World Business News Headlines for January 16, 2009

Fears grow Steve Jobs may step down from Apple for good

Tech Central Blog: has the cancer returned?
Source: Latest Business News from Times Online | 16 Jan 2009 | 7:57 pm

Company Creates Cologne that Smells Like a Soccer Team Locker Room

The smell of a (soccer) changing room has been made into a new aftershave. Scent of Success is created from a blend of grass, sweat, boot leather and heat spray, reports the Daily Telegraph. It is made by Sports Interactive, who also make cult computer game Football Manager. They say it has been created from samples collected from a number of successful teams’ dressing rooms.

It is the latest in a long line of bizarre scents that have been bottled and sold as fragrance. Burger King (recently) launched a meat-flavoured body spray called Flame. And (early last) year the Channel 4 soap Hollyoaks launched its own aftershave and perfume range.

People stink enough as it is. Note to companies: Please don’t make it any worse.

Source: Business Pundit | 16 Jan 2009 | 1:49 pm

Wall Street points toward higher opening (AP)

AP - Wall Street is heading toward a sharply higher open as investors are focusing on big banks attempts to bolster their balance sheets.

Source: Yahoo! News: Stock Markets News | 16 Jan 2009 | 1:45 pm

Consumer prices fall for third month in December

WASHINGTON (Reuters) - Consumer prices fell by a slightly smaller-than-expected margin in December, according to government data on Friday that showed a sagging economy was exerting downward pressure on prices and raising the specter of deflation.

Source: Reuters: Business News | 16 Jan 2009 | 1:42 pm

Indications: U.S. futures up as B. of A., Citi reveal losses, gov.'t backing

U.S. stock futures point to a second advance in a row after the U.S. government injected $20 billion into Bank of America and guaranteed losses on over $400 billion in assets of both Bank of America and Citigroup.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 1:42 pm

Economic Report: Consumer prices show smallest gain in 54 years

In another sign of the depth of the global economic slowdown, U.S. consumer prices increased just 0.1% in 2008, the smallest increase in 54 years, the Labor Department reports.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 1:39 pm

Consumer prices in 3rd straight dip

Consumer prices fell in December for the third straight month, with plunging energy costs contributing to the drop, the government said Friday.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:38 pm

Consumer Deflation, The Risks Are Real

The December Consumer Price Index, or CPI measuring consumer-level inflation, is showing that the risks to deflation are actually real. Low prices are good. Low prices that go lower can generate a whole host of problems.

The Labor Department reported that the nominal headline CPI was -0.7% in December, which is not as low as November's -1.7%. Consensus estimates were roughly -0.8%. On the core CPI reading that removes food and energy (and arguably anything else volatile that you need) came in Unchanged or at 0.0%. Consensus on the core rate was +0.1%.

Interestingly enough, energy inflation fell again with a -8.3% reading in December. That follows a November reading of -17%. If we would have predicted this just last summer you would have thought we were talking upside-down.

The old argument that you need roughly 1% price hikes per year is showing that deflation "could" be a real concern. But after what we saw in food, energy, healthcare, transport, utilities, and more over the last couple of years, it is going to be hard to find too many consumers who are upset by today's data.

There is a flip-side to deflationary threats that could come into the play over the coming months. At some point, Uncle Sam might have to unwind that zero-interest rate target. And it unfortunately won't matter if the economy has shown any signs of recovery or not.

Jon C. Ogg
January 16, 2009

Source: 24/7 Wall St. | 16 Jan 2009 | 1:38 pm

Before the Bell: Citigroup, Bank of America, Intel in the spotlight

Stock market futures pointed to a second day of gains Friday as the U.S. government injected capital into Bank of America and guaranteed assets at Citigroup after heavy losses for both firms.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 1:37 pm

BofA: $20B bailout, huge Merrill loss

Bank of America has received another $20 billion from the federal government's bailout fund, along with guarantees on $118 billion of assets at the bank, to absorb its recent purchase of the ailing Merrill Lynch.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:35 pm

Bank of America posts first loss in 17 years (Reuters)

Reuters - Bank of America Corp , posted its first quarterly loss in 17 years on Friday and slashed its dividend, hours after winning a multibillion-dollar lifeline from the U.S. government to help absorb Merrill Lynch, which lost a record $15.31 billion in the quarter.

Source: Yahoo! News: Business | 16 Jan 2009 | 1:33 pm

Bank of America posts first loss in 17 years

NEW YORK (Reuters) - Bank of America Corp, posted its first quarterly loss in 17 years on Friday and slashed its dividend, hours after winning a multibillion-dollar lifeline from the U.S. government to help absorb Merrill Lynch, which lost a record $15.31 billion in the quarter.

Source: Reuters: Business News | 16 Jan 2009 | 1:33 pm

Livni flies to US as diplomatic moves over Gaza intensify

Israeli officials said their three-week offensive in the Gaza Strip may be entering its final act, as diplomatic efforts to end the crisis intensified
Source: Financial Times - US homepage | 16 Jan 2009 | 1:32 pm

Ireland nationalizes bank

Read full story for latest details.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:29 pm

Johnson Controls posts loss, shares fall

DETROIT (Reuters) - Auto parts maker Johnson Controls Inc posted a wider-than-expected quarterly loss on Friday and forecast a similar operating loss in the current quarter, sending its shares down 8.5 percent in premarket trading.

Source: Reuters: Business News | 16 Jan 2009 | 1:29 pm

Johnson Controls posts loss, shares fall (Reuters)

Reuters - Auto parts maker Johnson Controls Inc posted a wider-than-expected quarterly loss on Friday and forecast a similar operating loss in the current quarter, sending its shares down 8.5 percent in premarket trading.
Source: Yahoo! News: Business | 16 Jan 2009 | 1:29 pm

Bond prices tumble

Government debt prices sunk Friday as the government bailed out Bank of America again and after President-elect Barack Obama obtained access to the second half of the $700 billion financial rescue package.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:21 pm

Bank of America bailout buoys global stocks (AP)

AP - World markets rallied strongly Friday as investors breathed a sigh of relief that Bank of America, the biggest bank in the U.S., has been bailed out by the federal government as it tries to absorb losses from its acquisition of Merrill Lynch.

Source: Yahoo! News: Stock Markets News | 16 Jan 2009 | 1:21 pm

Intel profit sinks 90%

Intel Corp. reported a 90% drop in fourth-quarter earnings Thursday that were in line with Wall Street's reduced expectations, as demand for semiconductors remains weak.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:21 pm

Oil falls towards $35 after IEA demand report

LONDON (Reuters) - Oil slipped to around $35 a barrel on Friday after the International Energy Agency cut sharply its forecast for world oil demand this year and two of the biggest U.S. banks reported massive losses.

Source: Reuters: Business News | 16 Jan 2009 | 1:14 pm

Citi splitting up, freeing bank from toxic assets

NW YORK (MarketWatch) -- Citigroup Inc said Friday that it will realign into two businesses, Citicorp and Citi Holdings, in effect reverting back to running a banking business similar to its operations before Sandy Weill and his team turned the firm into a financial supermarket over the last decade.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 1:14 pm

Stimulus: Fix the banks first

The success of President-elect Barack Obama's fiscal stimulus plans may hinge on fixing the banking system - again.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:13 pm

Treasury, Bank of America agree on bailout

The government has extended a new multibillion-dollar lifeline to one of the country's biggest banks as officials continue to struggle with a serious crisis in the financial system. ...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 1:13 pm

Stock futures jump as BofA aid boost offsets results (Reuters)

Reuters - Stock index futures rose on Friday after Bank of America received a $20 billion government capital injection, overshadowing signs of more fallout from the credit crisis for the financial sector.

Source: Yahoo! News: Business | 16 Jan 2009 | 1:12 pm

Stock futures jump as BofA aid boost offsets results (Reuters)

Source: Yahoo! News: Stock Markets News | 16 Jan 2009 | 1:12 pm

Stock futures jump as BofA aid boost offsets results

NEW YORK (Reuters) - Stock index futures rose on Friday after Bank of America received a $20 billion government capital injection, overshadowing signs of more fallout from the credit crisis for the financial sector.

Source: Reuters: Business News | 16 Jan 2009 | 1:12 pm

Honda cuts U.S. jobs, production

Read full story for latest details.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:12 pm

Ukraine, EU chiefs seek end to Russian gas cutoff

The Ukrainian president threw Russia's plans for a weekend gas summit in Moscow into disarray by meeting Friday with European leaders in Kiev to discuss the natural gas crisis. Ten days...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 1:11 pm

Intel shares poised to open higher on heels of results

Shares of Intel track toward a higher open, playing off financial results that showed the chip giant reporting a 90% drop in fourth-quarter net profit as it navigated what Chief Executive Paul Otellini describes as a “dramatic” decline in sales.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 1:11 pm

Honda extends production halt in Britain

Honda Motor Co. said Friday it will halt production at its British factory for another two months, doubling its planned shutdown period, as the European car market fails to show any sign of
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 1:09 pm

Mortgage Rates Fall to Record Lows (BusinessWeek Online)

BusinessWeek Online - Mortgage giant Freddie Mac said on Jan. 15 that rates on 30-year fixed-rate mortgages fell below 5% this week -- the lowest level since it began surveying lenders in 1971.
Source: Yahoo! News: Business | 16 Jan 2009 | 1:08 pm

Citigroup (C): Two Businesses Need Two CEOs

Buried a bit in the news that the government had entered into a definitive agreement to share losses on $301 billion of Citigroup's toxic assets and the announcement that the company lost $8.3 billion last quarter was a description of a plan to break the firm into two pieces.

The new operations will be called Citicorp and Citi Holdings. Citicorp will function as a commercial bank. The holdings operation will have the company's brokerage and asset management businesses.

Vikram Pandit, Citi's CEO, would, it appears, be the head of both units. He has done such a poor job managing the large financial services company that it is amazing that the board would allow him to run the two piece of an operation that he has nearly ruined.. He should be left to run the traditional bank and someone with a better set of skills for managing the business of managing money should be hired as head of Citi Holdings.

Douglas A. McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 1:06 pm

Stocks love a bailout

U.S. stocks were set to advance at Friday's open, buoyed by yet another government bailout of the financial sector, despite massive losses at Bank of America and Citigroup.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 1:06 pm

Toyota and Honda cut more output amid EU gloom

TOKYO/PARIS (Reuters) - Honda joined fellow Japanese carmaker Toyota in cutting output further on Friday, as a top European official warned some of the region's manufacturers might not survive a "brutal" 2009 for the industry.

Source: Reuters: Business News | 16 Jan 2009 | 1:02 pm

Bank of America bail-out agreed

Bank of America, the US's largest bank, will receive $20bn in government aid and $118bn of guarantees against bad assets.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 1:02 pm

Using Crisis to Create an "Impossible" Competitive Advantage

FRANKFURT, Germany, January 16 /PRNewswire/ -- - How Companies can Turn the "Headwinds" of Today's Economic Crisis to Their own Advantage ...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 1:00 pm

Citigroup to split as losses grow

Struggling US banking giant Citigroup is to split the firm in two, as it reports a quarterly loss of $8.29bn (£5.6bn).
Source: BBC News | Business | World Edition | 16 Jan 2009 | 12:57 pm

Brazil's Petrobras cancels platform tender

SAO PAULO, Jan 16 (Reuters) - Brazil's state-run oil company Petrobras said late Thursday it canceled tenders for the construction of the P-61 and P-63 production platforms as it considered the prices...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 12:57 pm

London Markets: U.K. banks advance as world governments back lenders

London shares advanced on Friday, with stocks set to end a week of misery on an upbeat note as investors eyed more moves to support the banking sector around the globe.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 12:57 pm

Dollar mostly lower, gold up in morning trading

The U.S. dollar was mostly lower against other major currencies in European trading Friday morning. Gold rose. The euro traded at $1.3271, up from $1.3163 late Thursday in New York. ...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 12:56 pm

Top Pre-Market Analyst Upgrades (BKS, BCO, K, NAV, OCR, SONS, TKC)

These are some of the top pre-market analyst upgrades we have seen early this Friday morning:

Barnes & Noble (BKS) Raised to Neutral at JPMorgan.
Brink's (BCO) Started as Outperform at Oppenheimer.
Kellogg (K) Raised to Buy at UBS.
Navistar (NAV) Started as Buy at Goldman Sachs.
Omnicare (OCR) Raised to Overweight at Barclays.
Sonus Networks (SONS) Raised to Buy at Jefferies.
Turkcell (TKC) Raised to Overweight at Morgan Stanley.

Jon C. Ogg
January 16, 2009

Source: 24/7 Wall St. | 16 Jan 2009 | 12:56 pm

Europe Advances, U.S. Recedes on 2009 World's Top 25 Trains List(TM)

LOUISVILLE, Ky., Jan. 16 /PRNewswire/ -- The U.S. and Mexico gave way to Norway and Britain this year as The Society of International Railway Travelers(R) today announced its...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 12:55 pm

Bruce Power Ontario Bruce 6 reactor back in service

NEW YORK, Jan 16 (Reuters) - Bruce Power LP's 822-megawatt Unit 6 at the Bruce nuclear power station in Ontario returned to service early Friday, the Independent Electricity System Operator said in a report...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 12:54 pm

Top Pre-Market Analyst Downgrades (ABB, BCS, CPO, CYNO, FFIV, GG, HMA, HBC, MBT, NWS, TRI, VIA, VIP)

These are some of the top pre-market analyst downgrades we have seen early this Friday morning:

ABB (ABB) Cut to Neutral at Goldman Sachs.
Barclays (BCS) Cut to Sell at RBS.
Corn Products (CPO) Cut to Sell at Deutsche Bank.
Cynosure (CYNO) Cut to Hold at Citigroup.
F5 Networks (FFIV) Cut to Neutral at UBS.
Goldcorp (GG) Cut to Neutral at JPMorgan.
Health Management (HMA) Cut to underweight at Barclays.
HSBC (HBC) Cut to Sell at RBS.
Mobile TeleSystems (MBT) Cut to Equal Weight at Morgan Stanley.
News Corp. (NWS) Cut to Neutral at UBS.
Thomson Reuters (TRI) Cut to Neutral at JPMorgan.
Viacom (VIA) Cut to Neutral at UBS.
Vimpelcom (VIP) Cut to Equal Weight at Morgan Stanley.

Jon C. Ogg
January 16, 2009

Source: 24/7 Wall St. | 16 Jan 2009 | 12:53 pm

Opening Bell: 01.16.09

Citi To Split Into Bad Bank/Worse Bank (Reuters)
"Citigroup Inc unveiled a plan to break into two businesses as a way to shed troubled assets, and reported an $8.29 billion fourth-quarter loss, its fifth straight quarterly loss.

The company also said on Friday that it anticipated more departures from its board, which is losing Robert Rubin as a director later this year. Nevertheless, Citigroup shares rose 14.9 percent to $4.40 in premarket trading, in part because of hope about the bank's plans to restructure and separate its good assets from its bad ones."

Bank of America To Get $20B, $118B Guarantee (WSJ)
Apparently there's anger abound as BoA exec's feel like they've been duped because Merrill's balance sheet could reasonably be used to wipe one's ass. There's only two real ways this could go: either Bank of America comes out and says that they were caught off guard by the standing of Merrill's balance sheet, in which case you really have to ask whether or not everyone was at least sober during the valuation, or they say they knew.

They're calling the preliminary loss at Merrill at $15.41B, while the BAC 4Q numbers are in at $1.8B. Headline of press release from Bank of Amerillwide: "Bank of America Earns $4 Billion in 2008."

"A Miracle On the Hudson" (Bloomberg)
It's quite possible that's both the first and last time I'll ever quote Paterson, but it is what it is.

""It's somewhere between remarkable and miraculous; probably more miraculous," said Mann, of R.W. Mann & Co. in Port Washington, New York. "If you had choreographed this, you couldn't have done any better and couldn't have done it as quickly.""

For those of you wondering about Bankers on board the aircraft, it appears BoA had a large group on the plane, and Wells Fargo had three. Be sure to reach out to your colleagues today.

O'Bama Has Access To Remaining Tarp Money (WSJ)
It's quite possible that the expectations and optimism are far outshining the capabilities of the President Elect to perform. That said, it's also quite possible that those same expectations and optimistic views will create enough momentum to pull us out of this.

Wall Street Still Alive (WSJ)
"Though a number of the society's luminaries -- including former Bear Stearns Cos. Chief Executive James E. Cayne, Lehman Brothers Holdings Inc.'s Richard S. Fuld Jr. and ex-Merrill Lynch & Co. Chief Stanley O'Neal -- have faced rebuke and were conspicuously absent, members still standing haven't lost their sense of humor. This year's attendees gave a rare standing ovation to a rendition of Don McLean's "American Pie," rewritten to read: "Bye, bye to my piece of the pie.""

Source: Dealbreaker | 16 Jan 2009 | 12:52 pm

Johnson Controls swings to 1Q loss

Johnson Controls Inc. says it lost $608 million in its first fiscal quarter, citing soft demand from slumping automotive and construction markets and hefty one-time charges. The...
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 12:39 pm

Honda to shut UK production for 35 days

Honda is suspending work at its plant in Swindon in April and May in response to a collapse in consumer demand for cars in Europe.
Source: Latest Business News from Times Online | 16 Jan 2009 | 12:39 pm

Citigroup splits into two as it loses $8.3bn

Citigroup announced it would split into two units after reporting a fourth quarter loss of $8.29bn, or $1.72 a share
Source: Financial Times - US homepage | 16 Jan 2009 | 12:38 pm

Two-month shutdown for Honda

Honda announces plans to stop production at its plant in Swindon for the months of April and May due to a collapse in global sales.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 12:38 pm

Citi splitting into two after $8.3 billion loss

Citigroup reported a much bigger-than-expected $8.3 billion quarterly loss Friday, while the beleaguered bank also revealed plans to split up into two businesses, effectively bringing an end to the company's "financial supermarket" model.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 12:38 pm

Citi loses $8.3 billion, separates into two units

NEW YORK (Reuters) - Citigroup Inc unveiled a plan to break into two businesses as a way to shed troubled assets, and reported an $8.29 billion fourth-quarter loss, its fifth straight quarterly loss.

