Tag Archives: Coverage
by Liz Hester
The International Monetary Fund joined the chorus of warnings against a potential U.S. default. The international banking organization lowered its global growth expectations amid the uncertainty as well as weakening economic conditions across the globe.
The Wall Street Journal had this story:
The International Monetary Fund cut its world growth forecast Tuesday amid deteriorating emerging-market prospects, urging authorities to shore up their economies as the U.S. prepares to exit its easy-money policies and wrestles with a budget impasse that threatens to derail the global recovery.
In its sixth consecutive downward revision, the IMF cut its growth forecast for this year by 0.3 percentage point to 2.9% and next year by 0.2 percentage point to 3.6%, compared with the fund’s last assessment in July.
“Two recent developments will likely shape the path of the global economy in the near term,” the fund said in its latest World Economic Outlook.
First, the pace of the Federal Reserve’s exit from its easy-money policies meant to spur growth can make or break growth. If the Fed withdraws its stimulus too fast, it could stall global growth as borrowing costs rise too quickly for many economies and fuel further emerging-market volatility as investors pull out their capital en masse.
Second, “there is strengthening conviction that China will grow more slowly over the medium term than in the recent past,” particularly as Beijing has indicated it can live with lower growth as a way to foster healthier long-term expansion of the economy. The fund cut China’s 2014 outlook nearly half a percentage point from its last forecast to 7.3%.
The WSJ story continued to discuss the state of emerging markets, offering a global and less political perspective to the coverage. It went on to detail the effects the Federal Reserve’s actions had as well as a peak in expansion for several of these countries. While emerging economies may be struggling, the New York Times story decided to focus on the American political contribution to slowing global growth:
Over all, developed economies have strengthened whereas emerging economies have weakened, the fund said. The private sector in the United States has posted better numbers, and some European countries have stopped contracting, though growth across the Continent remains weak.
“Growth is looking up, financial stability is returning and fiscal accounts are looking healthier,” Christine Lagarde, the fund’s managing director, said of developed economies at a speech this month in Washington. “Nowhere is this clearer than the United States. We see it all around us,” she said, citing improvements in housing and household finances.
Yet growth in those wealthier countries remains anemic — just 1.6 percent in the United States and 1.4 percent in Britain, with a 0.4 percent contraction in the euro area. Financial problems and recessions in Europe continue to weigh down the rest of the world, the fund said.
In Washington, budgetary turmoil has introduced new strains, including the partial government shutdown and fears that the United States might default on its debt. If the Federal Reserve pulls back, or tapers, its major bond-buying program, the global economy may also be at risk.
“U.S. monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the United States and many other economies,” the fund said. “This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening.”
It is against the backdrop of a deadlocked Congress and shutdown federal government that the world’s finance ministers and central bankers are gathering in Washington this week. The stalemate has already led to the biggest drop in consumer confidence since Lehman Brothers collapsed, according to some measures.
Bloomberg’s story devoted about the same amount of space to talking about the Fed’s moves, China, Europe and currency volatility:
The IMF raised its forecast for the 17-country euro area to a contraction of 0.4 percent this year compared with a 0.6 percent decline in July. It now expects an expansion of 1 percent next year instead of 0.9 percent three months ago. While Italy and Spain are expected to shrink this year, Spain’s forecast contraction of 1.3 percent is an improvement from a 1.6 percent prediction three months ago.
Still, the region’s financial industry remains fragile and next year’s planned assessment of the banks’ balance sheets by the European Central Bank “provides a critical opportunity to put the system on a sounder footing,” the IMF said.
The euro-area’s central bank should also consider giving additional monetary support through lower interest rates, forward guidance on future rates or negative deposit rates, it said.
The prospect of higher U.S. long-term interest rates and a partial reversal of capital flows is leaving emerging markets with weak fiscal positions or higher inflation particularly exposed, the fund said.
USA Today led with the debt ceiling issue, pointing out the damage to the global economy:
A failure by Congress to raise the nation’s borrowing limit “could severely damage the global economy,” the International Monetary Fund said Tuesday as it trimmed its global economic forecast due to slowing growth in emerging markets.
If Congress doesn’t increase the nation’s borrowing authority this month, “It would probably lead to a lot of financial turmoil,” IMF chief economist Olivier Blanchard said at the annual meeting of the IMF and World Bank. “It would be an issue for all credit markets, including China.”
Blanchard added that the current federal government shutdown — resulting from a separate standoff over funding the government — would hurt the U.S. economy and, in turn, the global economy, only if it persisted for several weeks.
“Our assumption is that the shutdown will end and there’ll be no problem raising the debt ceiling,” Blanchard said.
