Finance and Economic

The government will wind down its largest and most complex rescue from the 2008 financial crisis, a $182 billion package to save insurer AIG, by selling stock over the next two years. The plan could net taxpayers billions in profits.

American International Group Inc. paid its $21 billion outstanding balance to the New York branch of the Federal Reserve on Friday and converted preferred stock owned by the Treasury Department into more than 1.6 billion shares of common stock that can be sold on the open market.

The common stock gives the government a 92 percent ownership stake. The Treasury Department is expected to start selling its shares in March.

Converting the government’s $47.5 billion investment in preferred shares into 1.6 billion common shares means the government paid about $30 for each share. AIG stock closed at $54 on Friday on the New York Stock Exchange. If it holds that value over the next two years, as the government unloads its shares, taxpayers would clear about $40 billion profit.

“We will work to make sure that the U.S. taxpayer will get back all of its money with a healthy profit,” AIG CEO Robert Benmosche told The Associated Press in an interview.

Treasury Secretary Timothy Geithner said in a statement that the government “remains optimistic that taxpayers will get back every dollar of their investment in AIG.”

The government came to the rescue of AIG in September 2008, at the depths of the financial meltdown. It did business with hundreds of firms around the world, and officials feared its collapse would wreck the financial system.

AIG became a symbol for excessive risk on Wall Street and a touchstone of public anger. It was criticized by some members of Congress for spending $440,000 on spa treatments for executives only days after it was bailed out.

The bailout, which included loans and federal guarantees, was the largest of a series of rescues announced during the stomach-churning weeks of the financial crisis in the fall of 2008.

Much of the $700 billion fund set up by the government to help wobbling banks, plus AIG, General Motors and Chrysler, was never disbursed. About $385 billion in cash had been handed out as of Sept. 30, according to the Government Accountability Office.

Almost $204 billion has been paid back to the government, and the fund has made $28 billion more on interest, dividends and profits on investments in companies like Citigroup. About $180 billion is outstanding, most of it with pieces of AIG, auto companies and small banks.

The Congressional Budget Office estimated in November, the fund, the Troubled Asset Relief Program, will wind up costing taxpayers $25 billion.

The government sold the last of its stake in Citigroup in December payday loans no teletrack. The transaction was smaller, but similar in structure, to the unwinding of the federal stake in AIG: The government converted its investment into common stock and sold it publicly. The government owns about a third of the common stock of GM and is paring that down gradually as well.

Most of the large banks have repaid their bailout amounts in full.

AIG first announced its repayment plan in September. Since then, the company has worked to raise cash to pay back the government by selling parts of itself around the world.

On Thursday, it agreed to sell its 98 percent stake in Taiwan’s third-largest insurance company. Before that, it took Asia’s AIA Group life insurance company public, raising $20 billion. It raised $16 billion by selling American Life Insurance Co. to MetLife.

The pace at which AIG moved toward ending its government involvement surprised Kevin Ahern, a credit analyst at Standard & Poor’s, who raised the insurer’s rating from junk status to a more respectable BBB+ last month.

Ahern said that while AIG may have given up some of its jewels to raise cash, it has offered the government “a simpler path to exit its stake.”

The bailout of AIG had been expected to result in massive losses, but the Treasury Department now believes it will book a multibillion dollar profit. AIG stock has nearly doubled over the last year as the company sold off assets and trimmed its business.

The AIG rescue was complex. The government still has $20 billion tied up in shares of MetLife and AIA. And the Federal Reserve still holds many of the $50 billion worth of complex derivatives that it took off AIG’s books.

How much the government makes or loses on those other parts of the AIG rescue will determine whether it comes out in the black on the overall bailout of the insurer.

AIG itself is today a much smaller and less flashy company than it once was. It was undone by its financial products division, which bought and provided insurance on risky investments that got other financial companies in trouble.

The financial products division held $2 trillion in assets in September 2008. It had little more than $500 billion at the end of September 2010.

Today, the company is mostly a global property and casualty insurer and a U.S. life insurance business. And it still has work to do to rebuild its reputation.

“Both of the core businesses are less profitable now than they were before the crisis,” said Bruce Ballentine, lead analyst for AIG at Moody’s, the corporate ratings company.