Source: Reuters: Business News | 16 Jan 2009 | 12:37 pm

UPDATE 1-Bioton says Polpharma deal dropped; seeks capital

* Polpharma unit drops plan to pay $143 mln for Bioton stake
Source: RSS feed - channel BNewsBusiness | 16 Jan 2009 | 12:36 pm

Earnings Watch: Updates, advisories and surprises

A roundup of the latest corporate earnings reports and what companies are saying about future quarters.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 12:31 pm

Meet Obama's new favorite business

Never mind Joe the Plumber; meet John the Manufacturer. That's what President-elect Barack Obama will be doing Friday, when he stops in Ohio to pitch his $825 billion economic recovery and job creation package.
Source: Business and financial news - CNNMoney.com | 16 Jan 2009 | 12:27 pm

MarketWatch First Take: Citigroup creates a 'bad' bank, can it build a 'good' one?

NEW YORK (MarketWatch) -- Citigroup Inc. has proven it's adept at building a bad bank. Now, we're going to find out if it can build a good one.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 12:26 pm

Europe Markets: Europe stocks make broad advance after seven losses in a row

European shares advanced broadly on Friday, with sharp gains from oil producers, mineral extractors and banks following seven straight losses on worries over the health of the financial system.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 12:25 pm

Citi loses $8.3 billion, separates into two units (Reuters)

Reuters - Citigroup Inc unveiled a plan to break into two businesses as a way to shed troubled assets, and reported an $8.29 billion fourth-quarter loss, its fifth straight quarterly loss.

Source: Yahoo! News: Business | 16 Jan 2009 | 12:21 pm

Bank of America gets $138bn lifeline

Bank of America is to get capital injection of $20bn as part of a federal government emergency package which will also see the government guarantee most of $118bn worth of loans related to the acquisition of Merrill Lynch
Source: Financial Times - US homepage | 16 Jan 2009 | 12:20 pm

A Two-Year Drought In Oil Prices

If there was ever any concern that consumers would face higher gas prices, many are now assuming that this economic worry may be gone. And the case for deflation is growing.

More and more analysts are coming to the conclusion that oil supplying nations cannot drop the price of crude fast enough to keep up with slumping demand.

According to MarketWatch, "The International Energy Agency on Friday forecast that world oil demand will drop for two consecutive years, the first time it's done so in 26 years."

If the forecast is accurate, the price that consumers pay for goods and services could be pushed down for another year because so many of the things that they buy are oil-based. The drop in crude could also make the exploration and refining of oil much less profitable, adding to the wind that deflation takes out of the sails of the economy.

Of course, all of the prediction about cheap oil may be an illusion. OPEC has not tested demand to the extent it could. It took production down by about two million barrels a day at each of their meetings in September and December. If tempted by economic need, the next cut could be four or five million barrels. Even a sharp drop in demand might not cover a cut which is that radical.

The price of oil hit its highest number, $141 last summer. The past is often the best way to predict the future. So consumers must be careful not to assume that the current low price of crude is the new normal.

Douglas A. McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 12:17 pm

Zimbabwe rolls out Z$100tr note

A Z$100tr, currently worth about US$30 is to be introduced in Zimbabwe, state media says.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 12:15 pm

Bank of Japan downgrades regions' outlook ahead of meeting

Economic conditions in Japan’s nine regions have worsened, the Bank of Japan says as the central bank revises lower its assessment of the nation as a whole for a second consecutive quarter.

Source: MarketWatch.com - Top Stories | 16 Jan 2009 | 12:14 pm

Irish bank set to be nationalised

The Irish government is to nationalise the troubled Anglo Irish Bank as its funding struggles continue.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 12:03 pm

Nationalised

Anglo Irish Bank was running out of money
Source: BBC News | Business | World Edition | 16 Jan 2009 | 11:53 am

Citi to split up group as Merrill loss hits $15bn$

Citigroup today revealed plans to split itself in two and a $235 billion ($£157 billion) Government bailout as the newly-rescued Bank of America announced that Merrill Lynch, which it acquired this month, reported a $15.3 billion loss.$
Source: Latest Business News from Times Online | 16 Jan 2009 | 11:49 am

Sony Ericsson Results: The Age Of The Cellphone Gets Interrupted

Sony Ericsson, by most measures the fourth-largest handset company in the world, missed analysts' estimates for the last quarter. The age of the endless growth of cellphone purchases may have come to an end. It may not be as temporary as the period of the recession. The market for cell phones may have reset for good.

Management at Sony Ericsson estimates that handset growth last year was about 6%., Their view of this year is that it will be worse.

Reuters writes that the firm's CEO said "Sony Ericsson forecasts that the global handset market will contract in 2009 and that the industry ASP will continue to decline."

Cell phone sales have been close to one billion units each of the last three years. They were not much below that in the three years before that. Many of the latest sales were upgrades from older phones. Viewed through the lens of that data, it is safe to say that most of the people in the world who could own a handset already do.

Rapidly growing markets like India and China have driven the lion's share of the increase in handset sales. Those markets are now moving into economic slowdowns which could quickly become recessions. Consumer spending will fall rapidly. Cell phone sales will be undermined.

Consumers worldwide are looking at all major purchases the way they look now at buying a new car. A phone does not have to be replaced every year. The latest generation of phones, most purchased in the last several quarters, could last frugal owners for a long time. A car can run for 100,000 miles. Why replace it? A cellphone can work for 10,000 hours, so the same thought process is starting to take hold.

Douglas A. McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 11:41 am

Satyam chief's custody extended

An Indian court extends custody of Ramalinga Raju, head of fraud-hit Satyam, until Monday and will hear a bail plea then.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 11:35 am

John Lewis fails to match post-Christmas rush

Trading at the John Lewis Partnership gained ground last week but the performance of the department stores and the Waitrose grocery chain was less impressive than in the first week of post-Christmas sales.
Source: Latest Business News from Times Online | 16 Jan 2009 | 11:24 am

Citigroup (C): Rebuilt Against Its Will

The rehabilitation and restructuring of Citigroup (C) was supposed to take months, or maybe a year. The big bank got a cash infusion when it sold a part of Smith Barney to Morgan Stanley. The plan for the creation of a new Citi was based on its ability to limit its losses so that it could buy time to unload other parts of its family of financial companies.

Things did not work out that way. Citi announced that it had lost $8.3 billion last quarter. There was no confidence in management. The general belief that the banking system is so badly broken fueled the fear in the government and the public that matters were going to get even worse.

The Fed will step in and do what it did for Bank of America (BAC) as its Merrill Lynch unit posted a $15.3 billion loss in the fourth quarter. Citi will also get a program which will guarantee the value of certain bad assets and keep the bank from failing.

Under the government's aid program for Citi the government will share losses on over $300 billion in assets, with a term on the guarantees up to ten yeas.Citi will immediately separate its banking unit from its brokerage and money management units. There is simply too much risk in the investment operations to keep them married to a commercial bank.

Citi will have access to loans from the Federal Reserve in additon to the loss sharing program. This federal support is based on extremely complex rules, but the net of it is that the bank will have access to the cash it needs to keep from failing.

While the moves to step in and save two of the nation's largest banks may keep the national financial and credit systems from collapse, the action also make the federal government the de facto owners of these companies.

Americas big banks are being nationalized whether the banks and the Fed want to put it that way or not.

Douglas A. McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 11:23 am

Waitrose to add 4,000 positions

Supermarket chain Waitrose says it will add 4,000 new jobs as it embarks on an expansion drive.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 11:22 am

Deflation: The Enemy Of A Depression

A run-of-the-mill economist would define deflation as the loss of money supply and credit in the markets. Simply stated, the value of money erodes as prices drop sharply. The value of labor and goods and services goes into free fall.

Investment drops in a period of deflation. Who wants to put money into assets which may continue to lose value? Who wants to buy goods and services and hire people when all of those may cost less in the future?

Deflation may not have had a bad name until it hit the Japanese economy in the early 1990s. The financial activity in the Asian nation went into a long hibernation. The pace of commerce slowed to a point which had not been seen in the modern history of the country.

Whatever the risks of deflation, it is a natural enemy of the depression which sits just on the other side of a rapidly deepening global recession. Deflation could conceivably make economic matters worse by enticing businesses and consumers to delay purchases based on hopes that prices for goods and services will keep falling. But, there is a potential benefit to a sharp drop in the value of almost everything.

The point comes when consumers believe that assets are so inexpensive that they will not be this low again for decades. A house which was once worth $500,000 is on the market for $125,000. A new appliance which would have sold for $600 a year ago can by bought for $200. Consumers, who have panicked over their debt and lost jobs, have finally saved enough money and paid enough debt so that unspeakably low prices bring them back into the market.

The same set of dynamics hold true for businesses. If they have any cash flow at all, they put it toward improving their balance sheets and hoarding cash. But, when labor which once cost $20 an hour moves down to $8, the temptation to make very modest investments in adding employees and expanding production eventually becomes irresistible.

Consumers and businesses who believe prices will fall forever may hasten a depression by deferring purchases. Deflation, however, may be the only floor that the economy can hit to prevent the global financial system from entering the worst period in over a century.

Douglas A. McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 11:05 am

Mortgage rescue plan is extended

A scheme aimed at stopping thousands of vulnerable people losing their homes is to be extended across England.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 10:56 am

Oil demand to fall again in 2009

Global oil demand will fall for a second year in a row in 2009, the first time this has happened in 26 years, a report says.
Source: BBC News | Business | World Edition | 16 Jan 2009 | 10:47 am

The Winning Idea Of The "Bad Bank"

Now that Bank of America (BAC) has been given $20 billion more capital from the government in addition to about $118 billion in guarantees against toxic asset losses, the subject of whether the government will end up owning big banks is back in the headlines.

The government set up a loss sharing of $301 billion for Citigroup as it announced over $8 billion in losses today. It will also give the firm a series of loans, if Citi needs them. And, it will.

Bank of America has a market value of $42 billion. Why shouldn't the taxpayers end up owing at least a third of the company for their $20 billion? In Citi's case, the Fed may end up with the equivalent of a 50% share.

The government has avoided answering the question of ownership by putting cash into preferred shares which can convert to common stock or be bought back by the banks. This creates the illusion that the "ownership" issue has somehow been deferred, perhaps to the day when banks can redeem the Fed's investment.

If the assets of banks continue to lose value due to failing consumer credit, corporate bankruptcies, and dropping real estate values, the idea of guaranteeing toxic assets really begs the question of government ownership of these banks. In the UK, the government is considering buying the worst assets from financial firms and putting them into a so-called "bad bank", a cesspool of loans and derivatives which may continue to lose value and drain bank reserves.

The trouble with the bad bank idea is that the government would fairly expect something in return for taking worthless paper from the financial companies. This brings the program of the government providing capital to saving banks back around to the idea that the Fed will own more equity in the nation's banks. All of the roads to saving the banks lead to the same place. Taxpayers will own the core of the banking system--the largest banks in the country.

Nationalization of banks has been discussed for months now. The government is reluctant to take over banks and control the course of private enterprise. It does not matter. That is where the road ends. Money from the TARP will inevitably increase the government's skin in the bank game.

Taxpayers can only hope that the banks reclaim their value in the next two or three years and that private capital will want to buy the government's stakes.That would be part of a normal economic recovery cycle. Companies which have lost most of their value become attractive as the rising tide lifts all boats.

The country's banks will be owned by the government in one form or another. The only question is when can these banks become private enterprises again.

Douglas A. McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 10:44 am

HK stocks inch higher as HSBC drags on market (AP)

AP - Hong Kong' stock index inched higher Friday as the U.S. government extended another lifeline to Bank of America.
Source: Yahoo! News: Stock Markets News | 16 Jan 2009 | 10:21 am

IEA predicts further fall in oil demand

Global oil demand fell in 2008 and will drop again this year amid the impact of the economic crisis, the first time since 1982 that consumption has declined for two years in a row, the International Energy Agency said
Source: Financial Times - US homepage | 16 Jan 2009 | 9:52 am

Stocks open firmer (AFP)

AFP - London shares opened firmer on Friday, snapping a series of heavy losses in a strong technical rebound sparked by a recovery overnight on Wall Street and gains in Asia.

Source: Yahoo! News: Stock Markets News | 16 Jan 2009 | 9:19 am

Media Digest 1/16/2009 Reuters, WSJ, NYTimes, FT, Bloomberg

According to Reuters, Bank of America will get a huge financial aid package from the government.

Reuters reports that Congress is advancing legislation to release the balance of the TARP funding.

Reuters says that Intel (INTC) sees margins improving in the second half.

Reuters reports that the Minneapolis Star Tribune filed for Chapter 11.

Reuters says that Sony Ericsson posted a larger-that-expected loss.

Reuters reports that three bidders are looking at Circuit City.

Reuters reports that Toyota (TM) cut North American production.

Reuters writes that Wall St. layoffs are hurting landlords.

Reuters reports that the new stimulus package would help the auto industry, airlines, and Amtrak.

The Wall Street Journal reports that Microsoft (MSFT) may have a chance to gain on Google (GOOG) by creating a deal with Yahoo! (YHOO). MSFT CEO Steve Ballmer had a chance to launch his own search product a decade ago and passed on the idea.

The Wall Street Journal reports that the Democrats released plans for a $825 billion economic stimulus package.

The Wall Street Journal reports that debt holders formed a group to negotiate with GM (GM).

The Wall Street Journal reports that JP Morgan (JPM) posted a small profit.

The Wall Street Journal writes that Yahoo!'s new CEO has a compensation package tied largely to the firm's stock price.

Th Wall Street Journal reports that the aid package may be a major benefit to tech companies.

The Wall Street Journal reports that MSNBC will makes its video more easy to search.

The Wall Street Journal reports that producer prices dropped again last month.

The Wall Street Journal writes that the ECB cut rates to 2%.

The Wall Street Journal reports that new fears of deflation will be set off by release of the Consumer Price Index.

The Wall Street Journal reports that mortgage rates fell below 5%.

The Wall Street Journal reports that Moody's altered its model for valuing CDOs.

The Wall Street Journal reports that credit losses are testing bank reserves.

The Wall Street Journal reports that new car sales in Europe hit a 15 year low.

The Wall Street Journal reports that Airbus will cut production further if orders keep falling.

The Wall Street Journal reports that the CEO of Target (TGT) will also become chairman.

The Wall Street Journal reports that The Boston Globe will cut staff.

The Wall Street Journal reports that Saks (SKS) will cut staff.

The Wall Street Journal reports that Johnson & Johnson (JNJ) won a stent patent appeal against Boston Scientific (BSX).

The Wall Street Journal reports that Sprint's (S) new prepay plan will pressure rivals.

The New York Times reports that bank losses are becoming so great that big firms may be end up with the government as the major owners.

The New York Times reports that oil continues to trade at $35 on lack of demand.

The New York Times reports that GM (GM) lowered its estimate for total US vehicles sales this year to 10.5 million which may mean it needs more money.

The New York Times said a drop in wholesale prices may cause deflation.

The FT reports that Intel (INTC) warned of a deteriorating market for chips.

The FT reports that the CEO of JP Morgan (JPM) attacked a new plan that would allow bankruptcy judges to change mortgage terms, saying ti would take lending incentives away from banks.

The FT reports that Hollywood will cut payment to actors as DVD sales falter.

Bloom berg reports that the Treasury could create a "bad bank" to buy toxic assets from banks.

Bloom berg reports that consumer prices in the US probably posted their first annual decline since 1954.

Douglas A McIntyre

Source: 24/7 Wall St. | 16 Jan 2009 | 9:07 am

Dublin nationalises Anglo Irish Bank

The Dublin government on Thursday night nationalised Anglo Irish Bank, the Irish Republic's third largest lender, which has seen the collapse of its share price accelerate in recent days amid fresh reports...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:36 am

Anglo Irish investors will get compensation

The Irish Government said today that it was drawing up a compensation scheme for investors in Anglo Irish Bank after the surprise decision last night to pull €1.5 billion (£1.3 billion) in funding and nationalise the ailing lender.
Source: Latest Business News from Times Online | 16 Jan 2009 | 8:35 am

Bank of America gets $138bn lifeline

Bank of America will on Friday receive $20bn in fresh capital from the US government and a guarantee on most of a further $118bn of potential losses on toxic assets.The emergency bail-out will help to...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:20 am

Minneapolis Star Tribune in bankruptcy filing

NEW YORK (Reuters) - The Minneapolis Star Tribune filed for bankruptcy, becoming one of the biggest U.S. newspapers yet to financially flame out under a heavy debt load and a punishing decline in advertising revenue.

Source: Reuters: Business News | 16 Jan 2009 | 8:01 am

Bank of America gets $20 billion more from U.S.

The federal government also agrees to share losses on $118 billion of the company's assets. Months after the worst...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Cook relies on core values as Jobs' surrogate at Apple

The chief operating officer's accomplishments include transforming the firm's supply chain operations. He took over for the CEO in 2004 while Jobs recovered from surgery. ...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Intel profit plunges 90% but meets expectations

The chip maker's fourth-quarter sales drop 23%, in keeping with its guidance. Shares rise 2.1% after hours. INTEL
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Stocks bounce back from steep sell-off prompted by Bank of America news

The Dow rises 12 points to 8,212 as investors who began the day worrying about a revival of the banking crisis grow optimistic that the government will again help the financial industry. ...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Children's clothing makers in a frenzy over lead testing

As buyers converge on the L.A. garment district to decide what to stock in stores, already struggling manufacturers are scrambling to have kids' items tested to comply with federal law. ...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Bankruptcy judge OKs Tribune's short-term financing plan

The L.A. Times owner also is granted more time to file schedules of assets and liabilities and other statements. ...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Warner Bros. and Fox settle 'Watchmen' copyright dispute

The agreement ends a nearly yearlong legal battle and paves the way for Warner to release the highly anticipated superhero movie March 6 as planned. ...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

A not-so-bad December for video game makers

A sales increase of 9% stands in stark contrast to the job cuts and studio closures that hit the industry last year. ...
Source: RSS feed - channel BNPaperBusiness | 16 Jan 2009 | 8:00 am

Retailer Ahold reports 13 percent rise in 4Q sales (AP)

AP - Royal Ahold NV, the operator of the Stop & Shop and Giant grocery chains in the U.S., reported sales growth of 13 percent for the fourth quarter on Friday, buoyed by a stronger dollar.
Source: Yahoo! News: Business | 16 Jan 2009 | 7:52 am

Bank of America gets big government bailout (Reuters)

Reuters - Bank of America Corp was rescued by the U.S. government on Friday through a $20 billion bailout and a guarantee for almost $100 billion of potential losses on toxic assets to cushion the blow from a deteriorating balance sheet at Merrill Lynch & Co, its recently acquired brokerage.
Source: Yahoo! News: Business | 16 Jan 2009 | 6:39 am

Bank of America gets big government bailout

WASHINGTON/NEW YORK (Reuters) - Bank of America Corp was rescued by the U.S. government on Friday through a $20 billion bailout and a guarantee for almost $100 billion of potential losses on toxic assets to cushion the blow from a deteriorating balance sheet at Merrill Lynch & Co, its recently acquired brokerage.

