"My friends aren’t working at the jobs they trained for," says Julie, working the counter at a Country Style doughnut shop in Toronto’s west end. She mentions a girlfriend who graduated with marketing and management skills now unhappily toiling in the picture-framing department of a Wal-Mart.
"Others have given up looking," says Julie, a 22-year-old single mom who asked that her last name not be used.
With only a few weeks before school starts, there’s not much point now trying to land a job to cover the tuition, the $400 second-hand textbooks, and room and board.
Julie counts herself fortunate not to be among the record 201,000 young Canadians out of work. That’s one in five members of the youth workforce of 18- to 24-year-olds, in the worst summer-student hiring season in recent memory. In this recession, young people have been hit hardest.
"If there is any positive spin there for the broader economy," Bank of Montreal economist Douglas Porter wrote in a recent client note of the dismal July employment figures, "it’s that the job losses were almost entirely concentrated among summer students (try telling your teenager that’s good news)."
The vocational fields in which youth hiring typically is highest – tourism, hospitality and construction – have suffered everything from consumers no longer dining out to a soaring loonie and new U.S. passport rules that have crimped tourist trade.
Obviously, the global economic downturn looms large as a cause of the unprecedented youth unemployment. But another blow has been dealt by deficit-stricken governments cutting or eliminating funding to programs such as B.C.’s Student Summer Works program, which matched an employer’s contribution to a student’s pay.
With about a million British youth unemployed, ours is hardly an isolated crisis. A recent editorial in the conservative U.K. Economist says the "plight of the jobless young … invokes talk of a lost generation." It notes the well-known phenomenon that "prolonged unemployment early in people’s working lives will leave them scarred in the long term. Youngsters who have been jobless for a year or more tend to do worse in the labour market for the rest of their lives."
Joblessness among the young is a global epidemic. By recent UN calculations, young people make up about 25 per cent of the world’s working population, but they account for 40 per cent of the unemployed.
"For the young" UN Secretary-General Ban Ki-moon said earlier this month, "informal, insecure and low-wage employment is the norm, not the exception."
Julie is enrolled to start at Centennial College next month. The tuition for her course in "Community and the Justice Services" is about $6,000 a year, a bit higher than the Canadian average annual tuition of $5,000. Or a total of about $12,000 to earn her two-year diploma.
Julie’s eyes light up as she describes her career goals. The Centennial program is a pioneering one that integrates criminology with social work, training students to coordinate the services of police, the Salvation Army, spousal abuse centres and career-counselling services. "You’re not trying to fix just one aspect of an individual’s problems," Julie says. "Finally, you’re looking at the whole person."
But Julie won’t be going to Centennial this year, after all. Her job – with its low wage and number of work hours available – didn’t allow her to save the $3,000 for her first five-month semester. And the daycare fees for her 3 1/2-year-old son, Malachi, and other costs have caught up with her car loan interest rates.
Too many of Julie’s college-graduate friends are unemployed or underemployed.
"I’d go to school, but I decided that with the jobs not there, it just isn’t worth it," says Julie, turning to serve a customer. "At least not now."
It is worth it, of course. Higher education is a prerequisite to decent-paying jobs in the "knowledge economy" rapidly replacing the "hollowed-out" manufacturing sectors in both Canada and the United States.
With university or college accreditation increasingly compulsory for fulfilling careers, more young people are graduating with a mountain of debt. A debt burden of $30,000 to $40,000 is not uncommon for graduates heading into relatively low-paying vocations such as teaching, nursing, social work and urban planning.
The better-paying careers in law, on Bay Street, in specialized branches of medicine and engineering, require even heftier debt loads. Because starting salaries in those fields are so much higher, the insidious effect is to dissuade young people from vocations of choice in, say, teaching or social work. Those would trap them in debt for perhaps a decade, and require them to postpone the expense that comes with starting a family.
The prospect of a "lost generation" due to long-term unemployment is an increasing fear among social scientists.
"This is just the start of a long and downward spiral, which all too often leads to crime, homelessness, or worse," Martina Milburn, CEO of the Prince’s Trust, a British non-profit organization, said recently. "Only by stopping young people falling out of the system can we rescue this lost potential."
As the global recession set in last year, Canadian youth joblessness of 11.6 per cent of the 15- to 24-year-old labour force was a bit lower than the average for the 30 industrial nations of the Organization for Economic Cooperation and Development. But even then, job prospects for Canadian youth trailed those of the Netherlands, Japan, Denmark, Australia and South Korea, nations with more comprehensive government-subsidized training and work-placement programs.
