Bear Stearns’ Hedge Fund Mangers to be Indicted Thursday

National Public Radio’s Dina Temple-Raston this afternoon confirmed that two Bear Stearns’ hedge fund managers are to be indicted Thursday for misleading investors. The indictment was reported first in Monday’s Wall Street Journal but the timing of the indictments was unknown. Managers Ralph Cioffi and Matthew Tannin are accused of “painting a rosy picture to investors…” while internally fretting over investments in mortgage backed securities. These indictments are likely to be the first of many stemming from the credit crisis. Messr. Cioffi and Tannin managed the two Bear Stearns hedge funds which collapsed last June, heralding the start of the credit crisis.

UPDATE: See The Wall Street Journal’s article “Prosecutors in Bear Case Zero (Focus) In On Email” from Thursday’s paper.

AP: American Red Cross disaster funds are depleted

According to the Associated Press, its national disaster relief fund is depleted and its has started taking out loans to pay for relief in Midwestern states affected by recent flooding. Chief Development Officer Jeff Towers said “[we] would borrow to keep workers and volunteers in the field helping flood victims.” This announcement is troubling enough on its own, and is made worse by its timing. As the summer season swings into full force, so do natural disasters such as hurricanes, tornadoes, and heat waves. Current Red Cross estimates for Midwest flood relief put the figure around $15 million, but it could grow as large as $40 million. Mr. Towers reported that the organization has only collected $3.2 million through June 16. Impeding fundraising efforts are myriad problems ranging from the state of the US economy to aging baby boomers (a core donation demographic now finding itself with limited disposable income) to image problems resulting from the organization’s response to 9/11 and Hurricane Katrina.

The shortage of funds stems largely from a surprising problem: a lack of major disasters. Thanks largely to the widespread media coverage and awareness, major disasters account for a substantial portion of the funds raised to support the domestic disaster fund. The last few years have seen a series of smaller and mid-size disasters, such as isolated tornadoes in Kansas, and “silent disasters,” which do not garner the national and international attention that Hurricane Katrina did. This situation, perverse on the surface, leaves the Red Cross in an uncomfortable situation and puts disaster relief at the mercy of the Red Cross’ lenders.

Further reading:

  • The AP article can be found here.
  • Visit the Red Cross online at www.redcross.org.
  • Hear more about the shortage in this piece from NPR’s Day to Day.

GAO Decision Could Lead to Airforce Tanker Contract Redo

Today the Government Accountability Office (GAO) released its decision regarding Air Force contracts for mid-air refuling tankers. The GAO found that the Air Force made serious errors in awarding the contract, a complaint Boeing has made since the February 29 announcement that the contract would go to Northgrup Grumman. According to Boeing, the Air Force changed its requirements during the bidding process, resulting in a more favorable proposal from Northrup Grumman and its partner European Aeuronautic Defence & Space (EADS), parent company of Airbus. Boeing contends that it would have offered a modified version of its 777 series instead of its 767 model to better compete with the modified A330 from Airbus, had it known from the start that the Air Force wanted the larger model.

I’m not sure if this is a good or bad decision. On the one hand, Boeing is a US company with a predominantly US-based workforce (the 787 Dreamliner is another story). On the other hand, this contract was the first major agreement of its type with a non-US defense supplier. It represented the cooperation and trust between the US and Europe, and also showed the world that the US markets are open to foreign competition. At a time when the US is regularly signing free trade agreements, we showed that we really believed what we were selling. Now, the picture is not so clear. To be fair, while Boeing would utilize its US workforce, Northrup is also a US company with a strong, homegrown workforce. Northrup has already said it would perform as much as 50% of the work in Alabama, though at least some work would be done overseas simply due to its partnership with EADS.

UPDATE: WSJ posted this expanded article on its site late in the afternoon.

Senator Dodd and the Housing Crisis

Last Friday, The Wall Street Journal reported that Senator Chris Dodd (D-CT), chair of the Senate Banking Committee, may have received favorable loan terms from Countrywide under its “Friends of Angelo” program (Dodd Tied to Countrywide Loans). Not good, to say the least, for one of the most outspoken critics of the mortgage finance sector to emerge since the “credit crisis” set in. Of course, the Senator denies that he received any special treatment. His press secretary, in the same Journal article, asserted that the Senator received a competitive rate. The Senator himself also responded, saying “As a United States Senator, I would never ask or expect to be treated differently than anyone else refinancing their home. This suggestion is outrageous and contrary to my entire career in public service” (Statement). He goes on to say that he and his wife shopped around and received a competitive rate.

Considering that the Senator is currently negotiating a $300 billion home loan refinancing program, this could be a big problem, to put it mildly. It doesn’t help that each week seems to bring more details about Countrywide’s “Friends of Angelo” program.

We’re Getting Closer

For all of those readers out there with Sirius or XM satellite radio service, The Wall Street Journal this morning reported that the FCC is circulating a draft of its final decision. According to the article, found here, the draft indicates approval of the merger. The FCC was the final regulatory body left to bless the merger, after the Department of Justice approved it earlier this year. While not unexpected, given the DOJ approval, this is certainly welcome news nonetheless for both subscribers and shareholders alike. As both, I have been eargerly awaiting a final decision, particularly because I currently have Sirius and would love to have Major League Baseball on my satellite radio.

Oddly enough indeed…

Oddly Enough is certainly an apt title for the Reuters column that runs stories like this one: “Armpit sniffer gets jail and cane.” According to the article, the 23 year-old man was sentenced to 14 years in jail and 18 strikes of the cane for sniffing womens’ armpits in stairwells, elevators, and even their homes. Even stranger, the man is reported to be mentally unstable. If you ask me, regardless of his mental faculties, 14 years is a bit excessive for this kind of thing. Or maybe this is normal in Singapore. In that case, I wonder what their punishment for drunk driving or murder is?

