Stories by Liz Hester
Covering Bernanke at Congress
by Liz Hester
Federal Reserve Board Chairman Ben Bernanke appeared before a Congressional hearing on Wednesday and the headlines he made were decidedly different across the various national media covering his remarks.
First, the Wall Street Journal story, which ran with the headline “Bernanke: Bond Buys Could Slow at ‘Next Few Meetings’” and focused on the Fed’s ending of economic stimulus:
Federal Reserve Chairman Ben Bernanke said the central bank could begin winding down its $85 billion-a-month bond-buying program at one of its “next few meetings” if the economic data continues to improve, but he warned market participants that a step down in purchases won’t mean the Fed has started a one-way march toward the exit.
“We are trying to make an assessment of whether or not we have seen real and sustainable progress in the labor-market outlook,” Mr. Bernanke said during a congressional hearing Wednesday, when pressed about when the Fed intends to end its easy-money policies.
If Fed officials see continued economic improvement and have confidence that it is going to be sustained “in the next few meetings we could take a step down” in pace of purchases, he said. At the same time, Mr. Bernanke said the Fed wants to be careful not to move prematurely on the policy shift.
When the Fed does take that step, Mr. Bernanke said it won’t mean we are “automatically aiming for a complete wind-down,” Mr. Bernanke said. “Rather we would be looking beyond that to seeing how the economy evolves and we could either raise or lower our pace of purchases going forward. Again that is dependent on the data,” he said.
Overall, Mr. Bernanke’s comments on winding down the bond-buying program indicate the Fed has a plan, but remains undecided about when to pull the trigger. When pressed further on timing, Mr. Bernanke declined to say whether the Fed would make this move by Labor Day.
The New York Times took nearly the opposite approach with a story running under the headline “Fed Stimulus Still Needed to Help Recovery, Bernanke Says”:
Despite recent improvement in the job market, the Federal Reserve needs to continue its stimulus efforts to avoid endangering the recovery, the Fed chairman, Ben S. Bernanke, told Congress on Wednesday.
While acknowledging the risks of historically low interest rates and the Fed’s aggressive policy of buying government bonds to help stimulate the economy, Mr. Bernanke said in testimony that “a premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.”
After his opening statement, however, Mr. Bernanke seemingly opened the door a bit wider to tapering down.
Under questioning by Representative Kevin Brady, a Texas Republican who chairs the Joint Economic Committee, Mr. Bernanke said the Fed could prepare to “take a step down” in the next few meetings if the outlook for the labor market improved.
“It’s dependent on the data,” he said. “If the outlook for the labor market improves, we would respond to that.”
The Washington Post took a much more political angle on the story, pointing out to Congress for the failures in the economy:
Ben Bernanke testifies before Congress today for the first time in three months, and the Federal Reserve chairman has a message for lawmakers: You’re the reason the economy isn’t taking off more.
Of course, Bernanke is too polite to phrase things quite so bluntly. But to anyone versed in Fedspeak, that’s the gist of his message. Even as state and local governments are becoming less of a drag on growth, Bernanke says in his prepared testimony before the Joint Economic Committee, “fiscal policy at the federal level has become significantly more restrictive.”
“In particular,” his testimony says, “the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”
He adds that with the Fed’s interest rate policies already near zero, “monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”
It might be one thing if the fiscal retrenchment was also solving the country’s longer-term deficits. But, Bernanke says, it has not. “Although near-term fiscal restraint has increased, much less has been done to address the federal government’s longer-term fiscal imbalances,” he says in the prepared testimony. “Indeed, the [Congressional Budget Office] projects that, under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter.”
That’s three different leads from the nation’s leading newspapers, which makes it a bit confusing to determine the real message behind the Fed chairman’s remarks. Typically large news organizations tend to focus on similar leads and language, especially in covering remarks that are provided before. In this case, your guess to his meaning is as good as any.
Apple and those pesky tax laws
by Liz Hester
Apple CEO Tim Cook was in the spotlight Tuesday while being grilled by a Senate committee on Apple’s payment (or lack thereof) of taxes. The company is accused of using overseas accounts to hold cash, making it exempt from U.S. taxes, something the executive strongly denied.
From the Wall Street Journal:
Mr. Cook’s appearance on Capitol Hill followed the disclosure his company has paid no corporate income taxes on tens of billions of dollars in overseas income during the past four years, according to a report from the U.S. Senate’s Permanent Subcommittee on Investigations released Monday.
Sen. Carl Levin (D., Mich.), chairman of the panel, accused Apple of employing “alchemy” and “ghost companies” to escape tax collectors in the U.S. and Ireland, the base of the firm’s international operations outside the Americas.
“Apple has sought the Holy Grail of tax avoidance,” said Mr. Levin said. “Apple is exploiting an absurdity, one that we have not seen other companies use.”
Countered Mr. Cook: “There’s no shifting going on…We pay all the taxes we owe, every single dollar.”
Apple used technicalities in Irish and American tax law to pay little or no corporate taxes on at least $74 billion over the past four years, according to the Senate panel’s findings. The investigation found no evidence that Apple did anything illegal. Aides to the subcommittee said they have never seen a company use a subsidiary that didn’t owe corporate income taxes to any country.
USA Today offered the most concise summary of the tax issues:
The testimony came in response to the Senate panel’s Monday report that said Apple avoided tens of billions of dollars in U.S. taxes on its income by shifting the funds through a global web of offshore entities — including three that had no tax residency in any nation.