Source: Reuters: Business News | 16 Jan 2009 | 6:39 am

NZ stocks: Market climbs as offshore stocks recover

The New Zealand share market rose today as offshore markets recovered but the flow of local corporate news remained light. US stocks rose overnight as investors bet the government would provide fresh capital to crisis-hit banks,...
Source: New Zealand Herald - Business | 16 Jan 2009 | 6:06 am

Currency: Dollar rallies after mid-week plunge

The New Zealand dollar rallied today on short-covering ahead of the weekend after plunging this week. The NZ dollar was buying US54.70c at 5pm today from US53.40c at 5pm yesterday. It fell as low as US52.80c overnight. A day...
Source: New Zealand Herald - Business | 16 Jan 2009 | 5:25 am

Whole Foods: Too Pricey to Thrive in a Recession?

The country may be in a recession, but standing in the middle of the Whole Foods (WFMI) flagship store in Austin, Texas, you’d hardly know it. From the small stream that runs through the patio at the entrance to the half-dozen kinds of grind-your-own nut butter in the bulk foods section to the chocolate fountain at the candy counter, the store is an 80,000-square-foot monument to abundance. As a nod to tightening belts, small signs promote “Whole Deals”—in other words, cheaper items—yet there’s still plenty to bust the budget.

But three stories up, in Whole Foods’ corporate offices, CEO and founder John Mackey can’t ignore the economic crisis. For the first time in the chain’s history, same-store sales are dropping and the stock has lost about 75 percent of its value last year. In the middle of 2008 the company suspended its dividend and announced it would still open new stores, though not as many as originally planned. And in early November, the company sold a $425 million stake to Leonard Green Partners, shoring up the balance sheet yet diluting the holdings of existing shareholders.

When the CEO is also the company’s founder, “he’s not going be the guy who says, ‘let’s take a breather,’” said Scott Van Winkle, an analyst who covers the stock at Canaccord Adams. It’s too bad, he adds: “They should have made the decision to slow growth sooner than they did.”

For his part, Mackey makes no apologies for the company’s growth—it plans to open 15 new stores in 2009—nor for the decadence of the stores, which have a reputation as the kind of place where Barack Obama would be appalled by the cost of arugula. “Our mission isn’t to sell the cheapest food, it’s to sell the highest quality food”—that’s what sets Whole Foods apart, he says.

Pushing expensive food in lean times is a bold move, but Mackey has never been bland. Members of Austin’s die-hard food co-ops tagged their tough new competitor “Darth Vader” when he opened his first store in 1978. More recently, he triggered an informal Securities and Exchange Commission investigation—since closed—by posting anonymous comments about Whole Foods and Wild Oats on an Internet message board, and he’s still wrestling with the Federal Trade Commission over the 2007 acquisition of Wild Oats.

Even so, Ronald Burkle found the company’s prospects convincing. Last week, Yucaipa, the investment firm controlled by the supermarket billionaire, announced that it acquired 7 percent of Whole Foods shares. “There are substantial opportunities for the company to improve operations and its pricing image while maintaining its high-quality product offering,” Yucaipa said in its SEC filing.

In jeans and a Whole Foods polo shirt, Mackey looked more like a checkout clerk than a chief executive officer when he sat down with SmartMoney recently for a conversation about the slowing economy, the problem with the company’s “Whole Paycheck” reputation and keeping employees on board when their stock options are underwater.

SmartMoney: I was floored by the store downstairs.

John Mackey: It’s a monument to food itself. For most people, food shopping is sterile, it’s a chore. And yet Americans enjoy eating, they enjoy shopping. Food is this incredible, sensual, pleasurable thing, and our idea is to create stores that enhance that experience.

Q: Some of it seemed over the top. Does anyone really need seven different kinds of peppercorns?

A: Did you see how many people were in that store? We only need one in 100 to buy those peppercorns. And if they don’t sell, we’ll get rid of it.

Q: And yet you argue that Whole Foods isn’t an upscale place to shop.

A: It isn’t. Our first core value is to sell the highest quality, natural, organic food available. Sometimes that’s more expensive, and sometimes it isn’t. We have a value selection in our stores—we sell Monterey Jack and cheddar, we have inexpensive wines, but we’ll also have a $30 Brie and a $200 bottle of wine.

Q: But compared to Trader Joe’s, for example, you’re known for the expensive stuff.

A: Everything you can get at Trader Joe’s you can get in our private-label line at the same price. But everything at Trader Joe’s is inexpensive, so when you get to the checkout, your bill won’t be that high. And at Whole Foods, if you shop with a list and look for the least expensive items, your bill will be reasonable too. The problem is, while you were shopping, you didn’t buy all the least expensive stuff. You gave in to temptation. We get blamed when people choose the expensive stuff.

Q: That’s the argument McDonald’s makes: You don’t like the food, you don’t have to buy it.

A: I totally agree. People are responsible for what they buy and what they put in their stomachs.

Q: But you do actively tempt people. I didn’t want a cupcake until I had a sample downstairs.

A: One cupcake won’t kill you. Look, you have to develop your business around what customers actually eat. People want cupcakes. If we don’t sell ’em, they’re going to get them from our competitors. We’ve had this debate in the company, and we’ve said, “We’re not ‘Holy Foods market.’”

Q: So you’ve started promoting the cheaper items in the store; you’re giving “value tours.” Is there a contradiction here? It can’t be good for the bottom line if everyone shows the kind of self-restraint you’re advocating.

A: If our customer count didn’t go up, then obviously, our sales would go down. But if people only bought our less expensive items, they would come to realize that Whole Foods is very competitively priced, and they would tell their friends. The average ticket might go down, but the number of customers might go up.

Q: This is a tough time, and a lot of your employees have stock options. How do you keep people motivated?

A: It’s challenging. Almost every stock option in the company is worthless. Whole Foods has a philosophy of shared fate. We cut about 7 percent of the workforce last summer, which was regrettable but necessary. We tried to explain the situation. I think people will forgive you one reduction in force, but a second one will totally undermine their trust. So we cut deeply, so we wouldn’t have to cut again.

Q: How do you gauge morale?

A: You talk to people. When we were forced into that reduction in force, it was like a morgue in the offices. And I think morale is maybe 75 to 85 percent back to where it was. Still, people are afraid. These are weird times.

Q: Two years ago you dropped your salary to a dollar.

A: At the time I thought I had enough money. Now my net worth has declined about 85 percent in the last three years, so the joke is, perhaps I was a little rash. On the other hand, it’s been good for morale. At too many companies, the executives don’t bear any pain in hard times. That’s not the case at Whole Foods.

Q: In November, Leonard Green Partners took a 17 percent stake in the company for $425 million. The deal seemed to come together in a hurry. Did you panic?

A: It came together very quickly, but panic would be too strong of a word. We were concerned. If we really are heading into the worst economic downturn since the ’30s, we want enough capital to see us through. Yes, we diluted our existing shareholders, and it wasn’t the best time to sell stock—we know that—but the institution’s first goal is to survive.

Q: Wall Street was calling for you to slow growth and cut the dividend six months ago. What took so long?

A: That’s ridiculous. Our first quarter was a 9 percent comp; our second quarter was 6.7 percent. This economy has deteriorated tremendously. You can say we should have done it sooner, but there weren’t good economic indicators out there for us to see that. Nobody was predicting this financial crisis.

Q: You weren’t concerned about the ripple effects of subprime?

A: It looked like they were taking adequate measures to contain it. When was the last time something like this happened?

Q: You’re back to blogging. Why do you do it?

A: It’s fun. I really do believe that the 21st century CEO is going to be more accessible and transparent. I can’t just live in an ivory tower and expect to understand what’s going on.

SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.

Source: SmartMoney.com | 16 Jan 2009 | 5:00 am

Fannie Mae's Last Stand

"The chairman of the universe.”

“Washington, D.C.’s Medici.”

“The face of the Washington national establishment.”

“One of the most powerful men in the United States.”

All those phrases were used to describe a man you may never have heard of: Jim Johnson, the C.E.O. of mortgage giant Fannie Mae in the 1990s. Fannie was then one of the largest, most profitable companies in the world, with a stock-market value of more than $70 billion and more earnings per employee than any other company in America. (By comparison, G.M. at its peak, in 2000, was worth only $56 billion.) On one level, Johnson, now 65 years old, was just another businessman with a lot of money and multi-million-dollar houses in desirable locations from D.C. to Sun Valley, Idaho, to Palm Desert, California. Chairman of D.C.’s premier arts venue, the Kennedy Center, and one of its top think tanks, the Brookings Institution, Johnson was out “wearing white-tie and black-tie every night,” says Bill Maloni, Fannie’s former chief lobbyist. “Everyone wanted a little bit of Jim.”

But Johnson was also a political force, because the company he ran had a public mission—literally. It had been chartered by Congress to help homeownership. Johnson liked to paraphrase the old motto about General Motors: “What’s good for American housing is good for Fannie Mae,” he’d say. Accordingly, he built Fannie into what former congressman Jim Leach, a Republican from Iowa and longtime Fannie gadfly, calls “the greatest, most sophisticated lobbying operation in the modern history of finance.”

He may be right. John McCain was embarrassed last summer by revelations that his campaign manager, Rick Davis, had served as the president of the Homeownership Alliance, an advocacy group for Fannie and Freddie Mac, Fannie’s smaller brother. The “revolving door,” as people call it, between the Hill and Fannie and Freddie spun so quickly that it’s actually more surprising when someone isn’t on the list than when they are. Rahm Emanuel served on Freddie’s board! Right-wing godfather Grover Norquist lobbied for Fannie! Newt Gingrich was a consultant for Freddie, and Ralph Reed was a consultant for Fannie!

The Princeton-educated son of a Minnesota state legislator, Johnson has silver hair and round tortoiseshell glasses, which give him a warm appearance that is belied by the hard planes of his face. Indeed, he was “very warm, very nice,” in the words of one former Fannie executive, but also “very hard-ass.” In 1996, Richard Baker, a Republican representative from Louisiana, complained that the preface to a Treasury Department report on Fannie had been watered down to make it friendlier to the company. Rumors flew that this had been accomplished after Johnson, or someone else high up in the company, had simply made a call to Treasury Secretary Robert Rubin or President Bill Clinton, both of whom were Johnson’s personal friends. (Johnson and Clinton had met at a 1969 gathering on Martha’s Vineyard.) Johnson has denied calling either man, and has said that he and Rubin had a policy while Rubin was Treasury secretary that they would not discuss business. But, under Johnson, Fannie Mae had a reputation for never losing a fight. “The old political reality was that we always won, we took no prisoners, and we faced little organized political opposition” is how Daniel Mudd, son of journalist Roger Mudd and Fannie’s last real C.E.O., later described Fannie’s golden years.

On December 15, 1998, Jim Johnson’s retirement dinner was held at the National Museum for Women in the Arts. That seems to have been the second choice—according to The Washington Post, the gala was supposed to have been in the U.S. State Department’s Benjamin Franklin Room, which could be used by outsiders only if a government official requested it. The Post began making calls after it got hold of an invitation, at which point State Department lawyers pulled the plug. But the dinner was grand in any event. Rubin spoke, as did comedian Bill Cosby and Fannie board member Bill Daley, the brother of Chicago’s current mayor.

The press reported Johnson’s compensation in his final year as around $7 million, but an internal Fannie Mae analysis (which assumed a high stock price) said that the real number was closer to $21 million. Plus, he got perks that could add up to half a million a year: a consulting agreement, two support-staff employees paid for by Fannie Mae, a car, and partial payment for a driver.

There were rumors that Johnson was angling to become Treasury secretary. Instead, in 1999, he became one of the first outside directors of the investment bank Goldman Sachs, where Rubin had been C.E.O., and where current Treasury secretary Henry Paulson presided at the time. Johnson became the head of the compensation committee, making him the closest thing Hank Paulson had to a boss.

Flash forward to just 10 years later. On Friday, September 5, 2008, Treasury Secretary Paulson sat in a conference room at an obscure government agency known as the Federal Housing Finance Agency (F.H.F.A.), which had been charged with regulating Fannie and Freddie. Next to Paulson sat Jim Lockhart, the director of F.H.F.A. On Lockhart’s other side was Ben Bernanke, chairman of the Federal Reserve. Across the table sat Dan Mudd, who had become Fannie’s C.E.O. in late 2004. By the summer of 2008, Fannie and Freddie owned or guaranteed $5.2 trillion of American mortgages, roughly half the $12 trillion total. Just six weeks before the September 5 meeting, Lockhart had said publicly that Fannie Mae’s capital was “well in excess” of what it needed to survive the mortgage storm that was engulfing the nation. But at the meeting he announced that the company’s capital was, in fact, insufficient. The government officials told Mudd that his company had to give its consent to something called conservatorship, which meant that the government would take it over, pretty much wiping out shareholders—not because Fannie needed capital at that moment, but because they believed Fannie would need it in the future. Mudd was out. The message to Fannie executives, says one person who was in the room, was crystal clear: “If you oppose us, we will fight publicly and fight hard, and do not think that your share price will do well with all of the forces of the government arrayed against you.”

There was also a threat that F.H.F.A. would make life very unpleasant for both the board and management if they didn’t agree to the government’s terms, says another Fannie executive. “That’s really not true—there were no threats,” claims Lockhart, although he adds, “We were very firm.” Steve Ashley, former chairman of Fannie’s board, asked what the government wanted Fannie to do that it wasn’t already doing. The Fannie team didn’t feel that any good answers were given.

A lot of people assume they already know the story of Fannie’s fall from grace. In a narrative that has been repeated incessantly in op-eds and on cable TV, there were good guys and bad guys. The good guys were the Republicans, who had tried to rein in Fannie and Freddie (which was also put into conservatorship that same day), and the bad guys were the Democrats, who wanted to put people into houses they couldn’t afford with subprime mortgages, and Fannie itself, which took advantage of its supposed mission to enrich its executives at the expense of taxpayers. Some even argue that Fannie and Freddie—“the toxic twins,” former Connecticut Republican representative Chris Shays called them—are to blame for the entire economic meltdown. They were “the match that started this forest fire,” according to John McCain. On October 21, a group of House Republicans wrote to Attorney General Michael Mukasey, requesting that the Justice Department appoint a special counsel to investigate Fannie and Freddie executives. (The F.B.I. is investigating both Fannie and Freddie.) Jim Johnson, by last June the vetter of vice-presidential candidates for Barack Obama, had to resign the post due to allegations that he had gotten more than $7 million of loans—some at favorable rates—from scandal-ridden Countrywide Financial, a major Fannie Mae customer whose former C.E.O., Angelo Mozilo, was a friend of Johnson’s. (Johnson said at the time that he received no special favors.)

But there’s a very different—albeit equally radical—version of reality. In this version, which is told by former Fannie executives and shareholders, Fannie was shot, not because it had to be, but because it could be. “The weekend massacre” is how one former Freddie lobbyist describes the events of the September 5 weekend. “My view is [the Bush] administration said we’ve got four months to remove this thorn in our side,” says Tim Howard, who was Fannie’s chief financial officer from 1990 to 2004. “There will never be another time. We’ve got to do it now.”

It is worth noting that thus far the government has put not a dime into Fannie and only $13.8 billion into Freddie—which is a drop in the bucket compared to the taxpayer dollars that have gone to some other firms, such as the $45 billion Hank Paulson has handed Citigroup. In this alternative narrative, it was Paulson’s rash action of taking over Fannie and Freddie that helped cause the financial meltdown. As famous money manager Bill Miller, the chief investment officer of Legg Mason Capital Management, wrote in a recent letter to his investors: “When the government pre-emptively seized [Fannie and Freddie] not because they needed capital and could not get it, but because the government believed they would run out in the future, then shareholders of every other institution that needed or was perceived to need capital did the only rational thing they could do—sell, in case the government decided to pre-emptively wipe them out as well.”

In truth, Fannie was a company with extraordinarily powerful enemies. They spanned the decades, the two parties, and the ideological spectrum, from Reagan budget director David Stockman to Clinton Treasury secretary Larry Summers to President George W. Bush, and from Ralph Nader to former Federal Reserve chairman Alan Greenspan. These enemies, who detested the privileges Fannie got from its congressional charter, had long wanted to drastically curtail the company—or kill it outright. Johnson called the battle a “philosophical dispute with deep roots and many, many branches,” and it was, but it was also a personal dispute based on rivalries and jealousies. “The War of the Roses” is how a former Fannie executive describes it.

As in most wars, there is fault on both sides. Although in 2000 the Department of Housing and Urban Development (HUD), under Andrew Cuomo, increased the requirements that Fannie and Freddie buy loans made to lower-income people, a dramatic increase came in 2004—under the Bush administration. Some people believe it did so merely in order to pressure the companies into agreeing to new regulation. But Fannie itself isn’t a hapless victim, either. In the end, it was Fannie executives who made a business decision to stake their future on risky mortgages that had nothing to do with helping people own homes. The company used its political power to stymie effective regulation, and its extreme aggressiveness and arrogance gave its enemies license to do things they never would have done to a normal company. And, oh, did they ever.

The Vampire Issue

Gary Gensler, the Treasury undersecretary for domestic finance in the final years of the Clinton administration, likes to tell a story about the deal Alexander Hamilton cut with Thomas Jefferson and James Madison back in 1790. Jefferson and Madison agreed that the nation would assume the debt of the states; Hamilton agreed that the capital of the country would not be in New York, but rather on the Potomac. “This was a very wise move,” says Gensler, “because for about two centuries it separated the nation’s financial capital from its political capital.” Then he chuckles a little. “It worked until Fannie Mae and Freddie Mac came along.”