An aging population will need more caregivers. A world bent on reversing the peril of global warming needs specialized environmental technologists. Nations with aging infrastructure need more worldly urban planners and engineers.
As the baby boomers prepare to retire, the world will look as never before to its younger generation to shoulder the burden of conceiving and executing innovative solutions in every realm of work imaginable.
We need Julie to get her diploma, and put her passion to work. Britain’s Tory opposition proposes a scheme to create 100,000 more employee work apprenticeships and a fund to help finance job opportunities for the young. The Obama administration and the U.S. Congress have committed to a comprehensive set of job-creation and job-enrichment programs.
In Canada we seem to be heading in the opposite direction. With recent Canadian government announcements of much higher than expected deficits, public spending on workplace preparation for young people will be an easy target for still further cuts, even as tuitions continue to rise at budget-constrained universities and colleges.
The bottom line is a passive decision in Canada to underinvest in the nation’s future. It’s said that a dream deferred is a dream denied. But the cost of a lost generation will be inflicted widely, as Canada risks losing its competitive edge and its claim on sustained prosperity.
dolive@thestar.ca
Even though financial stocks have rallied nearly 70 percent since the end of March, the Federal Deposit Insurance Corp. issued another grim quarterly report Thursday on the health of the nation’s banks.
The agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. Its deposit insurance fund dropped 20 percent, to $10.4 billion, its lowest level in nearly 16 years. And the number of "problem banks" increased to 416, from 305 in the first quarter, and is expected to remain high.
Indeed, federal officials warned that while the economy and financial markets were showing signs of improvement, the banking sector was unlikely to rebound soon.
"These credit problems will at least outlast the recession by a couple of quarters," said Sheila Bair, the FDIC chairwoman. "Cleaning up balance sheets is a painful process that does take time, but it is absolutely necessary to the industry’s sustained profitability."
The dismal report shows how the industry’s problems have spread. A handful of the biggest banks were among the first to suffer big losses nearly two years ago from complex mortgage assets and other securities, but have posted strong profits from trading over the last two quarters.
Still most of the nation’s 8,195 banks primarily make their money from lending to consumers and businesses. They are now facing increased pressure from soaring loan losses and higher deposit insurance costs as the FDIC seeks to shore up the industry fund. Analysts say a recovery will not be in sight until the job market and broader economy stabilize.
So far, 81 banks have failed this year, including 45 in the second quarter. That, in turn, has put enormous stress on the government’s deposit insurance fund, which is supported by fees charged to the banks regulated by the FDIC. Its second-quarter reserve of $10.4 billion compares with $45.2 billion a year earlier.
The bulk of the decline comes from additional money that the agency has set aside to cover the cost of bank failures, and Bair said the fund had ample resources to make sure insured depositors would not lose money. But the levels are so low that FDIC officials said Thursday that they would consider imposing a special assessment on the banks, on top of elevated insurance fees, toward the end of the third quarter.
Through similar actions, it added about $9.1 billion to the fund in the second quarter.
Bair said she did not anticipate having to immediately tap an emergency credit line run by the Treasury Department, although she did not rule it out. "I never say never," she said. The FDIC quarterly report came after a similar release by the Office of Thrift Supervision on Wednesday that showed savings and loan associations eked out a $4 million profit, the first time the sector posted positive results since the fall of 2007. Still, the number of "problem thrifts" rose to 40, up from 17 a year earlier.
The savings and loan industry "is not out of the woods yet," said John Bowman, the acting director of the Office of Thrift Supervision. "Despite some encouraging signs, the industry’s performance remained uneven."
Federal banking regulators are bracing for hundreds of small and medium-size banks to collapse in the coming months even though the economy has shown early signs of a recovery. Banks are burdened with billions of dollars of bad loans made over the last few years and are continuing to set aside more money to cover losses. In fact, credit loss rates reached a record high in the second quarter.
Over the past decade, Fidelity Contrafund manager Will Danoff did something the stock market couldn’t: He made money, returning 2.3% a year. His fund also beat 95% of the portfolios that invest in large, fast-growing companies.
Yet unless Contrafund was an option in your 401(k), you probably couldn’t invest in it during the bear market. Fidelity shuttered the popular stock fund to new investors in 2006.
Now that the fund has reopened, here are some things you should know.
Overseeing $52 billion has its privileges.