The three entities were run by some of Apple’s top executives but were located, on paper, in Ireland, though they in some cases had no employees. One reported $30 billion in net income for 2009-2012, yet filed no corporate tax return and paid no income taxes to any government during those years, according to the report.
Another affiliate received $74 billion in sales income over four years, but paid taxes “on only a tiny fraction of that income,” the report said.
Apple also transferred economic rights for some of its intellectual property to its offshore affiliates in low-tax jurisdictions, saving tens of billions of dollars in levies, the Senate panel concluded in its latest look at corporate tax avoidance tactics.
The company then went a step further by using U.S. tax loopholes to avoid federal taxes on $44 billion in otherwise taxable offshore income from the intellectual property rights during the last four years, the report said.
And many people aren’t happy about their accounting or use of the current tax code, according to the New York Times:
J. Richard Harvey Jr., a professor at Villanova Law School, estimated that Apple’s legal maneuvering had saved the company $7.7 billion in potential American taxes in 2011.
“Apple is an iconic U.S. multinational corporation that has enjoyed extraordinary financial success,” he said. “In addition to demonstrating excellence in designing, building and selling consumer products, Apple has been very successful at minimizing its global income tax burden.”
For example, in 2011, 64 percent of Apple’s global pretax income was recorded in Ireland, where only 4 percent of its employees and 1 percent of its customers were located, Mr. Harvey said.
While Apple has repeatedly insisted it does not engage in “tax gimmicks,” Mr. Harvey was dubious. “Apple does not use tax gimmicks? I about fell off my chair when I read that,” he said.
While Mr. McCain, the panel’s top Republican, and Senator Carl Levin, a Democrat, were critical of Apple, the company was not without its defenders on the panel.
“I’m offended by the spectacle of dragging in Apple executives,” said Senator Rand Paul, a Kentucky Republican. “What we need to do is apologize to Apple and compliment them for the job creation they’re doing.”
USA Today points out that Cook wasn’t without his own agenda for the hearing. He used it to make recommendations about ways to overhaul the tax code:
Cook also sketched a proposal for a revenue-neutral simplification of federal tax laws that would lower corporate tax rates to roughly 25% and create a “single-digit” percentage tax on foreign earnings that multinational U.S. firms bring home to use for job creation and economic investment. On paper, U.S. corporations are taxed 35% on worldwide income. But levies on overseas income are deferred until the funds are brought back to the U.S.
Such a change “would likely result in an increase in Apple’s U.S. taxes,” said Cook, who noted that the company’s $6 billion federal tax payment last year likely made it America’s largest corporate tax payer.
No matter the outcome of the hearings, it does raise the interesting point that individuals continue to bear the burden of supporting the government while cash-flush corporations are able to defer some taxes.
This just looks like all the more reason that Congress should tackle that overhaul of the tax code, but given the current issues at the Internal Revenue Service, that may not be possible. At least Congress is hopefully hearing the case for changing the rules for everyone, especially those corporations with lots of overseas profits.
Companies review health plans
by Liz Hester
The Wall Street Journal had an interesting and important piece on how employers, especially those with lower-earning workforces, are looking to provide coverage in order to comply with the Affordable Care Act.
Here are some of the details of what companies are considering:
Employers are increasingly recognizing they may be able to avoid certain penalties under the federal health law by offering very limited plans that can lack key benefits such as hospital coverage.
Benefits advisers and insurance brokers—bucking a commonly held expectation that the law would broadly enrich benefits—are pitching these low-benefit plans around the country. They cover minimal requirements such as preventive services, but often little more. Some of the plans wouldn’t cover surgery, X-rays or prenatal care at all. Others will be paired with limited packages to cover additional services, for instance, $100 a day for a hospital
Federal officials say this type of plan, in concept, would appear to qualify as acceptable minimum coverage under the law, and let most employers avoid an across-the-workforce $2,000-per-worker penalty for firms that offer nothing. Employers could still face other penalties they anticipate would be far less costly.
But the story goes on to say that the plans may not actually be in full compliance with the new coverage laws:
The idea that such plans would be allowable under the law has emerged only recently. Some benefits advisers still feel they could face regulatory uncertainty. The law requires employers with 50 or more workers to offer coverage to their workers or pay a penalty. Many employers and benefits experts have understood the rules to require robust insurance, covering a list of “essential” benefits such as mental-health services and a high percentage of workers’ overall costs. Many employers, particularly in low-wage industries, worry about whether they—or their workers—can afford it.
But a close reading of the rules makes it clear that those mandates affect only plans sponsored by insurers that are sold to small businesses and individuals, federal officials confirm. That affects only about 30 million of the more than 160 million people with private insurance, including 19 million people covered by employers, according to a Citigroup Inc. report. Larger employers, generally with more than 50 workers, need cover only preventive services, without a lifetime or annual dollar-value limit, in order to avoid the across-the-workforce penalty.
These types of plans are just one strategy companies are looking to in order to avoid penalties associated with the new laws and to save costs:
The low-benefit plans are just one strategy companies are exploring. Major insurers, including UnitedHealth Group Inc., Aetna Inc. and Humana Inc., are offering small companies a chance to renew yearlong contracts toward the end of 2013. Early renewals of plans, particularly for small employers with healthy workforces, could yield significant savings because plans typically don’t need to comply with some health law provisions that could raise costs until their first renewal after Jan. 1, 2014.
Insurers and health-benefits administrators are also offering small companies a chance to switch to self-insurance, a form of coverage traditionally used by bigger employers that will face fewer changes under the law. Employers are also considering limiting workers’ hours to avoid the coverage requirements that apply only to full-time employees.
