Money & Company

Health-care bill: Taxes would rise on incomes above $350K

Tom Petruno — Fri, 10 Jul 2009 14:50:28 -0700

House Ways and Means Committee Chairman Charles Rangel today got more specific about his plan to tax high-income-earners to pay for health-care reform, including coverage of the uninsured.

From Dow Jones newswires:

The House of Representatives will propose a surtax on taxpayers with income above $350,000 to help fund a $1 trillion health-care overhaul, House Ways and Means Chairman Charles Rangel, D-N.Y., said Friday.

The tax will be graduated, so wealthier taxpayers will be subject to a higher rate. While the rates themselves have yet to be nailed down, Rangel indicated they would be in the range of 1% for married couples making $350,000, 2% for those with income above $500,000, and 3% for those with incomes over $1 million.

A bill is expected to take shape next week in the House.

In his 2007 health-care plan Rangel proposed an extra 4% tax on incomes above $200,000 and an additional 0.6% on incomes above $500,000.

Earlier in the week the rumor was that Rangel, this time around, wanted to impose higher taxes starting at income of $250,000. So he has raised the income threshold by $100,000.

The top federal tax rate now is 35% on taxable income above $372,950 for married couples.

See this story for more on how the battle is shaping up over health-care reform and how to pay for it.

-- Tom Petruno

California: A 'permanently smaller' economy?

Tom Petruno — Fri, 10 Jul 2009 08:30:00 -0700

Not that anyone in California should need more sobering-up about the state's economic outlook, but the scenario painted by blogger Gregor Macdonald, who describes himself as a veteran oil analyst and energy investor, is particularly stark.

In a summary of his piece titled "The Scholarship of Collapse," he writes:

"Without the two industries that characterized post-war growth in the U.S., housing and automobiles (and the financial industry that squatted on top of these) it’s hard to see how California -- and the U.S. by extension -- does not become a permanently smaller economy.

"I now foresee zero net physical infrastructure or housing growth in California for at least another 5 years. If housing units go up somewhere in California, they’ll be bulldozed someplace else. If new roads or highways are erected, they’ll be discontinued or dismantled somewhere else. Without California, there will be no sustainable U.S. GDP growth."

I’m not convinced that the U.S. can’t grow without growth in California. Texans probably had similar thoughts when their mini-Depression began in the mid-1980s, with the collapse of oil prices and real estate values. But obviously the long workout ahead for California will weigh on U.S. growth.

In a broader view, Macdonald sees California as emblematic of the tipping point faced by the U.S. economy overall:

"The United States, just like California, now sits astride massive, gargantuan post-war infrastructure that was built with cheap energy and leveraged with cheap energy, for over 50 years. . . . To make matters worse, the federal government is in the midst of one of the largest policy mistakes in U.S. history as it has chosen to make enormous new investments in car companies, cars, biofuels, roads, and highways to the exclusion of public transport. This is a classic, textbook example of the sunk cost effect in decision making and is a hallmark of the collapsed societies of antiquity."

-- Tom Petruno

Don't tell Sacramento, but state's bonds lure buyers again

Tom Petruno — Fri, 10 Jul 2009 05:30:00 -0700

Investors' appetite for California municipal bonds has improved noticeably in the last few days, driving down market yields on the securities.

Unfortunately, that could send exactly the wrong message to the Legislature and Gov. Arnold Schwarzenegger, who are at a stalemate in budget negotiations. If they think falling interest rates mean investors have faith in the state’s financial outlook, there may be even less incentive to strike a budget deal soon.

Market yields on the state’s general obligation bonds began to surge in late May as the budget nightmare worsened and some spooked investors bailed out, pushing down the prices of the bonds. As the price of a fixed-rate bond fall its yield rises.

The annualized tax-free yield on 10-year California bonds jumped from about 4.4% on May 22 to nearly 5.25% by the end of June, the highest level since the massive sell-off in all muni bonds during the credit-market meltdown last fall.

But renewed buying interest since July 1 has pulled the 10-year bond yield back below 5%. Bloomberg News data pegged the yield at 4.99% on Thursday. Some bond dealers were quoting yields just under 4.9%.

Market rates have pulled back on the state’s bonds across the board. The yield on five-year general obligation issues has fallen to about 3.8% from more than 4% two weeks ago.

"There are still a lot of sellers, but not as many as last week," said Joe Lee, a trader at De La Rosa & Co. in Los Angeles. That has allowed yields to come down as more individual investors have stepped into the market, he said.

Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn., recommended in late June that income-hungry clients begin to put some money into California bonds, citing their high yields.

For a couple in the 32% combined federal and state tax bracket in California (which begins at taxable income of about $94,000), a 5% tax-free muni yield is the equivalent of earning a yield of about 7.3% on a taxable investment, such as a corporate bond.

