," then "restructure," and finally "maximize." As if to head off investor restlessness, Mr. Pandit said that the phases "could" overlap, and quicken the bank's progress.
Mr. Pandit also addresses the recent shake-ups at the firm's securities and banking unit -- the very business that has cost Citi tens of billions in losses from bad bets on subprime mortgages.
"We're looking at everything," Mr. Pandit said of the unit's long-term prospects, but added that Citi intends its securities business to eventually produce a return on equity of "18-20%."
Mr. Pandit stressed that such progress won't come quickly, however. The unit's performance will be "lower, clearly, for the next couple of years," he said.
By KEVIN KINGSBURYMay 9, 2008 11:47 a.m.
Citigroup Inc. plans to wind down more than $400 billion in assets over the next two to three years as the financial-services giant moves to slim down under new Chief Executive Vikram Pandit.
The disclosure is part of the company's presentation at its annual investor & analyst day.
Citi has recorded some $40 billion in write-downs the past three quarters amid the fallout from the credit crunch and seen credit costs surge amid increased delinquencies and charge-offs. As a result, the company has raised roughly $40 billion in new capital in recent months, including some $12 billion the past several weeks.
Citi said it had nearly $500 billion in so-called legacy assets as of the first quarter, nearly half of which being low-return. Nearly two-thirds is in consumer banking and one-third in securities and banking segment. The company plans to shed all those assets from securities and banking -- excluding alternative investments -- and more than 50% at consumer banking. The company plans to cut the amount to under $100 billion in two to three years.
Beyond reducing legacy assets, Mr. Pandit's plan calls for focusing on returns, increasing asset productivity, managing risk and re-engineering the company's cost base. Citi has long been criticized for having a bloated cost structure, as expenses long surpassed revenue growth under former CEO Chuck Prince.
The company is also targeting annual revenue growth of about 9% a year, annual earnings of at least $20 billion and return on equity -- an important measure of profitability at financial-services firms -- of 16% to 18%.
Mr. Pandit said he envisions the bank's return to profitability will last through three phases, during which he says Citi must "get fit," then "restructure," and finally "maximize." As if to head off investor restlessness, Mr. Pandit said that the phases "could" overlap, and quicken the bank's progress.
Mr. Pandit also addresses the recent shake-ups at the firm's securities and banking unit -- the very business that has cost Citi tens of billions in losses from bad bets on subprime mortgages.
"We're looking at everything," Mr. Pandit said of the unit's long-term prospects, but added that Citi intends its securities business to eventually produce a return on equity of "18-20%."
Mr. Pandit stressed that such progress won't come quickly, however. The unit's performance will be "lower, clearly, for the next couple of years," he said.
Wednesday, May 7, 2008
Shoeshine Boys In La Paz Need A Good Lawyer
Shoeshine Boys In La Paz Need A Good Lawyer
Legal Project in Bolivia Empowers Outcast Kids; Mr. Cooper Gets Creative
By MATT MOFFETTMay 8, 2008; Page A1
LA PAZ, Bolivia -- Shoeshine boys have such lowly status in this Andean metropolis that they hide their faces in shame behind ski masks. The children, known as lustrabotas, dart around like phantoms, dodging shop owners who shake them down and motorists who try to run them into the gutter.
But when American law professor James Cooper looks at these young outcasts, he sees foot soldiers for a revolution in Latin American justice. Mr. Cooper heads Proyecto Acceso, Project Access, a nonprofit group that uses innovative tactics to try to improve Latin America's notoriously weak legal systems and make the law work for the region's humblest citizens.
Mr. Cooper recently brought together 30 shoeshiners, between the ages of 8 and 17, for a know-your-rights seminar from a Bolivian Supreme Court justice and a banker who had once been a shoeshine boy himself. Each of the children got a pair of slick-looking pants with superhero emblems. If the boys continue attending Acceso seminars and learn enough to chat up customers on the basics of the law, they'll get shirts and baseball caps emblazoned with human-rights slogans.
For the lustrabotas, receiving a gift was a big deal. Some of the children had been sent home or harassed by schoolteachers because their hands were stained with polish, or beaten by their parents for not bringing home enough money. Clutching his new pants to his chest after the first seminar, Carlos Mamani, a 15-year-old who has had to contend with bullies on the job, said he had learned something about property rights. "No one has the right to mess with anyone else's shoeshine box," he explained.
Acceso, which provides specialized training for Latin legal professionals as well as basic education on the law for the general public, is headquartered at the California Western School of Law in San Diego, where Mr. Cooper is an assistant dean. Acceso is a Spanish acronym that translates as: "Creative Lawyers Collaborating to Find Optimal Solutions."
Reality TV
Mr. Cooper, who goes by Jamie, takes the "creative" part of the title seriously. To highlight deficiencies in legal protections for Mexican workers under the North American Free Trade Agreement, he produced a reality TV show -- which has run on TV in San Diego and at Acceso conferences -- featuring U.S. law students laboring at a Tijuana toy-making factory. The students earned $60 a week for enduring harsh assembly-line conditions and environmental hazards.
Acceso
People watched a fashion show that Mr. Cooper organized inside a woman's prison in Bolivia.
In Paraguay, Mr. Cooper put on puppet shows to illustrate lawyering techniques. In Bolivia, he organized a fashion show in a women's prison -- with inmates themselves strutting on a catwalk in the exercise yard -- as part of a prisoners' rights project. Another time, he put lawyers from Bolivia and Chile, countries that are historical enemies, together for a training seminar aboard a "Justice Train" traveling from La Paz across the Andes to the Chilean coast.
Before co-founding Acceso a decade ago, Mr. Cooper, a 42-year-old Canadian who has a master of law degree from the University of Cambridge, had worked for 15 months at the mammoth corporate law firm Baker & McKenzie. It wasn't long before he had grown disenchanted with "making the world safe for McDonald's, Coca-Cola and Levis," he says.
Mr. Cooper's campaign to foster greater regard for the law in Latin America seems almost quixotic. In the barrios ringing La Paz, the police and courts are so discredited that residents hang dummies from light poles as warnings that lawbreakers will be lynched. Bribery and intimidation by drug traffickers are so commonplace that judges sometimes face an ultimatum: plata o plomo, silver or lead, meaning they can either accept money for a favorable decision or get shot.
Acceso has been in the thick of promoting one of the few hopeful trends in Latin justice: the adoption in several countries of the more open, U.S.-style adversarial trial system. Acceso has trained 2,500 judges, prosecutors and public defenders in 15 Latin countries in oral-advocacy techniques used in the new system, such as cross-examination and the handling of expert witnesses. Such procedures seem exotic in a region where trials were long carried out with written filings to an all-powerful judge -- and where aggressive questioning is considered unmannerly.
