Tag Archives: Coverage

Citi

Fed rejects Citi capital plan

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Wednesday wasn’t the best for Citigroup or its shareholders. The Federal Reserve Board again said the bank wasn’t ready to deal with financially stressful situations and rejected plans for stock buybacks.

Writing for Reuters, Emily Stephenson and David Henry had this story:

The Federal Reserve said Citigroup Inc’s ability to plan to cope with stressful scenarios is still not sufficient, and it nixed the bank’s plans to return more capital to shareholders, dealing a blow to a bank still fixing itself after the financial crisis.

The decision marks the second time in three years that the bank has failed to win the Fed’s approval for plan to return money to shareholders, known as the “capital plan.” The bank’s ability to return money to shareholders through buying back shares is critical for its meeting a key target for profitability.

Shares of Citi fell 4.5 percent to $47.90 in after-hours trading on Wednesday.

Winning regulatory approval for the bank’s capital plan is crucial for the credibility of Citigroup Chief Executive Michael Corbat, who was charged with improving the bank’s relationship with regulators when he took over as CEO in October 2012.

On Wednesday, the Fed said that Citigroup has improved its risk management practices in recent years, but the bank cannot determine well enough how its revenue and income would be hurt under stressful scenarios around the world. The bank’s internal examination process does not sufficiently consider how global crises could influence its broad number of businesses, the Fed added.

But despite being the headline on all the stories, Citigroup wasn’t alone in their rejection, according to The Wall Street Journal story by Stephanie Armour and Ryan Tracy:

The five institutions that didn’t get approval—Citigroup, Zions Bancorp, and the U.S. units of HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Banco Santander —must submit revised capital plans and must suspend any increased dividend payments unless they get the Fed’s approval in writing. The foreign banks that didn’t pass muster with the Fed are restricted from paying increased dividends to their parent firm. The five banks that failed to get their plans approved can continue to pay dividends at last year’s level.

The Fed approved the shareholder-reward plans for Bank of America Corp. and Goldman Sachs Group Inc. only after the two banks adjusted their requests. Both of the banks initially fell below minimum capital levels in the Fed’s ‘severely adverse’ stress testing scenario and resubmitted their plans last week.

The Fed’s annual “stress” tests are designed to ensure that large banks can handle a deep slump like the 2008 financial crisis and continue lending without needing a government rescue. A first round of tests last week concluded that 29 of the banks had adequate capital buffers to withstand a severe drop in housing prices and surging unemployment.

Michael Corkery wrote for The New York Times that overall health of U.S. banking operations is improving, but this is a blow for Citi:

Over all, the results of the annual test showed that most of the banking system has healed substantially since the financial crisis. The Fed used the annual test to review the capital plans of 30 large banks under a series of stressful scenarios.

Citigroup’s failure is a setback for a bank that has aggressively tried to shed risks and cut costs after receiving a taxpayer rescue five years ago. The Fed also rejected the bank’s plans in 2012. Shares of the bank fell as much as 5 percent in after-hours trading.

In its report, the Fed said there were “sufficient concerns regarding the overall reliability of Citigroup’s capital planning process.”    The central bank said that while Citigroup had made progress in the areas of “risk-management and control practices” its capital planning process “reflected a number of deficiencies.”

Citigroup, the Fed said, had failed to make “sufficient improvement” in certain areas that supervisors had previously identified as “requiring attention.”

Specifically, the Fed questioned the sprawling bank’s “ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations, and its ability to project revenue and losses under a stressful scenario.”

One of the big winners today, according to Bloomberg’s Michael J. Moore and Elizabeth Dexheimer, was Bank of America:

Bank of America, ranked second by assets, raised its quarterly payout to 5 cents from 1 cent after the Fed’s decision and authorized a new $4 billion stock buyback. The increase is a victory for Bank of America Chief Executive Officer Brian T. Moynihan, who has pressed to raise the payout from the token level that prevailed since the financial crisis.

The Fed blocked plans in 2011 for an increase by the Charlotte, North Carolina-based company, which didn’t ask for anything the following year and won permission for a $5 billion stock buyback last year.

JPMorgan Chase & Co., which won approval last year while still having to resubmit to address qualitative weaknesses, had its capital plan ratified as it maintained a Tier 1 common ratio of 5.5 percent, a half-point above the minimum. The quarterly dividend will rise to 40 cents a share from 38 cents, and the company authorized a $6.5 billion stock buyback, according to statement from the New York-based lender, ranked first by assets.

The ratio at Wells Fargo & Co., the biggest U.S. home lender, was 6.1 percent, while Morgan Stanley’s was 5.9 percent.

After the 2008 financial crisis, regulators began looking at the health of the nation’s largest lenders in an attempt to reassure the public they could survive another stressful situation. It’s likely been a slight drag on bank stocks, however, as the government is able to accept or reject companies’ plans for using capital. It looks like it’s back to the planning stages for Citigroup, leaving the bank behind peers.

Candy Crush

Candy Crush maker prices IPO

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King Digital Entertainment sold shares to the public in the middle of its stated price range, indicating that investors willing to invest, just not the soaring amounts that other tech companies have garnered recently.

The New York Times had this story by Michael J. de la Merced and Mark Scott which points out that now King must convince investors it’s more than just a one-game wonder:

Perhaps virtual candy is not as enticing as once thought.

