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October 14, 2008
United States to Invest $250 Billion
in Banks
The Treasury Department is expected to announce a plan today to invest
up to $250 billion in banks and guarantee new debt issued by banks for
three years - a measure meant to encourage the banks to resume lending
to one another and to customers, the New York Times reported
today. The Federal Deposit Insurance Corp. (FDIC) will offer an
unlimited guarantee on bank deposits in accounts that do not bear
interest - typically those of businesses - bringing the United States in
line with several European countries, which have adopted such blanket
guarantees. Of the $250 billion, which will come from the $700 billion
bailout approved by Congress, half is to be injected into nine big
banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs
and JPMorgan Chase, officials said. The other half is to go to smaller
banks and thrifts. The investments will be structured so that the
government can benefit from a rebound in the banks' fortunes.
href='http://www.nytimes.com/2008/10/14/business/economy/14treasury.html?_r=1&hp=&oref=slogin&pagewanted=print'>Read
more.
Debt-Relief Firms Attract
Complaints
As the economy weakens, a growing number of consumers are paying big
money for services from debt-settlement companies that purport to help
them settle their debts for a fraction of what they owe, but some
consumers are finding that the claims are too good to be true, according
to a report in the Wall Street Journal today. At
financial-services Web site Credit.com, the number of complaints about
debt-settlement companies received so far this year is already double
the number received in all of 2007, says John Ulzheimer, the site's
president of consumer education. The Federal Trade Commission, which has
also seen an increase in consumer complaints, was concerned enough about
the issue that it held a workshop late last month to examine
debt-settlement business practices. Regulators, consumer advocates and
industry groups are taking a closer look at debt-settlement firms.
However, even some nonprofit organizations that offer alternatives, such
as credit counseling and education, have come under scrutiny, with the
Internal Revenue Service examining their ties to for-profit
outfits.
href='http://online.wsj.com/article/SB122394458494631223.html#printMode'>Read
more. (Subscription required.)
Analysis: Insurance on Lehman Debt Is
the Financial Industry's Next Test
Nearly three weeks after the Wall Street bank sank into bankruptcy,
financial companies and investment funds that wrote what are effectively
insurance policies on Lehman Brothers' debts are being called on to pay
hundreds of billions of dollars in claims, the New York Times reported
on Saturday. The danger is that the claims on the Lehman default are so
large - they are estimated at $400 billion to $600 billion - that
settling them could leave some companies with large, perhaps even
crippling, losses and heighten the turmoil in the financial markets.
Lehman's debt was priced at 8.625 cents on the dollar at an auction on
Friday, leaving companies and funds that insured these debts against
default on the hook for the remainder. “The huge value of
credit-default swaps on Lehman Brothers, and the low price obtained in
this auction, mean there are billions of dollars in obligations,”
said Eric R. Dinallo, the New York State insurance superintendent.
“No one knows who owes this money, how much each counterparty
owes, or whether any of these counterparties will now be in trouble
themselves, with further potential problems for the financial
markets.” The case is In re Lehman Brothers Holdings Inc.,
08-13555, U.S. Bankruptcy Court, Southern District of New York
(Manhattan).
href='http://www.nytimes.com/2008/10/11/business/11credit.html?sq=bankruptcy&st=cse&scp=14&adxnnlx=1223902824-vn4WHI%207nPC0WjeMPxcyXg&pagewanted=print'>Read
more.
Court Clears Way for Linens 'N Things
Sale
Bankrupt home goods retailer Linens 'N Things Inc. has chosen a stalking
horse bidder for the sale of nearly all of its assets, which is set to
take place this week, Bankruptcy Law360 reported yesterday.
Bankruptcy Judge Christopher Sontchi on Friday granted
Linens' motion to sell its assets. The stalking horse bidder will be a
joint venture of Gordon Brothers Retail Partners LLC, Great American
Group LLC, Hilco Merchant Resources LLC, Hudson Capital Partners LLC, SB
Capital Group LLC and Tiger Capital Group LLC, according to Judge
Sontchi's order. Linens, which announced that it was considering
liquidation last week, will hold an auction on today and a sales hearing
is set for Wednesday.
href='http://bankruptcy.law360.com/articles/72545'>Read
more. (Subscription required.)