Acceso training sessions combine comic-book touches with case law, as many of Mr. Cooper's 20-odd multinational trainers and advisers take on superhero personas. For instance, Lilia Velasquez, a San Diego immigration attorney who teaches oral advocacy, is billed as "The Flame of Justice," and dresses in bright red from her pants to her beret.
Chile has made the most progress adopting the adversarial system. "Jamie Cooper was very, very important in training the first group of lawyers in a system that was initially very strange to them," says Jaime Camus, an erstwhile Acceso student who is chief of an office of 22 public defenders in northern Chile.
Pop Music
Mr. Cooper, an amateur drummer, also used pop music to explain the new system to the general Chilean public. In 2005, Acceso, the German government-aid agency and the Chilean Justice Ministry produced a CD of justice-related songs, "Súbele el Volumen a la Reforma," or "Turn up the Volume on the Reform." One tune took its title from a legal concept that wasn't very familiar to Chileans: "Presunción de Inocencia," or "Presumption of Innocence."
The songs, written by lawyers and played by professional musicians, aired on radio, and one was performed by a local band opening for pop star Shakira before 50,000 fans at Chile's National Stadium.
"Jamie's got more energy than 10 people combined," says Irma Gonzalez, chief U.S. judge for the Southern District of California and a California Western trustee. "He's out there."
Sometimes, Mr. Cooper is a little too far out there. A man pulled a gun on him in Paraguay while he was working on a documentary about organized crime. In coup-ridden Ecuador, an Acceso training event was disrupted by an anonymous bomb threat, though that didn't halt the postseminar "Rule of Law Rave."
The shoeshiners in Bolivia weren't an easy audience. One of the children dozed off during a video presentation by Mr. Cooper. During the lunch break, it became known that the boy had barely eaten in a day.
Bolivian Supreme Court Justice José Luis Baptista, the main speaker, said he was pleased that some of the lustrabotas asked him pointed questions about children's rights. "It's important to make these kids see that they aren't some excluded class," he said.
But it is also hard to change the shoeshiners' deeply ingrained world view. When a Bolivian newspaper photographer barged into the closing ceremony, about half of the kids instinctively pulled their ski masks over their faces in embarrassment.
One youth who continued showing his face was 13-year-old Santos Candore. He said he was keen to continue the course, "because I've learned that everyone has rights, even lustrabotas."
Legal Project in Bolivia Empowers Outcast Kids; Mr. Cooper Gets Creative
By MATT MOFFETTMay 8, 2008; Page A1
LA PAZ, Bolivia -- Shoeshine boys have such lowly status in this Andean metropolis that they hide their faces in shame behind ski masks. The children, known as lustrabotas, dart around like phantoms, dodging shop owners who shake them down and motorists who try to run them into the gutter.
But when American law professor James Cooper looks at these young outcasts, he sees foot soldiers for a revolution in Latin American justice. Mr. Cooper heads Proyecto Acceso, Project Access, a nonprofit group that uses innovative tactics to try to improve Latin America's notoriously weak legal systems and make the law work for the region's humblest citizens.
Mr. Cooper recently brought together 30 shoeshiners, between the ages of 8 and 17, for a know-your-rights seminar from a Bolivian Supreme Court justice and a banker who had once been a shoeshine boy himself. Each of the children got a pair of slick-looking pants with superhero emblems. If the boys continue attending Acceso seminars and learn enough to chat up customers on the basics of the law, they'll get shirts and baseball caps emblazoned with human-rights slogans.
For the lustrabotas, receiving a gift was a big deal. Some of the children had been sent home or harassed by schoolteachers because their hands were stained with polish, or beaten by their parents for not bringing home enough money. Clutching his new pants to his chest after the first seminar, Carlos Mamani, a 15-year-old who has had to contend with bullies on the job, said he had learned something about property rights. "No one has the right to mess with anyone else's shoeshine box," he explained.
Acceso, which provides specialized training for Latin legal professionals as well as basic education on the law for the general public, is headquartered at the California Western School of Law in San Diego, where Mr. Cooper is an assistant dean. Acceso is a Spanish acronym that translates as: "Creative Lawyers Collaborating to Find Optimal Solutions."
Reality TV
Mr. Cooper, who goes by Jamie, takes the "creative" part of the title seriously. To highlight deficiencies in legal protections for Mexican workers under the North American Free Trade Agreement, he produced a reality TV show -- which has run on TV in San Diego and at Acceso conferences -- featuring U.S. law students laboring at a Tijuana toy-making factory. The students earned $60 a week for enduring harsh assembly-line conditions and environmental hazards.
Acceso
People watched a fashion show that Mr. Cooper organized inside a woman's prison in Bolivia.
In Paraguay, Mr. Cooper put on puppet shows to illustrate lawyering techniques. In Bolivia, he organized a fashion show in a women's prison -- with inmates themselves strutting on a catwalk in the exercise yard -- as part of a prisoners' rights project. Another time, he put lawyers from Bolivia and Chile, countries that are historical enemies, together for a training seminar aboard a "Justice Train" traveling from La Paz across the Andes to the Chilean coast.
Before co-founding Acceso a decade ago, Mr. Cooper, a 42-year-old Canadian who has a master of law degree from the University of Cambridge, had worked for 15 months at the mammoth corporate law firm Baker & McKenzie. It wasn't long before he had grown disenchanted with "making the world safe for McDonald's, Coca-Cola and Levis," he says.
Mr. Cooper's campaign to foster greater regard for the law in Latin America seems almost quixotic. In the barrios ringing La Paz, the police and courts are so discredited that residents hang dummies from light poles as warnings that lawbreakers will be lynched. Bribery and intimidation by drug traffickers are so commonplace that judges sometimes face an ultimatum: plata o plomo, silver or lead, meaning they can either accept money for a favorable decision or get shot.
Acceso has been in the thick of promoting one of the few hopeful trends in Latin justice: the adoption in several countries of the more open, U.S.-style adversarial trial system. Acceso has trained 2,500 judges, prosecutors and public defenders in 15 Latin countries in oral-advocacy techniques used in the new system, such as cross-examination and the handling of expert witnesses. Such procedures seem exotic in a region where trials were long carried out with written filings to an all-powerful judge -- and where aggressive questioning is considered unmannerly.
Acceso training sessions combine comic-book touches with case law, as many of Mr. Cooper's 20-odd multinational trainers and advisers take on superhero personas. For instance, Lilia Velasquez, a San Diego immigration attorney who teaches oral advocacy, is billed as "The Flame of Justice," and dresses in bright red from her pants to her beret.
Chile has made the most progress adopting the adversarial system. "Jamie Cooper was very, very important in training the first group of lawyers in a system that was initially very strange to them," says Jaime Camus, an erstwhile Acceso student who is chief of an office of 22 public defenders in northern Chile.