King Digital Entertainment, the maker of the hit puzzle game Candy Crush Saga, priced its offering at $22.50 a share on Tuesday, according to a person briefed on the matter. That was the midpoint of an expected price range. Still, that values the company at just over $7 billion in one of the biggest initial public offerings so far this year.

Now King must convince its new investors that it can come up with new hits to replace its aging cash cow, avoiding the missteps of other game makers that failed to duplicate previous successes.

Its much-anticipated arrival on the public markets signals the continued hot streak of the I.P.O. market, as companies hope to seize on buoyant stock markets and eager stock buyers. Issuers have raised $31.2 billion in proceeds to date, up nearly 70 percent from the same time last year, according to data from Renaissance Capital.

Much of potential buyers’ attention has revolved around fast-growing digital companies like Twitter, whose initial stock sale raised $1.8 billion.

Drawing almost as much scrutiny is King, an 11-year-old multinational company that has posted huge growth thanks to its one monster hit, Candy Crush. A version of a classic “match-three” game in which players line up three or more same-color candies, the title became a global cultural phenomenon.

Nearly 100 million users play Candy Crush every day, drawn, in part, by a seemingly endless supply of new levels and features. Its success has overshadowed King’s other titles, including Farm Heroes Saga and Pet Rescue Saga.

Bloomberg’s Leslie Picker and Cliff Edwards reported that investors may have been scared after other IPOs with similar business models:

King’s discount may reflect lessons investors learned following Zynga’s debut. The maker of “FarmVille” went public in December 2011, dropped 5 percent in its debut and slumped almost 80 percent in the subsequent year. Zynga’s revenue, like King’s, was concentrated in one major source at the time of its IPO: more than 90 percent of its sales came from Facebook Inc. Shares continued to slide as Zynga’s users started defecting to “Candy Crush.”

Unlike Zynga, which hasn’t posted an annual profit since it went public, King’s after-tax profit margins were 30 percent last year, its prospectus shows.

King’s shares will start trading tomorrow, listed on the New York Stock Exchange under the symbol KING. JPMorgan Chase & Co., Credit Suisse Group AG and Bank of America Corp. managed the offering.

But as Matt Jarzemsky points out in his story for the Wall Street Journal, the company’s $7 billion valuation is hardly indicative of a company without prospects:

The standard term that people use to describe this kind of [business] is hit-driven,” said Rett Wallace, chief executive of private-company research and data provider Triton Research LLC.

“For all of the claims that Zynga made—and King makes the claim too—that they have a scalable, repeatable process, it just turns out that the alchemy of figuring out a thing that billions of people are going to use all the time is really hard,” Mr. Wallace said.

However, King is seeking a relatively modest valuation versus some of its peers, some analysts say. Sterne Agee & Leach Inc. analyst Arvind Bhatia estimates the company’s revenue will grow to $2.49 billion this year. At the IPO price, it would be trading at 3 times his sales estimate. Zynga trades at 5.5 times analysts’ average 2014 sales forecast.

On a price-to-earnings basis, King would also be valued at a discount to established videogame companies like Activision Blizzard Inc. ATVI +0.48% and Electronic Arts Inc.,EA +1.00% according to Mr. Bhatia.

“They’re being honest with investors regarding their slowing growth rate, which I think is helpful,” said Rob Romero, portfolio manager at Connective Capital Management LLC, a Palo Alto hedge-fund firm with $120 million under management. He said in an interview before the pricing that he planned to try to buy shares in the deal.

“They need to be able to generate new games and successfully develop and market their new-game pipeline to replace the revenue that will inevitably be lost when Candy Crush begins to decline,” Mr. Romero said. “And they have such a pipeline.”

Matt Krantz of USA Today called the deal “pivotal” since it’s likely to forecast the direction of the IPO market:

It’s a pivotal deal for the IPO market, which is in a boom that is shaping up to be the biggest since the dot-com frenzy. Yet so far, young tech companies haven’t been a big factor in IPOs, but that could quickly change if deals like King work out. “The market is getting hotter for tech,” says Francis Gaskins, director of research for Equities.com.

The King IPO is more than just child’s play for investors. That’s clear in the:

• Resurgence in the role of tech. Young tech companies such as King are traditionally the soul of a robust IPO market. But the number of tech IPOs lagged behind health care, specifically biotech, all year. Just nine of the year’s 53 IPOs so far have been in tech, says Renaissance Capital. A vast majority, 29, have been health care.

• Return of young companies. Thanks to young companies such as King, the average age of companies with IPOs this year is 13 years, Renaissance says. That’s down from 16 in 2013 and 20 in 2012. The return of younger firms to the IPO market underscores the viability of IPOs to executives vs. other ways to cashing out, including selling out to competitors.

While King didn’t max out it’s price initially, it may prove to be a good investment for those buying at the offer. Because demand didn’t push the price too high, it may see a nice pop. Or, obviously, it could fall flat.

Apple

Apple and Comcast in talks

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Streaming television is getting a new competitor. The Wall Street Journal had the internet abuzz Sunday night with a report that Apple is talking to Comcast about a TV service that would bypass the web, giving it priority over other services.

The Wall Street Journal story by Shalini Ramachandran, Daisuke Wakabayashi and Amol Sharma outlined these details:

Apple Inc. is in talks with Comcast Corp. about teaming up for a streaming-television service that would use an Apple set-top box and get special treatment on Comcast’s cables to ensure it bypasses congestion on the Web, people familiar with the matter say.

