How to Save Detroit
And $50 Billion
Holman Jenkins
For a sum small compared to their revenues but large in relation to their market caps, the Detroit auto makers were all over the two conventions. Their lobbyists had something to sell -- a plea for $50 billion in federal loans. Congress practically owes us this money, Ford, GM and Chrysler argue -- because Congress slammed us with new fuel mileage mandates that will cost us $100 billion to meet.
John McCain caved. The White House is in the process of caving. Barack Obama didn't need to cave. But before rushing to pass the legislation, there's an easy way to save $50 billion or whatever part of these loans wouldn't be paid back: Just repeal the fuel economy rules.
It must infuriate the auto makers how readily their critics attribute their problems to their own incompetence. Then how to explain that GM is thriving in Europe, selling small cars that get lots of miles per gallon? Buick is among the biggest selling brands in China. GM is running away with Latin America.
The Big Three's problem, to be blunt, is North America. They should have pulled out long ago.
Not only did history saddle them with a UAW labor monopoly that their foreign competitors have managed to avoid. Even that might not have been fatal had Congress not enacted its "corporate average fuel economy" rules in the 1970s.
Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.
CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting. Rationally, they scrimped -- and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive -- such as SUVs, pickups and minivans -- hold their own against the Japanese and command real loyalty among U.S. consumers.
Let us have a moment of nonflagellating realism. Toyota is as capable of poor market timing as GM or Ford -- witness its multibillion-dollar bet on the Tundra pickup. It flies in the face of human and business realities to imagine that, generation after generation, Detroit hired idiots while Toyota recruited geniuses -- though that's the usual explanation of Detroit's troubles.
Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place -- to the extent consumers valued those investments. That is, if they were profitable.
If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn't mean CAFE is an effective substitute. It isn't and never was.
"When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away," Robert Crandall of the Brookings Institution wrote here last year. "Too bad these proposals will not be subjected to economic scrutiny before they become law."
Yup. We won't second-guess Detroit's political behavior during its 30-year fuel economy captivity, which consisted mostly of offering lip service to Congress's delusions. It might have done as Volvo, Mercedes, BMW and others did, and simply paid fines for failing to meet the targets. No doubt its friends in Congress advised that doing so would only make its political situation worse.
Having squandered the domestic auto industry's capital on millions and millions of cars that lost money, now Congress will squander the taxpayer's capital. It will lend the auto makers $50 billion to invest in fuel efficiency innovations that, by definition, won't command from car shoppers a price high enough to cover the cost of making them. Which makes it very unlikely we will get the $50 billion back.
Bottom line: Fifty billion won't turn CAFE into effective policy. It will do just fine, though, as an indicator of Washington's willingness to throw good money after bad rather than admit the folly of its own long-running handiwork.
The Spending Explosion
Here's a prediction: The media will report today that the federal budget deficit is big and getting bigger. What most of them won't report, alas, is that the cause of these deficits is an explosion in federal spending. The era of big government is back, bigger than ever.
![[The Spending Explosion]](http://s.wsj.net/public/resources/images/ED-AI204_1budge_NS_20080909210012.gif)
The real news in yesterday's Congressional Budget Office semiannual report is that federal expenditures on everything from roads to homeland security to health care will on present trends reach 21.5% of GDP next year. That's a larger share of national output than at anytime since 1992. If the cost of the federal takeover of Fannie Mae and Freddie Mac prove to be large and are taken into account, next year federal outlays could be higher as a share of the economy than at anytime since World War II. In this decade alone, federal spending has increased by almost $1.2 trillion, or 57%.
The federal deficit is expected to hit $407 billion for fiscal 2008 (which ends at the end of this month) and $438 billion next year. Still, the deficit is expected to be only 3% of GDP, which is in line with the average of the last 30 years. We hope Congress and the Presidential candidates don't obsess over the deficit per se, because the real fiscal drag from government comes from how much it spends, not how much it borrows.
The Bush tax cuts also aren't the budget problem. Until this year federal tax collections have been surging. In the four years after the 2003 tax cuts become law, tax receipts exploded by $785 billion. This year revenues have declined by 0.8%, but a major reason is the $150 billion bipartisan tax rebate that has hit the Treasury without spurring the economy. Without these nonstimulating rebates, federal tax payments would have climbed another 2.5%, according to CBO. Revenue is expected to be a healthy 18.5% of GDP next year without any tax increase.
