Business this week

Oct 23rd 2008
From The Economist print edition

America’s Federal Reserve took further measures to boost liquidity by unveiling a plan to provide up to $540 billion to support money-market mutual funds. The funds, which are usually low-risk investments in short-term debt, have been troubled since the collapse of Lehman Brothers, which caused Reserve Primary to lose money for its investors, the first time such a fund had done so for 14 years. Around $500 billion has since been withdrawn from the market, which invests in commercial paper, certificates of deposit and other financial instruments. The Fed’s facility creates five “special-purpose vehicles” that will buy instruments held by the funds.

Wachovia reported a $23.7 billion quarterly loss, the biggest ever for an American bank. The company wrote down $18.7 billion in goodwill, partly because of declining asset values. The takeover of Wachovia by Wells Fargo is proceeding as planned.



Seeking public support
European banks began tapping the rescue funds offered recently by their governments. BayernLB sought €5.4 billion ($7.2 billion) in aid, the first German bank to do so, and France provided €10.5 billion to six banks, with half the total going to Crédit Agricole and BNP Paribas. Meanwhile Sweden detailed a broad bail-out programme for its banking sector, which could involve up to SKr1.5 trillion ($200 billion).

ING received a €10 billion ($13 billion) lifeline. ING’s retail-deposit base was thought to be large enough to prevent it from having to recapitalise, but its share price sank after it said it expected to make its first-ever quarterly loss, forcing it to turn to the Dutch government.

There were signs that the concerted effort by central banks to improve liquidity was thawing the money markets, and that banks were beginning to lend to each other again. Interbank loan rates continued to fall, in some cases to the levels they were at in mid-September. See article

The pound dropped to a five-year low against the dollar, $1.63, when Mervyn King, the governor of the Bank of England, issued his most downbeat assessment yet of the British economy, asserting that it was now “entering a recession”. The euro fell to a two-year low against the dollar on speculation that the European Central Bank would cut interest rates further.

No safe harbour

Stockmarkets endured another rocky week. However, investors in emerging markets were unnerved by the unfolding pensions situation in Argentina (which hurt share prices throughout Latin America), the news that borrowing costs for developing countries were at a five-year high, and economic woes in Hungary, South Korea and Ukraine. See article

China’s GDP growth rate slowed to 9% in the third quarter, year-on-year, its lowest for five years. See article

The share price of CITIC Pacific, part of China’s largest state-owned investment group, plunged by 55% after it said it could lose up to $2 billion after betting that the Australian dollar would strengthen. The currency has fallen by 15% this month against the American dollar, which has grown robust since the start of the financial crisis. CITIC’s revelation comes soon after Caisse d’Epargne, a French bank, said a “trading mistake” had cost it €600m ($808m).

Exiting Detroit
Kirk Kerkorian decided to start cutting his loses at Ford. In April the investor revealed that he had built up a stake in the carmaker—reaching 6.4%—which was taken as affirmation that Ford’s turnaround strategy was working. Since then, its share price has tumbled. Mr Kerkorian is now offloading his stock, and he could stand to lose $700m. See article

Exelon, one of America’s largest electricity companies, launched a $6.2 billion unsolicited offer for NRG Energy, which operates power plants in southern California, Texas and the north-east. The financial turmoil has caused the share prices of some debt-burdened energy companies to tumble, and analysts expect more consolidation in the industry. Exelon said its deal would create the largest power company in the United States.

Samsung Electronics withdrew its $5.9 billion offer to buy SanDisk, citing the shrinking earnings potential at the Californian company, which produces flash-memory technology used in digital cameras, music players and the like.

Yahoo! said it would cut 10% of its workforce by the end of the year amid a weakening market for online advertising. See article

Apple cheered investors when it said quarterly net profit was up by 26% compared with a year ago on the back of strong iPhone sales—it shifted almost 6.9m in the quarter. However, the company issued a cautious outlook for the rest of the year.
In The Economist