For instance, when Danoff calls, CEOs pick up the phone. But the fund is also limited by the enormous amount of money it oversees. "Managing Contrafund is like trying to turn a tanker," says Morningstar fund analyst Christopher Davis.
Despite the fund’s size, Danoff says there is still a place in Contrafund for small and midsize stocks — in fact, they make up 19% of the portfolio. But he admits that even if he made a brilliant call on a smaller stock today, it would have a negligible impact on the overall fund.
As the fund has grown, so has the size of its average stock. It’s now twice as big as it was five years ago, when the fund managed $39 billion.
While Danoff, who’s been running Contrafund for nearly 20 years, invests in growth companies, he does so in a conservative manner.
For starters, he doesn’t try to bet on hot sectors, as many of his peers are doing with energy stocks now. He simply looks for fast-growing companies regardless of industry. And because he favors conservative firms with low debt, his fund is filled with high-quality stocks such as Johnson & Johnson (JNJ, Fortune 500) and McDonald’s (MCD, Fortune 500).
His love of cash-rich companies has recently led him to technology stocks — his top holding is Google (GOOG, Fortune 500). But he’s still light in tech relative to the S&P 500 large-cap growth index, a sign he’s not interested in owning just any fast grower.
Danoff used the 2008 bear market as an opportunity to stock up on high-quality companies.
"A selloff is a great chance to upgrade the quality of your portfolio," he says. But since high-quality stocks have lagged in the recent rally, Contrafund trails 80% of its peers year to date.
It’s not unusual for Contrafund to lag in euphoric times. It under-performed large growth stocks by 10 percentage points a year during the tech bubble of 1997-99. But after the bubble popped in 2000, Danoff crushed them by 12 points annually in the 2000-02 bear market.
Says Jim Lowell, editor of the Fidelity Investor newsletter: "He’s shown a remarkable ability to dodge most of the market’s big disasters."
Cash for Clunkers is just about at the end of the road.
The government-funded rebate program, popular with consumers, comes to its official completion on Monday.
Dealers still have only until 8 p.m. Monday ET to write deals deals under the program.
The government has extended the deadline for filing Clulnker voucher claims to noon Tuesday following technical problems with the Web site dealers use to submit claims, the Department of Transportation announced Tuesday afternoon.
The U.S. Department of Transportation had received 625,000 applications from dealers for Cash for Clunkers vouchers totaling $2.58 billion as of Monday morning, the DOT said.
In a statement released late Friday, the National Automobile Dealers Association called on the government to accept dealer rebate requests until Aug. 31. The group cited computer slowdowns that could result from "overwhelming demand" on Monday.
Some dealers said they were participating in the Clunker program right up to the end. Others said they had stopped because they didn’t want to risk giving a $4,500 discount on a car and not be reimbursed by the government.
AutoNation (AN, Fortune 500), the country’s largest dealership chain, stopped doing Cash for Clunker transactions after Friday. AutoNation had completed over 12,000 deals, according to spokesman Mark Cannon.
"It’s been a great run," Cannon said.
Under Clunkers, which launched July 27, vehicles purchased after July 1 are eligible for refund vouchers worth $3,500 to $4,500 on traded-in cars with a fuel economy rating of 18 miles per gallon or less.
Car buyers trading in a vehicle must prove that the vehicle has been titled to them for at least a year and, in most states, that the car has been insured for a year. Dealers have to provide copies of that paperwork, among other things, to the National Highway Traffic Safety Administration in order to get their rebates.
The Virginia Automobile Dealers Association reported late last week that about 25% of its member dealerships had already dropped out of the program because of uncertainty over getting paid for their deals.
The Virginia auto dealers’ group reports that dealers have been reimbursed for only about 3% of all the deals that have been done in that state. Hall described the submission process as challenging, with frequent problems and rejections.
"It’s been ugly, ugly," Hall said.
The principal trade group for dealers made a last-minute push to extend the deadline for dealers to submit paperwork.
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Goldman Sachs Group Inc holds a weekly meeting of its research analysts where they offer trading ideas that are given to top clients, the Wall Street Journal reported on its website on Sunday.
But the paper cited Steven Strongin, Goldman’s stock research chief, as saying these meetings did not give anyone an unfair advantage and the tips did not contradict research notes that carry predictions over a longer term.
Goldman’s analysts talk about short-term developments around specific stocks during the meeting, called a “trading huddle,” which is also attended by some of the firm’s own traders, the Journal reported.