The Washington Post also had a story Monday about how individuals might be able to reduce their out-of-pocket costs when covered by high-deductible health plans:
There is no free lunch. As more people buy high-deductible health plans, they’re discovering that while premiums for such plans are more affordable, the trade-off can be high out-of-pocket costs before coverage kicks in.
However, some plans sold on the individual market offer a way for healthy people to shrink their deductibles. Under so-called deductible-credit plans, the deductible diminishes year by year for policyholders who don’t spend a lot on health care.
Supporters say these programs reward good health by helping customers reduce their costs. But consumer advocates say the programs may discriminate against sick people and run afoul of the Affordable Care Act.
In a plan with a deductible credit, if an enrollee’s health claims don’t exceed the deductible one year, the deductible drops by 20 percent the following year, then by the same amount the following year, until the deductible may eventually be reduced by half, the maximum reduction allowed.
So if someone has a plan with a $5,000 deductible, for example, the deductible could be reduced to $4,000 after the first year. The following year, it could drop another $1,000; after three years, it could be cut to $2,500. If at that point the policyholder had, say, a car accident with claims totaling $10,000, the person would receive credit for the $2,500 reduction and owe less out of pocket. The following year, the deductible would reset to the original $5,000 and the process would start all over again.
It’s obvious that in the search to save money, many people, especially those earning lower salaries are going to have trouble paying for health care. If you have a plan where visiting a hospital isn’t possible, or paying for it out-of-pocket could cost all of your income, then getting the care you need becomes a struggle.
The unintended consequences of the Affordable Care Act may end up hurting those who most need it. Continuing to cover what insurance companies will offer and how different companies choose to comply with the law will be a big story. Let’s just hope that the business press remains vigilant on the topic, putting out thorough pieces like these.
Spending $1.1 billion to save Yahoo
by Liz Hester
Yahoo Inc. is going to spend $1.1 billion in cash to purchase blogging site Tumblr, which has yet to make money. It’s a bold move, especially for the closely watched CEO Marissa Mayer.
Here are a few of the details and rational for the deal from the Wall Street Journal story:
Tumblr, founded in 2007, fast built a following by making it easy for people to post blogs and photos, follow other people on Tumblr and receive updates via a feed. The website’s simple design has lowered the bar for online publishing and effectively merged blogging with social media.
By acquiring Tumblr, Yahoo would instantly gain a social-media site that has become a hub of communication and blogging for millions of people, but one that generates little revenue.
Tumblr Chief Executive David Karp has focused on building the company’s user base for its minimalist blogging platform while leaving for later the question of earning money. It is a pattern typical for young Internet companies.
Tumblr began placing ads on its service last year. Mr. Karp, who once told the Los Angeles Times that he was “pretty opposed to advertising,” said in recent media reports that Tumblr generated $13 million in revenue last year.
People familiar with the matter said Yahoo believes it could help Tumblr bring in more money by selling ads, boosting its own revenue in the process.
The New York Times points out the significance of the deal for Mayer and how integrating it will also be a challenge:
The acquisition is the biggest yet under Yahoo’s chief executive, Marissa Mayer, as she attempts to reinvent the once-embattled Web pioneer’s fortunes. Under her, the company is seeking to make up for years of missing out on the growing use of social networks and mobile devices.
Buying Tumblr is intended to help address that shortfall. The six-year-old company is one of the most popular blogging services, with over 108 million blogs. Buying the company could provide a wealth of user-generated content.
The acquisition will be a test for Ms. Mayer, who will have to ensure that Tumblr does not get lost inside Yahoo. In the past, acquisitions made by Yahoo’s former chiefs, including Geocities, an early social site, and Flickr, the popular photo-sharing Web site, have either been shuttered years later or neglected within the company.
The Guardian also notes that this is a big deal for Yahoo, pointing out they plan to live stream the announcement:
With a high-profile press conference scheduled for Monday afternoon at a location in a lounge in New York’s Times Square, just a couple of miles from Tumblr’s headquarters, nobody expects Mayer will turn up empty-handed. According to the Wall Street Journal on Sunday evening, the Yahoo board have agreed to pay $1.1bn for Tumblr and will let it continue to operate as an independent business.
Yahoo declined to comment ahead of the announcement, but pointed out that it will be streamed live. That’s something the company previously only did (in audio) for its quarterly financial results. Which points to Mayer being aware of its significance, and wanting the world’s media to realise it too.
For Yahoo, capturing the white-hot blogging site which is so easy to use that it repeatedly and effortlessly captures the zeitgeist (such as “White Men Wearing Google Glass“) could catapult it back into the top flight of contenders, in a web world that has become hugely more complicated since it was set up in March 1995 – before Google and nearly a decade before Facebook.
And it could be that Tumblr needs Yahoo just as much as Yahoo needs Tumblr, the Guardian reports:
But for Tumblr, Yahoo could bring the skills at pulling in advertising sales it has been sorely missing. It also looks like something of a shotgun marriage. Tumblr only has a few months’ worth of cash left, according to industry gossip, and has been shopping itself around the industry for a little while. It pulled in $13m of advertising in 2012, but is spending far more than that.
It hoped to hit a $100m revenue target for 2013 but that seems unlikely now, making its purchase a potential lifesaver for both companies, and for investors.