The discussions between the world’s most valuable company and the nation’s largest cable provider are still in early stages and many hurdles remain. But the deal, if sealed, would mark a new level of cooperation and integration between a technology company and a cable provider to modernize TV viewing.

Apple’s intention is to allow users to stream live and on-demand TV programming and digital-video recordings stored in the “cloud,” effectively taking the place of a traditional cable set-top box.

Apple would benefit from a cable-company partner because it wants the new TV service’s traffic to be separated from public Internet traffic over the “last mile”—the portion of a cable operator’s pipes that connect to customers’ homes, the people familiar with the matter say. That stretch of the Internet tends to get clogged when too many users in a region try to access too much bandwidth at the same time.

Apple’s goal would be to ensure users don’t see hiccups in the service or buffering that can take place while streaming Web video, making its video the same quality as Comcast’s TV transmissions to normal set-top boxes.

While devices such as Microsoft Corp.’s Xbox gaming console and Roku Inc.’s set-top box have made some inroads in the TV industry, none offer the kind of fully formed TV service, with the guarantee of network quality, that Apple desires.

Apple has spent several years exploring various avenues to enter TV, but it has been unable thus far to find business models that media companies and cable providers find appealing.

Writing for Business Insider, Jay Yarrow outlined how the service might work:

Apple appears to have a vision for how to deliver an Internet-based TV service. It would store content in the cloud. It would be live, and on-demand. Presumably, it would have a simple, gorgeous interface that’s easy to use.

But Apple, even with $146 billion in cash, can’t just go out and do this on its own. It has to work with Comcast because Comcast delivers Internet and TV to millions of people in the U.S.

Say Apple wanted to pay TV networks for rights to shows, just like Comcast pays TV networks. Apple would still have to run its Internet-based TV service through Comcast’s Internet service. That could lead to choppy service if Apple didn’t pay Comcast extra, just like Netflix recently paid Comcast.

That means Apple has to pay a ton of money to get TV rights, then more money to Comcast, then it has to charge users, and it ends up as a low-margin, pain-in-the-rear business for Apple.

TechCrunch reported in a story by Ryan Lawler that Comcast has already invested in its own delivery network:

Already, Comcast has introduced a managed service for streaming videos that it delivers through its streaming Xbox Live app. That means that those streams don’t travel over the broader Internet, but to work they require a subscriber to be a Comcast broadband subscriber as well as a TV subscriber.

All of which is to say, the type of deal that Apple and Comcast are talking about isn’t without precedent. And a whole lot of how it is delivered will be dependent on who exactly owns the customer relationship and what the service entails.

This is where the WSJ report gets a little iffy, but most of whether or not a deal gets done will depend on the details. The devil is in the details. And the report acknowledges that Comcast and Apple aren’t exactly “close to an agreement.”

On the one hand, Apple wants to create a service in which users would log on with their Apple IDs and control customer data. It would also ask for a cut of the subscription cost, according to the report. Meanwhile, Comcast would want to “retain significant control over the relationship with customers and the data.”

It’s difficult to imagine a world in which Comcast would give up its network and control of customers that are streaming data through such a service.

Then there’s the part about content rights. The report claims that Apple would need to acquire content rights, but that Comcast “would want to ensure that the price Apple has to pay to acquire rights wouldn’t cause the service to be priced higher than traditional pay-TV service,” according to one person.

While it’s a good scoop that will have many talking for the next few days, it’s hard to believe that Apple and Comcast will actually come to an agreement. Between the need to innovate and Comcast’s control over distribution there are many, many details that need to be worked out before papers are signed.

Airbnb

Airbnb valued at $10 Billion

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Earning a piece of travelers’ wallets is big business, and Airbnb is proving just how lucrative it can be. The company is close to closing funding valuing it at more than $10 billion.

Michael J. de la Merced had this story for the New York Times:

Airbnb is close to joining a rarefied group of start-ups: the 11-digit valuation club.

The couch-surfing company is close to raising more than $400 million in a new round of financing, a person briefed on the matter said on Thursday. The fund-raising effort would value the six-year-old Airbnb at more than $10 billion.

Leading the round is TPG, which has already taken stakes in other Silicon Valley darlings like the car-ride service Uber.

Airbnb’s fund-raising round is the latest sign of exuberance in the technology world, as the new generation of start-ups fetches eye-popping valuations. Companies like the online storage provider Dropbox have been appraised at about $10 billion, while Facebook – itself worth more than $172 billion – bought the messaging application WhatsApp for $16 billion last month.

The Financial Times story by Tim Bradshaw added this background about the company’s roots and what they plan to do with the cash:

Airbnb’s rise has been meteoric. Founded in 2008 by roommates who rented out beds to help pay for their San Francisco loft, the company said at the end of last year that it has hosted more than 11m guests in 34,000 cities around the world.

As well as joining that elite group of private technology companies in the US to attain an 11-figure valuation, Airbnb is the latest to seek private equity funding thta will allow it to delay an initial public offering. The deal was earlier reported by the Wall Street Journal.

The company is raising more than $400m to help expand its peer-to-peer home renting marketplace into a broader offering of “hospitality”, including transport or cleaning services, said co-founder Brian Chesky, now chief executive.

TPG, the private equity group that also led sharing-economy rival Uber’s fundraising last year, will lead the Airbnb investment, according to sources close to the discussions. Airbnb declined to comment and TPG did not immediately respond to a request for comment.

