Wall Street Breakfast: Must-Know News

• Bye bye Bernie. Madoff pleaded guilty to 11 criminal charges yesterday, including securities fraud, money laundering and perjury, and was ordered to jail until his June 16 sentencing. Speaking publicly about his crime for the first time, he said "when I began my Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme... As the years went by, I realized that my arrest and this day would inevitably come... I am painfully aware that I have deeply hurt many, many people." Prosecutors had offered a plea deal but Madoff rejected it because it would have required him to admit to a conspiracy and provide the names of individuals who helped him run his $65B scam.
• GE loses an "A." As anticipated, S&P downgraded General Electric (GE) and GE Capital to AA+ from the AAA rating it first earned in 1956. GE said it "does not anticipate any significant operational or funding impacts from this change... We are prepared to fund the Company as a Double-A, but we will continue to run GE with the disciplines of a Triple-A company." S&P said its outlook on GE is now 'stable,' suggesting there won't be additional downgrades in the foreseeable future, and investors responded positively, pushing shares to a 12.7% gain.
• Berkshire rating gets a haircut. Fitch Ratings downgraded Berkshire Hathaway (BRK.A) to AA+ from AAA, citing concerns about Berkshire's equity and derivatives investments and Warren Buffett's tight grip on the company. Fitch said it "views the company's potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the 'AAA' level." However, Fitch added that no financial-oriented holding company should be rated AAA because of significant market volatility. Shares closed up 2.4%.
• Lewis sees brighter BoA outlook. CEO Ken Lewis said Bank of America (BAC) turned a profit during the first two months of 2009 and expects to make money this year. According to Lewis, the bank doesn't expect to use more government capital and one of TARP's side benefits is that taxpayers "will most likely make a lot of money from it." Lewis also came out strongly against the idea of nationalization, calling the scenario a 'nightmare.' Shares +5.1% premarket (7:00 ET).
• GM can finish month without aid. General Motors (GM) has enough cash to keep operating through the end of March and won't need the $2B of government capital it had asked for. GM did indicate that it will still need additional government aid, but said cost-cutting moves and spending deferrals in January and February were sufficient to see the automaker through this month without more U.S. funds.
• Citi readies for new board. Citigroup (C) is reportedly preparing to announce boardroom changes early next week when it files its annual proxy statement with securities regulators. According to people familiar with the situation, Citigroup will nominate four financial experts, including two former bank chief executives, to be directors. The likely recruits include Jerry Grundhofer, former CEO of U.S. Bancorp; Michael O'Neill, former CEO of Bank of Hawaii Corp; and William S. Thompson, former co-head of bond-giant Pimco. Citigroup will likely also add at least one more director with a risk-management background. In the filing, Citigroup is also likely to disclose that current directors Kenneth Derr and Franklin Thomas will step down because they have reached the board's retirement age of 72.
• Linking pay to performance. New York Attorney General Andrew Cuomo is working with Rep. Barney Frank and other lawmakers on a plan to tie Wall Street pay to the long-term performance of firms. The plan has the backing of Frank and other prominent Democrats, though legislation has not yet been introduced. Cuomo is looking into additional ways to stagger compensation payments over several years so if a business built on short-term risk blows up, firms will be able to claw back pay. Sources say Cuomo believes change is needed but doesn't intend to micromanage the private sector.
• Tax havens yield to global pressure. Yielding to international pressure on tax havens, the European principalities of Andorra and Liechtenstein promised to relax their bank-secrecy laws. Officials from the U.K. and Germany said the announcement was good news but needs to be followed by 'concrete steps' because 'it is action that counts.' Since together Andorra and Liechtenstein account for just 1% of the $11.5T offshore banking industry, the real question will be whether major tax-haven centers like Switzerland choose to take similar steps.
• Obama extends olive branch to business community. Obama spent more than an hour speaking to 65 CEOs from the Business Roundtable yesterday in his most aggressive outreach yet to the business community. Obama signalled his willingness to talk about lowering the 35% corporate tax rate and indicated he could compromise on his plan to cap carbon emissions so as not to stifle corporate innovation. (Read a live-blog of Obama's appearance)
• IBM splashes into water venture. In an effort to continue branching out from traditional computer services, IBM (IBM) has a new business venture in which it will help manage water resources. Part of IBM's Big Green Innovations initiative, the new business will design and install systems of sensors and back-end software to monitor water pipes, reservoirs, rivers and harbors. "There's a lot of stress on water systems around the world," said Sharon Nunes, head of the Big Green venture. "With a limited supply, you'd better be able to manage it." Nunes estimates information technology for water management could become a $20B market.
• Japan gets third stimulus. Japanese Prime Minister Taro Aso has ordered a third stimulus plan to help lift the economy from what could be its worst recession since WWII. Aso warned "there is a risk of further economic downturn. We must act before the risk becomes reality." Sources say the size of the package is expected to reach at least ¥20T ($204B).
• China confident in growth target, worried about U.S. debt. Chinese Premier Wen Jiabao said China has 'adequate ammunition' to add to its 4T yuan ($585B) stimulus package at any time, and reaffirmed China’s target for 8% growth in 2009 as “difficult but possible.” He also expressed concern over the outlook for U.S. government debt that China holds, urging Washington to take the necessary steps to revive the U.S. economy.
• Household wealth tumbles. U.S. households saw 18% of their net worth, or $11.2T, vaporized in 2008, wiping out four years of gains according to the Fed's quarterly Z.1 release. By year-end, households owned $9.9T in equities, less than the $11.3T they owned in 1998.
• Retail sales dip. February retail sales -0.1% vs. -0.5% consensus. They're still -8.6% from a year ago. January revised to +1.8% from +1.0%. Gasoline sales -32.3% from last year. Motor vehicle and parts dealers sales -23.5% from last year.
• More joblessness. Initial jobless claims rose to 654K from last week's 645K (revised), more than the 645K consensus. Continuing claims rose 124K to a record high of 5,139,750.
• Inventories drop. Business inventories fell 1.1% in January (vs. -1.0% consensus) and are down 1.5% Y/Y, the Census Bureau reported. Combined sales fell 1.0% to $1.004T, and are down 14.0% Y/Y.