Unlike Facebook, Tumblr has been slow to pull in advertisers. Speaking to the Guardian in January 2012, Karp expressed disdain for how other sites use ads. Of Google-owned YouTube, he said: “They take your creative works – your film that you poured hours and hours of energy into – and they put ads on top of it. They make it as gross an experience to watch your film as possible. I’m sure it will contribute to Google’s bottom line; I’m not sure it will inspire any creators.”
No matter what, it’s a big price to pay for a site that’s not generating any money and could be out of cash. Yahoo is banking on selling ads across platforms and creating another reason for users to visit its site and use its search.
Translating users of one site to another can be difficult at times and history is full of deals like this one that haven’t panned out.
Why we care about Wal-Mart earnings
by Liz Hester
With Wal-Mart Stores Inc. reporting “disappointing” earnings Thursday, it’s easy to shrug it off as not that big a deal. Many of Wal-Mart’s core customers continue to struggle in the current economy, making details about sales an interesting window into the broader U.S. situation.
Here are a few earnings details from the Wall Street Journal:
Wal-Mart Stores Inc.’s first-quarter profit and revenue edged higher, but same-store sales at its namesake U.S. stores fell for the first time in seven quarters. The retailer blamed a delay in income-tax-refund checks, challenging weather conditions, and the payroll-tax increase.
While Chief Financial Officer Charles Holley said the second quarter was off to a “healthy” start, he said employment remain customers’ primary concerns and “our consumer is still stretched.”
U.S. same-store sales fell 1.4%, when Wal-Mart in February forecast flat comparable-store sales. “When we provided flat comp guidance for the first quarter, we had expected, among other things, to recover a reasonable portion of tax refunds and had also assumed that customers would follow historical spending patterns with these funds,” said Wal-Mart U.S. Chief Executive Bill Simon. “This did not materialize.”
The importance of tax refunds to lower-income consumers (and to Wal-Mart) can’t be overstated. Here are a few more details from the Reuters story:
Consumers with lower incomes have been especially squeezed by higher payroll taxes, consistently elevated gas prices and a shaky employment recovery.
Shares of the world’s largest retailer were down 2.1 percent, or $1.72, at $78.14 after falling as much as 3.2 percent earlier in the session. The stock had hit a new high of $79.96 on Wednesday.
“We hadn’t seen the business turn around particularly in April,” said ITG analyst John Tomlinson. “That was a concern because at that point you would think tax refunds and lower gas prices would have started to help the business.”
Earlier this year, Wal-Mart said that delays in tax refund checks from the U.S. Internal Revenue Service would crimp shoppers’ spending on discretionary items. But the effects went beyond that, and the drop in refunds pressured shoppers and, in turn, sales at the company’s U.S. stores.
“We do know that the lack of IRS refund checks did hurt our consumers,” Wal-Mart Chief Financial Officer Charles Holley told reporters. “In fact, the IRS, I think, has said that they’ve estimated that there were about $9 billion less in refund checks, and we certainly cashed less of those checks.”
The company forecast earnings of $1.22 to $1.27 per share for its second quarter, which began on May 1. Analysts had been expecting $1.29, according to Thomson Reuters I/B/E/S. The year-earlier profit was $1.18 per share.
Payroll taxes were also to blame, according to Bloomberg’s story:
Unemployment remains “high on the list of concerns” of shoppers surveyed by Wal-Mart, Chief Financial Officer Charles Holley said on a call with reporters today. The U.S. unemployment rate was 7.5 percent in April.
Wal-Mart’s sales slowed in January and February after shoppers’ incomes were reduced by a 2 percentage-point increase in the payroll tax. They also were hurt by tax returns that were delayed because of forms that were shipped late and additional, federally mandated fraud scrutiny.
Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail obtained by Bloomberg News that month-to-date sales had been a “total disaster.” Murray left Wal-Mart last month. Holley said in March that those sales returned to normal by the end of February.
The picture wasn’t great overseas either, according to MarketWatch:
Overseas, a stronger dollar dented international sales by $1 billion. Wal-Mart cited slower personal income growth pressuring U.K. consumers as it cut prices on key food items to lure shoppers.
Without specifying the impact of Target’s entry to Canada, Wal-Mart said consumers there faced higher household debt levels. In its South African market, where it participates through a 51% stake in Massmart, the company also cited cautious consumers. In China, traffic dropped 8% as shoppers consolidated trips. In Japan, “cautious consumer behavior” also was observed.
Holley declined to elaborate on Wal-Mart’s thinking behind not endorsing the Europe-led accord on safety in Bangladesh.
“The key debate will be how much of Walmart’s comp [sales] slowing is temporary” because of weather and deflation or permanent because of such factors as payroll tax hike, said ISI Group’s Greg Melich.
Wal-Mart said it’s seen things improving this month and expects positive U.S. same-store sales this quarter. Investors appear to still need more proof.
It will remain to be seen if consumers and investors return to the company in the second quarter. But it is another piece of the economic puzzle. While some are excited by home sales, many at the lower end of the spectrum continue to struggle to get by and purchase what they need.
Where’s the economy going?
by Liz Hester
Stocks rose on Wednesday despite the poor manufacturing numbers that fell for April. There was also mediocre news about the European economic recovery.
So, what are business journalists making of the stock market and how to cover such a seemingly large disconnect?
Here’s the Reuters story, via the New York Times:
Factory output dropped in April and manufacturing activity in New York state contracted this month, a sign that slowing global demand is weighing on the economy.
The anemic growth picture was highlighted by another report on Wednesday showing the largest decline in wholesale prices in three years. The data gives the Federal Reserve latitude to keep priming the economy with an easy monetary policy.
