Huge losses in the Small Business Administration’s main loan program have led President Barack Obama to propose phasing out the government subsidy for 7(a) loans beginning in fiscal 2012.
This would force the agency to support its government-guaranteed loans by charging higher fees on borrowers and lenders. That’s what occurred when Congress ended the subsidy for 7(a) loans – at President George W. Bush’s request – in 2004. Congress restored the subsidy this fiscal year, at a cost of $80 million.
The economic stimulus bill provided the SBA with an additional $375 million to waive fees for borrowers on most 7(a) loans and 504 loans, which mostly finance real estate, and increase the government guarantee on SBA loans from the typical 75 percent to 90 percent. Those enhancements made the loans more affordable for borrowers and less risky for lenders, enabling SBA lending to rebound after cratering during the financial crisis.
SBA loans are an important source of credit for small businesses that can’t obtain conventional loans.
In December, Congress came up with another $125 million to extend the fee reductions and higher loan guarantee until the end of February. Obama wants Congress to pass additional legislation extending them through Sept. 30, the end of the fiscal year.
The president’s budget proposal for next fiscal year, however, reveals that defaults on SBA loans have exploded over the past year, costing the government a projected $4.5 billion. Most of the problem loans were made between 2005 and 2007.
The administration proposes a $165 million subsidy for 7(a) loans next year, double this year’s subsidy if economic stimulus funds are excluded.
Beginning in 2012, however, Obama wants to give the SBA “the flexibility to adjust fees in the program to enable it to be self-sustaining over time,” according to the president’s budget plan. This would “strengthen the program’s long-term economic foundation,” the budget plan states.
Default rates for 7(a) loans aren’t much worse than the default rates for conventional loans, said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, which represents SBA lenders.
If the economy improves, default rates should fall, he said. A better business climate also could make an end to the government subsidy for 7(a) loans bearable, he said.
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NEW YORKâGoogle appears to be preparing to market its own smartphone, a move that would intensify the company’s rivalry with Apple Inc., whose iPhone dominates the high-end smartphone market.
On Friday, Google distributed a new phone running its own Android operating software to many of its employees. On the messaging service Twitter, some Google employees described the device as a "Google phone," renewing speculation that the company is getting ready to release a mobile phone with its own brand.
Google employees who asked not to be identified confirmed recently that the company was indeed developing new hardware and software for Android phones and coming up with new ways to get those phones into the hands of consumers, but they would not give more details. One Google employee said the new phone was designed by Google No teletrak payday loan.
The Wall Street Journal reported on its website that Google would sell the phone directly to consumers rather than through carriers. The move, if confirmed, would signal a more aggressive effort by Google to become a force in mobile devices.
On Saturday Google acknowledged on a corporate blog that it was indeed distributing a new class of Android phones to employees to experiment with new features.
Mario Queiroz, a vice-president of product management, said, "This means they get to test out a new technology and help improve it."
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CARACAS–A senior minister and close confidant of Venezuelan President Hugo Chavez resigned Sunday in a growing banking scandal that has triggered a purge of businessmen with ties to the government.
In a move likely to win him support, Chavez said he had accepted the resignation of Science and Technology Minister Jesse Chacon, whose brother was arrested Saturday following the closure of the bank he headed.
"Yesterday Jesse Chacon asked if the best thing for the government would be that he offered his resignation and I said I believe so. He will have to leave the government," Chavez said in his weekly television show where other ministers were among the audience.
Chacon took part in a 1992 coup that sought to bring Chavez to power and both men were jailed for their actions. He has held numerous posts under Chavez.
Police have also arrested Giuzel Mileira, the director of the Banco Real, bringing to eight the number of bankers in custody.
Another banker with government ties fled to Miami, Chavez said.
Those detained include a businessman who made more than one billion dollars partly by selling corn to government-subsidized supermarkets.
Venezuela last week closed the seven small banks for regulatory breaches including capitalization problems and unexplained funds, causing market turmoil as Chavez threatened to nationalize the financial system.
Most analysts agree that Chavez is unlikely to risk instability through a widespread nationalization of the country’s best-capitalized and profitable banks.
The rise of a new mega-rich elite during his decade in office has been a liability for Chavez, who wants to build a socialist society in Venezuela and took office in 1999 promising to end corruption.
The arrest of executives widely considered to be corrupt is likely to be popular with Chavez’s supporters before legislative elections in September.
More detentions are expected because authorities have issued 27 warrants including nine requests to Interpol for international arrests.
Reuters News Agency
The Federal Reserve should lose its authority to bail out big, failing financial firms like AIG and Bear Stearns under proposed reforms aimed at limiting the collateral damage from such failures, U.S. Treasury Secretary Timothy Geithner said on Thursday.