Fabian said the market has improved in part because of the turn of the calendar: Many dealers didn’t want to hold the state’s debt as of June 30 for accounting reasons, but have been willing to add to their inventories again with the start of the new quarter.

It also has helped the muni market that U.S. Treasury bond yields have tumbled in recent weeks.

Most muni market pros don't believe that California will default on its bonds, because debt repayment is mandated by the state Constitution. Still, the state's financial image is so tattered, bond yields are unlikely to drop substantially from here, says Parker Colvin, a trader at Stone & Youngberg in San Francisco.

"I think there’s definitely a limit" to the current rally, he said, with no budget deal in sight and the state issuing IOUs to pay many of its bills.

He also said that many nervous investors continue to shun California general obligation issues, and any bonds backed by property taxes, in favor of issues backed by revenue from essential services, such as water or power.

Ten-year bonds issued Thursday as part of a Culver City Wastewater deal paid a 3.95% yield -- about one full percentage point below what the state’s 10-year bonds are yielding, Colvin noted.

-- Tom Petruno

SEC says California IOUs are 'securities' under U.S. law

Tom Petruno — Thu, 09 Jul 2009 17:13:52 -0700

As expected, the Securities and Exchange Commission late today decided that California's IOUs are "securities" under the agency’s definition.

The SEC’s move won't have any effect on the state's ability to issue the IOUs, because the agency has no jurisdiction over state governments.

Rather, the decision is aimed at limiting the potential for recipients of the IOUs to be defrauded by individuals or companies that offer to buy the scrip, which cash-strapped California is issuing to pay certain of its bills. The state says the IOUs will accrue tax-free interest at a 3.75% annualized rate and will be redeemed for cash on Oct. 2.

"As securities, the IOUs are subject to the antifraud provisions of the securities laws," the SEC said in a statement. "As a result, buyers and sellers will have certain rights and remedies for fraud, and the Commission will be able to take action against any person committing fraud in connection with the purchase or sale of an IOU."

What would constitute fraud? Say an individual decides to act as a dealer, buying IOUs from people who are stuck with them. This individual tells a potential seller, "I have it on good authority that the state won’t repay these IOUs as promised on Oct. 2. You’d be smart to take 85 cents on the dollar right now."

Assuming the state has said nothing about delaying repayment, the would-be dealer could be charged with misrepresentation under federal securities laws.

So the SEC’s move might keep some of the sharks at bay. But there’s a reason why sharks are at the top of the food chain: They’re good at going for the kill.

"If you hold an IOU and wish to sell it prior to maturity you should consider whether you think you are getting a fair price," the SEC says. But how will you know what’s fair? That’s the problem.

Some independent electronic marketplaces, such as SecondMarket.com, have expressed interest in acting as intermediaries to bring buyers and sellers together. But there won’t be a central market for the IOUs similar to the New York Stock Exchange or Nasdaq for stocks.

And the idea of doing business with someone who has just popped up on the Internet to buy IOUs has caveat venditor written all over it.

The problem for IOU recipients who need immediate cash will become much bigger after Friday, which is the final day that major banks, including Bank of America and Wells Fargo, say they’ll redeem IOUs for customers. California credit unions may be the best alternative: Many say they'll continue to redeem IOUs in full -- if you're a member. Go here for a listing.

Californians wouldn’t have to worry about any of this if Sacramento would just pass a fiscal 2010 balanced budget. But the stalemate continues.

Too bad the SEC can’t charge the Legislature and governor with misrepresenting themselves as responsible public servants.

-- Tom Petruno

Photo: A California IOU. Credit: Rich Pedroncelli / Associated Press

SEC may put California IOUs under fraud-protection rules

Tom Petruno — Thu, 09 Jul 2009 12:37:53 -0700

The Securities and Exchange Commission soon may step into the fray over the IOUs California is issuing to pay certain debts.

The SEC could decide today that the IOUs are securities, according to a source familiar with the matter. The Municipal Securities Rulemaking Board, which regulates trading in muni bond debt, was leaning in that direction earlier this week.

A move by the SEC would be an attempt to provide some fraud protection for recipients of the IOUs. Any person or firm offering to make a market in the IOUs -- bringing buyers and sellers together -- could have to register as a broker-dealer and would be subject to federal anti-fraud rules.

Recipients of the IOUs still would be free to sell them or cash them anywhere they’d like. The SEC would be trying to ensure that some orderly markets develop for the scrip, given that major banks, including Bank of America and Wells Fargo, say they won't cash the IOUs after Friday.

The state says it intends to pay off the IOUs on Oct. 2, with interest. The IOUs are earning a 3.75% annualized interest return, which is exempt from federal and state income tax.

The Associated Press reports today that SecondMarket, which creates markets for illiquid assets, has received "decent interest" from hedge funds, municipal bond investors and distressed asset investors as potential buyers of the IOUs, according to Jeremy Smith, the New York company's chief strategy officer.