“The somewhat sluggish economic growth and limited inflation are the equivalent of rocket fuel for the Fed,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
U.S. Treasury debt prices rose on the reports and the dollar retreated from 4-1/2 year highs against the yen as investors fine-tuned their bets on Fed policy. Stocks on Wall Street trended higher while gold prices fell to their lowest in nearly a month.
Manufacturing production fell 0.4 percent last month after declining 0.3 percent in March, the Fed said. That pushed overall industrial output down by 0.5 percent, more than unwinding March’s 0.3 percent advance. Economists had expected industrial output to fall only 0.2 percent last month.
The drop in factory output, which accounts for more than 70 percent of industrial production, was broad-based and in keeping with data earlier this month that showed factory payrolls failed to expand last month.
Industrial capacity utilization, a measure of how fully the nation’s mines, factories and utilities are deploying their resources, dropped sharply from a more than 4-1/2 year high.
Bloomberg’s coverage cited the Federal Reserve’s stimulus as the reason for the continued rally:
U.S. stocks rose, pushing benchmark indexes to fresh records, as data showing weakness in manufacturing fueled bets the Federal Reserve will be in no hurry to scale back stimulus.
JPMorgan & Chase Co. jumped 1.7 percent to its highest level since June 2007 as financial shares rallied. Procter & Gamble Co. added 1.5 percent as the index tracking consumer-staples stocks hit a record. Macy’s Inc. increased 2.5 percent after reporting profit that beat estimates. Netflix Inc. rose 4 percent, extending gains for a sixth day. Cisco Systems Inc. climbed 8.5 percent after the close of regular trading as quarterly earnings topped analyst forecasts.
The Standard & Poor’s 500 Index (SPX) rose 0.5 percent to 1,658.78 at 4 p.m. in New York. The benchmark equity gauge has set a record in nine of the past 10 sessions. The Dow Jones Industrial Average added 60.44 points, or 0.4 percent, to a record 15,275.69 today. More than 6.5 billion shares traded hands on U.S. exchanges today, or 3.5 percent above the three-month average.
Then there’s the Euro-zone’s lagging recovery. Here’s the Wall Street Journal coverage:
The euro-zone debt crisis has mutated into Europe’s longest slump of the postwar era, as the currency bloc’s economy shrank for the sixth-straight quarter with no recovery in sight for most of the 17 countries.
The euro zone’s output of goods and services, or gross domestic product, fell at an annualized rate of 0.9% in the first three months of this year, data released on Wednesday showed, deepening a recession that began in late 2011.
Depression-like conditions in Southern Europe, combined with slowing global growth, are dragging down the core economies: Germany is barely growing, France is steadily contracting.
The euro zone, which accounts for 17% of world GDP, remains the weakest link in the global economy, mired well below its level of economic activity before the 2008 financial crisis.
Low interest rates and abundant liquidity for banks—and above all, the European Central Bank’s pledge to prevent the collapse of euro-zone government bond markets—have led to strong recoveries in many European financial markets. But borrowing costs for businesses in Spain, Italy and Portugal remain significantly higher than in Northern Europe, impeding investment and job creation.
So, it’s a mixed bag in the U.S. and in Europe with investors betting that the central banks will continue to prop up lagging economies. As many in the world struggle to find full employment, it’s probably a good thing that governments are willing to continue to prop up the economy. It’s just a bonus that some are able to make money while they do it.
Justice Department obtains AP phone records
by Liz Hester
In the next breaking scandal, the Justice Department seized phone records from nearly 20 reporters at the Associated Press.
Here are some of the details from National Public Radio:
The Associated Press is protesting what it calls a massive and unprecedented intrusion into its gathering of news. The target of that wrath is the U.S. Justice Department, which secretly collected phone records for several AP reporters last year. The AP says it’s caught in the middle of a Justice Department leak investigation.
The scope of the Justice Department subpoenas is what gives David Schultz, a lawyer for AP, pause.
“It was a very large number of records that were obtained, including phone records from Hartford, New York, Washington, from the U.S. House of Representatives and elsewhere where AP has bureaus. It included home and cellphone numbers from a number of AP reporters,” Schulz says.
It’s not clear what the U.S. Attorney in Washington, D.C., is investigating. But the AP thinks it might be related to its story from May 2012 that described the CIA stopping a terrorist plot to plant a bomb on an airplane with a sophisticated new kind of device.
How that story came to be is the subject of a criminal leak investigation. But the AP says the Justice Department might now be flouting the First Amendment to try to build a case.
According to Politico, reporters inside the AP are (rightly so) outraged over the revelation:
Reporters across The Associated Press are outraged over the Justice Department’s sweeping seizure of staff phone records — and they say such an intrusion could chill their relationships with confidential sources.
In conversations with POLITICO on Tuesday, several AP staffers in Washington, D.C., described feelings of anger and frustration with the DOJ and with the Obama administration in general.
“People are pretty mad — mad that government has not taken what we do seriously,” one reporter said on Tuesday. “When the news broke yesterday … people were outraged and disgusted. No one was yelling and screaming, but it was like, ‘Are you kidding me!?’”
“People are ticked,” said another. “Everyone supports the reporters involved.”
The behind-the-scenes anger — and heads-down determination of the AP staff members to keep doing their jobs amid the extraordinary public flap — comes as top executives from the wire service have mounted an aggressive public pushback against DOJ, calling its snooping a “massive and unprecedented intrusion” in a letter fired off to Attorney General Eric Holder. And yet something of a bunkerlike atmosphere has taken hold at the AP in Washington with no bureau-wide meetings or announcements about the DOJ’s action, AP sources told POLITICO.