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Democratic state lawmakers in Illinois are scrambling to pass massive personal and corporate income tax hikes Tuesday to bring their state budget back from the fiscal abyss.

Timing is critical because it will be much harder to raise taxes after Republicans take over more seats on Wednesday. The state GOP is firmly opposed to hiking taxes, preferring instead to cut spending. (Update: Tax hikes approved)

While the proposal is still in flux, it contains a mix of tax increases and new borrowing, with a nod to keeping spending under control. Democrats are trying to garner more support for the measure by scaling back the tax spike to 66%, down from an initial proposal of 75%.

Among the measures on the table are:

Temporarily raising the personal income tax rate to 5%, from 3%.Temporarily hiking corporate income taxes to 7%, from 4.8%.Increasing the tobacco tax to $1.99 per pack, from 98 cents.Imposing a moratorium on new programs with spending growth capped at 2% per year, with the exception of increased school aid of more than $700 million.Borrowing $8.5 billion to clear the current stack of unpaid bills.Borrowing $3.7 billion for the fiscal 2011 pension payment.

Deficits and unpaid bills

Illinois is not alone in its budget problems. States are facing a collective $41 billion budget gap, according to a recent survey. California’s new governor, Jerry Brown, just unveiled a budget proposal that will slash funding for social services, universities and aid to the needy.

But the Illinois budget crisis, which has been decades in the making, is arguably among the worst in the nation. The state’s income tax rates have not risen since 1989.

The state is facing a $13 billion shortfall that must be resolved by the end of the fiscal year on June 30. Illinois has $6 billion in unpaid bills to social service agencies, healthcare providers, contractors and others. And its state pension plan is severely underfunded.

"This is unprecedented," said Richard Dye, professor at the Institute of Government and Public Affairs at the University of Illinois. In a recent report he co-authored, he wrote it is hard to overstate the depth of the fiscal hole the state is in.

If the legislature doesn’t act by Wednesday, Gov. Pat Quinn will have tougher decisions to make when he introduces his Fiscal 2012 budget in mid-February. He may have to suggest deep spending cuts, which he has been loath to do.

And he may find it harder to turn to the bond markets since investors are growing increasingly skittish. Illinois relies on borrowing more than most states because it is allowed to use debt to fill budget shortfalls.

Republicans, meanwhile, are firmly opposed to raising taxes, saying it will hurt businesses and discourage new ones from moving to Illinois.

"While Illinois’ budget problems are grave, the answers lie in first attacking the excessive spending and enacting structural reforms that are needed before any new revenues are even considered," the Illinois Republican Party said in a statement. "We cannot let the Democrats drive business out of Illinois and all of the jobs that go with it."

The governor has promised to deal with the state’s financial problems very soon.

"We will pay our bills," he said in his inaugural address Monday. "We will stabilize our budget."

Even if Democratic lawmakers manage to pass the tax hikes, it won’t be enough to fully close the budget gap, Dye said. His analysis, which was based on the initial tax hike proposal of 75%, showed the state would still have to battle deficits in the coming fiscal year.

"It only solves half the problem," he said. 

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SAN DIEGO

NEW YORK, N.Y.

China’s plans to attack inflation with subsidies, sales of food reserves and the threat of price controls are likely to prove insufficient, and the central bank will have to raise interest rates further, economists said.

Analysts at nine banks surveyed this week by Bloomberg News predict the People’s Bank of China will add to last month’s rate rise, the first since 2007, by the end of December. Concern that rising consumer prices, which surged the most in two years in October, will undermine the economy spurred Premier Wen Jiabao to hold a cabinet meeting on the issue this week.

The measures contemplated by the State Council, ranging from a crackdown on speculation in agriculture goods to the imposition of price caps on “daily necessities” if needed, do nothing to address China’s credit growth. China’s benchmark stock index has had its biggest two-week sell-off since May amid concern that monetary tightening will hamper spending in the world’s fastest-growing major economy.

“Price intervention could be counter-productive because it may cause panic and worsen inflation expectations,” said Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd. who previously worked at the Hong Kong Monetary Authority and World Bank. The steps announced this week “may not be sufficient to bring down inflation quickly.”