Also from AP, echoing what my colleague W.J. Hennigan reported earlier this week:

The IOUs "have the hallmarks of securities, and if they are securities, they are pretty clearly municipal securities," MSRB General Counsel Ernesto Lanza said. "To the extent that municipal securities dealers are involved in the sale and trading of the warrants, our rules would apply. We would be especially concerned about dealers' obligations to customers with respect to fair pricing."

-- Tom Petruno

Buffett: First stimulus program was 'half tablet of Viagra'

Tom Petruno — Thu, 09 Jul 2009 11:49:50 -0700

Warren Buffett has come up with an interesting analogy for the shortcomings of the Obama administration's $787-billion economic stimulus plan, which Congress approved in February.

"Our first stimulus bill . . . was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in . . . as if everybody was putting in enough for their own constituents," the billionaire investor said on ABC’s "Good Morning America" today.

He reiterated his support for another stimulus program, saying of the economy, "We are not in a freefall, but we are not in a recovery either."

"I think that a second one may well be called for," Buffett said, adding, "You hope it doesn't get watered down in many ways."

He also took aim at the Treasury’s program to partner with major investment firms and buy up rotting mortgage-backed bonds from banks and other financial institutions. The Treasury on Wednesday named nine firms as its initial partners, including BlackRock Inc., TCW Group and Oaktree Capital Management.

By offering cheap loans to the buyers, the government structured the program to increase private firms’ likelihood of profiting from the purchases in the long run, even if mortgage defaults continue to surge.

"I do not like the idea of any kind of a plan involving the government where Wall Street makes a lot of money," Buffett said. "I just think that Wall Street owes the American people one at this point."

-- Tom Petruno

Photo: Warren Buffett. Credit: Nati Harnik / Associated Press

Pimco leaves Wall St. asking why it nixed toxic-asset plan

Tom Petruno — Wed, 08 Jul 2009 22:25:06 -0700

Why did bond titan Pimco suddenly pull its application to join the Treasury's long-awaited program to buy toxic mortgage securities from banks and other investors?

The government on Wednesday named nine money managers for the program, and Pimco wasn’t among them -- even though the firm’s well-known bond guru, Bill Gross, was in the New York Times just last month detailing how the program structure "puts the odds in your favor" as an investor in the securities.

The idea behind the so-called Public-Private Investment Program, or PPIP, is to combine government and private capital, and government loans, in new investment funds that will provide a source of buy-and-hold demand for toxic mortgage securities that banks and others may want to jettison.

Shortly after the Treasury’s announcement Wednesday Pimco put out a short statement, saying that "as a result of uncertainties regarding the design and implementation of the program, PIMCO withdrew its application to serve as a manager for the PPIP in early June."

Because Pimco wouldn’t elaborate beyond the statement, it triggered a torrent of speculation about the specific reason or reasons why it dropped out.

The idea of "uncertainties" in program design being a barrier seemed an odd excuse. Why wouldn’t the same "uncertainties" have troubled the other big firms that signed up, include BlackRock Inc. and Oaktree Capital Management?

Here’s one idea making the rounds on Wall Street: Despite its prowess as a bond investor generally, Pimco may have stumbled badly with its initial foray into buying troubled mortgage-backed bonds in 2007. That could have fueled concerns internally that the firm wouldn’t be able to raise from investors the minimum $500 million seed capital required for a manager in the PPIP under the Treasury’s rules.

That might seem hard to imagine for giant Pimco, but here’s what Bloomberg News reported on April 6:

The first fund set up by Pacific Investment Management Co. to buy troubled mortgages lost 33% since opening at the onset of the credit-market crisis in October 2007, according to an investor.

The $3-billion Pimco Distressed Mortgage Fund LP fell 25% in the fourth quarter of 2008, said the investor, who asked not to be identified because the fund is private.

The Pimco fund’s return was reported April 3 by online publication Private Equity Hub.

"When Pimco got into distressed mortgages in 2007, no one really knew how bad things would get," Geoff Bobroff, president of Bobroff Consulting Inc. in East Greenwich, R.I. said in an interview. "What will be impacted is their ability to raise new capital."

The Bloomberg story also said Pimco was trying to raise $3 billion for a new distressed-securities fund.

Maybe Pimco would have had investors breaking down the doors to invest with it in the PPIP. We can’t tell, because the firm just doesn’t want to say more about any aspect of the program or about its decision to drop out.

"No additional comments with be forthcoming beyond this statement," it said.

-- Tom Petruno

Photo: Bill Gross. Credit: Pacific Investment Management Co.

Post-Madoff, SEC inspection chief for fund managers quits

Tom Petruno — Wed, 08 Jul 2009 19:11:05 -0700

The Bernie Madoff scandal may have helped claim another head at the Securities and Exchange Commission.