The Wall Street Journal pointed out in an article by Evelyn M. Rusli and Douglas MacMillan that regulators have looked into the business model:

The service has become a cheap alternative to hotels for millions of tourists, a source of income for homeowners and a target for regulators wary about safety, oversight and tax collections.

Last October, New York Attorney General Eric Schneiderman subpoenaed Airbnb for information on its 15,000 hosts in the state, to determine if any are violating a 2010 state law that prohibits renters from subletting their homes for less than 30 days if they’re not present. The company is contesting the order in court. Hotel operators argue that the rentals unfairly skirt lodging taxes.

Airbnb is benefiting from soaring investor interest in mobile and Internet-based business models, which is propelling a wave of initial public offerings and eye-popping valuations for private companies. Facebook Inc. FB -0.12% recently agreed to acquire closely held text-messaging service WhatsApp for $19 billion.

In the past 12 months, at least 21 companies have raised new funds that valued them at $1 billion or more. At the top of that list, online-storage provider Dropbox Inc. and Chinese mobile-phone maker Xiaomi notched $10 billion valuations, while data-mining specialist Palantir Technologies Inc. was valued at $9 billion. Uber Inc., an on-demand car service, is valued at $3.8 billion, following an investment last year led by Google Ventures, with TPG participating.

Airbnb and Uber are part of the so-called sharing economy, in which people offer resources or services, such as cars, spare bedrooms, or extra time, to others for a fee. The companies need investments to expand into new regions, staff international offices and ward off competitors. One of Airbnb’s largest competitors is vacation-rental service HomeAway Inc., a public company valued at $3.9 billion.

Ryan Lawler wrote for TechCrunch that much of Airbnb’s growth is coming from Europe, which bodes well for tapping various markets:

With that report as a backdrop, Airbnb has shared some stats this morning that show its guests increasingly are traveling to, from, or in-between nations in Europe. In a blog post today, the company said that 50 percent of its guests over the last year were from Europe, and that number is only expected to grow over time.

Airbnb said that more than a million guests each from the U.K. and France have booked stays through its platform. Meanwhile, more than a million guests have stayed at places listed on Airbnb in both Italy and Spain. It’s likely that those guests and stays overlapped quite a bit — according to the company, more than 80 percent of European guests staying with Airbnb traveled to other destinations within Europe.

The growth comes as Airbnb has been investing in the continent over recent years — in 2012, the company opened offices in London, Paris, Barcelona, and Milan, among other European cities.

Airbnb has had a particularly international audience for a while, with three-quarters of all stays involving a stay by an international guest or a guest staying in an international listing. But this announcement marks a serious shift in the makeup of Airbnb guests. Back in 2011, about half of all guests were from the U.S., but that’s dropped to below 30 percent.

Airbnb is smartly raising money while the notion of the “sharing economy” is hot and people are flocking to its site. Many travelers are searching for a more personalized or authentic experience than hotels and finding it by staying with others. Some are using the site to pay the rent. No matter the reason, it is obviously filling a gap. But is the gap $10 billion wide? Only time will tell.

federal-reserve-400

Yellen makes Federal Reserve debut

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Janet Yellen’s debut didn’t say anything out of the ordinary, but apparently, investors didn’t care for her commentary.

The Wall Street Journal story by Jon Hilsenrath and Victoria McGrane led with investor reaction to Yellen’s comments around when the Federal Reserve might start raising interest rates:

Investors bristled after Janet Yellen emerged from her first meeting as Federal Reserve chairwoman with some unsettling signals about the central bank’s outlook for short-term interest rates.

The Fed intends to keep short-term rates near zero into next year, but investors sniffed out signs that rate increases might come a bit sooner and be a touch more aggressive than expected. Even though the Fed’s official policy statement sought to give assurances of continued low rates far into the future and Ms. Yellen played down rate-increase expectations, stock prices fell and longer-term rates on Treasury bonds moved up.

In a press conference after the meeting, Ms. Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends—a conclusion that could come this fall. She offered that projection with many caveats, but some investors took it as a sign that the Fed could start raising interest rates sooner than expected.

“This could have been a rookie gaffe on Yellen’s part,” Paul Edelstein, director of financial economists at IHS Global Insight, said in a note to clients. “This was, after all, her first press conference.”

In futures markets, prices indicated investors’ expected rate for the Fed’s benchmark federal funds rate for June 2015 moved up from 0.28% before the Fed’s meeting to 0.36% after the meeting.

Writing for Bloomberg, Craig Torres, Steve Matthews and Michelle Jamrisko also led with investor reaction:

Janet Yellen said the Federal Reserve wasn’t altering policy when it overhauled the way it signals changes in borrowing costs. Investors didn’t buy it.

In her first press conference as Fed chair, Yellen emphasized that dropping a 6.5 percent unemployment threshold for considering an interest-rate increase “does not indicate any change in the committee’s policy intentions.”

Rather than paying heed to Yellen’s assertion, investors seized on an increase in Fed officials’ own interest-rate forecasts and Yellen’s comment that that borrowing costs could start rising “around six months” after it stops buying bonds. Yields on two-year Treasury notes climbed as much as 10 basis points, the most since June 2011.

The market reaction highlights the perils faced by central bankers when they retreat to language investors consider vague after setting precise numerical markers for changes in policy. Lacking specific guidance in the Fed’s policy statement, investors swung toward the next best thing: Fed officials’ own forecasts for the benchmark federal funds rate.