The Federal National Mortgage Association (Fannie Mae) was founded in 1938, a creature of F.D.R.’s New Deal. The Federal Home Loan Mortgage Corp. (Freddie Mac) came along in 1970, when the thrift industry decided that Fannie needed a competitor. Referred to as Government Sponsored Enterprises, or G.S.E.’s, they were created to help homeownership, but that has never been because they lend money directly to homeowners. Instead, Fannie and Freddie bought mortgages from the local institutions—banks, thrifts, and mortgage originators—that had made them, which relieved those mortgage-makers of both the credit risk (the risk that the homeowner wouldn’t pay) and the interest-rate risk (the risk that the bank would earn less on the mortgage than it paid on its debt). This enabled the mortgage-makers to go out and make more loans.

In addition to having a congressional mandate to aid homeownership, Fannie and Freddie also had shareholders who wanted to see profits, just like Citigroup or General Electric or any publicly traded company. That’s because in 1968 President Lyndon Johnson, who needed money to pay for the Vietnam War, decided to remove Fannie from the government’s balance sheet by having it sell shares to the public. Freddie followed suit in 1989.

And yet, Fannie and Freddie weren’t just like Citigroup or General Electric, or any normal company, because they kept an array of special perks that came with their congressional charters. Among those perks: an exemption from state and local income taxes, presidential appointees on their boards of directors, and a line of credit with the U.S. Treasury. This last was by far the most important, because the line of credit—eventually $2.25 billion for each company—implied to many investors that the full faith and credit of the U.S. government stood behind Fannie and Freddie. Officially, everyone denied that that was the case, but this “double game”—as Rick Carnell, the Treasury undersecretary for domestic finance in the 1990s, called it—enabled the companies to raise money at a cost that was just a smidgen higher than that of the government itself, thereby providing them with an enormous competitive advantage over ordinary financial institutions.

As the mortgage market evolved, and finance grew more sophisticated, Fannie and Freddie came to make their money in two ways. One was supposedly conservative: they were paid a small fee by the mortgage-makers to guarantee that the homeowner wouldn’t default. And for most of their history, they wouldn’t buy just any loans, but rather loans that conformed to certain size limits (thereby excluding so-called jumbo loans, more than $417,000) and fairly strict credit standards. Then they repackaged these loans into what are known as mortgage-backed securities, and sold them to other investors. The new investors were willing to take the interest-rate risk, but didn’t have to worry about evaluating each and every homeowner’s ability to pay—a task of enormous proportions—because Fannie and Freddie guaranteed that. Today, this is the $3.7 trillion in mortgages Fannie and Freddie guarantee.

The other way Fannie and Freddie made money was when they began to repurchase their own mortgage-backed securities, and to buy similar securities that were created by Wall Street without the G.S.E. guarantee, and hold them in a portfolio. Then Fannie and Freddie pocketed the difference—what Greenspan called “the big fat gap”—between what the mortgages yielded and the companies’ own cost of borrowing funds. This was an immensely profitable business: Wall Street analysts estimated that it provided up to three-fourths of Fannie’s and Freddie’s earnings, and today the portfolio business comprises most of the $1.5 trillion in mortgages that Fannie and Freddie own.

This second way of making money became the source of great controversy. Critics, most notably Alan Greenspan, argued that the portfolio wasn’t worth any risk at all because it did nothing to put people in homes and existed only to make money for the companies’ executives and shareholders. He and other critics didn’t want just to modify Fannie’s and Freddie’s business. They wanted to drastically curtail it—or, better yet, wipe out the two G.S.E.’s altogether. And so it was only human nature that Fannie and Freddie fought back—hard. Or, as former Fannie chief lobbyist Bill Maloni, whose Friday-night poker games for Washington power players were the stuff of legend, wrote on a blog, “One fact of the GSE world is that you will be slaughtered either for being a sheep or a wolf, and I’d much rather meet my fate as a predator than as a lamb chop provider.”

Maloni and his bosses felt that they couldn’t lose any battle, no matter how small. “You punch my brother in the face, I’ll burn down your house” was one Fannie Mae saying. Another was “It’s better to throw one brick too many than one brick too few.”

But Fannie, no matter how aggressive it was, could never stop the criticism. Within Fannie, people called the desire to shrink them or kill them the “vampire issue”—because Fannie could never make it go away.

Jim Johnson had come to Fannie in 1990. His predecessor, David Maxwell, had been on the tennis team at Yale and was “the kind of man who sends only handwritten notes,” recalls Maloni. But Maxwell was also a tough cookie who knew how to get what he wanted. When he left, in 1991—with a $19.5 million retirement package—a humorous going-away video showed corporate cars leaving Fannie’s offices with body bags in the trunks.

Maxwell had met Johnson at a small Washington dinner party in 1985. Johnson was a partner at Shearson Lehman, where he’d landed after he and Richard Holbrooke (who would go on to become ambassador to the U.N. under President Clinton) sold a consulting firm they’d founded to the investment bank. Johnson’s world encompassed both business and politics. He had worked on the campaigns of Eugene McCarthy and George McGovern, and then served in the Carter administration as Walter Mondale’s executive assistant (and later the chair of his presidential campaign), during which time he married Mondale’s press secretary, Maxine Isaacs, now a lecturer at the Harvard Kennedy School. When Maxwell retired, he chose Johnson as his successor over protests from President George H. W. Bush’s people, who claimed Johnson was a partisan Democrat.

It was Johnson who “took the seeds that David Maxwell sowed and [grew] them far beyond what David Maxwell dreamed,” as Countrywide chief Angelo Mozilo later told a reporter. Like Maxwell, Johnson cut a charming, suave figure in society, but under his Minnesota-nice exterior was the heart of a born fighter. “In daily life, he’d say things like ‘We’re going to cut them off at the knees,’ ” says a former Fannie executive.

A key test for Johnson came early in his tenure, when Congress began work on how best to regulate Fannie and Freddie. The resulting legislation, which allowed the G.S.E.’s to hold lower amounts of capital than other financial institutions, was what one analyst later called Johnson’s “finest moment.” Fannie lobbied relentlessly, using a letter from former Fed chairman Paul Volcker, who said that if Fannie reached its proposed capital standards it would be able to maintain its solvency.

Fannie’s allies in Congress also made sure that the new regulator—which was known as the Office of Federal Housing Enterprise Oversight (OFHEO) until its name was changed to the F.H.F.A. in the summer of 2008—was placed inside HUD, which had no experience regulating a financial-services company, and that OFHEO, unlike any other regulator, would be subject to the appropriations process, meaning its funding was at the mercy of politicians—politicians who often took their cues from Fannie.

Not surprisingly, OFHEO was a notoriously weak regulator. For almost three years, from February 1997 to September 1999, the agency didn’t even have a director. “The goal of [Fannie’s] senior management was straightforward: to force OFHEO to rely on [Fannie itself] for information and expertise to such a degree that Fannie Mae would essentially be regulated only by itself,” wrote OFHEO in a report years later.

Johnson also addressed Fannie’s other big problem, which was that homeowners and politicians never really understood what it did. “There’s nothing in the homeowner’s life called Fannie Mae,” he’d say. So he had to show homeowners that the company was indispensable. The cornerstones of his strategy were the Fannie Mae Foundation and the Partnership Offices. In 1994, Fannie began opening offices in congressional districts around the country. They issued thousands of press releases, which usually featured a local politician prominently assisting Fannie in some good housing-related deed.

In 1995, Johnson seeded the Fannie Mae Foundation with $350 million in Fannie stock. In the ensuing years, the foundation gave away millions of dollars to organizations ranging from the Cold Climate Housing Research Center, in Fairbanks, Alaska, to the Congressional Hispanic Caucus Institute. All of this, along with the alliances Johnson built with others in housing, including homebuilders and real-estate agents, helps explain all the outcry today about Fannie’s and Freddie’s lobbying dollars—$170 million over the past decade, or just a little less than what the American Medical Association spent, according to the Associated Press. But that misses the point. It’s like counting only one arm on a giant octopus. “They ran a battle plan that would make Patton proud. It was 24-7 and never anything left to chance,” says former congressman and Fannie antagonist Richard Baker today.

Despite what right-wing critics now charge, however, Fannie and Freddie weren’t big risktakers, even after the 1992 legislation in which Congress also mandated that they had to buy a certain number of mortgages made to people with lower incomes. Critics now charge that this was when Fannie began to engage in risky lending practices. But, in reality, Fannie was extremely careful about the credit risks it took. Johnson was a master at announcing plans that sounded very grand—such as the trillion-dollar initiative, in which Fannie would buy a trillion dollars’ worth of mortgages to help housing—but didn’t really cost much. “About 98 percent were done at market rates [i.e., mortgages they would have bought anyway],” says a former employee. “We were giving away a little at the edge of the big machine.” Or, as Maloni puts it, Johnson could say to a member of Congress, “ ‘Have you seen our initiative for the handicapped?’ It might have only been for a few dozen loans, but our intent mattered.” Johnson would tell people that “the [congressional] housing goals had no teeth.” Indeed, during those years, Fannie and Freddie faced harsh criticism that they did less—not more—to support affordable housing than private lenders did.

This wasn’t because Fannie people were cynical about affordable housing. Quite the contrary: many referred to themselves as “housers,” which is slang for those who believe that better housing is the cure to all of society’s ills. But the company’s leaders knew that they couldn’t afford to make many unsafe loans, because any sign of financial weakness would be grist for their critics.

If the 1990s were a golden time for Fannie’s political power, they were for its financial power as well. Fannie’s market valuation grew from $10.5 billion at the beginning of the decade to more than $70 billion by the end. On Wall Street, Fannie and Freddie were big business—all those mortgage-backed securities and all that debt to fund their growth were sold through Wall Street firms—and “people dealt with them as if they were sovereign credits,” says one former banker. There was even talk, in those days of no federal deficit, that Fannie and Freddie debt would become the substitute for U.S. Treasuries.

The G.S.E.’s also became the place for ex-politicians to work. The Washington Monthly once declared that after he left the White House, Bill Clinton should go to Fannie because “scoring an executive post at Fannie Mae is recognized around establishment Washington as the equivalent of winning the lottery.” After all, where else could you make Wall Street–type money with no financial skills? And where else could you make so much money as a lobbyist?

In retrospect, this was a balancing act that was almost destined to fail. As Fannie and Freddie got bigger and more powerful, they struck even more fear into the hearts of those who resented their size and power. “We became dominant so quickly that we scared people,” says former Fannie chief financial officer Tim Howard today. And as a former top lobbyist for Fannie says, “A company like Fannie Mae, which has defined itself in Washington through its public mission, but which also has very well-paid executives, will have a hard time staying in the sweet spot.”

Profits of Doom

Every winter, Fannie Mae held a conference for Wall Street analysts and major investors. One year, right before Johnson retired, the theme song was a customized version of the song “The Best Is Yet to Come,” popularized by Frank Sinatra. Fannie Mae executives dressed up in top hats and tails to perform it. Frank Raines, who took over from Johnson as C.E.O., told investors that “the future’s so bright that I’m willing to set as a goal that our earnings per share will double over the next five years.” A report by the research firm Sanford Bernstein noted that the combined assets of Fannie Mae and Freddie Mac exceeded, in dollar terms, the G.D.P. of any nation except the U.S., Japan, and Germany.

When Franklin Delano Raines was named Johnson’s successor, he became the first African-American C.E.O. of a Fortune 500 company. Born in 1949 in Seattle to blue-collar parents—his mother cleaned offices at Boeing and his father was a custodian at the Seattle Parks Department—Raines went to Harvard, where he joined both the Young Democrats and the Young Republicans, and was named a Rhodes scholar. He interned in the Nixon White House and then served in the Carter administration, before leaving government to become a partner at the investment bank Lazard Frères. After 11 years at Lazard, Raines was spending four days a week on the road. He left, without his next move planned, in order to spend more time with his three young children. In 1991, when Johnson offered him the vice-chairmanship of Fannie Mae, Raines said yes—Fannie’s offices were just a mile and a half from Raines’s seven-bedroom Colonial home in Virginia.

In 1996, President Clinton lured Raines away from Fannie by appointing him the director of the Office of Management and Budget. Raines asked Clinton how long the job would last, and Clinton replied, “Until you balance the budget.” Within two years Raines produced the first balanced budget the U.S. had seen in 30 years. Later, he would be amazed to find himself painted as a partisan Democrat, because, during his time at O.M.B., Democrats had been angered by what they saw as his support for Republican fiscal policies. In 1995, Raines was appointed to the board of Boeing, where his mother had scrubbed floors. In 1998 he returned to Fannie Mae. At the time, there was talk that one day he would become the first black president of the United States.

There is no one who says that Franklin Raines isn’t incredibly smart. But praise for Raines’s intelligence is often accompanied by criticism of his interpersonal skills. “He’s very introverted,” says one former executive. “He cannot lower himself to make nice to people he considers intellectually inferior.” “Frank hurt himself,” says another. “He lacks a certain understanding of how to best position the other person so that you get what you want.”

Inside Fannie, there was also skepticism about the promise Raines made to Wall Street to double Fannie’s earnings from $3.23 per share in 1998 to $6.46 per share in 2003. “All the V.P.’s in the company looked at each other and said, ‘How is that going to happen?”’ says a former executive. The promise, combined with the lure of financial rewards, created an unhealthy pressure throughout the company. In 2000 the head of Fannie’s office of auditing gave a speech to the company’s internal auditors. “By now, every one of you must have 6.46 branded in your brains,” he said. “You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breathe, and dream 6.46 After all, thanks to Frank, we all have a lot of money riding on it.”

Almost immediately in Raines’s tenure, the criticism of the G.S.E.’s took on a new ferocity. One of the first salvos was fired by the Clinton Treasury Department under Larry Summers, who had replaced Rubin in the summer of 1999. Treasury workers knew that taking on Fannie was akin to political suicide, but “everyone jumped off together,” in the words of one former appointee, because they were all so convinced that Fannie and Freddie would eventually fall on top of taxpayers with a crushing thud. One of Summers’s goals was to weaken the perceived ties between the G.S.E.’s and the U.S. government, which was enabling the G.S.E.’s to take on too much risk. Most notably, on March 22, 2000, in congressional testimony, Gary Gensler said that the U.S. Treasury should consider cutting the lines of credit that Fannie and Freddie had with the government.

The response from Fannie Mae was immediate and furious. Tim Howard called Gensler’s comments “inept” and “irresponsible.” Fannie even tried to get the White House to distance itself from the Treasury, according to one person.

What has never been disclosed before is that, even before Gensler’s comments, and through the summer of 2000, Treasury held a series of meetings—some in a room just down the hall from Summers’s office—with Fannie’s top executives, in which Fannie tried to get Treasury to sign off publicly on a set of initiatives Fannie had devised in the hopes of appeasing its critics. Both sides describe Fannie’s strategy in the same way: keep your friends close and your enemies closer. But the negotiations came to nothing. One explanation is that the chemistry between Summers and Raines was “horrible,” in the words of one former executive. “The two of them were so alike,” says this person. “They were both arrogant, stubborn sons of bitches, and they both viewed themselves as the smartest guy in the room.”

Another explanation is that Summers realized that if Treasury supported Fannie in any public way it would only strengthen its apparent ties to the U.S. government, so he backed off. “Treasury was too smart,” Howard says now. “Larry wouldn’t bite.”

But perhaps the best explanation is that there just wasn’t a deal to be cut. Treasury officials simply didn’t believe Fannie’s arguments. As for Fannie, “you have to have some level of trust that they’re not trying to do you in, and there wasn’t that level of trust,” says another former Fannie executive.

As the critics became more vehement, Fannie’s responses became ever tougher. Its customers, including major banks, who were terrified of its rapid growth and Raines’s grand plans, set up a group called FM Watch, which began its own anti-G.S.E. lobbying effort. Fannie responded by comparing FM Watch to Slobodan Milošević, the Serb dictator who was charged with crimes against humanity for his role in the Balkan wars. “I think Frank was scared that he couldn’t be as tough as Jim, and so he overcompensated,” says a former executive.

Operation “Noriega”

When George W. Bush ran for president, part of the Republican Party platform was that “homeownership is central to the American Dream.” Those words were manna for Fannie and Freddie. And Bush appointed people to their boards, including Yale classmate Victor Ashe and campaign donor Manuel Justiz. (“It is a great honor to be appointed by the President to serve on the board of a company with such an important housing mission,” wrote the Bush appointees in a letter to OFHEO in late 2001.) In 2002, Karl Rove invited Raines to Bush’s economic summit in Waco. Raines still keeps a “Doonesbury” cartoon on his wall that features an admiring Bush saying, “Franklin can tell you … ”

Perhaps most notably, after a 2002 event in Atlanta in which Bush announced his efforts to help 5.5 million black and Hispanic families buy homes before the end of the decade, both Raines and Freddie C.E.O. Leland Brendsel flew back with him on Air Force One.

Then the Bush administration’s attitude changed dramatically. Both sides point to the same catalyst: Enron. “It was as if someone flipped a switch,” Raines says today. A former Bush-administration official says that the last thing the president wanted was to be at the center of another corporate scandal, and if you were looking for likely candidates, how could you miss Fannie and Freddie, with their longtime critics and thin capitalization? Raines, for his part, thought that the administration wanted to deflect the criticism it got for its ties to Enron by pointing at what it could claim was a Democratic scandal in the making. In 2003, Bush’s chief of staff Andrew Card was put in charge of a policy-review group. Soon thereafter, Bush pulled his presidential appointees from the G.S.E.’s boards.

And then there was Fed chairman Alan Greenspan. He was friendly with Raines, had regular lunches with him, and came to the grand Christmas parties at Raines’s home—but he never got past his deep suspicion of the G.S.E.’s. To wit: the portfolio business was a ticking time bomb, and who needed Fannie and Freddie anyway? Big banks, which were supposedly subject to the discipline of the market, were better holders of mortgage risks than the G.S.E.’s.

Although it didn’t happen immediately, Greenspan’s thinking on the G.S.E.’s soon came to dominate the Bush administration’s thinking on them. “[Greenspan and the Bush administration] weren’t interested in having a strong regulator,” says Howard today. “They were interested in constraining Fannie and Freddie. Obviously, Fannie and Freddie weren’t going to agree to that.” So someone had to win, and someone had to lose.