Lori Richards, the 49-year-old chief of the SEC’s division that inspects money managers, said Wednesday that she would resign.

Richards has headed the Office of Compliance Inspections and Examinations since it was created in 1995.

Congress earlier this year skewered Richards, former Enforcement Director Linda Thomsen and other SEC officials for failing to uncover Madoff’s $65-billion Ponzi scheme. Thomsen resigned in February.

Richards, a 24-year veteran of the SEC who worked in enforcement in the Los Angeles office in the early 1990s, told Bloomberg News that it was "completely my decision" to step down.

"I’m excited about taking on new challenges," she said, without revealing her plans. "I’ve been thinking about doing something different for some time."

U.S. lawmakers were livid that the SEC could have missed Madoff’s long-running Ponzi scheme, despite evidence it was given by a whistle-blower.

As Bloomberg notes:

"Perhaps most shocking" about the case is that Richards’ unit never conducted an inspection of the money-management side of Madoff’s business after he registered it with the SEC in September 2006, U.S. Rep. Paul Kanjorski said at a January hearing.

Kanjorski said the SEC overlooked "red flags" such as the inability of investors to duplicate Madoff’s returns and his use of "an auditor the size of a mouse" to review a fund "the size of an elephant."

Richards’ defense was that the SEC had about 400 staff members to inspect more than 11,000 money managers.

She told Congress in January that the agency had to "prioritize registrants for examination, and to assign examination staff to those advisors and funds that appear to present the greatest potential for having an adverse impact on investors."

Richards said the process was "a form of triage, to help match available staff resources to the most pressing risks."

But if the process missed Bernie Madoff, it obviously wasn’t very good at identifying "pressing risks."

-- Tom Petruno

Photo: Lori Richards. Credit: Associated Press

U.S. picks managers to buy toxic assets; Pimco opts out

Tom Petruno — Wed, 08 Jul 2009 14:13:11 -0700

The Treasury today picked nine money managers to launch its program to buy rotting mortgage-backed securities from banks.

One big surprise: Newport Beach-based bond giant Pimco isn’t on the list. The firm said it withdrew its application last month, after initially cheering the program.

The nine firms are: AllianceBernstein (and partners Greenfield Partners and Rialto Capital Management); Angelo Gordon & Co. (and partner GE Capital Real Estate); BlackRock Inc.; Invesco Ltd.; Marathon Asset Management; Oaktree Capital Management; RLJ Western Asset Management; TCW Group; and Wellington Management Co.

Oaktree is an L.A.-based firm famous for investing in "distressed" assets. RLJ Western Asset is a joint venture between Robert L. Johnson, the financier who founded Black Entertainment Television, and Pasadena-based bond manager Western Asset; TCW Group, a big investor in mortgage-backed securities, is the parent of Trust Co. of the West in L.A.

The Treasury said it would allocate up to $30 billion in government funds for the program, known as the Public-Private Investment Program, or PPIP. Each of the managers must raise at least $500 million in capital from private investors. Combining Treasury and private capital -- as well as government loans -- the firms then are expected to bid for troubled mortgage bonds, offering a way for banks to unload the securities.

Whether banks will want to sell, thereby locking in losses on the securities, still is a huge question. The Treasury acknowledged as much in its statement, noting that the program has been sharply scaled back from the original plan.

From the statement:

"Financial market conditions have improved since the early part of this year, and many financial institutions have raised substantial amounts of capital as a buffer against weaker than expected economic conditions. While utilization of legacy asset programs will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate. Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs."

As for Pimco, the firm issued this statement about its decision to remove itself from consideration:

"As a result of uncertainties regarding the design and implementation of the program, PIMCO withdrew its application to serve as a manager for the PPIP in early June. PIMCO is participating in the TALF [Term Asset-Backed Securities Loan Facility] and other programs. We continue to believe that it is important for the public and private sectors to work together to resolve the financial crisis and improve the economic outlook."

A Pimco spokesman wouldn’t elaborate on which "uncertainties" about the program triggered its withdrawal.

Pimco bond guru Bill Gross lauded the PPIP when it was unveiled in March. "This is perhaps the first win-win-win policy to be put on the table," he said at the time. "We intend to participate and do our part to serve clients as well as promote economic recovery."

-- Tom Petruno

Ex-baseball great Lenny Dykstra files for bankruptcy

Tom Petruno — Wed, 08 Jul 2009 12:42:52 -0700

Celebrity financial crash of the day: Former Major League Baseball star and Lake Sherwood resident Lenny Dykstra filed for bankruptcy protection today in Los Angeles, listing less than $50,000 in assets -- and debts totaling between $10 million and $50 million.

The 46-year-old Dykstra, who played for the New York Mets and the Philadelphia Phillies, retired in 1996. He has since been involved in a number of entrepreneurial ventures, including a string of car washes, an investment column for Thestreet.com, and a service called the Players Club Operations that offered credit cards, charter jets and other services to athletes.