Binyamin Appelbaums story in the New York Times led with the announcement and added this background about the statement:

The latest statement — the longest one the committee has ever published — was careful to say that the change in guidance was not intended to alter the possible timing of a rate increase. Instead, Ms. Yellen said that new measuring sticks were necessary because the unemployment rate had fallen more quickly than expected, while other economic indicators, like inflation, remained weak.

“The purpose of this change is simply to provide more information than we have in the past, even though it is qualitative information, as the unemployment rate declines below 6.5 percent,” Ms. Yellen said.

But the Fed also released a separate set of economic forecasts showing that officials had raised their expectations for the level of their benchmark rate at the end of 2015 to 1 percent from 0.75 percent.

The Washington Post story by Yian Q. Mui led with the notion that the Fed way paving the way to increase rates:

The Federal Reserve began laying the groundwork Wednesday for the first increase in interest rates since the Great Recession upended the economy.

The nation’s central bank said it will consider a broad swath of indicators to determine the moment of liftoff, including job market data, inflation expectations and financial developments. The official statement was a retreat from the blanket assurances that rates would remain untouched, which have dominated the Fed’s message for the past five years. Instead, the debate has shifted to how much longer the Fed should wait before pulling the trigger.

The Federal Reserve began laying the groundwork Wednesday for the first increase in interest rates since the Great Recession upended the economy.

The nation’s central bank said it will consider a broad swath of indicators to determine the moment of liftoff, including job market data, inflation expectations and financial developments. The official statement was a retreat from the blanket assurances that rates would remain untouched, which have dominated the Fed’s message for the past five years. Instead, the debate has shifted to how much longer the Fed should wait before pulling the trigger.

No matter how the story was framed, it was a stumble for Yellen. Much of the earlier coverage anticipated that she would have an easy debut, especially since the Fed has clearly projected its moves to the markets. The fact she rattled the markets with her post comments shows that she has some work to do, despite her years of experience and knowledge of the markets.

High-frequency-trading

NY takes aim at high frequency traders

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The opaque world of high frequency trading is coming under increasing scrutiny from regulators as the New York Attorney General Eric Schneiderman said he was looking into practices in the space.

Andrew R. Johnson had this story for the Wall Street Journal:

New York Attorney General Eric Schneiderman is investigating services offered by stock exchanges that he alleges give certain high-speed investors an unfair advantage by getting early access to data.

Mr. Schneiderman said during a speech Tuesday that he was urging stock exchanges to consider curbing such features and adopting proposed safeguards to ensure investors are competing on an equal playing field.

The features in question include “co-location,” which allow traders to locate their computer servers within exchanges’ data centers, and services that provide extra network bandwidth to high-frequency traders.

“These valuable advantages give high-frequency traders a leg up on the rest of the market,” Mr. Schneiderman said in the speech at New York Law School.

Mr. Schneiderman’s proposal is the latest in a continuing probe of Wall Street activities that allow investors and other market participants to gain a competitive edge through the early release of market-moving data, a practice he calls “insider trading 2.0.

Bloomberg reported that stock exchanges have been alerted to the attorney general’s concerns in a story by Keri Geiger and Sam Mamudi:

The attorney general’s staff has discussed his concerns with executives of Nasdaq and NYSE and requested more information, according to a person familiar with the matter, who asked not to be named because the talks were private. Schneiderman’s office is also looking into private trading venues, known as dark pools, and the strategies deployed by the high-speed traders themselves.

The investigation threatens to disrupt a model that market regulators have openly permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.

“We publicly file with the SEC for each and every one of these services, and we’re always engaged with government officials around the world,” Robert Madden, a spokesman for New York-based Nasdaq, said in a phone interview, referring to the U.S. Securities and Exchange Commission. He and Eric Ryan, a spokesman for NYSE, declined to comment on Schneiderman’s investigation.

Writing for the Financial Times, Kara Scannell and Arash Massoudi pointed out that the Securities and Exchange Commission brought enforcement actions against some trading platforms regarding this issue:

Mary Jo White, chairman of the Securities and Exchange Commission, the federal agency that regulates the equity markets, told a congressional panel last year that high-speed markets required “constant monitoring and analysis.”

Over the past few years the SEC has brought enforcement actions against NYSE and other trading platforms for giving certain investors better access to the markets.

An SEC spokesman said: “We are working on these and a wide range of issues as part of our ongoing review of our current equity market structure. We appreciate hearing the views of all market participants and other interested parties, including attorney-general Schneiderman.”

The investigation comes as Virtu Financial, a leading global proprietary trading company, is preparing to launch investor meetings for an initial public offering later this quarter, which would make it the first pure HFT company to go public.

People familiar with Virtu’s plans have said it hopes to raise $250m from a listing at a valuation of as much as $3bn.

The attorney-general’s office has made a priority of looking at potential insider trading by firms that are quick enough or rich enough to gain an early look at market moving information. While it is not Wall Street’s top regulator, the office has often wielded the Martin Act to force change in lieu of filing lawsuits.

In an interview on CNBC today, detailed in a story by Bruno J. Navarro, Scheinderman said he wasn’t opposed to capital markets, just those who have an unfair advantage:

“The problem is high-frequency trading—it creates liquidity; that’s a good thing—but it creates instability, and that’s a bad thing,” he said. “And the constant arms race of people having the incentive, which they have now, to try untested methods to gain those extra milliseconds of speed—that is a danger to the markets.”