Let’s hope that Blanchard is right. One thing is for certain, the U.S.-based media outlets aren’t missing a chance to tell anyone who will listen that not raising the debt ceiling will cause problems with the entire global economy. Hopefully some of the politicians are listening.
by Liz Hester
While the federal government partial shutdown continues into a second week with no deal in site, many are turning their attention to the looming debt crisis. If Congress doesn’t agree to extend the debt ceiling, or the amount the government can borrow, by mid-October then the U.S. may plunge the entire global economy into the dumps.
The Wall Street Journal had a story Monday saying that top bankers were warning about a potential plan to pay bond interest might backfire:
Top Wall Street executives are warning that any effort to pay interest on U.S. debt before other obligations such as Social Security, a strategy some lawmakers think would placate bond investors if the government breaches its borrowing limit, would pose severe risks to financial markets and the economy.
In recent meetings with Republican lawmakers and Obama administration officials, chief executives of the nation’s largest financial institutions said putting some payments ahead of others would create insurmountable uncertainty for investors, drive up borrowing costs and cause market disruptions, according to people familiar with the meetings.
The Wall Street pushback against an idea backed by the House GOP is part of an effort to force a resolution on raising the nation’s borrowing limit, which the Treasury has said it expects to reach by mid-October. If no deal is reached, many outside observers, including debt-ratings firms, assume the government would begin prioritizing payments to bondholders over others, such as Social Security recipients or veterans, rather than risk defaulting on U.S. debt.
Market participants say while the U.S. might not technically default on its debt, missing any type of payment would likely harm the economy. “This is going to be permanently damaging for business and consumer confidence if this happens. People will never look at the United States Treasury the same ever again,” said Tom Simons, money-market economist at Jefferies Group LLC, an investment bank.
The fast-approaching deadline, paired with the inability of Republicans and Democrats to make headway in resolving it, is starting to ripple through global markets that until recently had appeared blasé.
Stocks fell Monday, with the Dow Jones Industrial Average down 136.34 points, or 0.9%, to 14936.24. U.S. Treasury notes, seen as a haven in times of volatility, rose, as did the price of gold. The Chicago Board Options Exchange’s Volatility Index, a gauge of fear in the stock market, rose 15%.
The New York Times wrote a piece saying that Wall Street continued to brush off fears that the government would actually default:
Wall Street is showing few signs so far that it is fearing the financial panic it has been predicting should the government default on its debt.
The fiscal impasse in Washington continued to weigh on stock prices on Monday, as the market’s “fear gauge,” the C.B.O.E. volatility index, jumped 15.95 percent to its highest level since June. Nonetheless, the market reaction to date has been muted compared with past crises.
“We all tell ourselves, ‘This is something that is not going to happen,’ ” said David Coard, the head of fixed-income trading at the Williams Capital Group. “This would be like a black swan event — it’s not something that you would have thought that the U.S. could do in a million years.”
But the relative calm on Wall Street is worrying some investors, who fear the markets will not signal to politicians the true danger of hitting the debt ceiling until it is too late.
“The markets are sending this complacent message, and I think the politicians are interpreting it incorrectly and they have no sense of urgency,” said Douglas Kass, the owner of the hedge fund firm Seabreeze Partners Management.
There are certainly signs that nervousness on trading desks is growing as the nation draws closer to Oct. 17, when the Treasury Department has said it will run out of emergency measures to borrow more money. Soon afterward, the government could run out of money to make payments on its bonds — the much-dreaded default that has Washington buzzing.
But the NYT’s Dealbook editor, Andrew Ross Sorkin, wrote a column claiming that a default is possible:
“The United States government is not going to default, ever.”
That’s what Vincent Reinhart, former head of the Federal Reserve’s monetary division and now managing director and chief United States economist for Morgan Stanley, said late last week.
“As political theater,” he said, “the debt ceiling is not a useful threat, because politicians are basically threatening to shoot themselves, as they will rightly shoulder the blame for the serious global economic consequences of a default.”
Mr. Reinhart’s view has become conventional wisdom on Wall Street when it comes to whether the country will hit the debt ceiling limit on Oct. 17. Warren Buffett put it this way: “We’ll go right up to the point of extreme idiocy, but we won’t cross it.”
Nobody believes the country will actually exceed the debt limit — which is exactly why it might.
Oddly enough, despite all the predictions of panic, the stock market was down only marginally over the last couple of sessions.
Here’s the perversity of Wall Street’s psychology: The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn’t reached.
That just can’t be good. Since the markets aren’t reacting to the potential default, the conventional wisdom is that it may give politicians a false sense of security. And if that’s the case, we’re all in trouble. Let’s hope someone blinks first.
by Liz Hester
Two days into the partial U.S. government shutdown, the media began to chronicle the effects being felt by various businesses. While it’s early to tell the full economic repercussions of the continued shuttering of government services, those with contracts are already feeling the pinch.
The Wall Street Journal had this story:
The partial shutdown of the federal government is leading to layoffs and production disruptions at defense contractors and some manufacturing companies.