In April, he bragged to espn.com that he was worth $60 million.

Evidently not.

In the bankruptcy petition he said he owes JPMorgan Chase & Co. $12.9 million and Bank of America Corp.’s Countrywide and credit-card units a combined $4.2 million, according to Bloomberg News.

Dykstra also owes almost $1 million to jet charter services, about $342,000 to celebrity lawyer Daniel Petrocelli and $229,000 to literary agent David Vigliano, Bloomberg said.

From the espn.com piece in April:

"And after thumbing through a series of lawsuits that stretches from coast to coast and chatting up his business associates, you wonder if this aspiring financial Pied Piper is, indeed, living in a fantasyland. You wonder if the dream, built on glitz and greed in a time of economic uncertainty, is a teetering house of cards. You wonder if anyone this side of Bernie Madoff has ticked off more people -- business partners and family, alike -- than Lenny K. Dykstra.

"The lawsuits suggest that one of two things is going on here: Either Lenny hates to pay his bills, or he's a financial train wreck.

"Just in the past two years, Dykstra has been the subject of at least 24 legal actions, including 18 since November. Three suits hit the courts on Jan. 29. He's been sued by publishers and print companies, by three different groups of pilots and by a Maryland-based financial and litigation consulting firm that offered expert testimony on his behalf in an earlier lawsuit. He's even been sued by a die-hard Mets fan who was the best man at his wedding 20-some years ago, though that New York investor claims there is no bad blood."

Dykstra’s Lake Sherwood home, which he bought for $18.5 million in 2007, began to show up in pre-foreclosure-activity listings in April.

-- Tom Petruno

Photo: Lenny Dykstra. Credit: Amy Sussman / Getty Images

Oil dives for sixth day as bad news piles up for price bulls

Tom Petruno — Wed, 08 Jul 2009 11:10:36 -0700

Oil prices are down for a sixth straight session today, the longest losing streak since mid-December, on the triple-whammy of economic fears, rising gasoline supplies and growing calls to rein in speculators in futures markets.

Near-term crude futures were down $1.77, or 2.8%, to $61.16 a barrel at about 11 a.m. PDT. The price now has tumbled 16% since reaching $72.68 on June 11, and is the lowest in seven weeks.

Gasoline futures also are plummeting, down 6.3 cents, or 3.6%, to $1.67 a gallon. The price peaked at $2.07 on June 16.

From Bloomberg News:

Gasoline stockpiles climbed 1.9 million barrels to 213.1 million in the week ended July 3, more than twice the increase forecast in a Bloomberg News survey, the Energy Department said. Inventories of distillate fuel, a category that includes heating oil and diesel, rose to the highest since 1985 as consumption dropped to a 10-year low.

"The market is starting to focus on the weak fundamentals," said Antoine Halff, head of energy research at Newedge USA in New York. "The deterioration of the fundamentals should continue in the weeks ahead. The drop in prices has yet to run its course."

Traders took no comfort in data showing that U.S. oil inventories fell last week. Supplies still are 7.4% higher than the five-year average for this point in the year.

Commodity prices have been slumping in tandem with the stock market over the last week as investors has lost faith in an economic rebound in the second half. That sentiment ballooned after the dismal June employment report last Thursday.

The U.S., British and French governments also may be spooking players in the oil market by threatening to limit what they view as excessive speculation.

The Commodity Futures Trading Commission on Tuesday said it would hold hearings on whether to impose limits on the dollar value of bets that a single speculator could make via commodity futures.

Separately, British Prime Minister Gordon Brown and French President Nicolas Sarkozy used the op-ed page of the Wall Street Journal today to call for steps to reduce "damaging speculation" in the oil market.

"Governments can no longer stand idle," they wrote. "Volatility damages both consumers and producers."

They weren’t specific about what to do -- other than calling for greater "transparency and supervision" of futures trading -- but in a falling market they’re giving oil speculators another excuse to exit.

-- Tom Petruno

Amgen shares jump on bone-cancer drug trial results

Tom Petruno — Tue, 07 Jul 2009 19:37:27 -0700

Amgen Inc. investors got good news late Tuesday on trial results for one of the Thousand Oaks company’s potential blockbuster drugs.

From Reuters:

Amgen said its experimental osteoporosis drug reduced and delayed serious bone complications among patients with advanced breast cancer, and the news sent its shares up almost 13% in after-hours trade.

The biotechnology company said its drug, denosumab, proved superior to Novartis AG's Zometa in a late-stage study.

Bone metastases, or the spread of cancer to the bone, are a serious consequence of breast cancer, weakening or destroying bone around the tumor.

The Phase 3 study assessed the incidence of serious bone complications among 2,049 such patients, including fractures, or the need for radiation or surgery to bone.