The practice started some two years ago, and since then the Wall Street firm has given ideas on hundreds of stocks, the Journal reported, citing internal Goldman documents.
Goldman could not be reached immediately for comment on Sunday night.
The company told the Journal that its own traders were not allowed to use the information until it had been given to clients.
The Journal also cited Goldman spokesman Edward Canaday as saying that a comment that could lead to changes such as those in earnings estimate, ratings or price target must be sent out to all clients. But Canaday told the Journal that it was rare for comments to reach such levels.
(Reporting by Paritosh Bansal; Editing by Muralikumar Anantharaman)
Shares of AIG jumped as much as 31% Thursday after newly appointed CEO Robert Benmosche said he was optimistic about returning the troubled insurer to its former glory.
"At the end of the day, we believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well," Benmosche told Bloomberg in an interview while on vacation in Croatia. "My first charge is to get the company to operate at the level it used to operate, being the world’s best."
Shares closed 21% higher on Thursday.
AIG (AIG, Fortune 500) was once the world’s largest insurer but is now just a shadow of its former self. The company owes taxpayers more than $80 billion of a $182 billion bailout, which it plans to pay back by selling off many of its assets.
But those asset sales have been slow-going and sold at depressed values thus far, as credit remains tight. AIG has made just over $9 billion on those deals so far.
As a result, AIG has agreed to spin off three huge chunks of its business, selling stakes in two of them to the Federal Reserve. In exchange, when the deal is finalized later this year, the insurer’s loan will be reduced by $25 billion.
The company will still have more than $55 billion to pay back to taxpayers by selling off other assets. But Benmosche said he is not discouraged — or being encouraged — to sell assets for below market value.
"The government is working with us. They want us to do things that are very prudent," he said. "The fact is we owe the U.S. government a lot of money and we are not going to be able to pay it back just by our profits, so we will sell some of the company off, but only at the right time at the right price."
For instance, Benmosche halted the auction of AIG Advisor Group last week, after deciding it was essential to AIG’s retirement business free credit report online. Though the government hopes for a speedy payback, AIG’s stability and success as an insurance company is critical to it paying back the taxpayers.
Payback: Retired AIG CEO Edward Liddy reiterated earlier this month that the company would likely be able to repay the government in full in three to five years.
The bailed out insurer took home a profit of $1.8 billion in the second quarter — its first since the third quarter of 2007 — but it will not use those profits to repay the taxpayers. The company said it won’t likely be able to sustain a string of profitable quarters, as it will take hefty restructuring charges for its looming core asset sales.
Prior to joining AIG, Benmosche was the CEO of MetLife (MET, Fortune 500) until he retired in 2006. He oversaw MetLife’s transition from a private to a public company, which experts say gave him the experience necessary to lead AIG’s transition from the world’s biggest insurer to a much smaller domestic life insurance company.
But Benmosche also has to deal with the ongoing distraction of hundreds of millions of dollars in bonuses that have still yet to be paid to employees of its troubled Financial Products unit. The company became the subject of a public uproar after the revelation in March that AIG paid $165 million in bonuses to employees of the division that nearly brought the company to its collapse.
Benmosche’s own compensation plan made news Tuesday, after the company filed an SEC filing that said the new CEO will take home a salary, stock options and a bonus that are worth around $10.5 million a year.
You know it at as junk mail, though the industry prefers to call it direct mail. But whatever the name, you’re getting a lot less of it.
But before you start rejoicing, think about what this means for the economy. Less junk mail means fewer companies want to sell you their services — whether that’s personalized checks or rug cleaning — which reflects wider problems in our economy.
"In one way, it’s good that we’re getting less [direct] mail," said Andrew Davidson, senior vice president with Mintel Comperemedia, a Chicago-based firm that tracks direct advertising. "On the other hand, it’s a sign that these companies, such as the card issuers and banks, are being more cautious in light of the difficult economic environment."
The credit card industry, among the most prolific of the direct-mailers, sent out 5.4 billion pieces of direct mail in 2008, down from 7.3 billion in 2007, according to Mintel. The decline became even steeper this year, with less than 900 million pieces mailed in the first six months.
The mortgage industry has also slowed down its direct mail offers of secured loans, from a peak of nearly 4 billion pieces in 2005, to about 1.1 billion pieces in 2008, according to Mintel. Only 220 million pieces have been mailed in the first six months of this year.
Kirk Swain, a partner with Directmail.com in Prince Frederick, Md., said that orders from charities and politicians have also dried up, since consumers no longer have the funds to make contributions.