Pop Music
Mr. Cooper, an amateur drummer, also used pop music to explain the new system to the general Chilean public. In 2005, Acceso, the German government-aid agency and the Chilean Justice Ministry produced a CD of justice-related songs, "Súbele el Volumen a la Reforma," or "Turn up the Volume on the Reform." One tune took its title from a legal concept that wasn't very familiar to Chileans: "Presunción de Inocencia," or "Presumption of Innocence."
The songs, written by lawyers and played by professional musicians, aired on radio, and one was performed by a local band opening for pop star Shakira before 50,000 fans at Chile's National Stadium.
"Jamie's got more energy than 10 people combined," says Irma Gonzalez, chief U.S. judge for the Southern District of California and a California Western trustee. "He's out there."
Sometimes, Mr. Cooper is a little too far out there. A man pulled a gun on him in Paraguay while he was working on a documentary about organized crime. In coup-ridden Ecuador, an Acceso training event was disrupted by an anonymous bomb threat, though that didn't halt the postseminar "Rule of Law Rave."
The shoeshiners in Bolivia weren't an easy audience. One of the children dozed off during a video presentation by Mr. Cooper. During the lunch break, it became known that the boy had barely eaten in a day.
Bolivian Supreme Court Justice José Luis Baptista, the main speaker, said he was pleased that some of the lustrabotas asked him pointed questions about children's rights. "It's important to make these kids see that they aren't some excluded class," he said.
But it is also hard to change the shoeshiners' deeply ingrained world view. When a Bolivian newspaper photographer barged into the closing ceremony, about half of the kids instinctively pulled their ski masks over their faces in embarrassment.
One youth who continued showing his face was 13-year-old Santos Candore. He said he was keen to continue the course, "because I've learned that everyone has rights, even lustrabotas."
Moody's Investors President Steps Down
Moody's Investors President Steps Down
Clarkson's Exit Marks Highest-Profile Casualty to Date Over Role of Credit-Rating Firms in Subprime Rout
By AARON LUCCHETTIMay 8, 2008; Page C1
Brian Clarkson, the driving force behind Moody's Investors Service's push into lucrative but riskier businesses, is stepping down as president and chief operating officer of the oldest bond-rating firm, the company announced Wednesday.
Mr. Clarkson's exit, effective by July, marks the highest-profile casualty to date in the controversy over the complicity of credit-rating firms in the subprime meltdown. Mr. Clarkson, 52 years old, once ran the group overseeing mortgages and other structured-finance products, and his stature rose as Moody's became a major player in analyzing complex securities based on home mortgages.
Last year, he was promoted to president and chief operating officer of the firm, the largest unit of Moody's Corp. But his standing was tarnished when many of the products he oversaw suffered heavy losses.
"Challenging credit-market conditions, combined with Moody's role and function in those markets, have created scrutiny and criticism from numerous external sources about various aspects of our business," Moody's Corp. Chief Executive Raymond McDaniel said in a letter to employees Wednesday.
"While much of the criticism aimed at Moody's is unfounded, Brian believes that the time is right for new leadership to drive forward the changes we have been making in recent months," the letter said.
In recent weeks, Mr. Clarkson discussed with Mr. McDaniel whether a change in leadership was needed to restore confidence, according to a person briefed on the discussions. Moody's said Mr. Clarkson made the decision to leave, though Mr. McDaniel informed the board, a person familiar with the matter added. Moody's has made "great strides" in the past two decades, Mr. Clarkson said in a statement. He couldn't be reached for comment.
Mr. Clarkson is being succeeded by Michel Madelain, also 52. Mr. Madelain runs Moody's fundamental ratings business, which includes the older units that rate simpler corporate and government bonds. Mr. Madelain will continue to work from London, though the parent company will continue to be based in New York.
The resignation comes amid heightened scrutiny by investors, regulators and lawmakers into the role of Moody's and its rivals in the meltdown of complex mortgage-related securities, many of which received top triple-A ratings from the credit raters, only to be downgraded sharply in the past 12 months when the housing downturn worsened.
Mr. Clarkson, a lawyer who grew up near Detroit, joined Moody's as an analyst in 1991. Energetic and hard-driving, he earned promotions and encouraged Moody's analysts to work harder at treating bond issuers better.
Since bond issuers usually push for higher ratings and determine which ratings firm is used for a particular mortgage deal, Moody's and other raters face pressure to use methodologies that lead to high ratings.
In the early 2000s, Mr. Clarkson overhauled the residential-mortgage team and ushered in a new methodology that led to higher ratings for some mortgage bonds and more market share for Moody's in the area. While the bonds performed well, in later years, people who worked under Mr. Clarkson assigned ratings to complex mortgage bonds that didn't take into account the likelihood of a national housing price decline and the widespread nature of fraudulent loans that backed some subprime mortgage bonds.
"We were preparing for a rainstorm and it was a tsunami," Mr. Clarkson said in an interview in late 2007.
As Mr. Clarkson's divisions rated more deals amid the housing boom, Moody's revenue, profit and stock price soared.
But the downturn has sparked a public outcry that has put pressure on rating firms to bring in new management.
"This departure offers Moody's a fresh chance to root out the practices which presented blatant conflicts of interest," said New York Sen. Charles Schumer in a statement Wednesday. "Hopefully, new management will bring new vigilance to the rating system at Moody's."
A Moody's spokesman said "new management is absolutely committed to further enhancing ratings independence and credibility."
Sen. Schumer recalled Mr. Clarkson told him in a September 2007 meeting that the company had done nothing wrong during the mortgage crisis.
Clarkson's Exit Marks Highest-Profile Casualty to Date Over Role of Credit-Rating Firms in Subprime Rout
By AARON LUCCHETTIMay 8, 2008; Page C1
Brian Clarkson, the driving force behind Moody's Investors Service's push into lucrative but riskier businesses, is stepping down as president and chief operating officer of the oldest bond-rating firm, the company announced Wednesday.
Mr. Clarkson's exit, effective by July, marks the highest-profile casualty to date in the controversy over the complicity of credit-rating firms in the subprime meltdown. Mr. Clarkson, 52 years old, once ran the group overseeing mortgages and other structured-finance products, and his stature rose as Moody's became a major player in analyzing complex securities based on home mortgages.
Last year, he was promoted to president and chief operating officer of the firm, the largest unit of Moody's Corp. But his standing was tarnished when many of the products he oversaw suffered heavy losses.
"Challenging credit-market conditions, combined with Moody's role and function in those markets, have created scrutiny and criticism from numerous external sources about various aspects of our business," Moody's Corp. Chief Executive Raymond McDaniel said in a letter to employees Wednesday.
"While much of the criticism aimed at Moody's is unfounded, Brian believes that the time is right for new leadership to drive forward the changes we have been making in recent months," the letter said.