Geithner, in testimony to the U.S. House of Representatives Financial Services Committee, said the Fed should keep its ability to act as an emergency lender of last resort, but only to solvent firms in times of severe stress in financial markets — with Treasury consent.
“Any firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure,” Geithner said. “The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm.”
Geithner said a bill by the Financial Services Committee’s chairman, Representative Barney Frank, meets the tests for key elements of a resolution authority that the Obama administration would like to see passed.
It is a “comprehensive coordinated answer to the moral hazard problem” and does not provide any implicit guarantees for financial institutions, he said.
“We cannot put taxpayers in the position of paying for the losses of large private financial institutions,” Geithner said cheap payday advance. “We must build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy.”
Geithner said large failing firms should be put into a receivership managed by the Federal Deposit Insurance Corp that would seek to “unwind, dismantle, sell or liquidate the firm in an orderly way” where losses would be borne by shareholders and creditors of the firms.
The costs of such shutdowns would be borne by other large financial firms, imposed afterward, Geithner said. This would eliminate a standing insurance fund that creates expectations that the government would step in to protect creditors and shareholders.
Regulators also must impose tougher capital and liquidity standards on large firms that take on more risk, Geithner said, to reduce the probability of a larger firm experiencing financial distress.
But Geithner said there would not be a set list of large firms held to higher standards, adding that the government did not want to provide a false impression that such firms would be protected from failure by the government in times of stress.
(Reporting by David Lawder; Editing by Andrea Ricci)
In the 1980s, when stocks mostly surged, a few mutual fund managers became the equivalent of rock stars.
Tops among them: Peter Lynch, who racked up average annual returns of a remarkable 29 percent over a 13-year run.
Lynch did it at Fidelity Magellan, which continued to grow after he left in 1990. What once was the world’s largest fund swelled from $13 billion to nearly $110 billion a decade later. Assets peaked three years after the fund shut its doors to new investors because it became so big it was hard to manage effectively.
So where is Magellan now? It’s at $24 billion, and struggling to draw investors who fled in droves after years of mediocre performance. Magellan is still big by any standard, but it’s merely Fidelity’s fourth-largest stock fund.
"I don’t worry about too many assets now," says current manager Harry Lange, who took over in late 2005.
Magellan reopened to new investors early last year, but those who gave it a try were disappointed. The fund’s 2008 plunge? Forty-nine percent — steeper than the market’s nearly 39 percent decline. Blame bad bets on dogs like AIG and Wachovia — financial companies that Lange held on to for too long.
But Lange is turning things around, thanks to a sharp departure from his predecessor’s style. Where Robert Stansky was criticized for too closely mirroring broader markets, Lange has tilted the fund heavily in favor of growth stocks — companies whose comparatively steep share prices are backed by expectations that earnings will keep growing rapidly. He’s eased out of cheaper value stocks with steadier earnings, and takes a go-anywhere approach in keeping with the fund’s namesake 16th century explorer. Nearly one-quarter of Magellan’s holdings are international stocks.
Many of the same bets on riskier stocks that weighed Magellan down last year are lifting it in 2009. It’s up 35.6 percent, easily topping the nearly 17 percent gain for its benchmark, the Standard & Poor’s 500, and beating nearly nine of 10 of its peer funds.
So is it time to climb back aboard Magellan? Only if you’re willing to commit to a fund whose penchant for racy stocks makes it unusually volatile.
This year, the fund expanded its already substantial stake in recently hot technology stocks — its second- and third-largest holdings are specialty glass maker Corning Inc. (up 62 percent this year) and semiconductor maker Applied Material (up 34 percent). It’s also favored hard-hit fare like home builder Toll Brothers (down 8 payday loan.8 percent) and big banks — Magellan’s most recent list of top 10 holdings included Bank of America, J.P. Morgan Chase, Wells Fargo and Goldman Sachs.
Lange has turned Magellan into "a fund for optimists," according to Morningstar’s lead Fidelity analyst, Christopher Davis.
"If you look at its portfolio, it’s positioned for an economy that’s improving," Davis says, noting an absence of such defensive favorites as Wal-Mart and Procter & Gamble.
Lange says this year he’s slightly eased off his leaning toward growth stocks but still heavily favors the category. Though value stocks outperformed growth for an eight-year run after the dot-com bubble deflated early this decade, the pendulum swung back to growth last year — financial stocks that were hit so hard last year are mostly in the value category. Growth’s ranks include plenty of tech names that have recently fared well.
Lange still likes tech because of its big stake in emerging markets, where consumers in countries like China and India continue to drive growing demand for gadgets including mobile phones from makers like Nokia, Magellan’s top holding. He figures that trend will continue giving growth an edge over value. "I’m pretty confident that growth will be as strong in the next six to 12 months," Lange says. "There are a lot of people out there who think after that, it will be a sluggish recovery. I’m more bullish than that."