"People, when they get scared, they tighten up their wallets," he said.
About the only industries still sending offers are insurers and telecommunications companies, said Davidson of Mintel. He said that "bundle" deals that include telephone, cable and Internet service remain popular, as are life and automobile insurance, which are some of the last things cash-strapped consumers will give up.
The overall decline of junk mail has pained the U.S. Postal Service, which is already billions of dollars in debt. Despite a $6 billion cost-cutting plan, the Postal Service lost $4.7 billion in the fiscal year-to-date for 2009, meaning the nine months ending on June 30. The Postal Service blames the reduction of mail volume, of which direct mail plays a major part compare car insurance prices. In fiscal year 2008, the most recent year for such data, 63% of all mail was direct advertising, according to the Postal Service.
"These are the worst trends that we’ve seen in direct mail, certainly for the last decade," said Bob Bernstock, president of shipping and mailing services for the Postal Service. "The marketing mail piece has gone from growth to decline. The economy is clearly the dominating factor."
Dr. Ramesh Lakshmi-Ratan, chief operating officer of the Direct Marketing Association, an industry trade group, expects direct mail to make a comeback over the next few years, once the economy as a whole recovers. "Do I see a good future for the Postal Service and direct mail?" he said. "Absolutely, but I think it’s going to be different."
Going forward, he projects that the direct mail industry will have less emphasis on credit and more on savings-driven spending, as consumer habits shift towards cash over credit.
Sandra Blum, the Fairfield, Conn.-based author of "Designing Direct Mail that Sells," said that direct mail is more effective than e-mail marketing because consumers have learned to delete advertising e-mails without even reading them, undermining their effectiveness.
"I think that people are hedging their bets and turning to e-mail marketing, thinking that it’s cheaper," said Blum. "But the key word is efficacy here. Believe or not, I think there’s a greater feeling of privacy [with direct mail. If [consumers] can choose when to pay attention to it, they’re tactile."
Another advantage of direct mail is that it doesn’t cost the recipient anything, unlike faxes, pre-recorded ad calls and text ads.
"Junk mail, I don’t have a problem with, honestly," said Brian Bromberg, a lawyer and member of the National Association of Consumer Advocates. "I don’t find it particularly invasive."
And while he is "happy" about getting less junk mail in his mail box, he is "unhappy that it reflects the fact that the economy has tanked."
Oil fell below $68 a barrel on Friday after a report showing weak consumer confidence undermined expectations of a rise in demand and tanked stocks on Wall Street.
U.S. crude oil futures fell $3.01 to settle at $67.51 a barrel Friday.
U.S. consumer confidence in early August dropped to the lowest level since March, according to the Reuters/University of Michigan Survey of Consumers, weakening the economic outlook and dragging down Wall Street.
"Crude futures are down, following a slide in the stock market and after the Reuters/University of Michigan survey showed consumer confidence down earlier this month," said Tom Pawlicki, analyst at MF Global Research in Chicago.
Earlier in the day, oil had climbed with support from data Thursday that showed Germany and France had posted second quarter growth, ending their recessions in April-June, which was earlier than expected online payday loans.
Oil prices have more than doubled from below $33 in December. Most of the support for the commodity so far has come from hopes for a recovery from the economic downturn, rather than fundamentals of demand and supply.
Some of the market’s attention has also been on the weather in the Atlantic Ocean, which could soon see its first named storm of the hurricane season.
Tropical storms and hurricanes can disrupt operations at offshore platforms and coastal refineries but many forecasts are for a mild hurricane season this year.
Wal-Mart Stores Inc., the world’s largest retailer, said Thursday that sales at its U.S. stores open at least a year, or same-store sales fell 1.2%, in the past quarter although profit from continuing operations was at the high end of its expectations.
Bentonville, Ark.-based Wal-Mart (WMT, Fortune 500) said it earned 88 cents a share from continuing operations in the three months ended July 31 compared to fiscal second-quarter income of 86 cents a year earlier.
The result was at the high end of its own forecast range of between 83 cents and 88 cents, and topped analysts’ consensus expectations of 86 cents a share.
The decline in Wal-Mart’s same-store sales was unexpected, and worrisome. Analysts surveyed by Thomson Reuters had forecast an increase of 1% in the measure.
Given Wal-Mart’s dominance in the retailing industry, and the fact that more than 200 million consumers shop at its stores every week, the seller is often seen as a barometer of the health of the consumer and of the economy.
