Finance and Economic

Pressure continues to mount on President Obama to select Elizabeth Warren as the nation’s first consumer financial protection regulator.

Warren, 61, has become something of a cause célèbre as the administration’s top pick to run the new agency charged with protecting consumers from abusive mortgage and credit card practices.

There’s even a Hollywood-produced Elizabeth Warren rap video circulating online called "Got a New Sheriff," featuring a rapping cowboy singing the Harvard professor’s praises.

Last week, 43 House Democrats sent a letter to President Obama, asking him to nominate Warren and requesting a meeting at the White House to discuss Warren’s appointment.

"You have an opportunity to appoint to head this body a true visionary — not the usual Washington careerist. You have an opportunity to appoint to this body the single best-qualified choice," said the letter, signed by Rep. Barney Frank, D-Mass., and Rep. Carolyn Maloney, D-N.Y., among others.

Last week, Warren sat down with the head of a large and influential banking lobbying group, the Financial Services Roundtable. The group declined to comment on the meeting.

Warren, who has repeatedly declined interview requests on this topic, has also been meeting with various key administration players, including a meeting with senior White House advisers on Aug. 12th.

The public groundswell for Warren puts the White House in a tough spot. It’s not clear when President Obama will make his decision, but an announcement is isn’t expected this week.

"The administration is hesitating because they’re faced with the traditional problem that Obama has faced," said Julian Zelizer, a professor of history and public affairs at Princeton University.

If the White House passes Warren over, Zelizer says, they disappoint liberals whose support has been key throughout the administration business card templates. If Warren gets the nod, the White House must deal with "political difficulties on Capitol Hill where centrists have quite a lot of power and Republicans are becoming quite obstinate," Zelizer said.

Warren teaches contract and bankruptcy law as a Harvard University professor and she’s also written a number of personal finance books. More publicly, she chairs a congressional oversight panel that has garnered attention for its critical reviews of government spending to bail out Wall Street banks under the Troubled Asset Relief Program.

Treasury is in the planning stages of creating the consumer financial protection bureau, which will be housed inside the Federal Reserve, thanks to the new law cracking down on Wall Street banks.

Warren is not the only candidate under consideration to run the bureau. But she is the most polarizing. Senate banking chief, Seen. Chris Dodd, D-Conan., has warned her nomination would cause a protracted and lengthy battle in the Senate, adding he isn’t sure she could secure a Senate confirmation.

Banking groups and conservatives paint her as too liberal for a regulator job. They say an aggressive regulator would undermine bank safety by crafting rules that force banks to make risky loans. They’ve also accused her of lacking the chops to be a regulator.

Supporters say the consumer regulator job was written for her. Warren came up with the idea for the consumer financial protection agency and has spent her career championing consumers duped by "tricks and traps" of the financial industry, she often says.

Other candidates rumored to be in contention for the job are Michael Barr, Assistant Treasury Secretary for Financial Institutions, as well as Deputy Assistant Attorney General Gene Kimmelman. 

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Attorney Diana Carey was appointed Thursday to act as trustee in the involuntary Chapter 11 personal bankruptcy of Mercer Island entrepreneur Frederick Darren Berg, according to court documents.

As trustee, Carey will be monitoring the operation of Berg’s companies and his personal assets.

Such appointments are not unusual, according to Mark Calvert, trustee in the separate Chapter 11 bankruptcy of a group of seven Meridian Mortgage Investors Funds operated by Berg guaranteed payday loans. Both cases were filed in the U.S. Bankruptcy Court for the Western District of Washington in Seattle.

“It gives people comfort when a trustee is involved that the value of the assets will be maximized for the benefit of the creditors,” Calvert said.

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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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Ann Moore, the chief executive of Time Inc. — the world’s largest magazine publisher — is stepping down from the company to be replaced by Jack Griffin, a group president of Meredith Corp., according to published reports.

The New York Times, Wall Street Journal and New York Post all reported the CEO shakeup Wednesday evening, citing unnamed executives at the companies.

A Time Warner (TWX, Fortune 500) subsidiary, Time Inc. publishes about 115 magazines worldwide including Time and Sports Illustrated and accounts for almost a quarter of total advertising revenues of U.S. consumer magazines. Measured by circulation, it’s the world’s largest magazine company, followed by Meredith, which is based in Des Moines, Iowa.