The fight became both nasty and personal in early 2004, when Raines sent what one person calls a “fuck you” letter to Andrew Card. This came about after the homebuilders complained to Raines that Card had told them Raines had agreed to regulatory compromises the homebuilders didn’t want. After that the White House took on Fannie and Freddie in an organized, orchestrated way that was akin to how Fannie itself had long operated. Some of those on the inside jokingly referred to their assault as “Noriega”—as in Manuel Noriega, the former Panamanian dictator and drug kingpin whom the U.S. military blasted with loud, incessant rock music during its attempt to get him to leave a Vatican compound and surrender.

Congressman Barney Frank, a Massachusetts Democrat and longtime supporter of the G.S.E.’s, told a Wall Street analyst that “the [Bush] administration is engaged in a strategy of political attacks on the G.S.E.’s, designed to pressure them into accepting the administration’s regulatory-reform bill by depressing their stock prices.”

But the best weapon the G.S.E.’s opponents could have had was handed to them by Freddie Mac itself. On June 9, 2003, Freddie’s entire top management team was ousted after the company confessed to needing to re-state its earnings for the past three years. They had understated—not overstated, but understated—earnings in order to produce the smoothly growing earnings that investors most valued.

Just days before Freddie announced its accounting error, ofheo had signed off on Freddie’s management and internal controls. This very public mistake was a huge black eye—a “humiliating experience,” in the words of Steve Blumenthal, then ofheo’s deputy director—for an agency that was already smarting from years of perceived and real condescension.

Not that anyone would have guessed that OFHEO’s director at the time, Armando Falcon, was a guy to take on the G.S.E. machine. A Texas Democrat who was appointed by Clinton to head OFHEO in 1999, Falcon had been raised near San Antonio by a father who was an aircraft mechanic. On the surface, he seemed like a shy, gentle soul—but he was far more politically savvy and ambitious than anyone would have expected. And he had Steve Blumenthal, a longtime Republican Hill staffer who viewed himself as a warrior, by his side. Even OFHEO’s supporters say that Falcon and Blumenthal were emotionally invested in getting Fannie. And even though Falcon is a Democrat, he and the White House both wanted the same thing. In early 2004, over Fannie’s protests that “there should be no question about our accounting” in the wake of Freddie’s problems, OFHEO launched a review of Fannie’s finances.

Fannie fought back in classic Fannie fashion. They tried to get Falcon and Blumenthal fired. Via a staffer who was a longtime friend and poker buddy of Maloni’s, Fannie got Republican senator Kit Bond of Missouri to launch a counter-investigation into OFHEO. The resulting 2004 report from the HUD inspector general (I.G.) came to some startling conclusions that couldn’t be dismissed as politics as usual, however. It claimed that Falcon and Blumenthal’s campaign against the G.S.E.’s was both ugly and relentless. It accused OFHEO of taking what one source within OFHEO called a “publicity-driven approach to oversight” with a “very strong intent to embarrass Fannie Mae.” A witness recalled that Blumenthal was “almost gleeful” when Fannie’s stock went down. (Blumenthal denied being gleeful, but did say, “You can’t hurt them enough to matter.”) Even more troubling was that both OFHEO’s chief accountant, Wanda DeLeo, and its chief examiner, Scott Calhoun, complained that Falcon and Blumenthal were overstating Fannie’s problems or prematurely reporting some of OFHEO’s findings, partly for political purposes. Another witness, who wanted to remain anonymous, had this way of explaining OFHEO's strategy: “Everybody runs for cover if somebody’s accusing a company of some impropriety in terms of their accounting. All of a sudden, they don’t have any friends anymore.”

An online exchange that took place in December 2007 shows how bitter emotions were, and still are, between Fannie publicist Bill Maloni and Blumenthal.

Maloni: “A HUD IG in a GOP Administration—with no Dems involved in the process—revealed the game you and your friends were playing.… Why would a regulator turn to guerilla tactics and try and financially injure one of its regulated institutions?”

Blumenthal, who didn’t directly answer the question, responded: “It has been my privelege [sic] to fight people like you all my life. Corrupt, fundamentally dishonest, cowards.… The HUD IG didn’t intimidate me, and a Chevy Chase wanna-be thug doesn’t either.” (Maloni now lives in Chevy Chase.)

Falcon and Blumenthal accused Fannie’s management of seeking to “misapply and ignore accounting principles” in order to meet Wall Street’s earning expectations. Although much of this was due to the implementation of a complicated new accounting rule for derivatives—one that caused hundreds of other companies to re-state their results as well—Falcon also accused Fannie of improperly deferring $200 million of expenses in 1998 to the following year in order to meet earnings targets and pay management’s bonuses. Both the Department of Justice and the S.E.C. opened investigations into possible accounting fraud at Fannie Mae.

At a congressional hearing on October 6, 2004, Raines and Falcon faced off. Falcon defended his work; Raines defended himself and his company. At the end of the hearing, longtime G.S.E. antagonist Richard Baker, the Republican from Louisiana, threw a curveball. More than a year earlier, he had requested information from OFHEO on the compensation of Fannie’s top executives. He hadn’t released it, because Fannie had hired Ken Starr—the former special prosecutor who investigated Bill Clinton—to represent it, and had gone so far as to threaten “criminal proceedings” against anyone who supposedly violated privacy laws to disclose the information. Now Baker had found his moment. He put up a chart showing that 20 of Fannie’s top executives—including three lobbyists—had earned more than $1 million in 2002, and 9 had made more than $3 million. Today, Baker says that when he brought the chart out “the whole room blew up. It was the most animated room I’d ever seen in a hearing.”

If Fannie had any hope of prevailing, that was demolished on December 15, 2004, when the S.E.C. sided with OFHEO and said that Fannie would have to re-state years of earnings, wiping out as much as $9 billion in profits. Under pressure from the board, which was itself under pressure from OFHEO, Raines retired and Howard resigned.

One and a half years later, on May 23, 2006, OFHEO issued its final report on Fannie Mae. The agency claimed that Fannie’s executives “deliberately and systematically” created earnings “illusions” to hit Fannie’s earnings-per-share targets from 1998 through 2004. Fannie agreed to pay the government $400 million. Christopher Cox, chairman of the S.E.C., promised to “vigorously pursue” the people responsible for this “extensive financial fraud.”

At the end of that year, OFHEO sued Frank Raines, along with Tim Howard and controller Leanne Spencer, demanding the payment of $100 million in civil fines and returned bonuses that could exceed $115 million. ofheo said that Raines, in particular, had gotten $90 million in total compensation from 1998 to 2003, of which more than $52 million was directly tied to achieving earnings-per-share targets.

But astonishingly, given the extreme rhetoric from OFHEO—Falcon even called Fannie a “government-sponsored Enron”—no criminal charges were filed against Fannie Mae or any of its executives. And despite Cox’s promises, the S.E.C. never filed civil charges against any Fannie Mae executive, either. This past spring, ofheo trumpeted the news that the former Fannie executives had paid $31.4 million to settle the charges against them, with Raines agreeing to forgo cash, stock, and other benefits of $24.7 million. But the headline number was an illusion. In Raines’s case, the bulk of his settlement consisted of stock options that were so out of the money they would never be worth anything, along with $5.3 million that ofheo called “other benefits,” but which Raines says was a “totally made up number.” Nor did Raines agree to keep his mouth shut. In fact, he wanted to respond to the settlement by saying that “the process against me began with lies and ended with lies,” but was persuaded by his lawyers to say instead that “the process invoked against me by ofheo was fundamentally unfair.”

Raines “had to settle because something was wrong,” says current F.H.F.A. director Jim Lockhart. He adds, “It was not one of my happier days. Over 20 percent of the agency’s budget was legal expenses. We were just being eaten up, and [Raines] knew it.”

To this day, Raines insists that he was sabotaged by his enemies. He tells friends that he told Clinton, “They spent more time and money investigating me than you!” In 2007, in a civil suit that is still proceeding against Fannie and its former executives, Raines subpoenaed the White House for what his lawyers called “evidence that officials in the most powerful office in the country were part of a plan to influence the political debate about Fannie Mae.” (Of course, Raines can afford to be aggressive, because as part of his “retirement,” Fannie Mae is paying his legal bills.)

“Frank Raines continues to try to re-write history to protect his reputation, but the history is clear,” counters White House deputy press secretary Tony Fratto.

But, in fact, the history isn’t perfectly clear. There is no question that Fannie Mae’s accounting problems were real, and that under Raines the company had an unhealthy focus on earnings growth, but, still, one has to wonder about the solidity of the charge that Raines led an Enron-like enterprise. While some believe the lack of prosecution merely reflects the Justice Department’s unwillingness to take on a deeply complicated accounting case, others argue that it didn’t have a case, because there is a line between aggressive accounting and intentional fraud. And, in fact, an internal Fannie Mae investigation led by former senator Warren Rudman found no evidence that Raines knew the company’s accounting policies departed significantly from generally accepted principles. For Fannie Mae, the distinction didn’t much matter, because its reputation was tarnished beyond repair.

Despite that, no new legislation for regulation of the G.S.E.’s made it through Congress. While it is true that votes often broke along partisan lines, with the Democrats siding with Fannie and Freddie, it’s also true that Republicans often broke ranks. In one instance, Senator Bob Bennett, a Republican from Utah, sabotaged a bill by adding an amendment that favored the G.S.E.’s. (Bennett’s son worked for Fannie’s partnership office in Utah.) Congressman Mike Oxley, an Ohio Republican and a recipient of much campaign cash from the G.S.E.’s, also introduced bills that the administration thought were too weak. “I think the administration, for whatever reason, wants to do a lot more than is possible,” said Oxley. Says former congressman Richard Baker today, “There were Democrats and Republicans who had reservations.… It was not a partisan thing.”

Maybe the truth is that, as one person puts it, “everyone was still scared of Fannie Mae and Freddie Mac.” Or maybe the truth is that everyone—not just Democrats, and not just Republicans—was terrified that hurting Fannie and Freddie would, as the G.S.E.’s always said, hurt the housing market. “Everybody had a fear of the unknown,” says consultant Bert Ely, another longtime G.S.E. critic.

The End of the Holy War

When Raines was dethroned, the board called Dan Mudd, then the company’s chief operating officer, at seven a.m., just as Mudd was getting dressed for work, and asked him to step in. Mudd couldn’t be more different from Raines and Johnson. He’s “not a rock star,” as one former Fannie employee puts it, he’s not a Democrat, and he’s all businessman. (He ran G.E. Capital Japan before joining Fannie, in 2000.) A self-deprecating ex-Marine, he was not close to Raines, and he had thought about leaving the company because he didn’t like what he called the “arrogant, defiant, my-way Fannie Mae.” But he stayed because, as he later said, “I’m not a quitter.”

Mudd immediately embarked on a strategy of conciliation with ofheo. He visited members of its staff and Congressman Baker, and he even gave OFHEO examiners their own badges so they didn’t need a Fannie Mae escort when they were at the company’s offices. “I thought for a very long time that it was our fault, because we were heavy-handed, because we had a propaganda machine,” he says now. “I thought the only way to solve it was to make it Fannie’s problem. It’s like having an argument with your spouse. There’s no use in being right. You have to find the way forward.”

There are some who think Mudd had no choice, and some who are far more critical. Says Maloni, “Dan’s attitude is great if you don’t live in a jungle where all the other animals are trying to eat you.” Even Mudd himself says today, “I thought there were things we could do to be a normal company. I did some, and it turned out they didn’t make a difference.” It was perhaps telling that during his years as C.E.O., he says, no one in the White House would ever take his calls.

By mid-2006 there was a new actor in this long-running drama: Hank Paulson, the former Goldman Sachs C.E.O. who had just become Treasury secretary. Unlike the advisers who surrounded Bush, Paulson did not believe that the G.S.E.’s were the bogeymen of the financial system. After all, they had been major clients of his for years, and the ties between Goldman and Fannie ran deep. Nor did Paulson want any part of what he called “the closest thing I’ve witnessed to a Holy War.”

Paulson quickly began to move away from what one observer calls the “extreme rigidity” of the administration’s position. Then, on the Tuesday night before the 2006 Thanksgiving weekend, he “threw down the gauntlet to change course on where the administration was going,” says someone familiar with the events. He “aggressively argued that the White House should soften its position” and cut a deal for new regulation—which Paulson strongly believed was necessary—with Barney Frank, who had just been named the chairman of the House Financial Services Committee. Bush, who had granted Paulson an unprecedented degree of independence in exchange for his taking the job, soon gave him the authority to change existing policy, according to one inside source.

“I was aghast,” says a longtime G.S.E. foe, expressing a common attitude. “Here we were fighting trench warfare with Fannie and Freddie, and Paulson says, ‘Let’s cut a deal and say we won.’ Some of us really did believe they were a house of cards.”

That fall, Barney Frank told The Washington Post that Paulson had told him he wasn’t going to use the Treasury’s authority to limit Fannie’s and Freddie’s ability to raise money by issuing new bonds. The Bush administration had won that right in 2004, and other Treasury officials had been saying the government would use it. With Paulson’s backing down from Treasury’s position, the White House had lost one of its major clubs against the G.S.E.’s.

At the same time, a critical change was occurring in Fannie’s and Freddie’s businesses. By the mid-2000s, the mortgage market was radically different than it had been in Fannie’s and Freddie’s golden years. What we now all know as the subprime business had taken off, and a whole new breed of opportunistic lenders, such as IndyMac and Washington Mutual, were selling their mortgages to Wall Street, which churned out its own mortgage-backed securities. These were often referred to as private-label securities, or P.L.S.’s, because they bypassed Fannie and Freddie and didn’t have the G.S.E. imprimatur. As a result, Fannie and Freddie, which had always been selective as to which mortgages met their criteria for purchase, saw their market share plunge. Shareholders and customers were begging them to dive into this new, highly profitable world.

Although both companies resisted due to their worries about the riskiness of the new products, eventually senior executives disregarded internal warnings, because the lure of big profits was too great. “We’re rushing to get back into the game,” Mudd told analysts in the fall of 2006. “We will be there.” Both companies did two major things. For their portfolios, they bought Wall Street’s P.L.S.’s. They also began to guarantee so-called Alt-A mortgages—loans made to people who had better credit scores than a subprime customer’s, but who might lack a standard job and pay stub. (These mortgages came to be known as “liar loans,” because either the customers or the brokers, or both, were often just making up the information on the applications.) By the spring of 2008, the companies owned a combined $780 billion of the riskiest mortgages, according to the Congressional Budget Office, even though they had bought P.L.S.’s that were rated Triple A by the rating agencies and they thought their Alt-A product was conservative. But they bought in bulk.

The Green Team

For a brief time, in the summer and fall of 2007, it did look as if the G.S.E.’s would be the saviors of the mortgage market. That is, if you didn’t look too closely and instead just listened to what congressional Democrats were pushing hard, and what the powers that were, including Paulson, Bernanke, Lockhart, and, yes, even President Bush, started saying. As the banks that everyone had said could handle mortgage risk better than the G.S.E.’s deserted the market, stumbling under the weight of billions of dollars in losses on subprime mortgages, there wasn’t anyone else to turn to. Even so, “is there anything dumber than the suggestion that the institutions to rescue the U.S. mortgage market are institutions that are leveraged 60 to 1 and only own U.S. mortgages?” asks one G.S.E. opponent.

Not surprisingly, Fannie and Freddie—egged on by Democrats—seized the opportunity to prove how critical they were to the market. By the first quarter of 2008, they were buying 80 percent of all U.S. mortgages, roughly double their market share from two years earlier.

To some observers, the most remarkable moment came on March 19, 2008, when OFHEO held a press conference to announce a deal that Bob Steel—a former Goldman Sachs partner who had joined the Treasury Department shortly after Paulson—had brokered with Fannie and Freddie. The deal was that the G.S.E.’s, which had already sold a combined $14 billion in preferred stock in late 2007, would raise as much as another $10 billion in capital. In return, new ofheo director Jim Lockhart agreed to lower the amount of capital the G.S.E.’s were required to hold, enabling them to acquire another $200 billion in mortgages. Several people who were involved with the discussions say that the theme was that they were all in this together. They say Steel would use the line “We want to come out of this with everyone on the green team.” (Possibly Mudd used the phrase first.) Says Lockhart today, “We could not afford them not being able to provide funding to the housing market.”

OFHEO (with Treasury’s support) cut this deal despite the fact that the G.S.E.’s losses from mortgages’ going bad were already escalating. By the spring of 2008, the two had reported combined losses of $9.5 billion over the previous year. And they had just $81 billion in capital, which was 1.5 percent of the $5.2 trillion in mortgages they owned or guaranteed. In other words, if they had to make good on their promises, they had very little money with which to do so. (Skeptics on the Street believed that ofheo’s calculation of Fannie’s and Freddie’s capital was deeply flawed and made the G.S.E.’s look healthier than they were.)

Fannie’s $300 billion Alt-A portfolio accounted for roughly 50 percent of its credit losses. At Freddie, the numbers were similar. Although both companies justified their purchases of risky loans based on their need to meet hud’s affordable-housing goals, former Fannie employees say that, while the P.L.S. purchases did aid in meeting the goals (which, given the abusiveness of these loans, is an abomination), the Alt-A loans did not. In other words, Fannie dove into Alt-A not because of its mission but because of its bottom line—and because its executives feared that Fannie would become irrelevant if it continued to say no to this brave new world.

By the summer of 2008, the market was going from bad to worse, and Fannie’s and Freddie’s stocks were plunging. International banks, which held big chunks of both companies’ debt, were panicking, and asking if the U.S. government stood behind the debt. On July 13, Paulson announced a plan under which Treasury would backstop all of the G.S.E.’s debt and buy equity if needed. “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out,” Paulson told lawmakers.

Said President Bush about Fannie and Freddie, “We must ensure that they can continue providing access to mortgage credit during this time of financial stress.”

Said Lockhart, “At a very difficult time in the market, the enterprises have the flexibility and sound operations needed to support their mission.” That was when he also said that their capital levels were “well in excess” of federal requirements.

Paulson’s plan was signed into law as part of legislation that—finally!—created a new G.S.E. regulator: the F.H.F.A. This legislation was based on a deal Paulson had cut with Barney Frank. (Despite the criticism of Paulson and Steel, they did succeed where their predecessors had failed, and helped create a far tougher regulator—although by then it was too late.) Slipped in was a provision that exempted Fannie’s and Freddie’s boards from shareholder lawsuits—which was an enormous threat—if they agreed to conservatorship in time of crisis. Fannie didn’t fight this provision, because Mudd thought that conservatorship would require a negotiation. “It’s like the president has the right to fire a nuclear weapon, but it’s unlikely he’ll do so,” as Mudd put it. And maybe there was also a little hubris at work. “I used to say that if two accounting scandals [and] a Republican Congress and White House couldn’t kill us, how could you kill us ever?” says a former executive.