United Technologies Corp. said on Wednesday that it is preparing to furlough nearly 2,000 workers at its Sikorsky unit, which makes Black Hawk helicopters for the Defense Department, and may have to idle several thousand more workers at its Pratt & Whitney and UTC Aerospace units if the shutdown drags on for weeks.
Government workers deemed nonessential were furloughed starting on Tuesday after Congress failed to meet a Sept. 30 deadline for extending government spending authority, and the cuts have spilled over to government suppliers and the companies that cater to them.
The impasse compounds the situation for U.S. manufacturers already nervous about the new health-care law and a wobbly U.S. economy. After hitting a low of about 11.5 million in early 2010, U.S. manufacturing employment recovered to nearly 12 million in mid-2012 but since then has stagnated.
Reuters pointed out that companies that rely on government workers to approve systems and contracts are also hurting:
The U.S. government shutdown is beginning to hit the factory floor, with major manufacturers like Boeing Co (BA.N) and United Technologies Corp (UTX.N) warning of delays and employee furloughs in the thousands if the budget impasse persists.
Companies that rely on federal workers to inspect and approve their products or on government money to fund their operations said they are preparing to slow or stop work if the first government shutdown in 17 years continues into next week.
United Technologies said nearly 2,000 workers in its Sikorsky Aircraft division, which makes the Black Hawk military helicopter, would be placed on furlough Monday if the shutdown continues. That number would climb to more than 5,000 and include employees at its Pratt & Whitney engine unit and Aerospace Systems unit if the shutdown continues into November, the company said in a statement.
UTC relies on the government’s Defense Contract Management Agency to audit and approve manufacturing processes for its military products. The DCMA inspectors were deemed non-essential federal employees and are on furlough, UTC said.
Aircraft maker Boeing said it is taking steps to deal with possible delays in jetliner deliveries, including its new 787 Dreamliner, because thousands of U.S. aviation officials needed to certify the planes have been idled.
The Los Angeles Times had a story saying that this shutdown could be more damaging to the economy than the last one in 1995:
The last time the federal government shut down, for three weeks in the winter of 1995-96, the American economy felt a jolt but recovered quickly.
Things don’t look anywhere near as promising this time around.
The nation is currently more than four years into an economic expansion with some momentum behind it. That also was the case in 1995. But this time, things are a lot more fragile.
Americans continue to suffer from a relatively high unemployment rate of 7.3%, which is about 2 percentage points higher than in December 1995. Back then, job growth was stronger, the economy was starting to benefit from the tech boom, and baby boomers were entering their prime earning years, not preparing for retirement.
The recovery from the Great Recession has been sluggish and repeatedly held back by political budget battles, but many had been hoping the economy would pick up steam heading into next year. Housing and stock markets have been growing, and consumers have cut their debts and are feeling more confident.
Businesses are going to start to post lower revenues, which caused some investors to begin to sell stocks, according to an Associated Press story:
Wall Street had a message for Washington on Wednesday: end the shutdown and move on.
The markets ended lower as traders, Europe’s central banker and Wall Street chief executives urged Congress to stop the two-day partial government shutdown that has closed national parks, put hundreds of thousands of federal employees on furlough and forced President Obama to cancel an overseas trip.
Wall Street made clear that the longer the budget fight dragged on, the more its bankers worried about significant damage to the economy and the possibility that Congress will not allow the government to borrow more. The financial market says that would be a disastrous move that could send the country into recession.
On Wednesday, the major indexes opened sharply lower, with American lawmakers appearing unwilling to yield in their entrenched positions. After Mr. Obama summoned Congressional leaders to the White House later in the morning, the market started to recoup some of its losses, but the recovery faded in the afternoon.
“The markets are sending a loud message to Washington lawmakers to get their act together and resolve the budget crisis,” said Peter Cardillo, chief market economist at Rockwell Global Capital.
Lawmakers should take businesses, contracts and the overall health of the economy into consideration as they allow the shutdown to drag on. While it’s only been a couple of days, hurting the confidence of global investors could also have long-lasting implications for the U.S. economic recovery. Already we’re likely to see manufacturing loose steam and issues in the defense sector. It would be nice if everyone could just get back to business (and government) as normal.
by Liz Hester
Pharmaceutical giant Merck & Co. is cutting jobs and research in a move that will likely hurt innovation and drugs. As revenue declines across the industry, companies are looking for ways to increase the bottom line.
Reuters had this story:
Merck & Co, taking a cue from rival drugmakers that have slashed research spending to bolster earnings, said it will cut annual operating costs by $2.5 billion and eliminate 8,500 jobs, or more than 10 percent of its global workforce.
Merck, whose shares rose 2.3 percent, said it aims to narrow its focus to products with the best chance of winning regulatory approval and achieving substantial sales.
It will jettison research products with less likelihood of success. It plans to pull the plug on some drugs already in late-stage trials, and will license some products to other companies.