A Time Warner spokesman could not be immediately reached for comment. CNNMoney is a joint venture of CNN and Time Inc.

A 32-year veteran of Time Inc., Moore was appointed CEO in 2002. She has presided during a time when magazines suffered an unprecedented decline in advertising revenue due to competition from online media and the recession.

In recent years, Time Inc. has made major staff cuts and shed some of its magazine titles.

Griffin ran Meredith’s magazine brands — including Better Homes and Gardens, Parents and Family Circle — as well as its Internet and digital properties.

Meredith announced his departure from the company on Monday, saying he had left "to pursue another opportunity."

Griffin would inherit Moore’s role just as Time Inc. reported a 50% surge in its quarterly operating profit Wednesday.

That surge was primarily due to substantial cost-cutting measures, including a restructuring of the company’s pension expenses.

Time Inc.’s quarterly revenue remained virtually unchanged. Advertising sales were up 4%, but other revenue failed to grow primarily due to flat subscription growth and an ongoing impact from the sale of Southern Living at Home last fall, the company said.

Nearly all of Moore’s career has played out at Time Inc., where she worked her way up the corporate ladder. She started as an analyst shortly after earning her Harvard M.B.A. in 1978 and later became publisher and then president of People. 

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First Franklin Corp. slid to loss of $558,000, or a loss of 33 cents per share, in the second quarter of 2010.

In the same quarter a year ago, the Cincinnati-based bank recorded net income of $7,000, or 1 cent per share.

In a statement, CEO Jack Kuntz attributed the lower performance during the quarter to lingering effects of the recession. But he also noted a number of higher expenses and one-time charges, including a loan loss reserve increase of $260,000; an increase in compensation of $224,000; $175,000 in costs related to the company’s proxy fight with Lenox Wealth Management; and a $300,000 external fraud loss.

“Although the economic upheaval combined with other expense burdens has impacted our financial performance, I remain optimistic and encouraged by our core business metrics,” he said in a news release.

First Franklin’s net interest income increased to $1.7 million from $1.5 million in last year’s second quarter, he said.

First Franklin is the parent of Franklin Savings, which has seven banking offices around Hamilton County and is the 18th-largest bank in Greater Cincinnati.

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The amount of foreclosures initiated by lenders in Massachusetts in June has dipped from June of last year according to a new report from The Warren Group.

June marks the second straight month that petitions to foreclose have gone down year over year, per the Warren Group. State lenders filed 2,220 petitions for foreclose — the first step in the foreclosure process — a 21.7 percent drop from 2,835 last June.

June’s foreclosure petitions were up 5.2 percent from the 2,110 filed in May.

A total of 13,338 foreclosure petitions have been filed so far this year statewide, down 3.4 percent from 13,813 during the same period last year.

“The foreclosure picture in Massachusetts hasn’t really improved that much. The level of foreclosure starts for the first half of the year is only slightly lower than a year ago. We have been averaging just over 2,200 foreclosure petitions a month this year compared to about 2,300 a month last year,” Warren Group CEO Timothy M. Warren said in a statement.

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Wise readers don’t want to overpay when investing in mutual funds. Here’s a typical question on the subject: "You wrote about paying attention to mutual fund expenses but never said what are acceptable expenses or how much is too high. Can you elaborate?"

Fund expenses include many things, such as commissions or "loads" when you buy a fund and/or redemption fees or "back-end loads" when you sell it, as well as ongoing operating expenses, including a management fee to the people who manage the fund’s portfolio.

Funds sold by brokers typically charge commissions when you buy and/or redemption fees if you sell before a certain time. Commissions for large purchases tend to be lower in percentage terms. Or, in lieu of a commission to buy, you may pay higher ongoing "service" or "distribution" fees on top of the management fees and other operating costs.

Different "share classes" of broker-sold funds reflect these different cost structures. The one that’s best for you will probably depend on how much money you invest and for how long.

I make my own investment decisions and buy only direct-marketed "no-load" funds that do not charge any commissions or loads. If you need professional advice, consider a fee-only adviser who is free to recommend any fund, including no-load funds. If you use an adviser who can recommend only from a list of load funds approved by his firm, I suggest you favor those with low ongoing operating expenses.