The AP employees interviewed by POLITICO did not want to be identified because, according to several sources, at least some journalists have been asked not to speak to the news media.
The Daily News points out that information about why the AP records were monitored is still scant and not forth coming, even from Attorney General Eric Holder:
Holder was pressed repeatedly about the secret and extensive seizure of phone records of Associated Press reporters and editors. He underscored that he had recused himself from the investigation early on for various reasons and left subsequent key decisions to top aides, whose actions he backed.
The wire service has protested a “serious interference with AP’s constitutional rights to gather and report the news” after disclosure that the government obtained phone records for more than 20 lines.
The reason for the seizure remains somewhat unclear. One suspicion is that it involved an ongoing investigation into leaks of information regarding the CIA’s breaking up a terrorist plot based in Yemen to blow up an airliner.
On May 7, 2012, the AP broke the story of the plot that was uncovered by the CIA. That followed its agreement to hold on to the information for several days at the behest of the White House.
Holder did not confirm or deny that the subpoenas for records followed that specific story. But he said, “This was a very serious leak. A very, very serious leak.”
“I have been a prosecutor since 1976,” he said, “and this is within the top two or three most serious leaks I have seen. It put the American people at risk. That is not hyperbole. Trying to determine who was responsible required very aggressive action.”
David Carr points out that snooping goes both ways in his latest New York Times column:
Word on Monday that the Justice Department had obtained the records of more than 20 phone lines at The Associated Press sent the Fourth Estate into a frenzy. Big Government, Big Data, Big Brother, all the golems of an increasing surveillance-driven age were invoked.
“There can be no possible justification for such an overbroad collection of the telephone communications of The Associated Press and its reporters,” Gary Pruitt, president and chief executive of The Associated Press, wrote in a letter of protest to Eric H. Holder Jr., the United States attorney general.
Given that the government has brought six cases against people suspected of leaking classified information, under an administration that has set a record for the use of the Espionage Act, the Associated Press story adds to a growing atmosphere in which working reporters always need to worry that someone is looking over their shoulder while they type. As Scott Shane wrote in The New York Times in 2012, the investigative aggression creates “a distinct chill over press coverage of national security issues as agencies decline routine interview requests and refuse to provide background briefings.”
In the instance of The Associated Press, its leaders, who were notified of the investigation last Friday, worried that the information obtained would “provide a road map to A.P.’s newsgathering operations and disclose information about A.P.’s activities and operations.”
All journalists should be worried.
IRS scandal and the aftermath
by Liz Hester
While many in the business news world have been chasing the story of Bloomberg reporters using functions to track subscribers, there’s another scandal looming that could have a broader impact for the nation. The Internal Revenue Service is now being investigated for actions it may have taken against conservative causes.
Here are some of the details from the Wall Street Journal:
The Internal Revenue Service’s scrutiny of conservative groups went beyond those with “tea party” or “patriot” in their names—as the agency admitted Friday—to also include ones worried about government spending, debt or taxes, and even ones that lobbied to “make America a better place to live,” according to new details of a government probe.
The investigation also revealed that a high-ranking IRS official knew as early as mid-2011 that conservative groups were being inappropriately targeted—nearly a year before then-IRS Commissioner Douglas Shulman told a congressional committee the agency wasn’t targeting conservative groups.
The new disclosures are likely to inflame a widening controversy over IRS handling of dozens of applications by tea-party, patriot and other conservative groups for tax-exempt status.
The details emerged from disclosures to congressional investigators by the Treasury Inspector General for Tax Administration. The findings, which were reviewed by The Wall Street Journal, don’t make clear who came up with the idea to give extra scrutiny to the conservative groups.
The Internal Revenue Service inappropriately flagged conservative political groups for additional reviews during the 2012 election to see if they were violating their tax exempt status. John McKinnon reports on the News Hub.
The inspector general’s office has been conducting an audit of the IRS’s handling of the applications process and is expected to release a report this week. The audit follows complaints last year by numerous tea-party and other conservative groups that they had been singled out and subjected to excessive and inappropriate questioning. Many groups say they were asked for lists of their donors and other sensitive information.
The Washington Post wrote in a blog post Monday that the problems at the IRS could turn into major issues for Democrats as more details about the targeting emerge:
What became clear in the first 72 hours of the story was that this (a) wasn’t an isolated, dumb incident by some random field office, (b) was something high-level officials were aware of, and (c) was going to be in the news cycle for quite some time.
The problem for Democrats is that the IRS’s targeting of conservatives plays directly into a long-held belief by many Republicans (and even some independents) that official government arms are being used to carry out political agendas.
According to ABC News, the scandal is reaching even farther than previously thought:
THE PLOT THICKENS: ABC News has obtained a draft of a soon-to-be-released investigative reporting showing that the Internal Revenue Service began targeting conservative groups as far back as 2010 and that senior IRS officials in Washington have known about it for almost two years. Last week, we learned that the IRS was targeting groups with “tea party” or “patriot” in their names, but it goes beyond that, ABC’s JONATHAN KARL reports. The draft report, conducted by the IRS’s internal watchdog, says the agency was tracking groups who’s goals included, quote “limiting government” and “educating on the Constitution and Bill of Rights” and that, “criticize how the country is being run.” Friday, the White House says it had it no idea the IRS was targeting Tea Party-allied groups. WATCH Karl’s “Good Morning America” report: http://abcn.ws/19igrJV
The timeline in the New York Times offers details about which types of organizations are being targeted:
The I.R.S. has been under pressure from Democrats and campaign finance watchdogs for some time to crack down on abuse of the 501(c)4 tax exemption, which is supposed to go to organizations primarily promoting “social welfare” but which is routinely granted to overt political advocacy groups with little or no social welfare work.