The job cuts would be in addition to expected remaining cuts of 7,500 positions from a 2011 restructuring that involved elimination of 13,000 positions – largely of administrative personnel but also related to sale or closure of manufacturing sites.
Merck, like Pfizer Inc, AstraZeneca Plc and Sanofi in recent years, is reaching again for its axe because of competition from generic medicines, stalled sales growth of its important drugs and failures or delays for high-profile experimental drugs.
But half the job cuts from Merck’s new restructuring will come from research and development, which has been a protected sphere for the drugmaker, which has long been renowned for its research prowess but has stumbled in recent years.
The Wall Street Journal added this context about the cuts, saying that despite recent revenue gains Merck is still behind on developing new drugs:
Advancements in the understanding of genetics and biology have increasingly fueled drug development in recent decades, and many of the most promising new drugs have been aimed at niche disease populations, developed in the labs of biotechnology competitors considered closer to the cutting edge of science. Merck has begun to catch up, most recently with an experimental cancer drug that harnesses the immune system to fight tumor cells. But some former executives worry that the company wasn’t quick enough to adapt and that its declining size mirrors the shrinking ambitions of other large drug makers.
“Merck and lot of the big companies wrongly tried to target blockbusters for major, mega-conditions, and that strategy failed,” said Eve Slater, a former research and development executive who left Merck in 2002. Now, “they make small acquisitions and have risk absorbed by the smaller biotechs that are populated by their former scientists.”
Merck Chief Executive Kenneth Frazier said in an interview Tuesday that the changes should help it improve its return on investment, focusing on diseases like cancer, Alzheimer’s disease and the hepatitis C virus. Mr. Frazier said that, despite the cuts, Merck was committed to research and development and would continue to invest for the long term.
USA Today noted that Merck also planned to relocate its headquarters:
The overhaul is part of a broader strategy being set by the company’s R&D chief Roger Perlmutter. Frazier hired Perlmutter in April as a replacement for Peter Kim, following developmental setbacks for experimental drugs in cardiovascular, surgery and osteoporosis.
The company also said, on Tuesday, in a separate news release, that it will move its global headquarters from Whitehouse Station to its existing facilities in Kenilworth, N.J. The company had previously announced that it would close its Whitehouse Station building and relocate its global headquarters to Summit, N.J.
But after re-evaluating its real estate needs in the state, Merck determined that it could achieve greater cost savings and operational synergies by closing both its Summit campus and its main Whitehouse facility, according to the Merck release.
The transition is expected to begin next year and be completed in 2015.
The Journal also highlighted Merck’s shift in strategy toward acquiring experimental drugs:
On Tuesday, the company said it would discontinue or out-license certain drugs in late-stage development, and put greater emphasis on acquiring experimental drugs from outside the company, which could help minimize exposure to costly research flops. Such a strategy is a departure from the days when large firms prided themselves on developing new drugs internally, said Dr. Slater, the former Merck executive.
“They’re sitting 30,000 feet in the clouds waiting for the biotechs to develop the good targets,” said Dr. Slater, now an associate clinical professor of medicine at Columbia University. “Merck is trying to reorient itself as a biotech [venture capitalist].”
Merck said it would continue its focus in areas like vaccines and diabetes, where it already has sizable footprints with drugs like Januvia, which had sales of $1.07 billion in the quarter ended June 30.
What is troubling about this development is what will happen to innovation and finding new ways to cure diseases. Discovering new treatments and funding for the research is difficult enough. For many ailments, drugs only come from big companies with the resources to find them. If one of the largest in the business is cutting research it doesn’t bode well for those hoping for new ways to cure their diseases.
I’d like to see some follow-up stories on how this move will affect patients and their families, particularly given the new health care laws and reimbursement programs.
by Liz Hester
At the time of this writing, a U.S. government shutdown seemed likely. Global market certainly reacted as if that were the case on Monday, posting losses. While investors and traders tried to figure out the potential outcome, some were jittery about the pending debt ceiling debate.
Here is the Reuters story:
U.S. stocks closed lower on Monday with just hours to go before a midnight deadline to avert a federal government shutdown, but major indexes ended September with solid monthly gains.
Losses were broad across the board and the decline accelerated in late trading but the benchmark S&P 500 index still ended up 3 percent for the month and 4.7 percent for the quarter. The Nasdaq jumped more than 10 percent for the quarter, its biggest quarterly gain since the first quarter of 2012.
With the law funding thousands of routine government activities set to expire at midnight, U.S. Senate Democrats killed a proposal by the Republican-led House of Representatives to delay Obamacare for a year in return for temporary funding of the federal government beyond Monday.
But market participants have grown accustomed to political battles in Washington resulting in a last-minute accord and voiced skepticism any shutdown would last for an extended period.