In recent weeks, Mr. Clarkson discussed with Mr. McDaniel whether a change in leadership was needed to restore confidence, according to a person briefed on the discussions. Moody's said Mr. Clarkson made the decision to leave, though Mr. McDaniel informed the board, a person familiar with the matter added. Moody's has made "great strides" in the past two decades, Mr. Clarkson said in a statement. He couldn't be reached for comment.
Mr. Clarkson is being succeeded by Michel Madelain, also 52. Mr. Madelain runs Moody's fundamental ratings business, which includes the older units that rate simpler corporate and government bonds. Mr. Madelain will continue to work from London, though the parent company will continue to be based in New York.
The resignation comes amid heightened scrutiny by investors, regulators and lawmakers into the role of Moody's and its rivals in the meltdown of complex mortgage-related securities, many of which received top triple-A ratings from the credit raters, only to be downgraded sharply in the past 12 months when the housing downturn worsened.
Mr. Clarkson, a lawyer who grew up near Detroit, joined Moody's as an analyst in 1991. Energetic and hard-driving, he earned promotions and encouraged Moody's analysts to work harder at treating bond issuers better.
Since bond issuers usually push for higher ratings and determine which ratings firm is used for a particular mortgage deal, Moody's and other raters face pressure to use methodologies that lead to high ratings.
In the early 2000s, Mr. Clarkson overhauled the residential-mortgage team and ushered in a new methodology that led to higher ratings for some mortgage bonds and more market share for Moody's in the area. While the bonds performed well, in later years, people who worked under Mr. Clarkson assigned ratings to complex mortgage bonds that didn't take into account the likelihood of a national housing price decline and the widespread nature of fraudulent loans that backed some subprime mortgage bonds.
"We were preparing for a rainstorm and it was a tsunami," Mr. Clarkson said in an interview in late 2007.
As Mr. Clarkson's divisions rated more deals amid the housing boom, Moody's revenue, profit and stock price soared.
But the downturn has sparked a public outcry that has put pressure on rating firms to bring in new management.
"This departure offers Moody's a fresh chance to root out the practices which presented blatant conflicts of interest," said New York Sen. Charles Schumer in a statement Wednesday. "Hopefully, new management will bring new vigilance to the rating system at Moody's."
A Moody's spokesman said "new management is absolutely committed to further enhancing ratings independence and credibility."
Sen. Schumer recalled Mr. Clarkson told him in a September 2007 meeting that the company had done nothing wrong during the mortgage crisis.
Consumer borrowing unexpectedly surges in March
Consumer borrowing unexpectedly surges in MarchWednesday May 7, 5:09 pm ET By Martin Crutsinger, AP Economics Writer
Consumers increase their borrowing in March at the fastest pace in 4 months
WASHINGTON (AP) -- Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month, in what was seen as a sign of rising economic stress.
The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.
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The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans. The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting.
Economists said consumers were being forced to make greater use of their credit cards during hard economic times when they are being battered by job losses, soaring gasoline prices and higher food costs.
"This represents distressed borrowing. Consumers need cash and they have turned back to their credit cards to fill the void left by lost jobs and weaker incomes," said Mark Zandi, chief economist at Moody's Economy.com.
Borrowing on credit cards was up at an annual rate of 7.9 percent, compared to a 5 percent gain in February, while borrowing in the category that includes auto loans jumped by 6.8 percent, compared to a 2 percent increase in February.
The overall growth in debt of 7.2 percent at an annual rate was the biggest gain since an increase of 8.25 percent last November.
Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
The Fed's measure of consumer borrowing, which does not include any debt secured by real estate such as mortgages or home equity loans, stood at a record $2.558 trillion in March
Consumers increase their borrowing in March at the fastest pace in 4 months
WASHINGTON (AP) -- Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month, in what was seen as a sign of rising economic stress.
The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.
ADVERTISEMENT
if(window.yzq_d==null)window.yzq_d=new Object();
window.yzq_d['2fQsCUJe5tg-']='&U=13b3970eq%2fN%3d2fQsCUJe5tg-%2fC%3d628474.12634496.12960149.1383221%2fD%3dLREC%2fB%3d5140298';
The gain was much larger than economists had been expecting and reflected strong borrowing on credit cards and also in the category that includes auto loans. The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting.
Economists said consumers were being forced to make greater use of their credit cards during hard economic times when they are being battered by job losses, soaring gasoline prices and higher food costs.
"This represents distressed borrowing. Consumers need cash and they have turned back to their credit cards to fill the void left by lost jobs and weaker incomes," said Mark Zandi, chief economist at Moody's Economy.com.
Borrowing on credit cards was up at an annual rate of 7.9 percent, compared to a 5 percent gain in February, while borrowing in the category that includes auto loans jumped by 6.8 percent, compared to a 2 percent increase in February.
The overall growth in debt of 7.2 percent at an annual rate was the biggest gain since an increase of 8.25 percent last November.
Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.
The Fed's measure of consumer borrowing, which does not include any debt secured by real estate such as mortgages or home equity loans, stood at a record $2.558 trillion in March
Paulson Sees Credit Crisis Waning
Paulson Sees Credit Crisis Waning
Treasury Secretary Calls Fed's Moves 'Inflection Point'
By MICHAEL M. PHILLIPS and DAMIAN PALETTA
May 7, 2008; Page A2
WASHINGTON -- Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.
Getty Images
U.S. Treasury Secretary Henry Paulson pauses as he testifies during a hearing before the Senate Finance Committee on Capitol Hill in February.
Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.
"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.
The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.
The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.
Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.
House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.
But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a "bailout" and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase.
It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill's main author. "It proves that ideology has triumphed in the White House over needed compassion and good economics," said the congressman's spokesman, Steven Adamske.
Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.
Paulson Sees Credit Crisis Waning
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Paulson Sees Credit Crisis Waning
Treasury Secretary Calls Fed's Moves 'Inflection Point'
By MICHAEL M. PHILLIPS and DAMIAN PALETTAMay 7, 2008; Page A2
WASHINGTON -- Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.
Getty Images
U.S. Treasury Secretary Henry Paulson pauses as he testifies during a hearing before the Senate Finance Committee on Capitol Hill in February.
Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.
"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.
The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.
The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.
Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.
House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.
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It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill's main author. "It proves that ideology has triumphed in the White House over needed compassion and good economics," said the congressman's spokesman, Steven Adamske.
Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.
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The worst of the financial pain may have passed, but the U.S. economic pain could be just ...
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Paulson Sees Credit Crisis Waning
Treasury Secretary Calls Fed's Moves 'Inflection Point'
By MICHAEL M. PHILLIPS and DAMIAN PALETTAMay 7, 2008; Page A2
WASHINGTON -- Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.
Getty Images
U.S. Treasury Secretary Henry Paulson pauses as he testifies during a hearing before the Senate Finance Committee on Capitol Hill in February.
Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.
"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.
The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.
The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.
Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.
House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.
But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a "bailout" and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase.
It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill's main author. "It proves that ideology has triumphed in the White House over needed compassion and good economics," said the congressman's spokesman, Steven Adamske.
Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.
Oil Futures Rally Above $120
Oil Futures Rally Above $120
Latest Nymex High Puts Price Up 27% For the Year to Date
By GREGORY MEYER May 7, 2008; Page C10
Crude-oil futures closed above $120 a barrel for the first time Tuesday as the market showed conviction that record prices won't necessarily trip up global demand.
Light, sweet crude for June delivery settled up $1.87, or 1.6%, at $121.84 a barrel on the New York Mercantile Exchange, after rising as high as $122.73.
The Energy Information Administration on Tuesday projected triple-digit prices for months to come, issuing its latest monthly outlook that forecast crude prices averaging $114 a barrel in the second half of the year. While the agency anticipates U.S. demand will slip by 190,000 barrels a day this year to its lowest annual level since 2003, it expects emerging economies to keep world demand expanding 1.4%, to 86.6 million barrels a day.
Associated Press
A worker of state oil company Pertamina cycled past barrels filled with fuel in Jakarta Tuesday.
"We've had a doubling in crude prices in the past 14 months, and they're still looking at a 1.4% increase in global demand across the year," said Jim Ritterbusch, president of energy-trading advisory service Ritterbusch and Associates in Galena, Ill.
Further agitating buyers, equity analysts at Goldman Sachs issued a report saying prices of $150 to $200 a barrel seem "increasingly likely" six months to two years from now. The same group of analysts made waves three years ago when they identified a "super-spike" lifting prices as high as $105 a barrel, then considered to be an outlandish notion.
Crude oil has risen 27% so far this year and is up 97% from a year ago on a combination of irrepressible global demand growth and supply troubles. The Organization of Petroleum Exporting Countries' oil production slumped 0.5% in April amid problems in member states Nigeria and Iraq, according to a Dow Jones Newswires survey.
Flows from investment funds into commodities have also ignited crude prices as people seek protection from inflation and a weaker dollar. This helps explain why crude-oil prices can remain strong in spite of faltering demand in the U.S., said Sarah Emerson, managing director at Energy Security Analysis Inc. in Wakefield, Mass.
"Oil prices are driven by two different markets," Ms. Emerson said. "I don't think the physical market warrants a price collapse, though it probably warrants a weaker market. But you have this other market, which is a desire to hold crude oil, and that's really in the drivers' seat at the moment."
Crude, which is priced in dollars, has drawn investors seeking a hedge against the greenback's decline. The dollar's weakness has also softened the impact of higher prices for buyers using other currencies.
CORN: Futures rose on weather concerns as rainy weather has left soils in the Midwest soggy and farmers idle. Outside market strength also supported corn. May corn at the Chicago Board of Trade gained 12.75 cents to $5.9475 a bushel.
SOYBEANS: Prices fell after a mostly firmer session, as selling pressure emerged on ideas the Argentine government and farmers would work out their differences and farmers would call off their strike. However, after the markets close, Argentine officials said the farm talks were suspended until Wednesday. May CBOT soybeans dropped 8.50 cents to $12.6450 a bushel.
Latest Nymex High Puts Price Up 27% For the Year to Date
By GREGORY MEYER May 7, 2008; Page C10
Crude-oil futures closed above $120 a barrel for the first time Tuesday as the market showed conviction that record prices won't necessarily trip up global demand.
Light, sweet crude for June delivery settled up $1.87, or 1.6%, at $121.84 a barrel on the New York Mercantile Exchange, after rising as high as $122.73.
The Energy Information Administration on Tuesday projected triple-digit prices for months to come, issuing its latest monthly outlook that forecast crude prices averaging $114 a barrel in the second half of the year. While the agency anticipates U.S. demand will slip by 190,000 barrels a day this year to its lowest annual level since 2003, it expects emerging economies to keep world demand expanding 1.4%, to 86.6 million barrels a day.
Associated Press
A worker of state oil company Pertamina cycled past barrels filled with fuel in Jakarta Tuesday.
"We've had a doubling in crude prices in the past 14 months, and they're still looking at a 1.4% increase in global demand across the year," said Jim Ritterbusch, president of energy-trading advisory service Ritterbusch and Associates in Galena, Ill.
Further agitating buyers, equity analysts at Goldman Sachs issued a report saying prices of $150 to $200 a barrel seem "increasingly likely" six months to two years from now. The same group of analysts made waves three years ago when they identified a "super-spike" lifting prices as high as $105 a barrel, then considered to be an outlandish notion.
Crude oil has risen 27% so far this year and is up 97% from a year ago on a combination of irrepressible global demand growth and supply troubles. The Organization of Petroleum Exporting Countries' oil production slumped 0.5% in April amid problems in member states Nigeria and Iraq, according to a Dow Jones Newswires survey.
Flows from investment funds into commodities have also ignited crude prices as people seek protection from inflation and a weaker dollar. This helps explain why crude-oil prices can remain strong in spite of faltering demand in the U.S., said Sarah Emerson, managing director at Energy Security Analysis Inc. in Wakefield, Mass.
"Oil prices are driven by two different markets," Ms. Emerson said. "I don't think the physical market warrants a price collapse, though it probably warrants a weaker market. But you have this other market, which is a desire to hold crude oil, and that's really in the drivers' seat at the moment."
Crude, which is priced in dollars, has drawn investors seeking a hedge against the greenback's decline. The dollar's weakness has also softened the impact of higher prices for buyers using other currencies.
CORN: Futures rose on weather concerns as rainy weather has left soils in the Midwest soggy and farmers idle. Outside market strength also supported corn. May corn at the Chicago Board of Trade gained 12.75 cents to $5.9475 a bushel.
SOYBEANS: Prices fell after a mostly firmer session, as selling pressure emerged on ideas the Argentine government and farmers would work out their differences and farmers would call off their strike. However, after the markets close, Argentine officials said the farm talks were suspended until Wednesday. May CBOT soybeans dropped 8.50 cents to $12.6450 a bushel.
Tuesday, May 6, 2008
Cyclone Death Toll Rises Above 22,000
Cyclone Death Toll Rises Above 22,000
Food Worries Emerge As Rice-Growing Area In Myanmar Was Hit
By JAMES HOOKWAYMay 6, 2008 4:57 p.m.
BANGKOK, Thailand -- The death toll from the cyclone that hit Myanmar climbed to more than 22,000 and could go far higher.
Myanmar's military government, which has often tried to isolate the country, has welcomed international help -- and many nations have pledged it. But so far few supplies are getting in, and international aid agencies are worried the toll could mount in the devastated Irrawaddy River delta region if relief doesn't reach victims quickly. Myanmar state radio said more than 41,000 people are missing, nearly all in them in the delta.