The New York Times obtained a 12-page timeline from the inspector general’s audit on Sunday. It suggests that the effort to single out Tea Party groups goes back to March 2010 when a special Determinations Unit in the Cincinnati office of the I.R.S. began searching tax-exemption applications that focused on groups on one side of the political spectrum, rather than broadly on political groups without a social-welfare mission.
The unit searched for groups using the names “Tea Party,” “Patriots” or “9/12 Project,” a movement begun by Glenn Beck. The unit was also looking for “applications involving political sounding names” like “We the People” or “Take Back the Country,” according to the document. That time frame brought the “Be On the Lookout” list back to the Tea Party movement’s early months, well before the movement helped fuel a historic Republican landslide in 2010.
On June 29, 2011, the document states, Ms. Lerner was briefed. By then the search appeared even more refined to conservative groups. Beyond “Tea Party,” “Patriots” and “9/12 Project,” the Cincinnati team was looking at issues of government spending, debt and taxes; educational efforts to “make America a better place to live”; and statements in the case file that “criticize how the country is being run.”
Ms. Lerner said Friday that the terms “Tea Party” and “Patriots” were used as a “shortcut” by the unit, not as a tool to single out any one political outlook. But the timeline suggests that the search went well beyond a few keywords. Over 100 applications had been identified by that briefing, using criteria with distinctly conservative undertones.
While this might seem like a political story, there are some business implications as well. As Congress begins to debate the overhaul of the tax code, including what corporations will pay, making sure that organizations are properly classified and monitored will be important. And given the relaxed rules corporations have for donating to political causes, this will likely be an important issue for their giving programs as well. Any time government entity that deals with money takes a reputational hit, we should all pay attention.
G-7 avoids confrontation with Japan
by Liz Hester
While all the international conferences on money may seem a bit over-covered and like they don’t have much influence, each business news outlet tends to focus on different parts of their talks. It’s important to cover meetings when the seven largest economies get together to discuss monetary policy. But what’s more interesting is what the reporters and editors think is most important – and how often that focus differs.
Here’s the lead from the Wall Street Journal:
The Group of Seven leading industrial nations on Saturday reaffirmed their commitment to refrain from deliberately weakening currencies through monetary policies.
The renewal of the commitment comes two days after the U.S. dollar’s exchange rate rose above ¥100 for the first time in four years, a milestone that was partly a consequence of a large stimulus program announced by the Bank of Japan in April.
The yen’s sharp drop is a potential source of tension with other G-7 nations as it benefits Japanese manufacturers at the expense of their rivals elsewhere.
However, U.K. Chancellor of the Exchequer George Osborne on Saturday worked to dispel speculation that there are strains within the G-7, saying the statement members made in February—a pledge to let market forces determine exchange rates and an assertion that central-bank policy would be focused solely on domestic objectives—had been successful.
The New York Times story chose to focus its introduction on Japan and the avoidance of tension about its stimulus policies:
Finance ministers from leading global economies on Saturday avoided a public rift with Japan over policies driving down the value of its currency, while keeping up pressure on Germany to help lift growth in Europe.
At the end of two days of talks among the Group of 7 finance ministers outside London, other nations appeared to accept — at least for now — Japan’s explanation that its new monetary efforts were meant to stimulate its domestic economy, rather than to drive down the yen on international currency markets.
The chancellor of the Exchequer in Britain, George Osborne, said on Saturday that ministers from the G-7, made up of the United States, Germany, Japan, Britain, Italy, France and Canada, had reaffirmed earlier commitments on exchange rates and agreed to make sure policies are “oriented towards achieving domestic objectives.” Other officials described the talks as in-depth and positive. Last week, the dollar breached the 100-yen mark for the first time in over four years.
The two-day meeting, in Buckinghamshire, also focused on efforts to stem tax avoidance and on banking reform, and Mr. Osborne said it was “important to complete swiftly our work to ensure that no banks are too big to fail.” The officials discussed efforts to create a European banking union, which have slowed in recent months.
“We agreed on the importance of ensuring banks’ balance sheets are adequately capitalized to enable them to play their role in supporting the economy,” Mr. Osborne said.
The talks took place against a background of growing austerity fatigue in Europe, and concern that the region’s focus on reducing deficits and debt risked driving some economies into a downward spiral.
Reuters (via CNBC) decided that banking reform was the biggest piece of news from the summit:
Group of Seven finance officials agreed on Saturday to press on with measures to deal with failing banks and gave a green light to Japan’s efforts to galvanize its economy.
British finance minister George Osborne said the finance ministers and central bankers meeting outside London focused on unfinished banking reforms.
The emergency rescue of Cyprus in March acted as a reminder of the need to finish an overhaul of the banking sector, five years after the world financial crisis began.
“It is important to complete swiftly our work to ensure that no banks are too big to fail,” Osborne told reporters after hosting a two-day meeting in a stately home 40 miles outside London.
“We must put regimes in place … to deal with failing banks and to protect taxpayers and to do so in a globally consistent manner,” he said.