Earnings: Thursday After Close

• Aeropostale (ARO): Q4 EPS of $ beats by $0.01. Revenue of $690M (+16.7%) vs. $682M. Same-store sales were up 6%. Sees Q1 EPS of $0.22-0.24 vs. $0.25. (PR)
• Pacific Sunwear of California (PSUN): Q4 EPS of -$0.47 beats by $0.03. Revenue of $352M (-8.5%) vs. $345M. (PR)

Today's Markets

• Asian stocks rode into the weekend on a high, led by Japan - a beneficiary of recent weakness in the yen. Nikkei +5.15% to 7,569. Hang Seng +4.37% to 12,526. Shanghai -0.24% to 2,129. BSE +4.95% to 8,757.
• Europe shares are higher at midday, buoyed by Asia strength and after word from Citigroup (C) that it doesn't need any more government money. London +2.2%. Paris +2.4%. Frankfurt +1.7%.
• Stock futures moved higher in the overnight session, sparking further speculation as to the validity of this week's rally. Dow +0.9% to 7,235. S&P +1.1% to 756. Nasdaq +0.9%.

Friday's Economic Calendar

• 8:30 International Trade
  8:30 Import/Export Prices
  9:55 University of Michigan Consumer Sentiment
• Notable earnings on Friday: none.

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[mc2406:]

Cuomo and Frank want pay for performance from Wall street exexcutives? What arrogance- how about pay for performance for our elected representatives and senators? And I don't mean pay from the lobbyists.

Mar 13 08:33 AM

[Mafeking:]

Perhaps the funniest moment of the whole financial debacle so far was Barney Frank's demand that those responsible for the mess should be charged and jailed.

Mar 13 08:51 AM

[notsosmart:]

congrats dumb-dumb taxpayers.you have just added made-off to your bailout support system.it costs about $70,000-80,000 to house him in jail.since its all ponzi(wall st ) these things should not be illegal.those greedy enough to fall for ponzi should not look for the gov. to protect them.the sec will never be ahead of this curve.do your own thing with your money.

Mar 13 09:01 AM

[daffy:]

I am curious as to who believes Lewis and Pandit?

Mar 13 09:12 AM

[axelrod608:]

Obama's carbon tax program - a cap and trade boondoggle - is yet another typical government program. It will provide thousands of nonproductive jobs for another bunch of beancounters, this time keeping track of carbon units, and establish yet another meaningless nonproductive "market" for carbon units. It is like designing another bloated bureacracy using the IRS and federal tax law as a model.

Hey !! Just levy a tax - in dollars - adding few or no additional personnel to the rolls of nonproductive workers if you want to reduce fossil fuel use. The greater the expense, the more businesses will find ways to minimize its use.

If a cap is desired, just graduate the tax higher on wasteful companies. (Of course that will drive them out of the US, but that's another topic completely.)

We do not need another bloated, nonproductive bureaucracy of beancounters.

Mar 13 09:43 AM

[C.Wayne Borum:]

Beware of false Profits
Two month profit? Doubt it. B of A over the last three months has cancelled thousands of "lines of credit" that were backed by home ownership, regardless of performance by those to whom they were extended. This instantly takes these from on side of the balance sheet to the other. What was once a potential assest drain now becomes a note froze and payable. Profit? or mere manipulation?

Mar 13 09:55 AM

[bobbobwhite:]

Since 1978 until recent retirement I worked in a job that tied pay to performance. At first, it was tough until I finally knew what I was doing. I almost quit many times until I finally got it, but am very glad I stuck it out as it was a great motivator for best performance.