The Shanghai Composite Index closed 0.8 percent higher today, after swinging between gains and losses at least 10 times, paring this week’s decline to 3.2 percent. The benchmark fell 4.6 percent last week.

Rate Forecasts

Standard Chartered Plc, HSBC Holdings Plc, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Mizuho Securities Asia Ltd., Royal Bank of Canada, UBS AG, and ANZ predict the central bank will add to the quarter-point increases that took the benchmark one-year lending rate to 5.56 percent and the one-year deposit rate to 2.5 percent.

“Every Friday there is always a chance that China is going to do something,” Qu Hongbin, co-head of Asian economic research at HSBC in Hong Kong, told Bloomberg Television, indicating a PBOC announcement can’t be ruled out for today. At the same time, given this month’s increase in banks’ reserve requirement ratios and the steps taken this week, a boost to borrowing costs is more likely next month, he said.

The so-called supply-side measures may help damp price pressures, along with a slowing pace of economic growth, Qu said.

Threat to Poor

China’s inflation rate reached 4.4 percent in October, exceeding economists’ forecasts. Standard Chartered analysts yesterday lifted their projection for the consumer price index for next year to an average of 5.5 percent, from about 3.2 percent for 2010.

The State Council’s meeting came amid rising concern at the threat that increased food costs pose to the poorest people in the world’s most populous nation. More than 81 million people in China will need food rations to survive the winter and spring after natural disasters, the official Xinhua News Agency reported, citing the Ministry of Civil Affairs.

“Inflation is showing up in food most obviously, but also in rents, service sector wages, and non-food commodities,” analysts including Stephen Green, head of research for Greater China at Standard Chartered, wrote in a report today. The bank anticipates a rate increase by Dec. 31 and three more by June 30.

Inflows of money from the trade surplus, foreign direct investment, and investors betting on gains by the yuan threaten to propel consumer prices after unprecedented lending by banks flooded the economy with cash from late 2008.

‘Root’ of Problem

Across Asia, China’s inflation compares with deflation in Japan and, at the other extreme, a 9.8 percent rate in India. In the U.S., consumer prices rose 1.2 percent last month from a year earlier. China’s inflation has mostly been driven by food costs.

Excess liquidity is the “root of the problem,” Tao Dong, a Credit Suisse Group AG economist in Hong Kong said this week.

At Societe Generale, Hong Kong-based economist Yao Wei said that China’s “old-fashioned price stabilization policies” will not be enough to reduce the case for monetary tightening. The possibility of “more interest-rate hikes by the year-end remains relatively high,” she said.

The central bank has raised lenders’ reserve requirements to drain cash from the financial system four times this year and last month raised rates for the first time since 2007.

–Li Yanping, Sophie Leung. With assistance from Susan Li in Hong Kong. Editors: Paul Panckhurst, Chris Anstey

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

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KFC Corp., which in the past has painted its logo on fire extinguishers and city streets as a means of grassroots marketing, is promoting its bunless chicken sandwich on the buns of college coeds.

KFC is paying women at various college campuses across the United States to wear red sweatpants with the KFC Double Down logo and the iconic Colonel Sanders portrait logo.

The chicken restaurant chain said it will select certain women to serve as “human billboards” and pay them with $500 stipends and KFC gift checks.

Women interested in participating in the promotion can contact KFC through the chain’s Facebook page, www.facebook.com/kfc, according to a news release.

John Cywinski, chief marketing and food innovation officer for KFC, said in the release that the promotion is aimed at attracting KFC’s key target: young men.

Louisville-based KFC is a division of Yum! Brands Inc. (NYSE: YUM), which also is the parent company of Taco Bell, Pizza Hut, Long John Silver’s and A&W Restaurants.

There are more than 15,000 KFC outlets in 109 countries and territories. It is estimated that the stores serve about 12 million customers per day.

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Three people have been charged in connection with the theft of nearly $250,000 from the Colorado Housing and Finance Authority, Denver District Attorney Mitch Morrissey said Friday.

The three were identified as Melissa Leeann DeHerrera, 32, a former CHFA employee; Zarak Tyron Shepard, 45; and Scheherazade Donya Yvette Marshall, 33.