And Bloomberg chose to focus on Europe and its continuing struggles to put member economies back on track:
European policy makers expressed a willingness to consider new ways to revive their ailing economy as they confronted fresh U.S. pressure to take action.
The bloc’s finance ministers and central bankers left weekend talks of the Group of Seven signaling that they’re poised to scale back austerity, are open to increased monetary aid and looking to unfreeze bank lending. European officials will meet in Brussels tomorrow to discuss the economy and review aid payments for crisis-struck nations from Greece to Spain.
Europe’s governments are in the midst of a policy rethink after three years of slimming budgets as they face up to a deepening recession in the euro area and a record unemployment rate that’s exceeded 12 percent. Still in doubt for economists is what kind of stimulus will actually be delivered and what effect it could have in the crisis-torn 17-member currency bloc.
“The new ‘fiscal realism’ is in evidence,” Mark Wall, co-chief European economist at Deutsche Bank AG in London, said in a report to clients. “Austerity may have reached its political limits and markets are happy to see some rebalancing. The key remains economic growth.”
But no matter which part you think it most important, the agreements and policy decisions coming out of these summits or meetings do have an effect on the average person. Markets will move, portfolio decisions will be made and investors need to pay attention to the signals coming from these meetings. It could be the difference between a return to growth and continued recession.
Falcone reaches SEC agreement in inside baseball story
by Liz Hester
In a made for New York-only story, hedge fund manger Phillip Falcone is settling with the Securities and Exchange Commission.
It’ll only cost him two years of his career. Here are some of the details from the Bloomberg story:
Philip Falcone, the billionaire hedge-fund manager sued by U.S. regulators over claims he improperly used client money to pay taxes, agreed to be barred from acting as an investment adviser in a proposed settlement.
In addition to the two-year ban, Falcone’s hedge fund Harbinger Capital Partners LLC would pay about $18 million in disgorgement, interest and penalties to resolve Securities and Exchange Commission claims filed in June, Harbinger Group Inc. (HRG) said today in a public filing. The agreement is subject to approval by SEC commissioners and a U.S. court.
The proposed settlement doesn’t bar Falcone, 50, from serving as an officer or director of a company, which means he can continue as chief executive officer and chairman of Harbinger, according to the filing. Still, during the two-year bar from the securities industry, Falcone can’t perform any management functions of Harbinger’s subsidiary advisers or make any recommendations about the purchase or sale of securities.
The Wall Street Journal added this bit of context to what his next role might entail:
The settlement marks a reversal of Mr. Falcone’s previous stance on the case. The hedge-fund manager had fought the charges and in February his lawyers argued in court for their dismissal, saying the SEC failed to show Mr. Falcone or his firm committed any illegal actions. Settlement talks started again in March, soon after the hearing of that motion to dismiss.
Although Mr. Falcone may after two years seek the SEC’s consent to have the ban lifted, the ban raises the hurdles he would face in resuming his career as a hedge-fund manager. Already, his investment firm is dealing with client redemptions that it has been having difficulty meeting, with billions of dollars tied up in a bankrupt wireless venture. He now faces two years of limitations on his ability to manage the hedge funds, along with additional constraints on his ability to oversee acquisitions by his publicly traded firm.
What’s more, investors in Harbinger funds are pushing for it to be wound down and their money returned to them, although they expect the process to drag on as Harbinger grapples with hard-to-sell assets, according to people involved in discussions with investors Thursday.
Mr. Falcone, meanwhile, has said he likes the idea of investing with a permanent pool of money that isn’t subject to requests for withdrawals by investors, as hedge funds are. Recently, he has been transitioning to more of a private-equity style of investment with acquisitions such as LightSquared Inc., the wireless-networking venture that has filed for bankruptcy.
Also as part of the settlement, the hedge-fund firm, Harbinger Capital, agreed to be overseen by a monitor, who will supervise the firm and ensure Harbinger is complying with the agreement, which includes provisions that his hedge-fund firm not raise capital or draw on certain capital commitments from existing investors.
The New York Times offered this description of his sins:
In one case, it accused Mr. Falcone of carrying out an illegal “short squeeze,” in effect, cornering the market in a particular category of bonds. Mr. Falcone, the S.E.C. said, “hijacked the market for the bonds and illegally manipulated their price and availability.”
In a separate action, the S.E.C. accused Mr. Falcone of allowing three unnamed banks and investment firms – Goldman Sachs, HSBC and Pamco, according to people close to the case – to withdraw funds from his hedge fund when others could not. In exchange for the special treatment, and in what the S.E.C. called a quid pro quo, the investors voted to allow Mr. Falcone to suspend other redemptions.
The S.E.C. also took aim at Mr. Falcone for taking a $113.2 million loan from his fund to pay his own tax bill in 2009. He borrowed the money, the S.E.C. said, at a time when the fund had blocked investor redemptions, and then kept the deal secret for five months.
Mr. Falcone’s lawyer, Matthew S. Dontzin, has argued that Mr. Falcone took the loan only after a prominent law firm signed off on the arrangement. The S.E.C. claimed, however, that Mr. Falcone hired the firm “to give the appearance of legality,” but kept the lawyers in the dark about some information.
Now I realize that Falcone is a huge name in finance and that this is a particularly juicy story for these national outlets. What I don’t understand is why all the ink being devoted to it since no one outside of high finance or major cities cares. It’s an inside baseball story, one that likely isn’t winning any readers for these publications.
It is interesting to note that the SEC seems to be continuing its enforcement actions under the new leadership, something many people outside New York are likely to applaud.