As for his fund’s choppiness, Lange acknowledges that with his growth-oriented style, "it’s pretty tough not to have volatility in these unusual times."
Even with this year’s strong results, winning back investors who fled Magellan has proved tough. Lange is still trying to shake the cumulative record of the last 10 years, a period when Magellan posted an average annual loss of 1.2 percent, slightly worse than most of its peers.
"This is not your grandfather’s Magellan fund," says Jim Lowell, a former Fidelity employee who runs an independent newsletter, FidelityInvestor.com, that evaluates the company’s funds.
Lowell currently recommends Magellan but says it’s no longer appropriate as a core retirement holding for investors who are looking for the broad exposure it once offered. Instead, Magellan is geared toward those seeking more growth exposure in an otherwise diversified portfolio.
The stock price of AMR Corp. surged on Thursday after the American Airlines parent company said it obtained $2.9 billion in new financing.
AMR’s (AMR, Fortune 500) stock was up more than 20% one hour after the opening bell.
The company, which owns American Airlines and American Eagle, said the funds included $1.3 billion in new liquidity, including $1 billion in cash from the advance sale of AAdvantage frequent flyer miles to Citi (C, Fortune 500), and nearly $300 million via a cash loan from GE Capital Aviation Services.
The remaining $1.6 billion comes from sale-lease finance commitments for Boeing 737 aircraft that were previously owned by the company, AMR said.
AMR said it will use the funding to purchase additional aircraft and to add first class cabins to existing aircraft. The company also said it will shift more capacity to hubs in Dallas-Forth Worth, Chicago, Miami and New York City.
Throughout the recession, the airline industry has been cutting back on flights to cut costs in the face of fuel price volatility and reduced air travel. But AMR said that capacity is actually expected to increase by 1% in 2010.
"Today’s announcement is obviously positive for the company and our employees, as this new financing will help us navigate through a tough environment and lay the groundwork for future success," said AMR Chief Executive Gerard Arpey, in a press release.
Microchip king Intel boosted its sales outlook for the current quarter on Friday, signaling an end to the deep PC market swoon.
The company raised its third-quarter revenue expectations to a range between $8.8 billion and $9.2 billion from a range of $8.1 billion to $8.9 billion. The new estimates trump Wall Street’s revenue forecasts for the current quarter of $8.6 billion, according to a Thomson Reuters survey of analysts.
Intel also said its gross margin will be in the "upper range" of its previous guidance of 51% to 55%. Analysts currently expect gross margin of 53.2%.
The tech bellwether said it expected demand for microprocessors and chipsets would be stronger than it had previously expected in the current quarter. That’s largely due to the PC market, which Intel last month said has started to bounce back sharply.
PC sales were expected to rebound this year, but not until the fourth quarter, when Microsoft’s (MSFT, Fortune 500) Windows 7 is set for release payday loan. But a recent Gartner study showed that computer sales are already showing signs of improvement. Apple (AAPL, Fortune 500) released its new Snow Leopard operating system Friday, which could boost Mac sales somewhat this quarter.
Intel already pleasantly surprised analysts last month when its second-quarter sales and profit easily beat Wall Street’s expectations. In its July 14 announcement, the company said it was very upbeat about the future, and its guidance blew past analysts’ long-term forecasts.
A spokesman for Intel was not immediately available for comment.
Shares of Intel (INTC, Fortune 500) rose 4% in morning trading.
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."
U.S. billionaire Len Blavatnik is planning to file a lawsuit against JPMorgan Chase on Monday, accusing the bank of mismanaging an investment account that held $1 billion in assets owned by Blavatnik’s industrial holding company, Access Industries, the New York Times said.
In the proposed lawsuit, Blavatnik’s lawyers blame Ted Ufferfilge, a JPMorgan banker advising Access, for losing $98 million of the company’s money betting on risky subprime mortgage securities, according to the paper.
The proposed lawsuit contends that Ufferfilge told Access that its funds were being invested in conservative instruments, not securities that wound up at the center of the American mortgage crisis, the paper said, citing a draft of the complaint prepared by the law firm Quinn Emanuel Urquhart Oliver & Hedges.
An Access spokesman told the paper that JPMorgan bought the subprime securities for Access “at a time when the bank itself was unwinding its positions in similar investments business cards online.”
JPMorgan intends “to defend this matter vigorously,” a spokeswoman for the bank told the paper. “We believe this lawsuit is meritless and a transparent attempt to recover losses resulting from the unprecedented market downturn,” she told the paper.
The bank has hired the law firm Paul, Weiss, Rifkind, Wharton & Garrison to represent it in the case, the paper added. JPMorgan and Access Industries could not be immediately reached for comment by Reuters.
(Reporting by Chakradhar Adusumilli in Bangalore; Editing by Muralikumar Anantharaman)
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