“The reason the stock market is not down 10 or 15 percent is because people are going, ‘I’ve seen this movie before’,” said Jordan Waxman, managing director at HighTower Advisors in New York.
Also calming market fears, Standard & Poor’s Ratings Services said the debate over raising the U.S. debt limit is unlikely to change the country’s sovereign rating as long as it is short-lived. In 2011, similar political tension prompted the loss of the United States’ triple-A credit rating.
The Dow Jones industrial average was down 128.57 points, or 0.84 percent, at 15,129.67. The Standard & Poor’s 500 Index was down 10.20 points, or 0.60 percent, at 1,681.55. The Nasdaq Composite Index was down 10.12 points, or 0.27 percent, at 3,771.48.
The New York Times pointed out that declines in confidence might be one of the more damaging aftereffects of the sparring:
But on Monday, economists were scrambling to estimate the more immediate effect on the economy if all nonessential government services were closed on Tuesday.
While many economists have said that the direct blow to the economy would be relatively modest if a shutdown lasted only a few days — as past shutdowns have — the political battles could hurt confidence.
“The hit to consumer and business confidence from such an outcome could be substantial, increasing the shutdown’s effects,” Gennadiy Goldberg, a United States strategist at TD Securities, wrote to clients on Monday.
Any reduction in spending would be problematic because economic growth has already been more sluggish than most policy makers want. The Federal Reserve determined recently that the economy was too weak to withstand even a small reduction in the central bank’s stimulus efforts.
The Fed chairman, Ben S. Bernanke, said during his news conference on Sept. 18 that the budget battles could make matters worse.
“I think that a government shutdown — and perhaps, even more so, a failure to raise the debt limit — could have very serious consequences for the financial markets and for the economy, and the Federal Reserve’s policy is to do whatever we can to keep the economy on course,” he said.
The Financial Times’ Alphaville blog wrote a piece last week about the disaster that breaching the debt ceiling would create and quoting an analyst note from RBC Capital Markets:
Of course, an actual debt ceiling breach is essentially Armageddon. Everyone already knows that. We’ve been scouring our inboxes for helpful research notes on the potential for market disruptions in the period leading up to the deadline, and we finally found one.
Produced by the rates crew at RBC Capital Markets, we post an extended excerpt below and have also chucked the whole thing in the usual place:
The Treasury has said they will run out of borrowing room around Oct 17, at which time they will have roughly $30bn of cash. We think this will allow them to squeak by until Halloween (Oct 31) before they hit the final deadline when they would run out of cash.
But unlike past episodes, it seems that the Treasury is not going to give an exact forecast of when the ceiling will be hit (presumably because they were strongly criticized in 2011 when they had $54bn of cash on the date they said they would be broke). Much like past episodes, namely the summer of 2011, we expect negotiation on this front to come down to the wire.
Let us be perfectly clear: crossing the debt ceiling would be catastrophic.
Well said. Not paying our national debt would be catastrophic. While some traders and investors seem to be relying on rational thought to avoid a government shutdown or to end it quickly, the potential for a government default is frightening. After watching the economy recover, portfolios regain some of the past losses and consumer confidence make some headway, politicians are gambling not only with the future, but also with global confidence levels. None of the squabbles seem worth wrecking the financial system and wiping out investors’ savings. Here’s hoping they can pull it together before mid-October.
by Chris Roush
Steve Kandell of BuzzFeed profiles CNBC sports business reporter Darren Rovell, who is a lightning rod for criticism because of what he covers.
Kandell writes, “Darren Rovell, just shy of 400,000 followers strong, does not exist on Twitter alone — his return to ESPN after six years at CNBC includes filing reported stories regularly and shooting non-sports segments for ABC News — but it’s what he thinks about, and what people think about when they think about Darren Rovell. (Even his detractors would grant that he’s been instrumental in changing the nature of sports reporting.) He will regularly spend hours researching and crafting a single tweet; there are whole Tumblrs devoted to criticizing his online output. He compares what he does to VH1’s Pop-up Video, dropping salient, bite-sized business-related footnotes to events we’re watching as fans. The often angry reaction thereto speaks to the uneasy relationship between sports’ string-pullers and the fans they ostensibly serve, as well as to his own murky relationship to both. (His Twitter background, in case any of this is too subtle: stacks of cash.) He does not profess to be sticking up for the little guy, and yet he firmly considers what he does to be, above all, a public service.
“‘If people are going to dislike me for commodifying the sports experience, or the idea that I’ve taken the fun out of it, that’s ridiculous,’ he says. ‘If you’re a fan today and you don’t understand the business, then you’re a bad fan. You will lose at the watercooler every single time. What’s your owner’s capacity to spend? You don’t know the salary cap? Come on.’
“Rovell looks back down at his phone. ‘Hold on, it’s 7:14, this Vikings one is going to go out now, I want you to see this.’ He hits send and…winces. ‘It’s loading. Shit. I don’t know if I have a signal.’