Reuters
People traveled in a boat past destroyed wharves at a port on a swollen river in Yangon Tuesday.
For the aid agencies, the calamity is causing big worries about food, as the cyclone hit a major rice-growing area. There are worries first about food for Myanmar and then about how the disaster could drive up the cost of bringing food to other crisis-afflicted parts of the world.
With world grain stocks at their lowest since the 1970s and the cost of rice nearly tripling since the beginning of this year, providing emergency food aid to disaster-struck countries has become much more expensive.
United Nations relief officials said Tuesday that getting food and water to hard-hit areas is a challenge because of widespread flooding. Richard Horsey, a spokesman for the U.N. Office for the Coordination of Humanitarian Affairs, said much of the damage was caused by a violent storm surge that flowed in from the sea and submerged much of the delta region.
Mac Pieczowski, who heads the International Organization for Migration office in Yangon, said in a prepared statement that "from the reports we are getting, entire villages have been flattened and the final death toll could be huge."
Myanmar is in desperate need of aid after a cyclone hit the country over the weekend. The United Nations, U.S. and Australia have already agreed to contribute.
It isn't immediately clear how much food aid Myanmar might need. The U.N. World Food Program has this year appealed to donor countries for an additional $756 million in funding to help it cover the soaring cost of providing food to needy countries, which historically have struggled to adequately feed themselves.
But a disaster like the cyclone that slammed into the swampy, rice-growing delta region of southern Myanmar exacerbates the funding problem because some poor nations, including Sri Lanka and Bangladesh, had been hoping to supplement their own supplies with imports from Myanmar.
Now, these countries -- and Myanmar -- may have to approach other sellers to make up shortfalls in their own domestic production at a time when many larger rice producers such as Vietnam and India are curbing exports to ensure their own supply of the staple grain.
Thailand, the world's largest exporter, is among the few big producers not to curtail rice sales. It is taking on the lion's share of supplying rice to other developing countries. Thai rice prices are now at $920 a metric ton, down 10% from last week, but still almost three times higher than at the beginning of 2008.
Rice traders say the international market hasn't fully priced in the cost of a significant natural disaster afflicting a large, rice-growing country such as Myanmar. Parts of Asia are prone to highly damaging storms. The Philippines is regularly battered by typhoons. Bangladesh, like Myanmar, is a low-lying delta plain vulnerable to cyclones; in November, a cyclone barreled into the country, destroying at least 600,000 tons of rice and killing more than 3,000 people. India depends on a good monsoon to ensure its 1.1 billion people are adequately fed without dipping into its stockpiles.
So the Myanmar cyclone could send prices higher, some rice traders suggest.
Associated Press
Locals in Yangon make their way past a fallen tree after the cyclone.
"At the moment, the market is pricing in what it knows -- the impact of the biofuel phenomenon, increasing demand from China and India and high oil prices," says Vichai Sriprasert, president of one of Thailand's largest exporters, Riceland International Co. "The situation is already dangerous without other factors such as natural disasters which haven't happened yet."
"The cyclone certainly complicates matters," says Paul Risley, a spokesman with the World Food Program in Bangkok. "It blew through the critical rice-growing areas of the country and it seems the harvest was only partially completed. This could represent a substantial loss to the country's rice output."
Before gaining independence from Britain in 1948, Myanmar -- which is also known as Burma -- was one of the world's biggest rice exporters. Since a military government took control in 1962 and introduced a socialist-style economy, production has slumped. However, Myanmar analysts say the country has managed to improve its rice production in recent years. Officials at the Food and Agriculture Organization of the U.N. say it produces about 30 million metric tons of rice a year, compared with Thailand's 30.5 million tons.
Most of this crop is consumed domestically, or lost to wastage or substandard milling, but in recent years Myanmar has begun to export some rice. Before the cyclone, the FAO forecast the country would sell 600,000 tons overseas -- mostly to Bangladesh and Sri Lanka. State-run media said Myanmar's leaders were confident of producing enough rice this year to feed the country's 52 million people.
But with many rice mills destroyed, distribution networks in tatters and large tracts of rice-growing land in the muddy, flat delta of the Irrawaddy still under water, traders in Bangkok say Myanmar may have to resort to importing rice.
Information on the ground in Myanmar is still sketchy, compounded by the country's secretive military government and poor infrastructure. A magazine run by Myanmar dissidents in Thailand, called Irrawaddy, said prices of gasoline, cooking oil and rice have doubled since the cyclone struck.
State-run radio announced that in badly hit areas, Myanmar's rulers are postponing a referendum Saturday on a new constitution. Political uncertainty pervades in the country eight months after soldiers brutally suppressed pro-democracy demonstrations in the main city, Yangon.
The opposition National League for Democracy said in a prepared statement that proceeding with the referendum, which critics describe as an attempt to legitimize military rule, is "unacceptable."
Food Worries Emerge As Rice-Growing Area In Myanmar Was Hit
By JAMES HOOKWAYMay 6, 2008 4:57 p.m.
BANGKOK, Thailand -- The death toll from the cyclone that hit Myanmar climbed to more than 22,000 and could go far higher.
Myanmar's military government, which has often tried to isolate the country, has welcomed international help -- and many nations have pledged it. But so far few supplies are getting in, and international aid agencies are worried the toll could mount in the devastated Irrawaddy River delta region if relief doesn't reach victims quickly. Myanmar state radio said more than 41,000 people are missing, nearly all in them in the delta.
Reuters
People traveled in a boat past destroyed wharves at a port on a swollen river in Yangon Tuesday.
For the aid agencies, the calamity is causing big worries about food, as the cyclone hit a major rice-growing area. There are worries first about food for Myanmar and then about how the disaster could drive up the cost of bringing food to other crisis-afflicted parts of the world.
With world grain stocks at their lowest since the 1970s and the cost of rice nearly tripling since the beginning of this year, providing emergency food aid to disaster-struck countries has become much more expensive.
United Nations relief officials said Tuesday that getting food and water to hard-hit areas is a challenge because of widespread flooding. Richard Horsey, a spokesman for the U.N. Office for the Coordination of Humanitarian Affairs, said much of the damage was caused by a violent storm surge that flowed in from the sea and submerged much of the delta region.
Mac Pieczowski, who heads the International Organization for Migration office in Yangon, said in a prepared statement that "from the reports we are getting, entire villages have been flattened and the final death toll could be huge."
Myanmar is in desperate need of aid after a cyclone hit the country over the weekend. The United Nations, U.S. and Australia have already agreed to contribute.