Others knew better. “Fannie Mae figured they could give the government an enormous loaded gun and they’d never fire it,” says Tim Howard.

Paulson’s bazooka to help Fannie and Freddie failed. It failed for a mixture of reasons. Investors were unsure what their eventual losses would be. Both companies announced terrible 2008 second-quarter results, with Fannie losing $2.3 billion and Freddie losing $821 million. But investors were also unsure what the new legislation meant. No one wanted to risk putting money into the G.S.E.’s, only to have the government radically raise capital requirements—or step in and wipe the shareholders out. And so, as if the second-quarter results hadn’t caused enough alarm on their own, the legislation had the perverse effect of ensuring the companies would be unable to raise new capital, even as everyone began to say that they had to do so.

Maybe Fannie’s executives should have anticipated what happened next, but they didn’t. After taking the red-eye back from a short family trip over Labor Day weekend—a trip he’d had to reschedule four times—Mudd got a letter from Lockhart that abruptly changed the tone. It “condemned everything we’d ever done,” says one person familiar with the letter’s contents. (Lockhart agrees it was a “severe letter” but says he had given “verbal warnings” about what his agency saw as a “significant deterioration” in their financial position.) On Friday morning, Mudd was summoned to the meeting at F.H.F.A. at three p.m. that day. When the Fannie contingent arrived, there had been no preparation for the meeting, so they were wandering around the lobby when Bernanke came in the front door. The Fannie people also spotted a Wall Street Journal reporter, who had been given advance notice of the meeting, lurking outside the door. It was “almost comical if it weren’t tragic,” Mudd has since joked.

In a conference room off his office, Lockhart told Fannie, he says today, that “pending losses … were going to make it such that [Fannie and Freddie] could not function and fulfill their mission” of supporting the housing market. Then government officials told Fannie that the company had to give its consent to conservatorship.

As for the terms, they were fairly straightforward, with one exception. The government would acquire $1 billion of preferred shares, giving it 80 percent of the company and pretty much wiping out the existing shareholders. Although the government would provide no upfront cash, it would put in money up to a combined $200 billion for Fannie and Freddie if needed. Both Mudd and Syron were out, and in short order they were told to forfeit their “golden parachutes.” The exception was an odd detail: Fannie and Freddie would be allowed to grow their portfolios through 2009 in order to help the mortgage market, but then would have to shrink them to $250 billion each. To Fannie people, that provision seemed like a clear indication that their adversaries had had a hand in the battle that ended the war.

Although Freddie agreed to conservatorship at a separate meeting that same day, the Fannie contingent headed to Sullivan & Cromwell’s law offices and called all of their board members to fly to Washington on Saturday for a deliberation. The board came to the conclusion that they had no choice. They could not “single-handedly declare war on the federal government!” Mudd said. Added board chairman Steve Ashley, according to people who were present: “We’ve closed the book on 70 years of housing policy in this country.”

There are a lot of conflicting views on why Paulson abruptly stopped supporting the G.S.E.’s. The best explanation is probably that he was convinced they needed large amounts of capital, and there was no way, given what a Treasury official calls the polarizing quality of the G.S.E.’s in Washington, that he could simply cut them a check without punishing their shareholders and executives.

When a CNBC host asked Paulson what he thought the losses would be, he said, “We didn’t sit there and figure this out with a calculator.” In truth, there’s no way to know, because the ultimate number will depend on what happens with the housing market, and on what activities Fannie and Freddie undertake at the direction of their new owner: you! Estimates, which depend on whether you talk to a G.S.E. friend or foe, range from as low as $30 billion for Fannie to well over the $100 billion the government has allocated to each G.S.E.

But a few things are clear. One is that the argument that Fannie and Freddie caused our entire economic calamity is absurd. Yes, the volume of bad mortgages that Fannie and Freddie bought may have blown the bubble bigger than it otherwise would have been. But to put the blame entirely on Fannie and Freddie is to exempt all the other players, including the mortgage originators who sold subprime mortgages and Wall Street, which packaged up the bad mortgages and sold them to investors around the globe.

Another thing that’s clear is that the critics were both right and very wrong about Fannie and Freddie. Yes, their executives and shareholders made fortunes in the glory years, and, yes, taxpayers are now bearing the brunt of whatever losses there are. Just as critics always warned, it’s “the privatization of profits and the socialization of risks.” But what the critics missed is that that wasn’t unique to Fannie and Freddie. It turns out our entire financial sector was operating under that same premise—and to a far greater degree than Fannie and Freddie.

The last thing is that what happened on September 7 didn’t solve anything. In fact, quite the opposite. “It is a hodgepodge of nothing,” says one Wall Streeter. One key idea was, as the Treasury put it, that Fannie and Freddie would “work to increase the availability of mortgage finance.” In other words, the government takeover would reduce the cost of Fannie’s and Freddie’s funds, thereby enabling them to raise money at cheap rates and pump that money into the mortgage market. In a great irony, almost everyone, even some longtime critics, now agree that’s necessary. As Larry Summers recently said, “They have to be used to keep the flow of capital going to the housing market.”

But the terms of the conservatorship are confusing, because the government backing lasts only through 2009, and government officials refuse to confirm that the U.S. actually guarantees Fannie’s and Freddie’s debt. Instead, they say there is an “effective guarantee”—which means nothing in a market as untrusting as this one. And so, Fannie’s and Freddie’s cost of funds has shot higher, making it economically unfeasible for them to buy up a slew of mortgages. (Lockhart continues to defend the conservatorship. “If we hadn’t done it, there would probably have been a run on the bank,” he says, adding, “My view is that conservatorship is working at this point. We prevented a downward spiral.”)

In other words, in the greatest irony of all, the G.S.E.’s critics have finally gotten what they wanted—Fannie’s and Freddie’s perceived ties to the government have been weakened—just when no one wants that anymore. “There is culpability somewhere,” says a former Fannie executive. “Whether it is a conspiracy or incompetence, I don’t know.” And in some ways, that sums up the entire story—on both sides.

Source: Portfolio.com: Top 5 | 16 Jan 2009 | 5:00 am

Spend a Little, Save a Little (Deal of the Day)

As credit-card issuers slash bonus miles, flier miles and other perks, "charging it" has become a much less rewarding experience. However, there are still ways to make that plastic pay.

Fidelity and Schwab (SCHW) both rolled out credit cards in December that offer 2% cash back on purchases that get deposited directly into either a brokerage or IRA account. (See details below.) Even better, there’s no cap on annual rewards, so big spenders can reap substantial benefits. (And there may be more of these card offers on the horizon: Fidelity plans to revamp its Investment Rewards and 529 College Rewards American Express (AXP) cards this spring, offering 2% cash back into a brokerage or 529 savings plan.)

“That’s a big carrot they’re dangling,” says Curtis Arnold founder of CardRatings.com, a credit card comparison site. “It’s unusual to see two cards with such aggressive rebates.” Typically, cash-back cards offer 1% on most purchases, with up to an additional 5% when you spend money in certain categories like at restaurants or gas stations. Overall, however, even the most reward-savvy cardholder usually earns just 1.5%, he says.

Before you rush to fill out an application, bear in mind that the new offerings are really a bid for deposits. Should the marketing push be too successful in attracting new cardholders, the banks could decide to scale back their rewards, says Arnold. And be sure the investment options (and associated fees) offered by these cards make sense for you.

Also, make sure you can pay your monthly balance in full each month. Both the Schwab and Fidelity cards carry high interest rates of 14.99% and 16.99%, respectively. “You’d be shooting yourself in the foot if you carry a balance,” warns Linda Sherry, a spokeswoman for Consumer Action, a nonprofit consumer advocacy group.

If you’re looking to put credit card to good use, check out these two new offerings, as well as a standby from Wells Fargo (WFC) that debuted in 2007:

Cards That Help Your Bottom Line

Credit Card

Rate

Details

Schwab Bank Invest First Visa Signature

14.99%.

Earn 2% cash back on purchases, deposited to a Schwab One brokerage account each month. (The investment account has no monthly service charges or minimum balance requirements so long as it’s linked to your card. You can also withdraw the funds as cash in lieu of investing them.) There's no cap on the awards you can earn.

Fidelity Retirement Rewards American Express

16.99%.

Earn 2% cash back on purchases, deposited in $50 increments as a current-year contribution to a Fidelity IRA. (IRA has no monthly service charges.) Rewards can also be redeemed for travel, merchandise, and other items. There's no cap on the awards you can earn.

Wells Fargo Home Rebate Card

10.65% to 21.65%

Earn 1% cash back on purchases, paid in $25 increments toward the loan principal on most Wells Fargo mortgages. There's no cap on the awards you can earn.

* Data from individual card issuers.

Source: SmartMoney.com | 16 Jan 2009 | 5:00 am

Westpac joins in and cuts mortgage rates

Westpac New Zealand is cutting some fixed home loan rates for the second time in a week and is also cutting its variable home loan rate. The bank is cutting its variable rate by 66 basis points to 7.49 per cent, effective for new...
Source: New Zealand Herald - Business | 16 Jan 2009 | 4:00 am

Apple shareholders ponder Jobs lawsuit

SEATTLE - After watching billions of dollars evaporate on news that Steve Jobs will take a medical leave of absence - just a week after the cancer survivor advised people to relax because his health problems were easily treated -...
Source: New Zealand Herald - Business | 16 Jan 2009 | 3:30 am

Mountain Buggy maker goes into receivership

The Wellington maker of Mountain Buggy prams has gone into receivership. Tritec Manufacturing axed 25 jobs just before Christmas, representing a quarter of its workforce. Managers blamed the economic downturn saying 90 per cent...
Source: New Zealand Herald - Business | 16 Jan 2009 | 3:00 am

Intel sees margins improving in second half

SAN FRANCISCO (Reuters) - Intel Corp expects margins to bounce back to "healthy" levels in the second half, but held back on giving detailed quarterly forecasts when it issued earnings on Thursday, citing economic uncertainty.

Source: Reuters: Business News | 16 Jan 2009 | 2:36 am

Selling online still good business, says Buy NZ Made

The demise of Ferrit may have seemed ominous for the Kiwi online sales experience, but operators of a Buy NZ Made website, say there's still money to be made selling online. The website www.getNZmade.net<
Source: New Zealand Herald - Business | 16 Jan 2009 | 2:30 am

Aircraft crashes in New York river

A US Airways jet departing New York's LaGuardia Airport crashed minutes after takeoff, sending 148 passengers and as many as six crewmembers into the Hudson River's frigid waters before their safe evacuation
Source: Financial Times - US homepage | 16 Jan 2009 | 2:28 am

Trends & Innovations - Thursday

Obesity becoming bigger problem

Source: Investor's Business Daily: BUSINESS | 16 Jan 2009 | 1:29 am

Digital music industry grows by 25% in 2008

The digital music industry grew by 25 per cent worldwide last year, with sales of $3.7 billion, despite the fact that 95 per cent of all downloads were illegal, according to a report by IFPI, the international record industry body.$
Source: Latest Business News from Times Online | 16 Jan 2009 | 1:26 am

Bush defends 'war on terror'

A defiant George W Bush insisted that his administration's 'war on terror' had been vindicated by the absence of attacks on US soil since September 2001
Source: Financial Times - US homepage | 16 Jan 2009 | 1:07 am

Biotech Firm's Tests Detect Predisposition To Cancer

Breast cancer is the most common type of cancer among women in the U.S. other than skin cancer. Each year, more than 180,000 American women learn...

Source: Investor's Business Daily: BUSINESS | 16 Jan 2009 | 12:45 am

In Brief - Thursday

GM (GM) cut its sales forecast to 10.5 mil units this year, more than 12% below what it had projected only a month ago. It rose 1.8% to 3.92.

Source: Investor's Business Daily: BUSINESS | 16 Jan 2009 | 12:45 am

Reverse Mortgages Get Popular; Rule Changes Enhance Appeal

New federal rules, a tough housing market and devalued retirement investments will likely spur more seniors to consider reverse mortgages.

Source: Investor's Business Daily: BUSINESS | 16 Jan 2009 | 12:45 am

After The Close - Thursday

SAKS (SKS), a department store chain, said it will cut 1,100 jobs, or 9% of its work force, due to declining demand for luxury goods. It also...

Source: Investor's Business Daily: BUSINESS | 16 Jan 2009 | 12:45 am

Business Briefs - Thursday

Genentech EPS misses, sales top. The biotech giant said after the market closed that its Q4 EPS rose 38% to 95 cents ex items, missing views by a...

Source: Investor's Business Daily: BUSINESS | 16 Jan 2009 | 12:45 am

Intel warns of deteriorating market

The world's biggest chipmaker reported a 90 per cent fall in profits and a drop in revenues it said was unprecedented in the past 20 years
Source: Financial Times - US homepage | 16 Jan 2009 | 12:35 am

Coke sued over VitaminWater claims

NEW YORK (AP) - A nutrition advocacy group has sued Coca-Cola, the biggest drinks maker in the world, over what it calls "deceptive" health claims about its "VitaminWater" product. The Washington-based Center for Science in the...
Source: New Zealand Herald - Business | 16 Jan 2009 | 12:30 am

Obama's SEC choice promises aggressive action (AP)

AP - President elect-Barack Obama's choice to head the Securities and Exchange Commission promised Thursday to revitalize the embattled agency's enforcement efforts and bring other changes to bolster investor protection.

Source: Yahoo! News: Stock Markets News | 16 Jan 2009 | 12:20 am

Equitable Life debacle: means test that punishes prudence

Twenty years ago, Gordon Brown campaigned vigorously for comprehensive compensation for the victims of the Barlow Clowes affair. It has to be said that he has been less vigorous on behalf of those who lost money in the Equitable Life debacle. Funny that.
Source: Latest Business News from Times Online | 16 Jan 2009 | 12:00 am

Mortgage lifeline plan unworkable, say lenders

Mortgage lenders warned the Government last night that Alistair Darling's plan to offer struggling homeowners a holiday from interest payments will result in new applications being turned down.
Source: Latest Business News from Times Online | 16 Jan 2009 | 12:00 am

Tories see electoral gain as Labour MPs are split

The decision to approve a third runway - overruling the objections of environmental groups, opposition MPs and up to 50 more from the Labour ranks – has split Labour and the Tories and is set to become one of the biggest issues at the next election.
Source: Latest Business News from Times Online | 16 Jan 2009 | 12:00 am

Apology for Equitable savers — but no payout yet

One million savers were given an apology — but no promise of early compensation — when the Treasury issued its long-delayed response to the verdict that regulators were partly responsible for the near-collapse of Equitable Life.
Source: Latest Business News from Times Online | 16 Jan 2009 | 12:00 am

JPMorgan chief attacks mortgage plan

JPMorgan Chase reported fourth quarter profits of $702m, or 7 cents a share, beating analysts' expectations that it would break even or suffer a slight loss
Source: Financial Times - US homepage | 15 Jan 2009 | 11:44 pm

Dollar stablises after yesterday's dumping

The New Zealand dollar was relatively unchanged this morning after being dumped in afternoon trading yesterday. The NZ dollar was buying US53.43c at 8am today from US53.40c at 5pm yesterday. It fell as low as US52.89c overnight. A...
Source: New Zealand Herald - Business | 15 Jan 2009 | 11:30 pm

Rice Says Hamas Started Gaza Conflict by Ending Truce

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 11:23 pm

Latin American stocks gain on bailout hopes (AP)

AP - Latin American stocks rebounded from four straight days of losses Thursday as investors bet a new set of government bailouts could boost the region's slowing economy.
Source: Yahoo! News: Stock Markets News | 15 Jan 2009 | 11:21 pm

Scorecard for the major stock market indexes (AP)

AP - Wall Street pulled off a big turnaround Thursday, rebounding from a steep early drop to finish modestly higher.

Source: Yahoo! News: Stock Markets News | 15 Jan 2009 | 11:16 pm

Senor Says Ehud Barak May Gain Most From Gaza Conflict

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 11:15 pm

Sorrell Says WPP Is Global Leader in `Consumer Insight'

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 11:14 pm

Democrats unveil $825bn stimulus

Democratic lawmakers unveiled a much-awaited $825bn stimulus package to halt America's vertiginous economic slide which Nancy Pelosi, the speaker of the House, said was only the "first step" in a process that could take weeks to pass into law
Source: Financial Times - US homepage | 15 Jan 2009 | 11:09 pm

SEC seeks papers in alleged NM investment scheme (AP)

AP - The Securities and Exchange Commission has asked for documents from a former state investment officer who claims New Mexico taxpayers lost more than $90 million in an alleged "pay-to-play" scheme involving contributors to Gov. Bill Richardson's failed presidential campaign.
Source: Yahoo! News: Stock Markets News | 15 Jan 2009 | 11:08 pm

SEC seeks papers in alleged NM investment scheme (AP)

NZ Shares: Market opens up after overnight US boost

The New Zealand sharemarket has risen in early trading on the back of a rise in US stocks. US stocks rose overnight as investors turned hopeful that the government would provide fresh capital to crisis-hit banks, including the...
Source: New Zealand Herald - Business | 15 Jan 2009 | 11:02 pm

Not all target-date funds are created equal (AP)

AP - Bracing for their year-end 401(k) statements, many investors who put money in 2010 target-date mutual funds may be facing a delayed retirement.
Source: Yahoo! News: Business | 15 Jan 2009 | 10:33 pm

Chch Airport chief executive resigns suddenly

Christchurch International Airport is looking for a new chief executive after the sudden resignation of Rene Bakx . Bakx took on the role three years ago but the airport company said yesterday that he is stepping down. The announcement...
Source: New Zealand Herald - Business | 15 Jan 2009 | 10:30 pm

VIX Index of U.S. Stock Option Prices Advances 3.8% to 51.00

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 10:28 pm

RBC's Dow Says ETFs Best Used As Long-Term Strategy

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 10:23 pm

SEC Pick Schapiro Pledges to Reinvigorate Enforcement (Bloomberg)

Bloomberg - Jan. 15 (Bloomberg) -- Mary Schapiro, seeking to win Senate confirmation to be chairman of the U.S. Securities and Exchange Commission, said she will âreinvigorateâ an enforcement unit that has drawn fire from lawmakers for missing Bernard Madoffâs alleged $50 billion Ponzi scheme.
Source: Yahoo! News: Stock Markets News | 15 Jan 2009 | 10:15 pm

Indicator: Free Shipping

The Port of Singapore

Alan Cordova

A while back, we blogged about how the plunging Baltic Dry Index (BDI) reflects the dramatic slowdown in international shipping. Today's bleak number is zero -- the cost to ship containers in Asia and Europe. Yes, you're reading this right, you can send your containerized products (such as the BBC's Box) for absolutely nothing on certain key routes.