The report was issued after regular market hours. Amgen’s shares, which inched up 18 cents to $52.23 in regular trading, jumped to $59 in after-hours activity, the highest since early January.

UPDATE: The stock was up $8.41 to $60.64 in early trading Wednesday.

Amgen has a lot riding on denosumab, as the company faces depressed sales of its arthritis drug Enbrel and of its longtime cash cows, the anti-anemia drugs Aranesp and Epogen.

The company still is highly profitable, but first-quarter earnings were down 8% from a year earlier, to $1.02 billion. Revenue was off 8.4% to $3.3 billion.

"Amgen’s entire story right now is denosumab in cancer," analyst Eric Schmidt at Cowen & Co. said in a Bloomberg News interview last month. "Everybody on Wall Street is waiting now to see if denosumab can deliver."

-- Tom Petruno

Pope urges 'world authority' to govern economy, finance

Tom Petruno — Tue, 07 Jul 2009 17:31:56 -0700

Pope Benedict XVI is offering a solution for what ails the global economy: a "true world political authority" to manage it all.

In a so-called encyclical published today -- just as leaders of the world’s biggest economies gather in central Italy for a summit -- Benedict mostly focuses on his ideas for achieving "justice and the common good" in the modern economy.

His basic themes are well-traveled, including fairness to workers, the evils of "excessive" wealth disparities and regard for the environment.

But then he ventures onto controversial turf, suggesting that the authority to fix all of this be vested in global governing bodies, including the United Nations.

The pope writes:

In the face of the unrelenting growth of global interdependence, there is a strongly felt need, even in the midst of a global recession, for a reform of the United Nations Organization, and likewise of economic institutions and international finance, so that the concept of the family of nations can acquire real teeth.

To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result; to bring about integral and timely disarmament, food security and peace; to guarantee the protection of the environment and to regulate migration: for all this, there is urgent need of a true world political authority, as my predecessor Blessed John XXIII indicated some years ago.

Such an authority would need to be regulated by law, to observe consistently the principles of subsidiarity and solidarity, to seek to establish the common good, and to make a commitment to securing authentic integral human development inspired by the values of charity in truth.

Many of Benedict’s ideas might have been viewed as roadblocks to progress during the global economy’s boom years, but his message no doubt will resonate today with many people worldwide who believe that unbridled capitalism has been ruinous.

He has choice words for the world’s financiers:

Finance, therefore -- through the renewed structures and operating methods that have to be designed after its misuse, which wreaked such havoc on the real economy -- now needs to go back to being an instrument directed towards improved wealth creation and development. Insofar as they are instruments, the entire economy and finance, not just certain sectors, must be used in an ethical way so as to create suitable conditions for human development and for the development of peoples.

Financiers must rediscover the genuinely ethical foundation of their activity, so as not to abuse the sophisticated instruments which can serve to betray the interests of savers.

-- Tom Petruno

Photo: Pope Benedict XVI. Credit: Pier Paolo Cito / Associated Press

Another dive for AIG shares as reverse-split move bombs

Tom Petruno — Tue, 07 Jul 2009 15:17:32 -0700

American International Group last year bungled its way into a huge federal rescue. Now the insurance giant's attempt to lure investors back to its stock also looks like a bust.

AIG on July 1 engineered a 1-for-20 reverse split of its depressed shares. The idea behind a reverse split is to take a low-priced stock -- usually one selling for a few dollars or less -- and boost the price by shrinking the number of shares outstanding.

The market value of the stock overall doesn’t change, just the share count: You hand in 20 shares and get one in return. But a $20 share price seems more respectable than, say, a $1 share price.

Problem is, reverse splits historically have been undertaken by lousy companies trying to make themselves look like they’re worthy of investors’ attention. The market generally isn’t fooled.

AIG shares have tumbled a total of 40% in the four sessions since the split. They fell $2.44, or 15.1%, to $13.75 today. It didn’t help that the company today suffered a setback in its attempt to get billions of dollars back from its former chairman.

One big risk with a reverse stock split is that "short sellers" who bet against stocks may regain interest in shorting a troubled company after a reverse split takes the price up from pocket-change levels. That probably isn’t the Wall Street interest that AIG hoped to rekindle with its move.

AIG remains nearly 80% owned by the government. The company is selling off pieces of itself to repay federal bailout loans, but CEO Edward Liddy told shareholders at the annual meeting June 30 that he could offer "no assurances" on how soon the government’s stake in the firm would be reduced.

-- Tom Petruno

Photo credit: Associated Press

Obama advisor Laura Tyson suggests another stimulus plan

Tom Petruno — Tue, 07 Jul 2009 11:07:53 -0700

Laura Tyson is adding her voice to those calling for more economic stimulus spending.

The UC Berkeley economics professor, a member of President Obama’s Economic Recovery Advisory Board, said in Singapore today that the $787-billion plan Congress passed in February "will have a positive effect, but the real economy is a sicker patient."