It isn't immediately clear how much food aid Myanmar might need. The U.N. World Food Program has this year appealed to donor countries for an additional $756 million in funding to help it cover the soaring cost of providing food to needy countries, which historically have struggled to adequately feed themselves.
But a disaster like the cyclone that slammed into the swampy, rice-growing delta region of southern Myanmar exacerbates the funding problem because some poor nations, including Sri Lanka and Bangladesh, had been hoping to supplement their own supplies with imports from Myanmar.
Now, these countries -- and Myanmar -- may have to approach other sellers to make up shortfalls in their own domestic production at a time when many larger rice producers such as Vietnam and India are curbing exports to ensure their own supply of the staple grain.
Thailand, the world's largest exporter, is among the few big producers not to curtail rice sales. It is taking on the lion's share of supplying rice to other developing countries. Thai rice prices are now at $920 a metric ton, down 10% from last week, but still almost three times higher than at the beginning of 2008.
Rice traders say the international market hasn't fully priced in the cost of a significant natural disaster afflicting a large, rice-growing country such as Myanmar. Parts of Asia are prone to highly damaging storms. The Philippines is regularly battered by typhoons. Bangladesh, like Myanmar, is a low-lying delta plain vulnerable to cyclones; in November, a cyclone barreled into the country, destroying at least 600,000 tons of rice and killing more than 3,000 people. India depends on a good monsoon to ensure its 1.1 billion people are adequately fed without dipping into its stockpiles.
So the Myanmar cyclone could send prices higher, some rice traders suggest.
Associated Press
Locals in Yangon make their way past a fallen tree after the cyclone.
"At the moment, the market is pricing in what it knows -- the impact of the biofuel phenomenon, increasing demand from China and India and high oil prices," says Vichai Sriprasert, president of one of Thailand's largest exporters, Riceland International Co. "The situation is already dangerous without other factors such as natural disasters which haven't happened yet."
"The cyclone certainly complicates matters," says Paul Risley, a spokesman with the World Food Program in Bangkok. "It blew through the critical rice-growing areas of the country and it seems the harvest was only partially completed. This could represent a substantial loss to the country's rice output."
Before gaining independence from Britain in 1948, Myanmar -- which is also known as Burma -- was one of the world's biggest rice exporters. Since a military government took control in 1962 and introduced a socialist-style economy, production has slumped. However, Myanmar analysts say the country has managed to improve its rice production in recent years. Officials at the Food and Agriculture Organization of the U.N. say it produces about 30 million metric tons of rice a year, compared with Thailand's 30.5 million tons.
Most of this crop is consumed domestically, or lost to wastage or substandard milling, but in recent years Myanmar has begun to export some rice. Before the cyclone, the FAO forecast the country would sell 600,000 tons overseas -- mostly to Bangladesh and Sri Lanka. State-run media said Myanmar's leaders were confident of producing enough rice this year to feed the country's 52 million people.
But with many rice mills destroyed, distribution networks in tatters and large tracts of rice-growing land in the muddy, flat delta of the Irrawaddy still under water, traders in Bangkok say Myanmar may have to resort to importing rice.
Information on the ground in Myanmar is still sketchy, compounded by the country's secretive military government and poor infrastructure. A magazine run by Myanmar dissidents in Thailand, called Irrawaddy, said prices of gasoline, cooking oil and rice have doubled since the cyclone struck.
State-run radio announced that in badly hit areas, Myanmar's rulers are postponing a referendum Saturday on a new constitution. Political uncertainty pervades in the country eight months after soldiers brutally suppressed pro-democracy demonstrations in the main city, Yangon.
The opposition National League for Democracy said in a prepared statement that proceeding with the referendum, which critics describe as an attempt to legitimize military rule, is "unacceptable."
Monday, May 5, 2008
UBS To Slash 5,500 Jobs; Records $11 Billion Loss
UBS To Slash 5,500 Jobs; Records $11 Billion Loss
By KATHARINA BART
May 6, 2008 1:41 a.m.
ZURICH -- UBS AG said Tuesday it plans to cut 5,500 jobs by the middle of next year, an effort meant to restructure the Swiss giant's troubled investment bank.
The Zurich-based bank will axe 2,600 investment banking jobs mainly in London and New York after massive write-downs on dud mortgage securities, totaling over $37 billion. The remainder will be cut through natural attrition across the across the
bank's units, UBS said. Alongside the job cuts, UBS said it swung to a first-quarter net loss of 11.54 billion Swiss Francs ($10.99 billion), from a 3.03 billion francs net profit in the year-ago period.
In its outlook, UBS, which is reportedly in talks over the mortgage positions it still holds, cautioned that market conditions remain tough.
The major losses and subprime write-downs have led UBS to rethink its investment bank, clamping down on risk, shrinking its balance sheet, and abandoning some of the high-stakes areas such as proprietary trading.
The losses have forced UBS to seek two massive injections of fresh capital this year, one from major investors and one as a capital increase from shareholders to help cover the losses.
The bank, which has swept its management ranks in recent months because of the losses, has also come under fire from activist shareholder Olivant Advisers Ltd. Olivant, a 1.1% shareholder, is urging UBS to consider asset disposals or a split-up to protect its flagship private bank.
At the private bank, which caters to the financial needs of wealthy individuals, inflows of fresh funds slowed dramatically. While the private bank garnered CHF5.6 billion in fresh funds -- a closely-watched gauge of future business -- the bank overall posted outflows of CHF12.8 billion, as money left both the asset management and business bank units.
UBS shares have slid 26% thus far this year, underperforming by far the Dow Jones Stoxx 600 bank index, which has edged 8.3% lower in the same period.
UBS shares closed at 36.88 francs Monday.
By KATHARINA BART
May 6, 2008 1:41 a.m.
ZURICH -- UBS AG said Tuesday it plans to cut 5,500 jobs by the middle of next year, an effort meant to restructure the Swiss giant's troubled investment bank.
The Zurich-based bank will axe 2,600 investment banking jobs mainly in London and New York after massive write-downs on dud mortgage securities, totaling over $37 billion. The remainder will be cut through natural attrition across the across the
bank's units, UBS said. Alongside the job cuts, UBS said it swung to a first-quarter net loss of 11.54 billion Swiss Francs ($10.99 billion), from a 3.03 billion francs net profit in the year-ago period.
In its outlook, UBS, which is reportedly in talks over the mortgage positions it still holds, cautioned that market conditions remain tough.
The major losses and subprime write-downs have led UBS to rethink its investment bank, clamping down on risk, shrinking its balance sheet, and abandoning some of the high-stakes areas such as proprietary trading.
The losses have forced UBS to seek two massive injections of fresh capital this year, one from major investors and one as a capital increase from shareholders to help cover the losses.
The bank, which has swept its management ranks in recent months because of the losses, has also come under fire from activist shareholder Olivant Advisers Ltd. Olivant, a 1.1% shareholder, is urging UBS to consider asset disposals or a split-up to protect its flagship private bank.