Another myth is that the war on terror has busted the budget. While operations in Iraq and Afghanistan are expensive, defense spending is $605 billion this year, or about 4.5% of GDP. That only seems large by comparison to the holiday from history of the 1990s, when defense fell to 3% of GDP. As recently as 1986, defense spending was 6.2% of GDP.
The real runaway train is what CBO calls a "substantial increase in spending" that is "on an unsustainable path." That's for sure. The nearby chart shows how much some federal accounts have expanded since 2001, and in inflation-adjusted dollars. This year alone, federal agencies have lifted their spending by 8.1%, with another 7% raise expected for 2009. There's certainly no recession in Washington. The CBO says that, merely in the two years that Democrats have run Congress, federal expenditures are up $429 billion -- to $3.158 trillion.
The fiscal blowouts have included a record farm bill, notwithstanding record farm income; an aid bill for distressed homeowners, extended unemployment benefits, and more generous veterans benefits. Next up: votes on $50 billion for Detroit auto firms, an $80 billion energy bill, as much as $50 billion for spending masked as a "second stimulus," plus $100 billion or more for the Fannie and Freddie rescue. Rather than sort through priorities, Congress is spending more on just about everything.
Meanwhile, remember that "pay as you go" spending promise that Speaker Nancy Pelosi made in 2006? We called it a ruse at the time, and the last two years have proved it. Senator Judd Gregg (R., N.H.) has tallied up at least $398 billion in "paygo" violations so far. Earmarks were also supposed to be cut in half by this Congress. In 2008 there were some 11,000 at a cost of $17 billion, the second most ever, and far more than half the peak of 14,000 in 2006.
The point to keep in mind is that this big spending blitz is coming even before a new President and Congress arrive next year with far more spending promises in tow. As they contemplate their choice for President, voters might want to consider which of the candidates is likely to be a check on Congressional appetites, rather than a facilitator.
Commentary by Matthew Lynn
Sept. 10 (Bloomberg) -- London can't say it wasn't warned. Over the past year, people have been arguing that the rising tax and regulatory burden of doing business in the British capital threatened its status as a world financial center.
Now there is a hint that firms are quitting. Henderson Group Plc, a U.K. money-management firm, said in August it planned to move its tax base to Ireland. The hedge-fund company Krom River Partners LLP said this week it planned to move its base from London to Zug, Switzerland.
London needs to respond fast -- or else watch a trickle turn into a flood. As other financial centers become more competitive, London is becoming less so. Unless it can turn that around, the city is going to face a real threat to its position. And cities such as Dublin and Zug will grow in importance.
``The one issue that stands out above all others when companies discuss quitting London is tax -- either corporation tax or personal tax,'' says Mark Yeandle, a senior consultant at Z/Yen Group Ltd., which has produced reports for the city of London on its competitiveness as a financial center.
There is little doubt that financial firms are starting to review whether the British capital is the best place to base themselves. Henderson Group is one of the best-known names in U.K. fund management. It dates back to 1934 and has 59 billion pounds ($103.8 billion) under management.
Irish Alternative
Now it has decided that U.K. taxes are too high, and has opted for Dublin instead. Irish corporate taxes at just 12.5 percent are less than half the British rate of 28 percent. It might just be a tax base at first. Yet it is a fair bet that once the headquarters have moved, other jobs will follow.
Krom River, a $180 million hedge fund based in London's Mayfair district, had similar concerns. Taxes weren't the only reason for its decision, according to a senior manager already based in Switzerland. The company resolved to make the switch after weighing lifestyle issues as well.
Insurance companies are on the move, too. Lloyd's of London insurers such as Hiscox Ltd. have moved from London to Bermuda: They pay almost no corporate tax in the Caribbean.
``The tax treatment of Lloyd's in the U.K. must be amended,'' Peter Levene, Lloyd's of London chairman, said at a dinner in London's financial district last week. ``It is under threat from other markets.''
One or two firms quitting the U.K. might be a coincidence. Yet the warnings have been there for some time. In February, the city of London published research on the emerging problems.
`This Has Changed'
``Until fairly recently the U.K. had what was felt to be a very attractive tax regime as regards both corporate and personal tax rates, but this has changed,'' the report said. ``The main competing financial centres were seen to be Dublin, the Netherlands and Switzerland. Each of these scored very well, and much better than London, on the competitiveness of their tax regimes.''