Cerberus' Role Crucial as GM-Chrysler
Merger Talks Continue
Merger talks are continuing between General Motors and Chrysler as the
companies study possible financial terms of a deal that would combine
two of the traditional Big Three automakers, the New York Times
reported today. The chief issues under discussion include how much cash
Chrysler's owner, Cerberus Capital Management, would contribute to the
merged entity and how much stock it would get in return. Executives at
GM and Cerberus are said to be eager to do a deal, but negotiating a
financial structure for the merger could take weeks to complete. A
merger of GM and Chrysler would bring together two automakers that are
losing market share and billions of dollars, but they could realize huge
savings in the development of vehicles, engines and alternative-fuel
technologies.
href='http://www.nytimes.com/2008/10/14/business/14auto.html?ref=business&pagewanted=print'>Read
more.
In related news, many industry experts say that little is to be gained
by merging GM, which has lost more than $18 billion this year, and
Chrysler, whose sales have fallen farther than any other automaker since
it was acquired last year by the private equity firm Cerberus Capital
Management. GM's revenues and profits have been decimated by a sharp
decline in sales of its trucks and big sport utility vehicles. Moreover,
industry analysts say GM should focus on shrinking to a size that is
more in sync with the market by reducing its overlapping lineup of
brands, bloated dealer network, and shifting its products to fit better
with the times.
href='http://www.nytimes.com/2008/10/13/business/13auto.html?ref=business&pagewanted=print'>Read
more.
GM to Close Plants, Restrict
Lending
General Motors Corp., now considering a merger with Detroit rival
Chrysler LLC, will close a metal stamping plant in Michigan and a truck
plant in Wisconsin sooner than previously expected, the Wall Street
Journal reported today. The closings are part of its efforts to cut
expenses ahead of what is expected to be a substantial third-quarter
loss. GMAC LLC -- the lending arm that finances a bulk of buyers
purchasing GM vehicles -- said yesterday that it is taking a more
conservative lending stance in financing, limiting purchase contracts to
customers with credit scores of 700 and above.
href='http://online.wsj.com/article/SB122394089082430783.html'>Read
more. (Subscription required.)
Faced with Slowdown, Restaurant Chains
Cut Prices and Close Locations
Restaurant chains are bracing for dismal fall and holiday dining seasons
by cutting prices, trimming earnings and sales forecasts and shuttering
locations, the Wall Street Journal reported yesterday. The
financial turmoil of the past several weeks has sharpened the downturn
among sit-down restaurants that started more than two years ago.
Restaurant executives predict that decreased consumer spending, coupled
with high ingredient costs, are likely to hasten a shakeout among
smaller restaurant chains and independents. Already this year, the
Bennigan's and Steak and Ale chains -- both owned by Metromedia
Restaurant Group -- filed for chapter 7 liquidation and shut the doors
of all company-owned restaurants. For the eight months ended in August,
sales at sit-down restaurants open at least 16 months declined 1.8
percent, according to Knapp-Track, which follows sales at about 10,000
locations. The hundreds of thousands of independent restaurants that
account for most of the nation's 945,000 eateries generally don't have
as much buying power or cash to withstand a steeper downturn.
href='http://online.wsj.com/article/SB122385180689027007.html'>Read
more. (Subscription required.)
Tangled in $3 Billion Fraud Suit,
Petters Files for Chapter 11
Venture capital firm Petters Co. Inc. filed for chapter 11 protection on
Saturday just weeks after federal prosecutors jailed the company's CEO
for allegedly bilking investors of over $3 billion in a massive fraud
scheme, Bankruptcy Law360 reported yesterday. Petters' filing
listed between $500 million and $1 billion in liabilities. Parent
company Petters Group Worldwide LLC also filed for chapter 11 on
Saturday in the same court, listing less than $50,000 in liabilities.