At the private bank, which caters to the financial needs of wealthy individuals, inflows of fresh funds slowed dramatically. While the private bank garnered CHF5.6 billion in fresh funds -- a closely-watched gauge of future business -- the bank overall posted outflows of CHF12.8 billion, as money left both the asset management and business bank units.
UBS shares have slid 26% thus far this year, underperforming by far the Dow Jones Stoxx 600 bank index, which has edged 8.3% lower in the same period.
UBS shares closed at 36.88 francs Monday.
Sears Braces for Spending Slump
Sears Braces for Spending Slump
By GARY MCWILLIAMSMay 5, 2008 5:44 p.m.
HOFFMAN ESTATES, Ill. -- Sears Holdings Corp. Chairman Edward S. Lampert said the retailer is taking a conservative stance to weak consumer spending, cutting its work force and paring budgets in response to an uncertain outlook.
Sears, with $53 billion in 2007 revenue, is expected to report weaker sales and a sharp decline in profits for its fiscal first-quarter, ended Saturday. It earned $216 million on sales of $11.7 billion in the year-earlier quarter.
Addressing shareholders about the company's outlook at its annual meeting here Monday, Mr. Lampert said the economy "certainly hasn't gotten better" since the fourth quarter, and that it is unclear whether consumers are "pausing" after years of steadily increasing spending, or are "done for a while." In recent months Sears has cut several hundred jobs at its headquarters and U.S. distribution centers to reduce costs, and is shunning capital spending on new stores as part of its more conservative financial tack.
Mr. Lampert, a billionaire hedge fund manager whose funds own nearly 48% of Sears stock, noted consumers are changing their shopping habits, turning online for music, movies and other goods that once drew them into its stores. He said an ongoing restructuring of the company into dozens of semi-autonomous business units would eventually allow the company to develop more nimble and profitable operations. But in the near term, competition could get tougher as rivals continue to use debt to finance store expansion and share buybacks.
"Our strategy ensures we have the financial strength to weather any financial storm that comes our way," he said.
Sears has used its cash flow to reduce debt and buyback shares. Mr. Lampert conceded that $2.9 billion spent to re-purchase shares last year, at as much as $150 apiece, would have been better "deferred." The stock has tumbled since reaching a peak of $183 last spring and was off 3% at $100.08 in 4 p.m. trading on the Nasdaq Stock Market.
Among other organizational changes, Mr. Lampert recently consolidated the company's major brands -- including Kenmore, Craftsman and Diehard -- into a single operation that can decide to license or distribute the brands through other retail outlets. He also created separate operations to oversee Sears's real estate, online operations, retail operations and support.
Under the traditional department store structure that Sears had followed, "it didn't feel like we were getting enough traction in some of these businesses," he said. The new structure, he said, already has helped the company attract more experienced executives, including John W. Froman, the recently named head of its tools, lawn and garden businesses, who had been chief operating officer at Circuit City Stores Inc. Mr. Lampert said he is continuing to search for a new chief executive for the holding company, to replace Aylwin B. Lewis, who was ousted in January, and for an executive to oversee a business unit for Sears brands.
While its shares have tumbled 44% in the last year, Mr. Lampert's strategy got a vote of confidence from fellow hedge fund executive William Ackman, president of Pershing Square Capital. In comments at the annual meeting, Mr. Ackman, who acquired five million Sears shares last year, called the stock "undervalued."
Mr. Lampert dismissed calls for Sears Holdings, which has seen same-store sales fall for more than eight consecutive quarters, to make major new acquisitions or format pushes, saying it must finish improving store operations and merchandising. "We've not been able to develop the big ideas to put our capital behind," he told shareholders.
By GARY MCWILLIAMSMay 5, 2008 5:44 p.m.
HOFFMAN ESTATES, Ill. -- Sears Holdings Corp. Chairman Edward S. Lampert said the retailer is taking a conservative stance to weak consumer spending, cutting its work force and paring budgets in response to an uncertain outlook.
Sears, with $53 billion in 2007 revenue, is expected to report weaker sales and a sharp decline in profits for its fiscal first-quarter, ended Saturday. It earned $216 million on sales of $11.7 billion in the year-earlier quarter.
Addressing shareholders about the company's outlook at its annual meeting here Monday, Mr. Lampert said the economy "certainly hasn't gotten better" since the fourth quarter, and that it is unclear whether consumers are "pausing" after years of steadily increasing spending, or are "done for a while." In recent months Sears has cut several hundred jobs at its headquarters and U.S. distribution centers to reduce costs, and is shunning capital spending on new stores as part of its more conservative financial tack.
Mr. Lampert, a billionaire hedge fund manager whose funds own nearly 48% of Sears stock, noted consumers are changing their shopping habits, turning online for music, movies and other goods that once drew them into its stores. He said an ongoing restructuring of the company into dozens of semi-autonomous business units would eventually allow the company to develop more nimble and profitable operations. But in the near term, competition could get tougher as rivals continue to use debt to finance store expansion and share buybacks.
"Our strategy ensures we have the financial strength to weather any financial storm that comes our way," he said.
Sears has used its cash flow to reduce debt and buyback shares. Mr. Lampert conceded that $2.9 billion spent to re-purchase shares last year, at as much as $150 apiece, would have been better "deferred." The stock has tumbled since reaching a peak of $183 last spring and was off 3% at $100.08 in 4 p.m. trading on the Nasdaq Stock Market.
Among other organizational changes, Mr. Lampert recently consolidated the company's major brands -- including Kenmore, Craftsman and Diehard -- into a single operation that can decide to license or distribute the brands through other retail outlets. He also created separate operations to oversee Sears's real estate, online operations, retail operations and support.
Under the traditional department store structure that Sears had followed, "it didn't feel like we were getting enough traction in some of these businesses," he said. The new structure, he said, already has helped the company attract more experienced executives, including John W. Froman, the recently named head of its tools, lawn and garden businesses, who had been chief operating officer at Circuit City Stores Inc. Mr. Lampert said he is continuing to search for a new chief executive for the holding company, to replace Aylwin B. Lewis, who was ousted in January, and for an executive to oversee a business unit for Sears brands.
While its shares have tumbled 44% in the last year, Mr. Lampert's strategy got a vote of confidence from fellow hedge fund executive William Ackman, president of Pershing Square Capital. In comments at the annual meeting, Mr. Ackman, who acquired five million Sears shares last year, called the stock "undervalued."
Mr. Lampert dismissed calls for Sears Holdings, which has seen same-store sales fall for more than eight consecutive quarters, to make major new acquisitions or format pushes, saying it must finish improving store operations and merchandising. "We've not been able to develop the big ideas to put our capital behind," he told shareholders.
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