Scheinderman suggested that frequent batch auctions might be one solution.

The practice would help maintain liquidity in the markets while removing the ability for traders to exploit momentary mispricings with increasingly faster computers.

“They’re using arbitrage between exchanges now,” he said. “Tiny, tiny differences in the timing of pricing can now make money for these folks. So, what my proposal was, as regulators—the federal government’s got to be involved in this, too, CFTC and SEC—we’ve got to step up to the plate and deal with the challenges of this new technology.”

Schneiderman said he wasn’t thinking about proposing a tax on certain kinds of trading.

“I’m a big fan of America’s capital markets,” he said. “In the last five years, we have funded something like five times all of Europe has funded in terms of investments and start-up companies and almost five times the rest of the world,” he said.

“Right now, because of this constant quest for those extra milliseconds, the markets are at a little bit more risk than they need to be. We can preserve the liquidity by something like our frequent batch auction proposal, which is being discussed at a forum at New York Law School right now, while protecting the markets and capping the race for speed.”

While milliseconds might not seem like a lot, it can mean millions for high-frequency traders. Schneiderman said that quest for timing created extra risk in the system than necessary, but that’s a claim that could be hard to prove. Hopefully he’ll publicly disclose the findings of his investigation in the spirit of transparency that he’s promoting.

GM

More troubles for GM

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General Motors Co. is increasing its response to safety issues, recalling more vehicles and vowing to do better. The coverage focused on various aspects of the crisis, but the long-term impact on the company could be the bigger issue.

Here are some of the details from the Wall Street Journal story by Jeff Bennett:

General Motors Co. Chief Executive Mary Barra stepped up her response to the company’s vehicle-defect problem, announcing three new safety recalls and vowing to change the way the auto maker handles recalls.

In a video posted on a GM website, Ms. Barra sounded a personal note as she tried to reassure customers, regulators, lawmakers and investors that the company is confronting not just the threats from defective vehicles but the corporate processes that failed to respond to them sooner.

GM last month recalled 1.6 million vehicles world-wide to fix faulty ignition switches that have been linked to a dozen deaths. It took the company nearly a decade to order the recalls after employees identified the problems ahead of the launch of the 2005 Chevrolet Cobalt compact car.

GM recalled some 1.7 million vans, sport-utility vehicles and Cadillac luxury cars to fix a variety of problems, chief among them a wiring defect that could result in seat air bags failing to deploy.

In all, GM has recalled 3.3 million vehicles world-wide since mid-February, with the majority of those sold in the U.S.

The top of the New York Times story by Bill Vlasic and Christopher Jensen focused on the comments by CEO Mary T. Barra and her plans for changing the way GM handles recalls:

Ms. Barra also made her most forceful comments yet on G.M.’s need to reform its safety efforts.

“Something went very wrong in our processes in this instance, and terrible things happened,” she said in an internal video broadcast to employees.

G.M. has come under intense pressure from government officials to explain why it took years to address faulty ignition switches that could cut off engine power and disable air bags in Cobalts and other small cars.

Ms. Barra’s comments to employees — including a letter on March 4 — represent the latest effort by the company to limit the damage that the recalls have inflicted on its reputation and consumer confidence.

“Mary Barra understands the value of taking full responsibility for G.M.’s latest, high-profile challenges, especially if she wants to send the message that this is a new G.M.,” said Karl Brauer, an analyst with the auto-research firm Kelley Blue Book.

Forbes contributor Micheline Maynard compared the issue to Toyota’s troubles in 2009:

GM’s predicament is the same kind of uproar that surround Toyota five years ago. In 2009 and 2010, the Japanese’ carmaker’s sterling reputation was battered by millions of recalls involving sudden acceleration in a variety of its vehicles. Like GM, Toyota was in the spotlight for months, as investigators and trial lawyers delved into its production methods and corporate culture. While the crisis ended after about half a year, Toyota is still mopping up the damage.

The 2009-10 experience was a historic turning point for Toyota, coming not long after it passed GM to become the world’s biggest carmaker. Used to maneuvering with an aura of opaqueness, Toyota had little preparation for the kind of scrutiny that came its way.

It was especially trying for Toyoda’s new chief executive, Akio Toyoda, the grandson of the carmaker’s founder. Toyota initially resisted efforts to have Toyoda testify before Congress, saying that the matter could be handled by its North American operations. But as it emerged that the decision making process for handling the recalls rested in Japan, Toyoda flew to Washington in February 2010 to appear before the House Committee On Oversight and Government Reform, one of three panels that opened investigations in the Toyota recalls.

Ben Klayman reported for Reuters that GM was working with suppliers to fix the costly problem:

The Detroit automaker said on Monday it would take a $300 million charge in the first quarter, primarily to cover the costs related to the ignition-switch recall and the three new recalls.

Barra previously apologized for GM’s failure to catch the faulty ignition switches sooner. In Monday’s video, she said GM is “conducting an intense review of our internal processes and will have more developments to announce as we move forward.”

The decade-long process that led to last month’s ignition-switch recall of such older GM models as the 2005-2007 Chevrolet Cobalt and 2003-2007 Saturn Ion has led to government criminal and civil investigations, congressional hearings and class-action lawsuits in the United States and Canada. All ask why GM took so long to address a problem it has said first came to its attention in 2001.