“There is undeniable drama in the sight of almost-grown men, having prepared their whole lives for this very night, witnessing their natural abilities pinned to fluctuating price points, and Rovell is ready for these stories, in his own way.”
Read more here.
by Liz Hester
As a government shutdown looms and politicians fight over funding the new health care law, news outlets are picking up their coverage since Tuesday brings the beginning of insurance marketplaces.
The New York Times wrote a piece called “On the Threshold of Obamacare, Warily,” looking at some of the decisions people must weigh as they try to comply with the new law:
The insurance marketplaces that form the centerpiece of President Obama’s health care law are scheduled to open on Tuesday, a watershed moment for the Obama administration, but also a crucial turning point for millions of Americans who will finally get the chance to square the law’s lofty ambitions with their own personal needs.
While some people desperate for coverage will need no persuading to sign up, for others the decision will amount to a series of complicated calculations that would challenge an accounting whiz, let alone an ordinary human: Are the new plans less expensive or more generous than existing ones? How do premiums and out-of-pocket costs compare? Are the networks of doctors and hospitals the most desirable? Who qualifies for how much of a subsidy, and what is the tax penalty for a miscalculation?
How millions of people answer these questions over the next six months will be vital to determining whether the Affordable Care Act lives up to its name and its ambitious goal of helping more people buy the coverage they need.
Much is at stake for insurers as well: they must attract enough healthy people to pay for the care of sicker patients and price their offerings to keep premiums low enough to be competitive but high enough to be sustainable.
Bloomberg ran a Q&A story taking a look at some of the biggest issues surrounding the rollout:
While the exchanges are expected to open on time, that milestone is unlikely to settle the 3 1/2-year grudge match over the Affordable Care Act. Technical limits and a long enrollment period mean it may be as late as April before it’s clear how many uninsured Americans sign up under the law.
“Is it going to be a train wreck, a complete failure? The answer is no,” said Dan Schuyler, a director at Leavitt Partners, a Salt Lake City-based health-care consultant. “Is it going to be completely seamless and instantaneous? No. It is going to be somewhere in between.”
The exchanges are at the heart of the law’s efforts to cover more of the 48 million uninsured Americans. About 7 million people will use the system to buy subsidized insurance by the end of the first open enrollment period on March 31, according to congressional projections.
Republicans will spotlight any problem as proof the law is a disaster. Democrats say they’ll overcome technical glitches and the law will sell itself as the uninsured gain benefits. Polls show most Americans side with the skeptics.
A Wall Street Journal story looked at the different types of plans, how it might affect small businesses and the fines among other issues. It was full of deadlines, informational websites and other practical information for those who may need to buy a plan:
Another Journal story outlined what is and isn’t going to be delayed. Here’s an excerpt from that coverage.
So is Obamacare happening or not? With frequent reports of delays ahead of the Oct. 1 rollout of new health-insurance exchanges, here’s a look at some of the major delays, and a reminder of what hasn’t changed.
Still going ahead is the core of the 2010 Affordable Care Act, the exchanges where people who don’t have health coverage from their employer or a government program can comparison-shop for coverage. Those exchanges are opening as scheduled on Oct. 1 in all 50 states. Thirty-six states have entrusted all or part of their exchanges to the federal government, while 14 plus the District of Columbia are running their own exchanges. People can buy coverage taking effect Jan. 1.
So far, so good. But not all of the functions originally envisioned will be available at the launch, and requirements for larger businesses have changed.
–Business mandate delayed: The law says businesses with 50 or more employees have to offer qualifying coverage to workers or face penalties. In early July, the Obama administration said this “employer mandate” won’t take effect until 2015, a year later than originally planned.
The New York Times also published another piece about how the insurance exchanges are scrambling to prepare:
The federal government, which will operate all or part of the exchanges in more than 30 states that declined to create their own, mostly because of political opposition to the law, is having readiness problems of its own. In one example, the Obama administration said Thursday, small businesses would not be able to buy coverage online through federally run exchanges until November.
Although the exchanges have been able to tap billions of federal start-up dollars and hire companies like Accenture, Oracle and Xerox to help with the work, their task has been highly complex and their time frame tight.
The web portals for the exchanges have to be able to share information in real time with insurance companies, state agencies and the federal government, which has built a “data hub” through which it can verify the income and citizenship of people applying for subsidies or Medicaid. Each portal has to undergo rigorous testing to ensure, for example, that data will flow properly, that the portal is secure and that it can handle heavy volume. Much of the testing is still going on.
And the systems likely will continue to be tested and modified as people use the exchanges and sign up for coverage. What is interesting will be chronicling the insurance companies’ abilities to make money and sign up younger, healthier customers. Media coverage will be intense leading up to Tuesday and chronicling what happens after the rollout. The overlap of business and government in this sector will make for interesting coverage going forward.
by Liz Hester
Bond investors have another sale to weigh as Fannie Mae is planning an offering. According to The Wall Street Journal, the securities will get their value from a pool of mortgages the company acquired in 2012, spreading the risk of default to bondholders.