Keep in mind that the numbers aren't exactly the same: the BDI measures the cost of shipping bulk commodities, such as cotton or oil, whereas the recently reported figures reflect the price of shipping containers, which are used to store pretty much everything else -- computers, cars, toys, etc. While both numbers are affected by the realities of modern ocean travel (including, believe it or not, pirates), certain countries pay far closer attention to one number than the other. For example, almost 90 percent of South Korea's exports are manufactured products, the vast majority of which will be sent to their destinations in shipping containers.

Although the BDI has rebounded a bit, industry analysts use such terms as "unmitigated disaster" to describe the container shipping situation. With the IMF predicting the first simultaneous contraction since World War II of advanced economies, many analysts expect that demand for container ships -- and the goods they convey -- will not recover in 2009. Because you and I have suddenly stopped buying computers, cars and toys, the major exporters of these manufactured goods, especially China, will be hit very hard.

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 10:08 pm

We Needed A Hero This Week

Knowing something about the topic, I cannot tell you how impressed I am with this pilot. There are two in flight emergencies that just scare me to death. The first, in flight fire. The second, engine out on take off.

The hardest thing to do is stick with the general rule, under your go-around altitude, to "land straight ahead." Doing that in the water is just exceptionally hard psychologically and practically. The temptation is to try and turn the plane, while "low and slow" and that is just the kiss of death.

Maintaining the energy to get where you want to be and then bleeding it off before landing without stalling the nose into the drink is just a gargantuan accomplishment.

This pilot, and his first officer deserve medals, without a doubt.

Not only that, but, at least given the picture, it looks like the First Officer is still in the cockpit. That's dedication.

This is also one of the ONLY successful jet emergency water landings I have EVER seen or heard about.

Perhaps Dealbreaker readers would be interested in throwing a few dollars into a little "Hero Fund?"

What say you, Dealbreaker readers?

Source: Dealbreaker | 15 Jan 2009 | 9:50 pm

US Air Flight Crashes In Hudson

Picture 588.png
Yes, we and you know, a US Airways plane headed From Laguardia to Charlotte made a crash landing into the Hudson, after hitting what was thought to be a flock of geese. Commuter ferries are attempting to get everyone off safely. The above photo sent in by a Dealbreaker reader. Take a minute to join us in hoping for a safe rescue for all the passengers and crew, and discuss it here if you'd like. Assholes' IPs will be nuked. Do not test us on this.

US Airways Plane Crashes in Hudson River [WSJ]

Update: The FAA has apparently put out a release that everyone is off the plane.

Source: Dealbreaker | 15 Jan 2009 | 9:23 pm

Carret's Gimble Says U.S. Economy Should Stabilize by End of Q2

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 9:20 pm

Zetland Says Bottled Water Costs Up to 10,000 Times Tap Water

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 9:06 pm

ECB cuts rates to lowest in three years

The European Central Bank cut interest rates by half a percentage point, saying it expected the recession to deepen, and signalled that borrowing costs could fall further
Source: Financial Times - US homepage | 15 Jan 2009 | 8:49 pm

Don't Believe What We Say

How's this for chutzpah?

A division of Countrywide Financial Corp., once the the nation's largest mortgage lender before it was sold to Bank of America at a bargain-basement price last year, faces scores of lawsuits over its subprime lending practices.

Considering that, what Countrywide's lawyers have been saying in a New Hampshire court is pretty interesting.

Gary and Jessica Raymonds of New Hampshire say they lost their home after Countrywide told them for months that they could modify their loan. Meanwhile, the lending giant has insisted in ads, to regulators and even to Congress that it is trying to rework as many home loans as possible.

In court, however, the lending giant's attorneys have been describing those efforts as "mere commercial puffery."

"It's breathtaking," attorney Mary Frances Stewart of Concord, N.H., said of Countrywide's response to the lawsuit she and co-counsel Krista Atwater filed in Merrimack County Superior Court. In its response, "Countrywide is saying, 'We don't have any obligation or even necessarily the intention of actually modifying these loans,' and yet they're representing that they do."

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 8:36 pm

Layoffs Watch '09: GE Capital

From the mailbag:

Cuts as high as 50% in some departments, but the good news is that none of the fuckheads who got the company on the rocks are affected. It was all lower-paid, junior employees.

They're keeping people on for a month or so and giving a max of 10% severance.

Source: Dealbreaker | 15 Jan 2009 | 8:30 pm

ING's Cliffe Says ECB Needs to Cut Rates Further

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 7:58 pm

Five Industries That Will Rake in Profits During the Obama Inauguration

This year’s inauguration of 44th president Barack Obama is likely to be the biggest inauguration in US history. The Obama inauguration will cost upwards of $130 million; as many as 5 million people are expected to attend. As with any major event, some industries associated with the inauguration will suffer—cell phone carriers, for example, expected network overload—while others will make out handsomely.

The five industries below (well, one is a company, but could be considered an industry unto itself) are rubbing their palms in happy anticipation of the 2009 inauguration:

5. Airlines

zzsouthwest

Delta and Northwest Airlines are increasing their capacity by more than 5,000 between January 16 and 21. Southwest Airlines is offering 26 flights between Washington DC and other regions during a similar period. Cha-ching.

4. Manufacturers and Vendors of Schwag

zzobama

What kind of schwag, you ask? All kinds, from gear that protects people from cold weather to gear that protects them from STDs:

Weather Schwag
Inaugural attendees will be standing outside in the cold for more than three hours. Nonetheless, they aren’t allowed to bring umbrellas to the swearing-in ceremony. The inaugural website lists the weather as being “typically cold,” usually wet, and around 37 degrees Fahrenheit. This fact alone should make local poncho and cheap raincoat vendors drool with anticipation.

Similarly, strollers aren’t allowed on the premises. Smart vendors might consider hawking baby slings and child leashes to the brave souls who bring their children to the inauguration.

Food Schwag
People aren’t allowed to bring more than a small snack to the swearing-in ceremony. No thermoses are allowed, and no food or drinks will be sold during the inauguration. After people make their way over to the inauguration and stand around in the cold for three hours, they will be famished and thirsty. Hot drink-, water-, and snack vendors will make a killing off hungry masses. Not to mention bars.

Political Schwag
US News’ Matt Bandyk reports that “Obama has more merchandise in his name than the Kiss Army.” Such schwag includes the usual T-shirt and baseball caps as well as less conventional items. Like condoms. Bandyk cites the following passage on his blog:

The Obama condom, originally produced along with a McCain condom (tagline: “Old but not expired”) this summer by New York entrepreneur Benjamin Sherman continues to be a strong seller, especially after comedian Lewis Black gave it a shout-out on “The Daily Show” recently. With more than 100,000 Obama condoms already sold, it may well be the item of the year.

CNN also reports that the official inaugural schwag website is selling a designer “Runway to Change” collection, including “an Alexander Wang scarf monogrammed with the word ‘Change.’” In the spirit of the recession, the items are reasonably priced. .

3. Portable Toilet Providers

zzportapotty

Previous inaugurations required about 300 portable toilets. This one requires at least 5,000. Portable toilet suppliers have built nationwide networks to meet demand. Nobody’s sure if 5,000 will even be enough. DC delegates have called upon government and private buildings to let the public in to do their business and shake off the January cold. Meanwhile, Port-a-Potty owners will make off like kings after the inauguration is over.

2. The Hospitality Industry

zzhilton

Hotels
Hotel employees, many of whom will be working several shifts, won’t be elated by the region’s influx of visitors. But hotels themselves are raking it in. The DC area is already booked to capacity. Higher-end hotels like the Hilton Washington are offering package deals pricey enough to make everyman’s eyeballs pop. Their exclusive “Behind the Inaugural Bash” package gives guests an opportunity to observe hotel planning sessions and event prep for the hotel’s presidential bashes, eat a custom dinner evoking the Candlelight Dinner, tour the Hilton’s presidential holding room, attend an inaugural ball, get limo service, and get keepsakes…to the tune of $44,000 for a two-night stay.

The Cottage Hospitality Industry
DC-area hotel demand is so high for the inauguration that local residents are offering up their houses and apartments for rent at a premium rate. Picture a $1,000/night one-bedroom apartment.

1. Hargrove, Inc.

Inauguration Floats

Hargrove, Inc., a DC-area company that has been the official inaugural event planner for every inauguration since President Harry S. Truman’s, is also responsible for this year’s massive inauguration. This inauguration day, according to Hometown Annapolis, Hargrove workers will design and manufacture parade floats, “coordinate 10 inaugural balls, a prayer breakfast, three candlelight dinners, the official parade and audio-video services for the events.” That’s no small feat—and Hargrove will be handsomely rewarded for its efforts.

Source: Business Pundit | 15 Jan 2009 | 7:56 pm

Litmus Test Results Say Citi Is Two Shakes From Being Nationalized

Do you think Citi's gonna be nationalized? Unless you answered 'yes' you are a fool because Charlie Gasparino does and he's always right. How does he know? Well! Many of you will recall that the CNBC commentator and Tarot card reader has a simple method for determining whether or not one of his 'visions' is accurate. Step 1: Call up flack Step 2: Throw vision out there. If the response is a denial or the like, Chaz knows he's got something big (I don't know what it means if they confirm the story). If said flack garnishes denial with accusations of Gasparino being insane, all the better. Now, consider this. Madame Gasparino has been getting rumblings about Citi nationalizing. Today, when he called up the firm, a representative claimed the whole thing was a baseless rumor and, Gaspar told Burnett, called it (and Chaz?) "off the wall." CG jokingly noted that "Vikram Pandit is not yet reporting to the Treasury Secretary," but you know he (and we) knows it's but a matter of time.

Update: CG tells Maria, "Right now the talk over at Citi is not about nationalizing, but about the end of the supermarket."

Source: Dealbreaker | 15 Jan 2009 | 7:43 pm

A TED Spread Quandry

Bud in Virginia wants to know:

The TED spread is (thankfully) heading below [one], but I observe that both LIBOR and 3-month Treasuries are VERY low -- does this dilute the good TED Spread news?

For those of you just joining us, I'll put some definitions at the very end of the post; if the above question makes sense already, forge ahead.

The interest rate on three-month Treasury bills serves as a benchmark for investors -- it's called the "risk-free rate of return." Because no other borrower inspires the same level of confidence as the U.S. government, all other lending (including interbank borrowing) takes place at a higher interest rate than what you get for a three-month T-bill.

Recently, the TED Spread has decreased to below 1 percent, or 100 basis points. This is the lowest it has been since August 15, a sign to TED-watchers that the global capital markets have calmed down from record-breaking levels. (video) However, as Bud notes, this has taken place because both the LIBOR and the 3-month T-nill interest rate have declined.

Is this a bad thing?

Not necessarily. It is true that the T-bill interest rate has fallen to historic lows, which can be a good thing or a bad thing, depending on whom you ask. Ultra-low T-bill rates hurt money market funds, which typically buy up government bonds. In the past month, almost half have been reporting no return on their investment, making it difficult for them to compete for investors.

Likewise,LIBOR affects mutual funds that are set up to buy corporate bonds. Since companies typically offer bonds at a rate that's LIBOR plus, say, another percentage point, mutual funds stand to get lower interest on the bonds.

So by themselves, lower rates are bad for certain parts of the financial markets. However, it's good for almost everyone else. For the economy to be healthy, banks have to be stable. When the TED spread is low, it shows that the market considers banks nearly as stable as the U.S. government.

P.S.:

Typically the 3-month LIBOR is a few tenths of a percent above the 3-month T-Bill rate. However, as this Wikipedia chart shows, we are living in unusual times. Keep an eye on the right side of our blog, where we bring you the very latest TED spread.

Definitions (more in the Planet Money Glossary):

TED spread: The difference between the three-month LIBOR and the interest rate on three-month US Treasuries. It's an indicator of investor perceptions of credit risk in the global economy -- the bigger the number, the more traders in the debt market are worried about banks failing. (video)

LIBOR (London Interbank Offered Rate): The interest rate that banks charge to lend each other money. This rate takes into account the probability that the borrowing bank will default. (video) U.S. Treasury Bills (T-Bills): Short-term bonds issued by the federal government. They represent the most secure type of investment available to domestic lenders because of the general belief in the global debt market that the U.S. government is the world's most secure issuer of debt.

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 7:23 pm

The Secret To Bernie Madoff's Success

Picture 587.png Take note, aspiring Ponz. Masters:

She is more outgoing and warmer than her husband, business associates say, freeing Mr. Madoff to play the avuncular wizard. And that is just part of the role she has played in the success of Madoff Investment Securities. Her mere presence helped make Mr. Madoff the most reassuring of archetypes, the devoted husband, which had a way of pre-empting questions about his integrity.
"Look, I'm an ex-litigator and I can usually smell a crook a mile away," says Frederick Adler, a Palm Beach entrepreneur who invested a modest sum with Mr. Madoff in the '90s and withdrew the money when he pulled out of stocks altogether during the tech bubble in 2000. "But I didn't get any odor from him, and I'm sure she helped. He's got this pleasant, sweet wife of 30 or 40 years. Not some young chick. It somehow added to his credibility."

Madoffs Shared Much; Question Is How Much [NYT]

Source: Dealbreaker | 15 Jan 2009 | 7:19 pm

Lilly-palooza

The $1.415 billion settlement that pharmaceutical giant Eli Lilly & Co. reached today with federal prosecutors includes the largest criminal fine ever paid by a single American corporation.

But is it big? Depends on how you measure it.

The settlement certainly involves large numbers. The criminal fine portion alone is $515 million. Added to that is Lilly's forfeiture of $100 million in assets and a civil settlement with the federal government and several states that could be worth up to $800 million.

The actual total will depend on how many states opt into this settlement rather than pursuing their own civil case against Lilly. Alaska wrung $15 million out of Lilly last year in a case it pursued on its own, for example. The federal share of the civil settlement is $438 million.

Big numbers, to be sure, but $1.4 billion represents Zyprexa sales over only a bit more than one year. The government says Lilly began promoting off-label sales to old-age homes about a decade ago.

The total settlement also amounts to less than three months' of the company's operating profit, which was $1.735 billion in the quarter ending September 30.

The settlement stems from allegations that Lilly sales representatives knowingly encouraged doctors to prescribe Zyprexa to treat some illnesses for which the company hadn't proven the drug to be safe and effective.

The Food and Drug Administration had accepted Lilly data showing that Zyprexa is effective in treating psychosis, manic-depression, and schizophrenia. Lilly has now admitted it instructed its sales force to also promote Zyprexa to treat much more common maladies without showing that it would work safely on them.

These so-called off-label uses include Alzheimer’s disease, anxiety, depression—even general symptoms like agitation, aggression, or hostility, the Department of Justice said. Adding these maladies greatly expanded Zyprexa sales.

"Off-label promotion of pharmaceutical drugs is a serious crime because it undermines the FDA’s role in protecting the American public by determining that a drug is safe and effective for a particular use before it is marketed," said Gregory G. Katsas, Assistant Attorney General for the Civil Division.

Doctors have the right, on their own, to prescribe drugs as they see fit, even if that means using them to treat conditions not approved by the FDA. Only the active marketing of off-label uses by drugmakers is illegal because that practice exposes patients to "unnecessary risks," said Laurie Magid, acting U.S. Attorney for the Eastern District of Pennsylvania.

"People have an absolute right to their doctor’s medical expertise," she added, "and to know that their health care provider’s judgment has not be clouded by misinformation from a company trying to build its bottom line."

In a statement, Lilly chairman and CEO John C. Lechleiter said: "We deeply regret the past actions covered by the misdemeanor plea."Related Links
Life, Death and New Drugs
Statins, Heart Attack and Genes
HPV Vaccine Inspires Yellow Health Journalism

Source: Portfolio.com: Top 5 | 15 Jan 2009 | 7:00 pm

Anti-Clinton Movie Gets Hearing at U.S. Supreme Court

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 6:56 pm

Foerster Sees Possible Loss of Half a Generation of Investors

Source: Bloomberg - All Podcasts | 15 Jan 2009 | 6:53 pm

The Semiannual Dealbreaker Guide To Avoiding Repeat Comments

We understand that technology can be difficult, and that some members of the finance community, newly liberated from the chains of their investment banking masters, have heretofore only limited experience with Dealbreaker, web browsers, the network of tubes that is the interwebs and instructions not delivered above 110dB. The curse of web blocking software has deprived an entire generation of financiers the ability to properly browse. Now at home in their pajamas, many are learning for the first time, the wonders of open comments on the forums. As an aside, won't you please give to the United Finance Workers Proper Browsing Fund? Every little bit helps.

Accordingly, periodically, we post these comment submission instructions, for the benefit of the community at large.

Step 1: Open new tab (tab 1) in browser.

Step 2: Browse to desired Dealbreaker posting.

Step 3: Enter comment text. (Use spell check, grammar check and idiot check feature of browser / frontal lobe, if required. Please note: Racial slurs, stalking the editors, or threatening violence- when not solicited by the editors- are all likely to get your comment removed. Repeated offenses will get your IP range banned).

Step 4: Review carefully. (Hint: If you don't get the joke, you are probably alone. Telegraphing this in comments is probably unwise before others have gone before you. Short, meaningless missive like "TLDR" or "FIRST" will not amuse the editors. Particularly if the post is short and your comment is not first). Press "Post Comment."

Step 5: Open new tab (tab 2) in browser.

Step 6: Continue browsing via tab 2. DO NOT OBSESS OVER THE STATUS OF YOUR COMMENT.

Step 7: After at least 90 seconds, close tab 1.

Step 8: Lather, rinse, repeat.

Commenting is a privilege and an awesome responsibility. Use it wisely.

Source: Dealbreaker | 15 Jan 2009 | 6:48 pm

Layoffs Watch '09: Agent Orange

We're not sure people give a rat's A about Ivy Asset Management but apparently there's some hardcore herbicide action going down over there circa now.