That way, at least your costs are low once you pay the initial load. For example, the class A shares from the American Funds Growth Fund of America, a fund with a strong long-term record, impose an upfront sales charge or load as high as 5.75 percent. But annual expenses are just 0.76 percent, about one-half the industry average for stock funds.

Ultimately, a fund’s annual operating expenses — the so-called fund’s expense ratio — may have a much greater impact on your wallet than the initial load.

Not all funds charge loads, but all funds ding you for operating expenses that subtract, dollar for dollar, from your returns.

Therefore, I will not buy a fund with an expense ratio so high that it makes it very difficult to achieve the returns I could more easily obtain with another fund.

For index funds that simply track a broad market benchmark, I want annual expenses no higher than 0.20 percent. With actively managed stock funds, I generally avoid those with an expense ratio of more than 1 percent, and for actively managed bond funds, of more than 0.50 percent.

That doesn’t mean I will never buy a fund with higher expenses, but there has to be an overriding factor, such as a consistent investment approach with a record of solid returns in good times and bad despite the higher costs.

Even then, I’ll try to find a cheaper alternative.

I have used — and can recommend — a fund analyzer tool at the website of the Financial Industry Regulatory Authority (www.finra.org/fundanalyzer) that lets you screen for mutual funds and exchange-traded funds based on factors such as investment objective, expense ratio and ratings by the fund analysis firm Morningstar.

You can compare as many as three funds side by side and see how their expense ratios stack up against the industry average of similar funds.

Other newly added features include one-click access to a fund’s prospectus and other disclosure documents, and a report in portable document format that you can print or save.

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Neenah luxury auto dealer, Bergstrom Premier Motorcars, has been named the exclusive carrier in Wisconsin the Fisker Karma, a plug-in hybrid electric car, and will debut the car at its Victory Lane location June 9.

The four-seat sedan has a total range of 300 miles, 50 of which are electric-only and powered by a lithium-ion battery that can be fully recharged in eight hours. The car can reach speeds of up to 125 miles per hour.

In a statement released Friday, Bergstrom said initial customer deliveries are expected to begin in first quarter 2011.

Bergstrom Automotive is one of the top 50 automotive retailers in the U.S. and is owned by John and Richard Bergstrom. The auto dealer has 30 locations throughout Wisconsin.

“We are very pleased to have been selected as the exclusive Fisker retailer for Wisconsin,” said Bergstrom chairman and CEO John Bergstrom. “This distinctive vehicle appeals to environmentally conscious individuals who don’t want to compromise their passion for driving.”

The Fisker Karma hybrid was designed by Henrik Fisker, who also designed the Aston Martin DB9 and BMW Z8.

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Right now, there is one thing St. Louis needs more than anything: jobs.

The recession destroyed more than 75,000 of them. We weren’t creating so many before it started, either.

And where do jobs come from? Small business.

Despite their headline-grabbing nature, big companies have been shedding workers in St. Louis for decades. Since 1993, the region’s net job generation has come from firms with fewer than 100 employees. They have generated 114,000 jobs, almost as many as the big companies have cut. And it’s not just jobs. Increasingly, small firms generate the ideas and innovations that power our economy.

Yet we’re not launching as many small businesses as we ought to be. St. Louis continues to lag behind the nation in the establishment of new companies. During the past decade, the metro area has remained in the bottom quarter of big cities. On its index of entrepreneurial activity over the last three years, the Kauffman Foundation last week ranked Missouri 45th out of the 50 states. People here are half as likely to be self-employed — a key sign of startup activity — as in leading states such as Georgia and Arizona.

"We’ve been low in this regard for a long, long time," said Jerry Katz, a professor of entrepreneurship at St. Louis University.

And there’s good reason to believe this is holding St. Louis back. Look at faster-growing regions, such as Denver, say, or Dallas. They grow more companies and more jobs. Research earlier this year from Kauffman found that new firms — those less than five years old — have accounted for all new jobs added since 1980.

Growth isn’t so much from the big boys’ getting bigger, as the little guys’ growing up. And the places where they grow up will benefit.

Too often, that’s not St. Louis. But it hasn’t always been this way.