The Journal had this story:
Fannie Mae is planning a bond deal that will pay buyers to share a tiny sliver of the risk of the U.S. home-lending business.
The Washington-based company plans to sell about $675 million of securities in an offering that is expected to be announced next month. The securities are derivatives whose value will depend on the performance of a pool of $28.05 billion of mortgages acquired by Fannie Mae in the third quarter of 2012, according to a term sheet reviewed by The Wall Street Journal.
The deal follows a similar issue in July from Fannie’s smaller brother, Freddie Mac. Both companies are issuing the securities to help meet a mandate from their regulator, the Federal Housing Finance Agency, to reduce the cost of defaults to U.S. taxpayers, who bailed out the companies with $188 billion during the financial crisis.
The plan represents the latest effort to lure Wall Street back into a business that generated billions of dollars in fees and profits during the housing boom but has since gone nearly silent.
Fannie and Freddie don’t make mortgage loans, but buy loans made by other lenders and package them into securities that they sell to investors, with a guarantee that buyers will continue to receive regular principal and interest payments even if underlying mortgages default.
Bloomberg Businessweek reported that the sale is a way for the government to reduce the exposure Fannie and counterpart Freddie Mac have to the housing market:
U.S. regulators see the notes as a way to reduce the dominance of the two government-controlled firms and assess if they’re charging enough to guarantee their traditional mortgage bonds, embracing a risk-sharing approach that may play a central role in the future of the $9.3 trillion U.S. mortgage market.
Fannie Mae’s sale, planned for next month, reflects U.S. attempts to reduce its role, with the current share of new mortgages financed by taxpayer-backed programs at about 85 percent. Fannie Mae and Freddie Mac, which were seized by the U.S. five years ago this month amid the worst housing slump since the 1930s, account for about two-thirds of the market.
The risk-sharing transactions resemble provisions included in legislation introduced this year by Republican Senator Bob Corker of Tennessee and Democratic Senator Mark Warner of Virginia, and endorsed by President Barack Obama. The proposal would create an agency to replace Fannie Mae (FNMA:US) and Freddie Mac that would bear catastrophic mortgage losses, after private firms take the first 10 percent.
The Fannie Mae sale comes as bond investors are seeking new supply because banks are increasingly holding onto other mortgages. After 27 non-government bond deals tied to about $12 billion of new mortgages in the first eight months of 2013, no widely marketed sales have been completed in September, according to data compiled by Bloomberg.
The International Business Times had a story that began with this background on how the two firms got to this point:
In September 2008, Freddie Mac and Fannie Mae were placed under federal control after combined losses of $14.9 billion and ongoing concerns about their ability to raise capital threatened the U.S. housing market. Between them, they owned or guaranteed about half of the $12 trillion U.S. mortgage market, including $5 billion of mortgage-backed securities, both significant amounts when you consider that government public debt was $9.5 trillion at the time.
Both have been recovering well over the past five years, Fannie posting a net income of $17.2 billion in 2012 and Freddie netting $10.8 billion over the same period. Importantly for the taxpayer, they have begun to aggressively pay back the $200 billion capital investment they received from the U.S. Treasury.
Now that the pair are back in good health, what does the government plan to do with them?
As of May 2013, Fannie has paid back $95 billion of its $117 billion debt and Freddie has paid $30 billion of its $72 billion debt. But once that debt is paid, there is no mandate to take the company public again or sell it. The original agreement, struck in 2008 when they needed capital, was that in exchange for an injection of cash to keep them afloat, they would give the government premium shares of the two companies, paying out as much as 10 percent to the Treasury on profits made.
The housing market continues to recover and more people are demanding mortgages, making it important that banks and other guarantors can shed some of the risk. Covering the recovery and where the risk ends up will be an important role for journalists, especially since chronicling the risk was a key part of covering the financial crisis.
by Liz Hester
Chrysler Group filed for an initial public offering on Monday after its majority owner and employee union couldn’t reach a valuation. Fiat would like to own the company outright, but needs to placate the union in order to do so.
Here’s the Wall Street Journal story.
Chrysler Group LLC Monday filed for an initial public offering, a move forced by the failure of the auto maker’s Italian majority owner and its main union to agree on the company’s value.
Fiat SpA, which owns 58.5% of Chrysler, doesn’t want a share sale and is eager to own the company outright. But the United Auto Workers union health trust, holder of a 41.5% stake in the No. 3 Detroit auto maker, has demanded that its shares be offered to the public after negotiations to sell them to Fiat stalled.
In its Monday filing, Chrysler warned that if Fiat can’t get control, the Italian auto maker could turn its back on Chrysler, unwinding a deal that was a centerpiece of the Obama administration’s 2009 auto industry rescue.