Another Petters division, Petters Aviation LLC, which operates Sun
Country Airlines, filed for bankruptcy protection on Oct. 6 listing
assets and liabilities between $50 million and $100 million. The
bankruptcy case is Petters Co. Inc., case number 08-45257, in
the U.S. Bankruptcy Court for the District of Minnesota.
href='http://bankruptcy.law360.com/articles/72615'>Read more.
(Subscription required.)
House to Hold Hearings on Economic
Stimulus Ideas
House Democratic leaders yesterday announced that committees will begin
holding hearings next week to develop a comprehensive economic recovery
package, but did not commit to legislation during a lame-duck session,
CongressDaily reported. The House Agriculture, Education and
Labor and Financial Services committees are those due to hold hearings
in the weeks before the election. House Financial Services Chairman
Barney Frank (D-Mass.) indicated that his panel will explore proposals
to strengthen foreclosure prevention efforts and bring about regulatory
reform of financial markets. House Speaker Nancy Pelosi (D-Calif.) said
that the recovery package would mainly focus on rebuilding the nation's
infrastructure, extending jobless benefits, bolstering the health care
system and aiding financially strapped states.
Wachovia to Pay $178 Million to
Settle RICO Class Action
Wachovia Bank has agreed to pay more than $178 million to
settle a class action RICO suit that accused the bank of allowing two
telemarketing firms to swindle elderly victims by obtaining their bank
account information and then drawing from their accounts through the use
of 'remotely created checks,' the Legal Intelligencer reported
yesterday. The proposed settlement in Faloney v. Wachovia Bank
replaces a previous $125 million settlement between Wachovia and the
U.S. Treasury Department's Office of the Comptroller of the Currency.
The previous settlement drew sharp criticism from plaintiffs lawyers and
a trio of Congress members who complained that it would be ineffective
because it would have required victims of the scheme to file claim
forms. Wachovia has agreed to increase the settlement to $163
million, with checks mailed directly to approximately 900,000 victims of
the schemes, and to pay $15 million in attorney fees to the team of
lawyers from Langer Grogan & Diver that also included John Grogan,
Edward Diver, Irv Ackelsberg and Judah Labovitz.
href='http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=1202425213471'>Read
more.
In related news, the Federal Reserve has approved Wells Fargo's $11.7
billion acquisition of Wachovia, the Associated Press reported on
Sunday. The Fed's move comes after federal antitrust regulators backed
the deal on Friday, allowing Wells Fargo, based in San Francisco, to buy
Wachovia, based in Charlotte, N.C. Citigroup on Thursday walked away
from its own efforts to buy the bank. Wachovia was hit by a $5 billion
run on deposits in late September after the failure of a West Coast
rival, Washington Mutual, according to court documents filed on Friday
by Citigroup.
Truck Transporter on Road to Chapter
11 Emergence
Bankruptcy Judge Brendan Linehan Shannon confirmed
truck transporter JHT Holdings Inc.'s reorganization plan nearly four
months after the company filed for chapter 11, Bankruptcy
Law360 reported yesterday. The company said that it was working to
consummate the plan and hoped for it to be effective on or before Oct.
22. JHT's reorganization plan called for the company's prepetition
lenders, led by General Electric Capital Corp., to receive a pro rata
share of the $60 million of the second-lien loan as well as a 70 percent
stake in the reorganized company.
href='http://bankruptcy.law360.com/articles/72513'>Read
more. (Subscription required.)
Former AIG CEO Calls for Changes to
Federal Rescue Terms for Insurer
Maurice 'Hank' Greenberg, former CEO of American International Group
Inc. (AIG) said that the terms of the federal government's $85 billion
bailout of AIG would result in the liquidation of the insurance giant
and he proposed changes to keep the company viable, the Wall
Street Journal reported today. Last month, AIG's board
entered an agreement with the Federal Reserve Bank of New York to obtain
the bailout via a two-year credit facility that requires AIG to pay a 2
percent one-time commitment fee, 8.5 percent interest on undrawn capital
and a floating rate that is currently 14 percent on drawn capital. The
U.S. Treasury received a 79.9 percent stake in AIG from the deal. The
interest charges currently add up to $1 billion monthly. Greenberg
proposed changing the loan to nonvoting preferred stock with a dividend
of 5 to 6 percent and a 10-year right of redemption at a 10 percent
premium. He also said that the ability sell some 'toxic' securities to
the new $700 billion Wall Street bailout fund and changes to
mark-to-market accounting would be a lifeline that 'in all likelihood'
could allow AIG to redeem the preferred stock in less than 10
years.
href='http://online.wsj.com/article/SB122398558059432381.html'>Read
more. (Subscription required.)