Each were charged with theft, forgery, computer crime, conspiracy to commit theft, conspiracy to commit forgery and conspiracy to commit computer crime, Morrissey said.

The charges allege that in March and April, DeHerrera used CHFA’s computer system to steal nearly $250,000 from the agency, conspiring with Shepard and Marshall in the theft low interest rate personal loans.

Shepard and Marshall were arrested Thursday, and an arrest warrant has been issued for DeHerrera, Morrissey said. Bond has been set at $100,000 for each person.

CHFA works to provide financing to homebuyers, small and medium-sized businesses, and apartment developers.

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The majority of people in a new poll say the Hewlett-Packard Co. board was right to force CEO Mark Hurd to resign over an ethics scandal.

Of the respondents, 55 percent said HP (NYSE: HPQ) did the right thing in forcing Hurd to resign, while 33 percent said he should not have been forced out. The remainder were undecided.

Hurd spent 25 years in Dayton with NCR Corp. (NYSE: NCR) before leaving to join HP in 2005. While at NCR, he also headed up the data warehouse division that was spun off into Miami Township-based Teradata Corp. (NYSE: TDC).

One person who voted in the survey said, "CEO's today, as never before, must demonstrate through their behavior exemplary values; integrity, responsibility and accountability to name a few."

Another person took the opposite view, saying "The HP board needs to be replaced. They failed on Fiorino, they failed on Dunn, the other board member who resigned, and now we are led to believe they failed on Hurd. No one knows exactly what Hurd did anyway. And the company lost $8 billion in value on the stock drop?"

In further breaking down the results, 47 percent said they agreed with what HP did because CEO's should be held to the same standard as other employees. However, 28 percent said he should only have been reprimanded.

"I don't think we have the whole story. It is possible the Board wanted him out and this was a objective means to achieve their goal," said another person who commented on the poll.

The BizPulse Survey ran Aug. 11 to Aug. 14 on the Dayton Business Journal Web site and had 186 responses. While not a scientific poll, it reveals the attitude of the business community in the days following the announcement of Hurd's departure.

For more on this story, including Hurd's full connections to Dayton through the years, click the following DBJ stories in our continuing coverage:

Mark Hurd - Rise and fall of a CEO

Report: Mark Hurd agrees to pay settlement

Hewlett-Packard stock plummets on CEO scandal

HP CEO Hurd to get $12M severance payout

Full text of Mark Hurd's separation agreement with HP

HP CEO Mark Hurd resigns amid sexual harassment scandal

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The Denver area has made “discernible progress” in recovering from the recession, with two straight quarters of economic growth, “but that growth has yet to be translated into jobs,” says Mark Muro, co-author of the latest quarterly “Mountain Monitor” report on the Intermountain West’s economy from the Brookings Institution and the University of Nevada at Las Vegas.

Denver was the only metro area in the region where the unemployment rate at the end of the year’s first quarter wasn’t higher than a year earlier, the report notes.

But overall, the study says the cities of Colorado and neighboring mountain states are “at once recovering and still struggling.”

“For the first time in three decades, the region finds itself unable to lead the nation out of a recession and [is] forced into a period of serious questioning about the sources of future growth with further federal stimulus unlikely,” the study says. “In these new, uncharted territories, certain corners of the Mountain West face the prospect of being left behind the rest of the country and virtually all of the region’s metropolitan areas have to re-evaluate the basics of the Western growth model.”

The quarterly Mountain Monitor analyzes data on jobs, output, home prices and foreclosure rates for the Intermountain West’s metro areas. The most recent report covers the first quarter.

Among the report’s key negative findings for the region:

• “The 10 largest Intermountain West metropolitan areas made little progress towards recovery between the last quarter of 2009 and the first quarter of 2010 as steeper-than-before employment declines weighed on the region low fee payday loans.”

• “Despite growing [output] by 1.1 percent this quarter, the Intermountain West’s large metros suffered a further employment setback of 0.6 percent” from the previous quarter.

• “Employment recovery eludes the entire region, and not a single metro [in the mountain states] made progress between the fourth quarter of 2009 and the first quarter of 2010 in recouping jobs lost to the recession.”