This just goes to show how different our two countries’ justice systems are. In Signapore, this activity warrants extended jail time. In the U.S., the offender would be institutionalized and medicated for his disorder, all the while undergoing extensive therapy.

Obama Unveils Economic Plan

After much anticipation, Democratic Presidential Candidate Barack Obama revealed parts of his economic plan in an interview with The Wall Street Journal. As reported in their June 17, 2008 article “Obama Plans Spending Boost, Possible Cut in Business Tax,” Bob Davis and Amy Chozick highlight some of the major proposals in Senator Obama’s plan.

Senator Obama’s plan focuses on three proposals: significant government spending on energy projects (infrastructure projects are included in the Senator’s plan), tax code reform to “narrow the gap between winners and losers in the U.S. economy,” and a reduction in business taxes.

The first leg of the plan, energy projects, is intended to spur the economy by providing work for the many unemployed. Included in these projects would be highway construction, along with power plant and other energy-related construction. Senator Obama proposes spending $15 billion over 10 years on these projects, paid for with revenue from a carbon trading system. The proposed trading system is projected to generate revenue of roughly $100 billion by providing a platform for trading pollution permits. The Senator also plans an infrastructure reinvestment bank which would spend $60 billion on high-speed rail service and improved energy transmission, among other projects. To further encourage development in the energy sector, Senator Obama wants to provide funding to “middle stage” companies invested in new energy technologies. In his view, these companies, which find themselves at a stage between innovation and commercialization, often struggle to raise the capital necessary to move their products to commercial viability at the same time that their products could provide the next step in the energy puzzle. (This program is similar to one under the Clinton administration which faced strong headwinds from Republicans and never expanded beyond small-scale projects.) Senator Obama also intends to establish a “green technology” fund to promote environmentally-friendly development.

For his part, Republican Presidential Candidate John McCain agrees with Senator Obama on the need for a cap and trade system, though his would be much smaller in terms of projected revenue. As for green technology and middle-stage funding, Senator McCain feels that Silicon Valley and venture capital have things covered. But I digress…

Senator Obama proposes a wide variety of changes to the tax code, focused on equalizing the tax burden faced by individuals and corporations. For starters, he would like to eliminate President Bush’s tax cuts for those families making more than $250,000 while maintaining them for those making less than that threshold. He would also eliminate the capital gains taxes for start-up companies, so that these entities can “accumulate capital [and] reinvest profits…to the point that they stabilize.” (Unfortunately, Senator Obama hasn’t defined a startup company.) For individuals entering the public service sector after college, the Senator proposes $4,000 annual tuition credits on the individual’s income tax return. His final proposal would eliminate income taxes for those individuals over the age of 65 who make less than $50,000 annually. The Senator anticipates that these changes will help “level the playing field” and allow him to reduce corporate tax rates as well as maintain the capital gains rate reductions President Bush implemented. In the article, Mr. Obama asserts “How much you pay in taxes as a corporation a lot of times depends on how good your lobbyist is.” His proposed changes aim to eliminate the lobbyist effect from calculating tax rates.

Early in the article, Mr. Obama states “Globalization and technology and automation all weaken the position of workers.” Many of his proposals aim to encourage technology development for the assistance and empowerment of workers, demonstrating his attempt to use technology to strengthen employees rather than weaken them.

One small item of note that could be lost in the sprawling article: Senator Obama’s plan to subsidize high-speed internet access as part of his infrastructure reinvestment bank proposal.

So what does all of this mean? We’re finally seen a bit of what Senator Obama’s economic policy may be. He has some interesting ideas, some new and some recycled. I think one of the biggest things his proposal shows is that he is focused on helping the average American in a time of increasing economic pressure and uncertainty. He has woven his “change” mantra into the proposal with some new, somewhat radical spending plans, while showing his critics that he can also learn from his predecessors by rehashing some long-debated concepts and ambitions. I am very interested to see the further details that will invetitable emerge in the coming months regarding Senator Obama’s economic policies.

Health Insurance

Check out this article in today’s Wall Street Journal describing recent graduates’ tactics for extending their health insurance after graduation. For those out their not fortunate enough to have insurance through their employers, there may be some useful tips here. Health insurance is sure to be a major issue facing our generation as we graduate and enter the workforce. With the problem already facing many millions of Americans, a solution is needed soon as many more enter the ranks of the uninsured.

The article, entitled “Graduates Get Creative to Find Health Coverage” was written by Mary Pilon and appeared in the June 17, 2008 issue of The Wall Street Journal.

Fighting to Survive in a World of Changing Accounting Rules

As reported in today’s Wall Street Journal, financial firms just can’t catch a break from the folks at FASB. David Reilly writes in his Heard on the Street article “Assets Get Harder to Shake” that the FASB last week proposed new rules regarding assets that companies securitize and sell to other institutions. Currently, when the assets are securitized and sold off, they are removed from the books of the company that sold them. Unfortunately for the financial services firms, they often retain some interest of one form or another in the securitized assets. This retained interest, say in the form of mortgage servicing, could force the investment vehicle back onto the books if, under the new rules, the entity that sold the vehicle is deemed to have retained significant control over or liability for its assets. Mr. Reilly doesn’t cite any estimates of how much could come back on the books, but he does note that Lehman Brothers securitized more than $700 billion in assets between 2003 and 2007.