And while most of its peers have been struggling to grow sales through the recession, Wal-Mart’s been one of the few merchants that has actually grown its market share as more consumers across all income levels trade down in their discretionary purchases to its value prices.
From April 2008 to April 2009, Wal-Mart reported 13 straight months of same-store sales gains. The company stopped reported monthly same-store sales in May, moving to a quarterly reporting of its comparable sales.
To that end, last quarter’s same-store sales decline marks the first drop in that measure for Wal-Mart in more than a year.
However, Wal-Mart executives said in a statement that the company’s quarterly performance "has been good, despite headwinds from price deflation, the effects of the recession and currency exchange rates."
"Even though our comparable sales were lower than we had expected, we believe our comparable sales outperformed the retail sector almost in every place that we do business," Wal-Mart CEO Mike Duke said in the company’s pre-recorded call to discuss its results payday loan lenders.
Duke also said that Wal-Mart saw increased foot traffic in its U.S. stores last quarter.
Scott Hoyt, senior director of consumer economics with Moody’s Economy.com said he’s not too surprised by the drop in Wal-Mart’s same-store sales.
He said Wal-Mart got a big sales lift in the same period last year from the government rebate checks that were given to consumers in an attempt to boost spending.
Wal-Mart offered free rebate cash checking in its stores in an attempt to grab a bigger share of the rebate money, a strategy that helped pump up its same-store sales 5.8% last June and up 3% in July.
"The stimulus that consumers got this year was not concentrated in one quarter but was spread out over the last nine months," Hoyt said.
Wal-Mart’s revenue for the quarter decreased 1.4% to $100 billion, which the retailer blamed on the negative impact from exchange rate fluctuations. Without the currency fluctuations, Wal-Mart said its revenue for the quarter would have increased 2.7% to about $104.2 billion.
For the full year, Wal-Mart said its expects earnings per share from continuing operations come in at the range of $3.50 to $3.60, compared with its earlier forecast of $3.45 to $3.60.
The retailers expects its third-quarter earnings per share from continuing operations to be between 78 to 82 cents a share, including a three-cent negative impact from currency exchange rates.
Wal-Mart said its expects third-quarter same-store sales for the 13-week period from Aug. 1 through Oct. 30 to be between flat and up 2%. Analysts surveyed by Thomson Reuters have forecast earnings of 80 cents a share in the third quarter and full-year earnings for Wal-Mart to come in at $3.56 cents a share.
Is the new cop on the U.S. securities beat armed with a pea shooter? The size of the penalties meted out by boss Mary Schapiro’s team at the Securities and Exchange Commission makes it appear so.
Schapiro should be applauded for cranking up the agency’s notoriously lax enforcement efforts. But letting companies off the hook so easily could undermine her new get-tough policy.
At first glance the penalties appear impressive. General Electric agreed to a $50 million settlement. Former American International Group (AIG, Fortune 500) head Hank Greenberg has to pay $15 million. And Bank of America has to pony up $33 million.
But these amounts are trivial when compared with the resources of those charged. BofA (BAC, Fortune 500) is the country’s largest bank by assets. Greenberg is a billionaire. And GE, even today, remains a $150 billion company. The SEC didn’t even get the defendants to admit guilt.
Perversely, the puny size of the penalties could provide an incentive for managers to stretch the rules. Take GE (GE, Fortune 500). The SEC alleged that it massaged its 2002 results so that it could continue its eight-year stretch of meeting consensus earnings estimates. The regulator says, absent GE’s accounting fiddles, it would have missed by about 1.5 cents a share 500 fast cash.
When GE missed estimates in the first quarter of 2008, its stock slid some 13%, wiping over $40 billion off its market cap. Using that percentage decline as a rough guide, GE’s moves back in 2002 saved shareholders — and managers with chunks of stock — nearly $33 billion.
The comparison isn’t entirely fair. GE missed by a greater margin in 2008, during a worsening financial crisis and a month after boss Jeff Immelt had promised to meet expectations.
But applying even a third of the 2008 percentage drop to GE’s early 2003 market value — more in line with the average decline by S&P 500 companies that miss estimates — would mean the conglomerate still saved investors some 220 times the cost of the SEC’s fine. That’s easily enough to turn the temptation to tweak the rules into a no-brainer.
Of course, such calculations are not clear cut. There’s the "name and shame" aspect, the legal costs and the loss of investor confidence to consider. Nonetheless, for the watchdog’s crackdown to have a real deterrent effect, its bite needs to better match its bark.
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