Barra said on Monday that the company was working with the supplier of the ignition switches, Delphi Automotive, to add a second production line for replacement parts and that customers would receive a detailed notice by mail during the second week of April.

While GM works to contain the problem, shareholder didn’t seem to mind the latest news. The stock was up slightly on Monday. The true test will be if consumers shun the automaker, which will be told in quarterly results.

Alibaba

China’s Alibaba Plans U.S. IPO

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The market for initial public offerings is heating up. To prove it, China’s e-commerce site Alibaba is planning to list its shares in the U.S. in a long-awaited share sale.

Reuters has these details in a story by Elzio Barreto and Denny Thomas.

Chinese e-commerce giant Alibaba Group Holding Ltd has decided to hold its long-awaited IPO in the United States and is in discussions with six banks to underwrite the deal, in what is set to the most high-profile public offering since Facebook Inc’s listing nearly two years ago.

Alibaba said in a statement on Sunday it had decided to begin the U.S. IPO process, ending months of speculation about where it would go public.

Separately, sources told Reuters that Alibaba is in discussions with Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, J.P. Morgan, and Morgan Stanley for lead underwriting roles.

Most of the six banks are to set to win the coveted role of joint global coordinator, added the sources, who were not authorized to discuss the matter publicly.

Analysts estimate the Hangzhou, China-based company has a value of at least $140 billion, and the IPO proceeds could exceed $15 billion, Reuters previously reported. The deal would be a huge coup for the six banks, as it would yield an estimated $260 million in underwriting fees, assuming 1.75 percent commission, and catapult them in league table rankings.

The Bloomberg story by Lulu Yilun Chen added this background on the reasons for listing in the U.S. versus an Asian market:

“The U.S. has obvious advantages in terms of the depth of the pool of capital and sophistication of the investor base,” said Duncan Clark, Beijing-based chairman of BDA China Ltd., which advises technology companies. “In terms of the control issue, Jack and the management, it seems that the Hong Kong stock exchange wasn’t able to accommodate.”

Alibaba has decided to start the process for an IPO in the U.S., and a future listing in China may be considered “should circumstances permit,” the Hangzhou-based company said yesterday in a statement. Alibaba proposed that its partners nominate a majority of the board of directors, a system that isn’t allowed under Hong Kong rules.

The IPO may be the biggest since Facebook Inc. (FB) in 2012 and is a blow to Hong Kong, which hasn’t hosted an initial share sale of more than $4 billion since October 2010. Alibaba hasn’t decided when to file for the listing, which U.S. exchange to list on, how much to raise or how large a stake to sell, the person familiar said.

Alibaba bought back a 20 percent stake from Yahoo! Inc. in 2012 in a deal that valued the Chinese company at $35 billion. The Sunnyvale, California-based Web portal still owns 24 percent of Alibaba while Japan’s SoftBank Corp. (9984) owns about 37 percent stake, the companies have said.

Gregory Wallace wrote for CNN Money that Alibaba has been negotiating for months with Hong Kong regulators about where to list:

Alibaba’s long-awaited decision was revealed Sunday after months of negotiations with Hong Kong stock authorities. The company had said a major sticking point was its proposed governance structure.

Alibaba’s announcement included a reference to that issue: “We respect the viewpoints and policies of Hong Kong and will continue to pay close attention to and support the process of innovation and development of Hong Kong.”

But the decision for a U.S.-based IPO “will make us a more global company and enhance the company’s transparency, as well as allow the company to continue to pursue our long-term vision and ideals.

But Wall Street is watching who will win the coveted roles of working on the offering. While there is plenty of money to go around, the Wall Street Journal story by Telis Demos and Juro Osawa said Alibaba planned to pay them all the same:

Credit Suisse Group AG CSGN.VX -2.89% , Deutsche Bank AG DBK.XE -1.52% ,Goldman Sachs Group Inc., GS -0.81% J.P. Morgan Chase JPM -1.08% & Co. andMorgan Stanley MS -1.08% are expected to get equal billing for their jobs as co-lead underwriters of the IPO, according to people familiar with matter.

The Chinese e-commerce company also is considering paying the banks about the same fee, though a final decision hasn’t been made and plans may shift, the people said.

With that arrangement, Alibaba would be making a break from recent large Internet IPOs, including those of Facebook Inc. FB -1.61% and Twitter Inc., TWTR -3.08% which each paid one bank far more than the others that were named to senior roles.

In the Facebook and Twitter deals, respective lead banks Morgan Stanley and Goldman Sachs received nearly twice the fees of the next tier of underwriters, according to company filings.

Alibaba, whose websites conduct more business than Amazon.com Inc. AMZN +0.60%‘s, said in a statement over the weekend that it has started its long-awaited march to an IPO in the U.S. after initially weighing a deal in Hong Kong.

The company picked the banks as co-leads of the planned share sale, The Wall Street Journal reported over the weekend. Citigroup Inc. also has a role in the deal, according to people familiar with the matter; details of the role weren’t clear Sunday night.

The IPO, which could come as soon as this summer, may raise more than $15 billion, making it one of the largest ever in the U.S., people familiar with the matter said.

That could translate into hundreds of millions of dollars in fees and other business to banks and exchanges in the U.S.