Analysts and others familiar with the situation say Fiat will likely now redouble efforts to reach a private deal with the UAW.
An IPO would follow General Motors Co.’s record-breaking offering in November 2010, which at $23.1 billion was the world’s largest at the time. Analysts estimate Chrysler could be worth between $10 billion and $11 billion, depending upon market conditions.
The UAW health-care trust holds its minority stake in Chrysler as part of the auto maker’s 2009 government-led bankruptcy restructuring. The filing doesn’t state a price for the shares, or how many will be offered. J.P. Morgan is the sole underwriter listed.
The New York Times added these details about the union’s financial obligations to employees and why they’re pushing for the IPO.
The Detroit automakers have large financial responsibilities to their retirees. On Monday, General Motors said it would raise money in the bond market to buy preferred stock in the company owned by its retiree health care trust at a cost of $3.2 billion. Chrysler’s offering arises from an unusual conflict of interests, made possible by the remarkable turnaround at Chrysler since the federal government shepherded it through bankruptcy four years ago.
The United Automobile Workers health care trust has the legal right to cash in a large part of its 41.5 percent stake in Chrysler, which is a legacy of a deal brokered in 2009 by the Obama administration’s auto task force. At the time, the deal was seen as a last effort to save the faltering automaker, while preserving peace with the U.A.W.
Now, with profits flowing again and the trust in need of cash, it has formally requested that Chrysler register for a public offering covering about 16 percent of the company’s overall shares. The offering is another sign of how Chrysler — like General Motors — has recovered since the bailout. In the case of G.M., the Treasury Department is continuing to sell its ownership position, and now owns less than 8 percent of the company’s stock.
The Chrysler offering, however, is not supported by Sergio Marchionne, the chief executive of Fiat and Chrysler and the architect of the American company’s revival.
Reuters pointed out that Chrysler has come a long way since its government bailout, but still has some ways to go to reach sustainable profitability.
Marchionne and the UAW trust, a voluntary employee beneficiary association, or VEBA, have been at odds over the value of Chrysler. Their inability to agree on a price for the VEBA stake led to Monday’s IPO filing.
Chrysler has risen from a nearly dead company in 2009 to one that is stronger than its parent in Italy.
Still, Chrysler said in its filing: “Despite our recent financial results, we have not yet reached a level of sustained profitability for our U.S. operations.”
Chrysler, based in suburban Detroit, had cash and cash equivalents of $12.2 billion as of June 30. Its net profit in the first half of the year fell 21 percent to $764 million from $966 million in the previous year.
Marchionne had wanted to avoid the IPO because the sale could delay his plans for a full merger of the two companies. A full merger would make it easier – but not automatic – to combine the cash pools of the two companies, giving Fiat more funds to expand its product lineup.
Currently, Chrysler and Fiat are forced to manage their finances separately, even though they are run by the same executive team.
USA Today made an excellent point about valuing the trust’s shares.
But how to value the trust’s share? As Brent Snavely reported last week in the Detroit Free Press, the trust thinks its stake is worth $5 billion. A JP Morgan analyst puts the value at $3 billion, a figure likely closer to what Marchionne is willing to embrace. Asked last week about the trust’s higher valuation, Marchionne was quoted by the LaPresse new agency, via AP, as saying, “Let them buy a lottery ticket” to make up the difference.
Of course, it’s hard not be sympathetic to the trust. The more money they get for their share of Chrysler, the more that will be available to make good on retiree’s health care coverage.
But it sounds like Marchionne would rather stake his companies’ future on IPO shares — with the market setting the price — and not on lottery tickets.
It’s definitely an unconventional way to go public. Let’s hope that the market will give the trust closer to the value it needs in order to pay its obligations. And that Chrysler’s management can get onboard with the plan.
by Chris Roush
Paul Koenig of The Kennebec Journal in Maine reports that the state’s chamber of commerce has signed a deal with a website, JustGOODNews.BIZ, to report good business news about Maine.
Koenig writes, “The company, JustGOODNews.BIZ, publishes a mix of stores from local and state organizations like the state chamber, as well as summaries of stories pulled from media outlets such as newspapers and TV stations.
“The partnership means the Maine State Chamber of Commerce will feature a feed of Maine-based stories on its website and will contribute news to JustGOODNews.BIZ, according to Kris Rush, founder and CEO of the company.
“Rush launched the Oklahoma City-based company in May after running a similar program at the State Chamber of Oklahoma, where her husband was president for more than 20 years.
“She said she started the company to spread positive business news about local communities to a wider audience.
“Connors said an example of the positive news the state chamber wants to publicize is that J.S. McCarthy Printers recently hired 80 full-time seasonal workers for its upcoming greeting card season, more than double the usual 35 workers it hires for the season.”
Read more here.