The plan turned out to be "a bit too small," she said.

From Bloomberg News:

"The economy is worse than we forecast on which the stimulus program was based," Tyson told the Nomura Equity Forum. "We probably have already 2.5 million more job losses than anticipated."

"The money is just really starting to come out in more significant amounts now," Tyson said. "The stimulus is performing close to expectations but not in timing."

Billionaire Warren Buffett also recently suggested that the U.S. may need more stimulus spending.

"It looks like we’re going to need more medicine, not less," Buffett said June 24 in a Bloomberg TV interview. "We’re going to have more unemployment. The recovery really hasn’t got going."

The administration so far has rejected calls for more spending, saying the current plan needs time to work.

But as long as the Treasury has no trouble selling mountains of new debt, the temptation to launch another stimulus plan may well grow.

Government bond yields have declined in recent weeks from eight-month highs despite Uncle Sam’s continued record borrowing.

Today, however, bidding was weaker than expected at an auction of $35 billion in new three-year notes. The notes were sold at an annualized yield of 1.52%, higher than the 1.49% forecast in a Bloomberg survey of bond dealers.

The Treasury will sell $19 billion in 10-year notes on Wednesday and $11 billion in 30-year bonds on Thursday.

-- Tom Petruno

Photo: Andrea Tyson. Credit: Munshi Ahmed / Bloomberg News

Sacramento might want to call Brasilia for some advice

Tom Petruno — Tue, 07 Jul 2009 01:00:00 -0700

California, which supposedly would be the world's eighth-largest economy if it were a standalone, might need to take some lessons in financial management from Brazil, which actually is the world's eighth-largest economy.

On the same day that the Golden State's credit rating was cut one notch closer to junk status by Fitch Ratings, Brazil was told by Moody's Investors Service on Monday that the country's credit grade may be raised from junk to investment-grade -- which would further burnish the nation's status as an emerging economic and financial power.

From Bloomberg News:

Brazil’s credit ratings were put on review for an increase to investment grade by Moody’s Investors Service, which cited the country’s “demonstrated resilience to shocks” in the global economy.

Moody’s placed both the country’s foreign and local ratings of "Ba1," or one level below investment grade, on review for upgrade. Moody’s is the only one of the three major rating companies that has Brazil below investment grade. Both Standard & Poor’s and Fitch Ratings raised Brazil to "BBB-minus," the lowest investment-grade rating, last year.

An investment-grade rating from all three ratings firms could lower Brazil's cost of borrowing and widen the investor audience for its debt. California is facing just the opposite: Market yields on the state's bonds have jumped over the last six weeks as the budget crisis in Sacramento has worsened and investors have been less willing to hold the state's paper.

California debt cut below 'A' grade as budget fight goes on

Tom Petruno — Mon, 06 Jul 2009 14:00:25 -0700

California's bond debt has a rating that starts with a "B" for the first time since 2004, after Fitch Ratings today cut the state to "BBB" from "A-minus," citing Sacramento's budget gridlock.

The new rating still is "investment-grade" -- but not by much. After "BBB" is "BBB-minus," and then the junk rating of "BB."

California has never had a junk rating on its debt, but it's tempting fate now. Fitch said it is keeping the state on "rating watch negative," meaning another downgrade is possible.

Fitch, a rival of the better known Standard & Poor's and Moody's Investors Service rating firms, is the first of the three to make a move since the state last week began issuing IOUs to cover some of its expenses. S&P and Moody's also have warned that they may cut their ratings ("A" and "A2," respectively). Fitch's decision could give them a nudge.

"The downgrade to 'BBB' is based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis," Fitch said, obviously not telling Californians anything they don't already know.

Still, Fitch said that, by maintaining an investment-grade rating for now, it was indicating that "expectations of default risk remain low." It acknowledged that, under the state Constitution, bond investors have a priority claim on tax revenue, after education funding.

Fitch had a "BBB" rating on California from December 2003 to Sept. 2004, amid the last big budget mess.

Municipal bond traders said market activity today was relatively quiet. Fitch's decision is unlikely to shock owners of California's bonds, although it may drive home that a junk rating isn't out of the realm of possibility (although many muni market analysts still believe the ratings firms won't go that low).

Market yields on California general obligation bonds have surged over the last six weeks as the state's financial situation has deteriorated, but buyers have stepped up in recent days, lured by high tax-free returns.

The annualized yield on 10-year California bonds is in the neighborhood of 5% today, down from about 5.2% at the recent peak but still well above the 4.4% yield of late May.

-- Tom Petruno

Photo: Scene of the crime: the Capitol in Sacramento

Unemployment as a lagging indicator: Is this time different?

Tom Petruno — Mon, 06 Jul 2009 07:00:00 -0700

Wall Street opens this week less confident that a turning point for the economy is on the near horizon, after last Thursday's report that the U.S. lost a net 467,000 jobs in June.