And that’s really what IPOs are all about. Individual investors rarely get to buy into the first sale meaning that institutional investors get the biggest first day gains. The real winners are likely to be those who get to list the shares.

BP

BP allowed to drill again

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BP is back. After nearly four years of suspension after a disastrous Gulf of Mexico oil spill in 2010, the company is now able to sign new drilling leases.

Here’s the story from Politico by Darren Goode:

BP will be allowed to sign new leases to drill for oil and gas in the Gulf of Mexico under a deal announced Thursday with the U.S. government that resolves outstanding issues tied to the British giant’s role in the 2010 Deepwater Horizon disaster.

The agreement settles “all suspension and debarment actions against BP” that prevented the company from doing business with the federal government, the EPA announced. The suspension stemmed from the April 2010 accident that killed 11 workers and gushed nearly 5 million barrels of oil, fouling miles of Gulf bottom, beaches and coastal marsh.

The announcement came just six days before the Interior Department is scheduled to hold a lease sale for 40 million acres in the Gulf. BP will now be eligible to participate, Senate Energy and Natural Resources Chairwoman Mary Landrieu (D-La.) said in a statement welcoming the agreement.

The Wall Street Journal added these details of BP’s new deal in a story by Tom Fowler:

Under the terms of the deal announced Thursday, BP has agreed to heightened safety, operations, ethics and corporate governance requirements, the company said.

BP must pay an independent auditor for the next five years to conduct annual reviews and report back to the government on compliance with the agreement, according to the EPA. The agency also said it can take corrective action if it believes BP breaches the agreement.

Thursday’s agreement means BP will be eligible to bid in the next auction of Gulf of Mexico oil and gas leases, which will be held on Wednesday.

The EPA blocked BP from obtaining new government contracts beginning in November 2012, shortly after the company and the U.S. Justice Department entered into a $4.5 billion settlement of all criminal and some civil charges related to the oil spill.

At the time, BP said it expected the suspension would be brief. But in August 2013, BP sued the agency for refusing to lift the ban even after the criminal case against the company had been closed.

In court filings, EPA officials said BP’s extended contract ban was because of the company’s conduct during the criminal investigation of the oil spill, as well as past safety pledges that were broken in the wake of a deadly refinery explosion in Texas and oil pipeline leaks in Alaska.

Clifford Krauss wrote in the New York Times that environmental groups were not happy about the new arrangement:

BP had sued to have the suspension lifted, and now the agreement will mean hundreds of millions of dollars of new business for the company. But even more important, oil analysts said, it signifies an important step in the company’s recovery from the accident, which has been costly to its finances and reputation.

“After a lengthy negotiation, BP is pleased to have reached this resolution, which we believe to be fair and reasonable,” said John Mingé, chairman and president of BP America. “Today’s agreement will allow America’s largest energy investor to compete again for federal contracts and leases.”

That prospect elicited sharp criticism from environmental groups. “It’s kind of outrageous to allow BP to expand their drilling presence here in the gulf,” said Raleigh Hoke, a spokesman for the Gulf Restoration Network, based in New Orleans.

The Washington Post story by Steven Mufson pointed out that BP pleaded guilty to criminal charges in 2012:

The EPA first suspended BP from new federal contracts on Nov. 28, 2012, citing its “lack of business integrity.” After BP pleaded guilty to criminal charges in a $4.5 billion settlement with the Justice Department, the EPA extended its ban. On Nov. 26, the agency again extended its ban on BP and 25 of its subsidiaries.

The five-year agreement announced Thursday requires BP to retain an independent auditor approved by that EPA who will conduct an annual review of BP’s compliance with a set of safety, ethics and corporate governance guidelines. The EPA said the agreement gives it the authority to “take appropriate corrective action in the event the agreement is breached.”

The suspension did not affect BP’s existing agreements with the government, and BP said it has invested $50 billion throughout the United States over the past five years.

But the agreement Thursday allows BP to add to its extensive lease holdings. In addition, BP can now bid on military fuel-supply contracts; previously the company was one of the U.S. military’s leading suppliers of fuel.

It looks like BP is out of the penalty box. The ability to bid on new business should help stop the earnings decline the company has experienced. On Feb. 4, BP reported a 25 percent drop in fourth-quarter profit. While shareholders are likely to cheer the new revenue potential, let’s hope BP is able to execute without damaging the environment.

TBN

Talking Biz News Today — March 13, 2014

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Thursday’s top stories:

The Associated Press

Amazon hikes prime membership to $99 a year by Mae Anderson

Reuters

U.S. business inventories up, sales post largest drop in 10 months by Lucia Mutikani

The Wall Street Journal

Shell sets plan to boost returns by Justin Scheck and Ian Walker

Fortune

Google’s plan for a store may be more like a museum by Courtney Subramanian

Businessweek

Missed alarms and 40 million stolen credit cards: How Target blew it by , , , and

Bloomberg

Chuck E. Cheese owner said to weigh Dave & Buster’s bid by Cristina Alesci and Leslie Patton

Today in business journalism

Washington Post names Ryan McCarthy assistant business editor
A mix of documentation and gumshoe reporting
Jaffe: Biz journalists need to use data with personal examples
Phoenix Business Journal publisher to retire
Heron, head of social media, leaving Wall Street Journal

This date in business journalism history

2011: Peoria business editor takes buyout

2006: Harwood joining CNBC as Washington correspondent

Business journalism birthday

March 13: Jeff Bercovici of Forbes