• “Home prices … remain depressed [in the region]. This quarter’s annualized price depreciations were steeper than last’s in every metro.”

“Reversing earlier gains, … the region’s overhang of real estate-owned properties — foreclosed properties that failed to sell at auction and are now owned by lenders — increased during the first quarter of 2010 and remains extremely high.”

On the other hand, the report says that “all but two of the region’s metros — Albuquerque and Las Vegas — grew [in terms of “gross metropolitan product”] at a faster clip than did the nation or large metros on average. Relatively high growth rates in Denver, Ogden [Utah], Phoenix, and Tucson [Ariz.] place these metros into the top performance [20 percent] nationally.”

The report covers Colorado as well as Arizona, Idaho, Nevada, New Mexico, Utah and Wyoming.

Click here for the full report.

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One would think that the merger of United and Continental airlines, a marriage that would create the world’s largest carrier, would be enough to rouse shareholders knocked unconscious by years of losses. But while the companies’ shares both gained more than 2% following Monday’s announcement, the news still held all the excitement and economic potential of a two-family garage sale.

That’s not to say that the airlines, and the industry overall, aren’t in desperate need of consolidation should they ever hope to earn a consistent profit. It’s just that the joining of two companies with rickety balance sheets, below-investment-grade bond ratings and a dubious history of making money is hardly the type of event that gets the investment world leaping from its Herman Miller chairs.

"It’s not the kind of behemoth that it would have looked like 20 years ago," says Robert Poole, director of transportation policy at the non-partisan Reason Foundation. "Airlines are kind of has-beens."

That fact can be best told in the numbers: The combined airline’s estimated post-merger market capitalization of $8 billion is 3% of Apple Computer’s, based on Monday’s close. Airlines as a whole lost $50 billion in the last decade. In this industry, mergers are more like a wounded man trading in one crutch for a pair: It’ll be easier for him to get around, but he’ll be no less hobbled.

Where’s Justice?

Not surprisingly, given the industry’s troubles, it’s hard to imagine that even a more labor- and consumer-friendly Justice Department — as opposed to the Bush-appointed crew that approved the Delta-Northwest merger in 2008 — will put up much resistance to the United-Continental deal.

And that’s not just because of the relative dearth of route overlap between the two airlines — a grand total of seven routes in the third quarter of 2009, according to data provided by Oliver Wyman’s planestats.com. The difficulty in shrinking capacity within the current industry structure argues heavily in favor of further concentration.

Industrywide capacity shrunk 8% from 2007 to 2009, but it was too little to offset cratering demand caused by the recession. Even with planes being parked in the desert, average airfares dropped approximately 8% during the same period, according to the BTS. "There in no pricing power. None," said industry analyst Vaughn Cordle of Washington, D.C.-based Airline Forecasts.

A marriage of convenience

So shouldn’t this mega-merger be the kind of jolt that finally gives airlines the ability to raises prices (instead of just adding on ridiculous fees) and get out of the jam? It’s one thing to take out a few seats; it’s another to be able to rid yourself of planes en masse.

Well, not exactly. For one, airline mergers are notoriously tricky. The pilots of US Airways and America West, who merged in 2005, are still fighting over who has seniority.

And even a united United-Continental won’t have that much sway. A decade ago, the major carriers controlled 80% of the market; by the end of this year it will be closer to 50% and Cordle sees it soon heading to 40%. Consolidation isn’t about increasing power, it’s about staying alive.

Cordle’s firm estimates that without the merger, the five current legacy carriers — Delta-Northwest, American, United, Continental and US Airways — face $20 billion in additional costs by 2014 from rising fuel prices, airport facility charges and security and labor hikes. The United-Continental merger should allow those airlines alone to save $3 billion in such costs, he said.

Even one of the industry’s low-cost competitors welcomes the merger. Virginia Gambale, a director at JetBlue, said the company is pleased with the deal, noting that the industry’s fragile state and mercurial fortunes make it difficult to engage in long-term planning. "As we deal with less players in the market, it makes it easier to decide where and how we will compete," she said. "Uncertainty breeds its own inefficiency." 

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