Financial Services
Bank Group Asks SEC to Override
Accounting Guidelines
The American Bankers Association (ABA) asked the Securities and Exchange
Commission (SEC) yesterday to override the accounting rule makers' new
guidelines on mark-to-market accounting, saying they still relied too
heavily on distressed asset values, Reuters reported today. The staff of
the Financial Accounting Standards Board released guidelines on Friday
intended to formalize a Sept. 30 joint clarification with the SEC that
said banks could rely on internal estimates, rather than deeply
discounted market prices, to value assets in illiquid markets. In a
letter to SEC Chairman Christopher Cox, ABA said that the board's
guidance was “circular” and refused “to recognize the
realities of the current situation” by requiring companies to
still evaluate liquidity risk in their calculations.
href='http://www.nytimes.com/2008/10/14/business/14audit.html?ref=business&pagewanted=print'>Read
more.
IMF Nations Vow to Prevent New
Failures
National governments around the world have agreed to do what is
necessary to prevent another major financial institution from failing,
the Wall Street Journal reported today. During weekend
meetings, the IMF's 185 member nations endorsed an earlier commitment by
the leading industrial nations to 'use all available tools' to prevent
the failure of 'systemically important' financial institutions,
according to IMF managing director Dominique Strauss-Kahn. Although the
meeting didn't produce a specific action plan, Strauss-Kahn applauded on
Sunday the plan by the 15 nations that use the euro to issue guarantees
and insurance and to buy stock in cash-strapped companies, and to issue
qualifying capital to financial institutions, among other measures. He
said he expected the 27-nation European Union as a whole to adopt the
measures, too.
href='http://online.wsj.com/article/SB122372688065025787.html'>Read
more. (Subscription required.)
Analysis: Margin Calls Prompt
Sales, Drive Shares Even Lower
In the last week, as the value of stock portfolios has plunged,
executives and fund managers who had bought shares on margin have been
forced to sell millions of dollars worth of stock to settle those loans
with banks, the New York Times reported yesterday. Professional
investors say that the margin calls probably added to the pressure on
stock prices last week, when the average stock plunged nearly 18
percent. Chesapeake Energy CEO Aubrey K. McClendon on Friday issued a
statement saying he had been forced to sell all of his 33.5 million
shares in Chesapeake because of a margin call. Sumner M. Redstone, the
chairman of Viacom and CBS, disclosed that he would sell $400 million in
shares in those companies to pay down a loan. Some analysts and
investors are concerned about a situation in which margin calls occur in
larger numbers, causing an even bigger wave of selling, even though most
analysts say that stock prices are already historically low.
href='http://www.nytimes.com/2008/10/14/business/14margin.html?_r=1&oref=slogin&pagewanted=print'>Read
more.
International
Emerging Economies Start to Feel
Effects of Credit Crisis
The global credit crisis is starting to take its toll on consumers in
China, India, Russia and Brazil that have boosted the world's economy
over the past few years, the Wall Street Journal reported
today. Easy credit that powered consumer spending is now contracting in
Russia, while outsourced jobs from Western financial companies are now
dwindling in India. A stock-market collapse and deflating property
prices are causing Chinese consumers to think twice about purchases, and
the prices for the commodities Brazil exports are falling. Growth in
these large, continental economies is still much faster than in the
United States or Europe, but indicators suggest that their newly
affluent consumers aren't going to be holding up global growth on their
own.
href='http://online.wsj.com/article/SB122386348186627717.html'>Read
more. (Subscription required.)