There was a time when this city was a leader in innovation and entrepreneurship. Jason Hall, director of the Missouri Technology Corp., points out that seven of the state’s 10 biggest companies — such as Emerson Electric Co., Monsanto, Leggett and Platt — were founded by individual businessmen, most of them more than a hundred years ago.

"We’re still living off them today," Hall said.

Indeed, big companies launched a century ago have sustained St. Louis ever since, and spread their wealth around the region. They funded its universities and museums. They founded Civic Progress to help tackle St. Louis’ problems. They built this city into a prosperous big-company town, a hub for the Fortune 500, flush with steady jobs.

But some say St. Louis got too comfortable, too reliant on its stable of hometown corporate icons.

"We had solid businesses making solid profits, and everyone was pretty content," said Katz. "St. Louis’ culture didn’t really support innovation."

And then, as we know, those icons faded.

Our global airline — TWA — disappeared. Local stalwarts from Purina to May Department Stores to A.G. Edwards were taken over by bigger competitors with a different hometown. Even Anheuser-Busch is not what it was, as the company has cut jobs under new ownership.

St. Louis does have its next-generation success stories — such as pharmacy benefit manager Express Scripts and Enterprise Rent-a-Car — but they have yet to fill the big shoes of their predecessors. And that has local leaders looking for answers. The trouble, some say, is that those answers too often revolve around luring other big companies.

Alan Richter has been beating the drum for entrepreneurship for years, including nearly a decade running the region’s Small Business Development Center. Most of that time, he has watched civic leaders in St. Louis and state officials in Jefferson City spend their energies, and their resources, trying to land the big fish from someplace else cash advance companies.

Look at all the big incentive programs, Richter says, the tax breaks for big job generation, the credits for real estate development. Such economic tools are designed to make Missouri attractive to the big employer, not to grow the small.

"It runs through our entire economic development strategy," Richter said. "We’re not as committed to growing small businesses as we are to stealing from somewhere else."

That’s starting to change, local economic development officials say. They realize that attracting big companies to the region is a tough, expensive, often fruitless game, and they say they’re bulking up their small business development efforts to provide more balance.

"It’s not an either/or situation. You want a balanced portfolio," said Denny Coleman, president of the St. Louis County Economic Council. "You want diversity of size and kind of companies."

And it’s not as if there’s a shortage of people with good ideas that could lead to good business.

Coleman’s agency recently partnered with Edward Jones to launch a business plan competition, to find the best entrepreneurs with the best ideas and help them grow. And by "help," they mean award $100,000 in prize money and top-flight consulting help to three winners.

They were hoping for maybe 50 applicants, he said. They received 226.

That’s a good sign that there are many ideas out there, Coleman said. And a reminder that St. Louis needs to build on them.

"This region is being forced to think more entrepreneurially," he said. "Downsizing and right-sizing has forced out a lot of good people. But there are other opportunities."

Coleman has been watching this shift developing for 20 years. In the early ’90s, he chaired the region’s efforts to recover from the massive cuts at McDonnell Douglas, by far St. Louis’ biggest employer until defense cuts pulverized its work force. Twenty-seven thousand people lost their jobs. Suppliers and subcontractors lost their main client. Everyone had to think differently.

"For decades, some companies’ marketing strategy was to wait for McDonnell to call them," Coleman said. "That went away."

The county and others worked with these companies, to help them think anew about what kind of services they could provide and to whom; to become more nimble, more flexible, more entrepreneurial. They also launched retraining and placement programs for the laid-off, about 10 percent of whom decided to start their own businesses.

Indeed, a big chunk of the region’s small business infrastructure — the World Trade Center, its largest tech incubator, a key county loan fund — came out of the post-McDonnell adjustment period, Coleman notes.

Those resources are perhaps even more important today, as the region endures a transition that is at least as wrenching as those post-Cold War days. So many of St. Louis’ remaining big employers — from carmakers to banks to retailers — have been battered in the recession. And the big companies that are growing haven’t been able to make up for the losses.

That makes entrepreneurship even more important these days, said Dane Stengler, a senior research analyst at Kauffman.

If St. Louis hopes to build back the 75,000 jobs it lost, and give those who would build a new economy the opportunity to do it here, it needs to sharpen its focus on small business.

"It’s not a silver bullet," Stengler said. "But a strong and sustained recovery simply won’t happen without it."

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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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