But as I noted in my weekend column in The Times, many stock market bulls are sticking with the view that the employment situation isn't a good indicator of where stocks are headed. Investors, the bulls point out, know that the job market always is the last thing to recover, and so are more likely to take their cues from other economic signposts in deciding whether stocks deserve higher prices.

Pimco CEO Mohamed El-Erian, however, takes issue with the idea that unemployment is a lagging indicator in the current recession.

He writes on Pimco's website:

"The unemployment rate is traditionally characterized as a lagging indicator and, as such, is viewed as having limited forward-looking information. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

"This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviors and outlooks.

"Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system."

Pimco, of course, is mainly a bond investor, so stock bulls will accuse El-Erian of talking his book. Bill Gross, El-Erian's co-chief investment officer at Pimco, also has been arguing for some time that the economy's structural challenges (too much debt, too little savings, etc.) will mean very slow growth, at best, in any recovery -- an environment that could favor many fixed-income investments over stocks.

But then, almost nobody expects a strong rebound for the U.S. economy this time around. The question is whether, despite high unemployment, many companies will be able to get their earnings back on a growth track with even a very modest increase in demand (which might well come from places outside the U.S.). Reviving earnings, after all, is what all the corporate cost-cutting of the last nine months has been about. And it's the expectation of rising earnings that draws investors back to stocks.

The market's spring rally was built on the assumption that the economy was no longer in a free fall, and that some kind of recovery was on the way -- a reason to hope.

After the dismal June employment report, two big tests now loom for Wall Street: Will other data this month support the optimists' view that the worst has passed for the economy overall, if not for jobs? And will companies in their second-quarter earnings reports provide guidance for the rest of the year that offers enough incentive to investors to stick around for better times?

-- Tom Petruno

For some stock sectors, the 'correction' is already here

Tom Petruno — Mon, 06 Jul 2009 06:00:00 -0700

Even counting last Thursday's slump, the U.S. stock market as a whole hasn't given much ground since the big rally began on March 10 -- frustrating sidelined investors who've been hoping for a pullback.

But under the surface there has been plenty of bloodletting among industry sectors and individual stocks over the last month or more. If buyers are still interested (a big if, it seems), they can already find a lot of issues marked down from their spring highs.

Though the Standard & Poor's 500 index was off just 5.3% through Thursday from its spring closing peak of 946.21 reached on June 12, four of the 10 main industry sectors in the index already are in "correction" mode, meaning they're down at least 10% from their highs.

The biggest loser among the 10 sectors: financial stocks, which had led the rebound from the market's winter low. The S&P 500 finance sub-index was down 12.7% through Thursday from its spring peak reached May 8.

More surprising, perhaps, is how much energy stocks have been hit since topping out in mid-June. The S&P energy sub-index was off 12.5% through Thursday from its June 11 high. Crude oil futures, which also peaked June 11, were down 8.2% through Thursday, to $66.73 a barrel.

The other two S&P sectors down more than 10% from their spring highs: materials, off 11.5%, and industrials, off 10.2%. The softness in those stocks suggests doubts about how soon the recession will end. In the industrial group, General Electric, at $11.46 on Thursday, was down 21% from its May 8 high of $14.53. (GE, of course, also has a huge financial business.) Farm machinery giant Deere & Co. has fallen 18% since May 6, to $38.53.

At the other end of the spectrum, the S&P sectors that have held up the best so far are consumer staples, off just 2.9% through Thursday from their spring high reached June 2; health care, off 3% since peaking on June 29; and technology, also off 3% from its high set on June 11.

Consumer staples (toiletries, packaged foods, etc.) and health care are considered classic "defensive" sectors, meaning places to hide in a lousy economy. Technology's relative strength, by contrast, signals that investors are counting on tech firms to lead the way if the economy is on the verge of reviving -- a view that will be tested soon by second-quarter earnings reports.

-- Tom Petruno

Photo: The statue of George Washington near the New York Stock Exchange. Credit: Andrew Harrer / Bloomberg News

Report: Goldman Sachs hit by theft of secret trading codes

Tom Petruno — Mon, 06 Jul 2009 01:12:48 -0700

Matthew Goldstein at Reuters has broken a story about a major brokerage security breach that he believes involves Goldman Sachs' vaunted trading operation.

From Goldstein:

While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution -- that sources say is none other than Goldman Sachs.

The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.

The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly profitable automated trades.

Goldstein has plenty of other details, although he says Goldman wouldn't comment on the case.

Meanwhile, Tyler Durden at the Zero Hedge blog connects the dots between the security breach, some missing information in the New York Stock Exchange's latest weekly report on computer-program trading, and "the even weirder than usual market action over the past 2-3 weeks." Read Durden here.

-- Tom Petruno