Source: Dealbreaker | 15 Jan 2009 | 6:34 pm

Mea Culpa

I'd like to correct a post I made yesterday on short-selling stocks.

A listener wrote in to ask what a person who loans a stock to short seller has to gain? Short selling can seem a bit counterintuitive but I always thought I understood it. When I answered the question yesterday, this is what I wrote:

When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. How much you make or lose from here depends on what happens to the stock's price.

If the price of the shares drops, you have to "cover" your bet by buying back the shares, and the broker returns them to the lender. Your profit is the difference between the price at which the stock was sold and the cost to buy it back.

But here's your risk. If the price of the shares increases, you have to buy it back at the higher price, and you lose money. Whoever loaned the shares can make out big. If, say, the stock rises 100%, they just made a lot of money.

As a few of our blog readers quickly pointed out (and a close broker friend of mine in Boston explained to me this morning along with a few choice put downs about my intelligence), I got it wrong.

Here is the correct answer: The person "loaning" the stock has nothing to gain here and may in fact never realize their shares were loaned in the first place. The upside here is to the broker or middleman who takes a fee for the transaction. As my (now former) broker friend told me this morning, the fees can be small but can become real money if a lot of shares are involved.

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 6:25 pm

Kanye West: Citigroup And Bank Of America Don't Care About Black People

Speaking of Kanye:

When the TARP was presented to Congress, Secretary Henry Paulson and others argued that the situation was dire, and that the failure of major financial institutions posed a systemic risk to our economy. The stated goal was to unfreeze credit so that banks can make loans to businesses and individuals. It was never contemplated that banks use their capital to make donations to organizations founded by a controversial figure like Jesse Jackson.

This will not end well.

TARP Inspector General Asked to Investigate Citigroup and Bank of America Donations to Rainbow/PUSH [Bloomberg]

Source: Dealbreaker | 15 Jan 2009 | 6:16 pm

God's Banker?

Hey, want to manage cash for the Church of England? You don't even have to believe. Short selling might be out though.

The successful candidate will report to the 33 Church commissioners, who include the Archbishops of York and Canterbury, who are in charge of the Church of England's investments, which was most recently valued at £5.7bn at the end of 2007. The commissioners are based in London.

Ok, sounds good so far, except maybe the Archbishop part. To wit:

Last year, John Sentamu, the Archbishop of York, said, "To a bystander like me, those who made £190 million deliberately underselling the shares of HBOS, in spite of its very strong capital base, and drove it into the bosom of Lloyds TSB bank, are clearly bank robbers and asset strippers."
When asked whether the Church would consider employing fund managers who had shorted HBOS, the spokesman said: "Part of the appointments process is assessing a person's ability to work within the ethos laid down by the Church."

Einhorn, apparently you've got two strikes. (Short seller, Jewish). We still love you, though.

Still, since Sentamu is an experienced skydiver (see photo), I suspect he'd be better at executing the DB Cooper type escape after you two lost most of the Church's money than certain Indiana managers of recent fame.

(I wonder if they still think interest payments are a sin).

Church of England Seeks Fund Manager-Belief in God Not Required [DealJournal]

Source: Dealbreaker | 15 Jan 2009 | 5:56 pm

An ordinary life outside the big top

Circus performers stun crowds with feats of skill, but the life of a circus performer can be pretty domestic. Sean Cole spent time with one performer in The Great Moscow State Circus.
Source: Marketplace | 15 Jan 2009 | 5:55 pm

DeFazio: TARP, stimulus still need work

Among the lawmakers unhappy with how the TARP funds are being administered is Oregon Democrat Rep. Peter DeFazio. He speaks with Kai Ryssdal about how the money's being spent and Obama's stimulus plan.
Source: Marketplace | 15 Jan 2009 | 5:55 pm

House Democrats unveil stimulus plan

House Democrats unveiled their $825 billion stimulus plan today. The package devotes billions to new spending and tax cuts, and is likely to grow. Steve Henn reports on the details.
Source: Marketplace | 15 Jan 2009 | 5:55 pm

Senate votes to release rest of TARP

The Senate approved President-elect Obama's request to release the second half of the $700 billion bailout. Obama's team was scrambling to convince wary Senators that there would be more accountability for the rest of the bailout package. John Dimsdale reports.
Source: Marketplace | 15 Jan 2009 | 5:55 pm

'Group of 30' calls for big reforms

Former Fed Chairman Paul Volcker and a group of international financial titans are calling for a series of reforms to fix the broken financial system. Amy Scott reports.
Source: Marketplace | 15 Jan 2009 | 5:54 pm

Will other big banks need more help?

With Bank of America seeking more TARP money to ease acquisitions of smaller competitors, can we expect banks such as J.P. Morgan Chase and Wells Fargo to request more bailout funds as well? Mitchell Hartman reports.
Source: Marketplace | 15 Jan 2009 | 5:54 pm

B of A looks to be in some trouble too

Bank of America, considered one of the "good" banks in the financial meltdown, is now looking for help. As it's been closing the buyout of Merrill Lynch, the bank has been seeking more bailout funds from the government. Ashley Milne-Tyte reports.
Source: Marketplace | 15 Jan 2009 | 5:54 pm

Cash for Clunkers: Now the United States Wants to Buy Your Car

zzhyundai

Congress is considering a new program called Cash for Clunkers. NPR reports what the program is all about:

The government has given billions of dollars to automakers who need to sell more cars. Now, Congress may soon offer motorists money to buy new vehicles. The idea behind the proposed program, called “Cash for Clunkers,” is to get millions of aging gas guzzlers off the road and replace them with fuel-efficient cars. If approved, the program would provide vouchers up to $4,500.

Fine and well, but what new car could you buy with $4,500? The cheapest new car I found was the $9,970 Hyundai Accent. Congress might just be thinking that people will take that cash and automatically seek out more fuel-efficient vehicles. That may be partially true, but the catch is that they either won’t be new, or buyers will have to go into debt to get them.

I’d rather see more incentives to make cheaper hybrids, then visible job-creation or small-business stimulus incentives. People will get rid of their gas guzzlers without government help when gas prices go back up.

Source: Business Pundit | 15 Jan 2009 | 5:35 pm

Peanut Butter Recall: Bird Droppings May Be At Fault

zzkeebler

First there was a plain ol’ peanut butter recall, now it’s time for peanut butter crackers to come off the shelves. The Washington Post reports:

Cereal giant Kellogg has asked stores to stop selling its popular Keebler and Austin brand peanut butter crackers, as health officials reported two more deaths in the nationwide salmonella outbreak that is linked to peanut butter.

Kellogg, of Battle Creek, Mich., said it hadn’t received any complaints or discovered any problems with the crackers, but took the action as a “precautionary measure” after one of its peanut paste suppliers, Peanut Corp. of America, announced a nationwide recall of peanut butter made in a Georgia plant.

The crackers are Toasted Peanut Butter Sandwich Crackers, Peanut Butter and Jelly Sandwich Crackers, Cheese and Peanut Butter Sandwich Crackers, and Peanut Butter-Chocolate Sandwich Crackers.

The article says that the strain originated from a plant belonging to a supplier named Peanut Corp.

Peanut Corp. issued a statement from its owner and president, Stewart Parnell, according to the AP. “We deeply regret that this has happened,” Parnell said. “Out of an abundance of caution, we are voluntarily withdrawing this produce and contacting our customers.”

The strain of Salmonella found in the peanut butter, S. Typhimurium, is often found in uncooked meat and eggs, according to a CDC quote in the article.

How Does Peanut Butter, a Processed Food, Get Salmonella In It?
Scientific American has an article explaining how salmonella makes its way into peanut butter.

Feces from some animal is a strong possibility. A leak in the roof, for example, caused one of the early outbreaks. How salmonella got into the water that was on the roof, no one knows for sure. Maybe birds, for instance, which accumulate around peanut butter processing plants.

The roasting of peanuts is the only step that will kill the salmonella. If contamination occurs after the roasting process, the game is over and salmonella is going to survive. Studies have shown that salmonella can survive for many months in peanut butter once it’s present. Fatty foods are also more protective of salmonella, so when it gets into the acid of the stomach — which is our first line of defense — it may not get destroyed. Peanut butter, being a highly fatty food, could survive better.

How could bird droppings leak into a food manufacturing plant? SciAm says it’s because many plants are more than 30 years old. They were airtight when they opened, but not any more.

They say the FDA is a troublesome organization. Here’s more proof that it needs to get its act together. The corporation was probably aware that its plant was old, but salmonella infesting peanut butter is very rare, so they didn’t think anything of it. The regulatory organization, however, is tasked with ensuring that food safety measures in its place. I hope that the FDA takes a hint from this latest failure.

Source: Business Pundit | 15 Jan 2009 | 5:06 pm

Meet You In The Middle

After the Wednesday podcast, listener TrevorL took exception to economist Anita McGahan's definition of disintermediation. McGahan has written back. Both responses after the jump.

TrevorL wrote:

The definition of disintermediation presented on the podcast today was wrong. Disintermediation is the process of removing the (unnecessary) middlemen from an industry. The classic example is removing agents from an industry (eg: GEICO for insurance, for-sale-by-owner for real estate) and allowing consumers to access the service directly. While this causes loss for those in the industry, it's generally a *good* thing for consumers, who get cheaper, higher quality service. In the newspaper business, the printers and delivery people are the middlemen in getting information from the journalist to the reader.

Anita McGahan writes:

Your listener makes a great point -- that taking out the middle man is one way that an industry may be fundamentally transformed. Certainly that would have radical consequences for the middle man, for example! But this is just one way that an industry can be disintermediated. In general, disintermediation involves keeping value-creating activities and dissolving activities such as the "middle man" role that are no longer creating value. Full-service investment brokerage was disintermediated when clients no longer wanted to pay for advice through $200 commissions on trades, but many brokerages still had valuable advisory services that could be offered in different ways. Traditional live fine-arts auctions were disintermediated by eBay and other Internet auctioneers, but retained valuable appraisal and consignment capabilities. Car dealerships were at least partially disintermediated by the online availability of information about car features and costs, but retained value-creating demonstration, preparatory, delivery and post-sales service activities. In other words, there are lots of ways that industries can be affected by disintermediation than by having all of the activities of a middle-man made irrelevant.

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 4:48 pm

Why Is The Dollar Climbing?

Jesse Zink of South Africa is paid in U.S. dollars, and the dollar has been rising pretty steeply compared to the South African rand. He wants to know why:

It seems that since the real crisis in the financial markets began last fall, the dollar has only strengthened against the rand and I've had more money to spend. It happened rapidly and was notable, at least 20 percent. I have no complaints about the extra rand in my wallet, but how come the dollar didn't weaken as virtually every other indicator did?

It may be counterintuitive, but there are reasons the U.S. dollar has appreciated against many currencies, including the South African rand, recently. For starters, even today, many investors around the globe believe U.S. Treasury bonds remain the safest investment out there, and they've been buying a whole bunch lately.

When so many investors run to safer investments such as Uncle Sam Treasury bonds, it means they have to dump their other foreign assets to free up cash for buying the new bonds. Before they can make the purchase, they need to convert their foreign currencies like Euros, Brazilian reals or Indian rupees into dollars. The demand for greenbacks drives the dollar up.

Things may stay this way for a while. (More good news for you, Jesse.) Many investors appear to believe the U.S. will be quicker to recover from the economic downturn than other developed and emerging markers. The U.S. was the first economy to falter, and President-elect Barack Obama seems more inclined to ramp up budget deficits in an attempt to encourage an economic recovery. (Meanwhile, other countries appear more hesitant by the day to blow the bank in order to combat their economic downturn.)

One more thing: this is not to say the U.S. doesn't have some long-term problems to keep in mind. Once the crisis ends, and other countries begin to recover, this whole scenario is likely to reverse and the dollar will fall. By then the U.S. will have a few more trillion dollars in debt and a much larger budget deficit to weigh it down.

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 4:17 pm

The Jobs Report

Steve Jobs' medical leave from Apple is likely to be permanent, analysts say.

In a letter to Apple staff on Wednesday, Jobs said he was taking a five-month medical leave because his health issues are "more complex than I originally thought."

In the note, Jobs promised to return to Apple in the summer, which many are hoping is true.

"Apple won't be the same w/o his creative leadership," tweeted Heredes. "Praying for your health, Steve."

But Jobs' letter contradicts a statement the CEO published just last week, in which he said he was "undergoing a simple and straightforward treatment" for a hormone imbalance. This letter gave the impression that Jobs merely needed to gain weight, and would continue as normal as Apple's CEO.

Now, however, Jobs' ill health appears to be much more serious. He is taking five months off work, when he took only a month away from Apple after undergoing surgery for pancreatic cancer in 2004.

The contradictory statements from Apple and Jobs are leading some to speculate that Jobs' latest missive is the first step in a phased goodbye.

"My bet is he's not coming back," said Roger Kay, an Endpoint Technologies analyst. "Despite all the protestations, I think he has cancer. They talk about digestive this and digestive that, but ... forget all the buzz you're hearing. Just look at the photos."

ThinkPanmure analyst Vijay Rakesh said it's been obvious for some time that Jobs' health condition is critical.

"What he's indicating is it needs more urgent attention," Rakesh said.

The following facts derived from recent reports suggest Jobs' latest letter from Apple is unreliable:

Health experts told Wired.com that Jobs' initial statement about his health was contradictory and made little sense. They speculated he had anything from hyperthyroidism to a new form of cancer.
Jobs did not deliver his keynote speech at Macworld Expo 2009. Before the show, Apple said this move was purely for business reasons. Later, Jobs said he opted out because of his health.
In recent press events, Tim Cook and Phil Schiller, Apple's COO and vice president of marketing, respectively, have been sharing the stage with Jobs more prominently than in the past. Analysts view this as a sign that Apple is preparing to dethrone Jobs.
Jobs' increasingly gaunt figure between public appearances in the past year is a possible sign of active cancer, according to Dr. Alan Astrow, Director of Hematology and Oncology at the Maimonides Cancer Center.

Mac fans, of course, are hoping that Jobs is well and will retake the reins in the summer. Shortly after Jobs' announcement on Wednesday, Twitter lit up with "get well" wishes for the CEO.

"My mother just asked me if I heard about Steve Jobs — of course I have," tweeted Warbrain. "I wish him the best."Related Links
The S.E.C. Catches Up With Steve Jobs
What (Fake) Steve Jobs Thinks of the Music Industry
iPod Porn

Source: Portfolio.com: Top 5 | 15 Jan 2009 | 4:00 pm

Deflation Watch: Super Bowl Tickets

Add to the list of suddenly cheaper products one of the most sought-after luxury items: tickets to the Super Bowl.

CNBC reports that the average price for this year's game on the secondary market has fallen to $2,278 from over $3,000 in the past three years. While the National Football League sold out tickets at fixed prices long ago, the original buyers are allowed to resell them, creating a market whose prices are affected on a daily basis by any number of factors.

This news comes after NFL Commissioner Roger Goodell granted last-minute extensions to its deadline for home teams to sell their playoff tickets in order for the games to be shown on local television.

If you're a football fan with several thousand dollars burning a hole in your pocket and don't feel like making home-loan payments or saving for retirement, this might just be your lucky year.

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Source: NPR Blogs: Planet Money | 15 Jan 2009 | 2:15 pm

Taxing Times in Italy

Legendary designer Valentino is making headlines in Milan once again—but not in the fashion pages. The Lazio, Italy, regional tax office has hit the designer and his longtime business partner, Giancarlo Giammetti, with a 33 million euro, or $39 million at current exchange, fine for allegedly evading tax payments. The fine was levied in relation to possible undeclared earnings.

More seriously, the fine could lead to a criminal investigation of the two men and even a prison sentence. Case in point: Sophia Loren spent 17 days in prison in Italy in 1982 for tax evasion. In Valentino's case, it's unlikely he would be sent to prison given his age, which is 76. Agreeing to pay the fine would put an end to the matter if Valentino and Giammetti didn't clear themselves of the accusations.

Whether the two men will pay up remained unclear Wednesday, however. "They are highly surprised by the position taken by the Italian authority and they will take the appropriate action accordingly," said Ronald Feijen, managing director of Valentino's and Giammetti's office in London.

According to the tax office, the couturier and Giammetti avoided declaring their incomes in Italy by moving their residence outside the country, while effectively keeping their business operations here. In the last few years, similar tax probes targeted high-profile figures such as motorcycling champion Valentino Rossi and the late Luciano Pavarotti, who respectively claimed England and tax haven Monte Carlo as their official residences.

Feijen stated that the duo "moved their residence and all their interests to London more than 10 years ago, since the sale of their maison." Valentino sold his namesake company to the now-defunct Holding di Partecipazioni Industriali in 1998. Feijen added that authorities had previously cleared the two men of any suspicion, stating that "their positions had in the past already been verified and deemed entirely legitimate and regular."

He concluded that if this issue will be "unexpectedly and surprisingly" resumed, the designer and his partner will be, "as usual, available to supply any explanation requested."

Valentino is not the first designer to battle Italian tax authorities. In November, Roberto Cavalli was cleared of a tax evasion indictment, after the designer was accused in 2002 of evading fiscal responsibilities by booking costs to remodel his villa on the hills surrounding Florence as company expenses for the fiscal years 1996 through 2000. Cristiana Cavalli, daughter of the designer and president of the company, told WWD at the time that they had proved "there were never fictitious activities or expenses."

Last year, Italian authorities opened a criminal investigation into the Dolce & Gabbana fashion group following allegations of tax evasion. Questioned on Wednesday about the status of the probe, a spokeswoman said the company had no comment.

Gianfranco FerrÈ, Santo Versace, Mariuccia Mandelli of Krizia and their business associates were indicted in July 1995 on charges of corruption and bribing tax police in return for swift, trouble-free audits. While they were originally found guilty, a higher court overturned the verdicts and found they were victims of extortion.

At that time, Giorgio Armani, Gerolamo Etro and Krizia chairman Aldo Pinto were indicted on similar charges, but pleaded guilty in May 1996 before the trial began. They, too, said they were victims of extortion, but took plea bargains to end their cases as soon as possible.

For a photo slideshow on how fashion labels from Tommy Hilfiger to Valentino have been scooped up by private equity shops, click here.

Source: Portfolio.com: Top 5 | 15 Jan 2009 | 2:00 pm

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