I truly believe this is the best and fairest way to pay anyone, and any other way that pays someone big money for poor or even negative results is wrong for the system, the person, and all the people that person works with and for.

Everyone should be paid this way, even in gov't. That would be authentic capitalism, not the failed version we have in much of the American workplace today.

Mar 13 10:02 AM

[BlueOkie:]

Pay is not a motivator it is a dissatisfier. Pay for performance sounds nice until you establish the scale. Too easy or too hard in the eyes of the payor or payee.

Mar 13 10:32 AM

[joes:]

The ratio of highest to lowest paid in an organization is a logical way to evaluate company culture and appears to be a leading indicator of manipulation.

I think they should be able to pay what the BOD approves, with each member's vote being known and the pay ratio compared with peer for investor evaluation.

Mar 13 10:47 AM

[Ferdinand E...:]

Good comment Axelrod608, but you left out one thing. The largest part of the revenue from that tax should find its way back to many members of the group that paid it, and used to increase the productive efficiency of that group.

Mar 13 10:48 AM

[dave mckay:]

The carbon tax is a joke. Global warming stopped ten years ago. Fact is that 1998 was the warmest of the last 10. And besides, what's the big deal, the earth has only increased 1 degree F in the 20th century! Some global warming! It's just a left-wing wealth redistribution scheme.

Mar 13 11:21 AM

[daffy:]

axelrod,

let us just hope that we see a continued rally so this spring when when cap and trade comes into the spotlight, they won't be able to push a stimulus 2 (as an actual rebate)at the same time to give an illusion that the bottom 95% will get a rebate from the Cap and Trade program. That is surely how they will drum support and leave the two completely separate. I totally agree with you, but we have to ever cognizant of the reality of our government. Cards are so far up the sleeves it is like they have a full deck hidden, and claiming just one deck being played with.

Also, be very wary of what is coming out of Copenhagen this week at the Climate Conference. Cap and Trade may work on a very small scale, but I get the feeling this global in scope. There is a lot of hand waving going on, and whenever I ask on of these "Climate experts" to show a viable forward and reverse model that doesn't explode, the can't. My education was in geophysics, and these experts claim that they need geophysicists to work on the problem, but very few geophysicists agree with them as far as I can tell.

Just watch it very carefully, and expect extremely underhanded tricks. This is apolitical movement and it has nothing to do with anything but selling a product that has no value.

Mar 13 11:22 AM

[bbowen7:]

While Axelrod is right about the cap and trade bureaucracy, that is the smallest part of the problem. There will be an $80 billion annual cost to utilities and manufacturers, with much of the proceeds redistributed to the non-productive sectors of society. How's that for an economic stimulus. And, - surprise, surprise - the greatest impact will be in the states that are coal-based, and happen to vote Red.

Mar 13 01:47 PM

[LJR:]

They have pay incentives in our banks here in the South Pacific, and from what I have seen, such performance incentives lead to a degree of ruthlessness. The employees will do anything to achieve a higher bonus or pay. The question becomes "how do you judge performance". If 'performance" = profitability" then there is a problem, such having to do with why we had the various investment bubbles lately.

The big issue has always been serviceor product quality versus bottom line. Too much of the latter leads to abuse.

Mar 13 02:04 PM

[Joseph Sherman:]

Bye bye Bernie - A scandal starts as something small - a tiny cover up, fudge in the paperwork or misrepresentation. After time it grows. What is the impact on the tribe? In this case, it kills them. Honesty is right, and it pays.

Mar 13 02:52 PM

[AndrewBaker:]

Well, Madoff in jail just when we need someone creative to make us all think it's better than it is. He could convince us that GE and Berkshire Hathaway are only downgraded because they've put their profits into B of A's accounts to make them look good, so maybe Citigroup will poach their directors off them for their new board, with the appropriate performance pay enticement too, of course. Obama will like that as he's going to be good to businesses now so that China won't be so worried about the money they've poured into the US to make up for our loss of wealth which is stopping us spending which is causing excessive job losses.

For all that, we've had a near-four-day stock-market rally in spite of it all: which lunatics are in charge of what asylum?

Mar 13 02:58 PM

[bthomas:]

The bankers must be reined in. We should start with rational regulation where responsible adults can trust the veracity of what comprises AAA rated securities. Those irresponsible parties must be held accountable. Conflict of interest is pervasive on all sides, from government to regulator to business . This seems to escape everyone's attention. It's all public money now folks, the public trust must be upheld. We are ten years hence from repealing Glass Steagall. Everything is in shambles now because greed overrode every other aspect of life. The Fed has too much power. congress should work to rein this in. Glass Steagall, or whatever replaces it, must be enacted to require people to do what greedy people cannot do for themselves: -the right thing. Split them up. Preserve the public trust.

Mar 13 08:55 PM

[Novice6:]

Thank you Daffy. You're dead on.


On Mar 13 09:12 AM daffy wrote:

> I am curious as to who believes Lewis and Pandit?
>

Mar 15 07:17 AM