It looks as if no one was listening. For an exodus to start you don't just need London to become less attractive. You need somewhere else to start becoming more attractive as well. After all, nobody can quit London without having somewhere else to go.
That is now happening. Dublin has its low corporate-tax rates. Switzerland has revamped rules on taxing hedge and private-equity funds, allowing individual cantons to lower tax rates for those entities. Don't be surprised if they start vying with one another to come up with the most competitive tax regime.
Two forces are now at work that will seriously erode London's position.
Bursting Dam
First, money managers like clusters. The reason they flock to London and New York is because they can mix with their peer group. Even in cities they gather within small locations. In London, for example, the hedge funds are mostly in Mayfair. Once a cluster emerges in Dublin and Zug, more and more will make the same switch. It's like a dam bursting. It starts as a trickle but can turn into a flood very fast.
Next, other cities will see what is happening, and make their own moves. How about a tax-free zone for hedge funds in Amsterdam or Paris? If Scotland breaks away from the U.K., perhaps it will attempt to turn Edinburgh into an even more significant money-management center with a special tax regime.
Financial firms bring well-paid staff with them, boost property markets and create local jobs. A tax-free zone could easily be self-financing for those countries -- and there would be the added satisfaction of stealing from the English.
London needs to act quickly to protect its position. Three moves could be made immediately to shore up its attractiveness.
Cut Corporate Tax
Corporate taxes should be cut from their current 28 percent. If necessary, that should be restricted to the City financial district and Canary Wharf. It might be expensive, but not as costly as letting the financial firms flee.
Next, the U.K. should relax the tax rules on carried interest and options, techniques used to pay financial-industry staff. That would make the overall tax regime a lot more acceptable and wouldn't have the same impact on the budget deficit as a cut in the standard rate of tax would have.
Finally, it should look at special tax breaks for industries such as insurance, where London has traditionally been strong. It has to remain competitive with offshore centers.
The U.K. might well need to rebalance the economy to reduce its dependence on financial services. But there is no good argument for losing its most successful industry. If it doesn't take action soon, the battle will be lost.
Sept. 10 (Bloomberg) -- Lehman Brothers Holdings Inc., reporting the biggest loss in its 158-year history, said it will sell a majority stake in its asset-management unit, spin off commercial real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence.
Lehman rose in New York trading after posting a $3.9 billion third-quarter loss on $5.6 billion of writedowns, worse than the $2.2 billion loss analysts had predicted. The company said it's auctioning off about 55 percent of the asset- management group, including fund-manager Neuberger Berman, and didn't name potential bidders. The real-estate spinoff is expected to be completed in the first fiscal quarter of 2009, according to a statement today.
``They are saying `we are fine now,' and that's buying them time to negotiate for that additional capital,'' Brad Hintz, an analyst at Sanford C. Bernstein in New York and former Lehman finance chief, said in a Bloomberg Television interview. ``They will need capital as part of the spinoff.''
Pressure on Lehman's Richard Fuld, the longest-serving chief executive officer on Wall Street, mounted yesterday after talks with Korea Development Bank ended, sending the shares tumbling 45 percent. Fuld is striving to convince investors that the fourth-largest U.S. securities firm will stem losses as housing prices decline. He and his management team also must keep clients and employees from leaving the company.
``This is an extraordinary time for our industry and one of the toughest periods in the firm's history,'' Fuld, 62, said in the statement.
Default Protection
Lehman gained 31 cents, or 4 percent, to $8.10 at 9:45 a.m. in New York Stock Exchange composite trading, as the cost to protect against a default by Lehman rose to a record. Credit- default swaps on Lehman jumped 75 basis points to 550 basis points as of 9:12 a.m., according to broker Phoenix Partners Group. That surpassed a previous peak of 580 basis points in March after the collapse and emergency sale of Bear Stearns Cos. to JPMorgan Chase & Co.
The global credit-market meltdown has led to more than $500 billion of writedowns and credit losses since it began a year ago, sending financial shares around the world swooning. Lehman, the worst performer on the 11-company Amex Securities Broker/Dealer Index this year, has lost 88 percent.
The New York-based securities firm moved its third-quarter earnings announcement up a week after a person familiar with the matter said yesterday that talks with state-owned Korea Development had ended, causing the stock to sink.
BlackRock Deal
Lehman is ``formally engaged with'' with BlackRock Inc., the biggest publicly traded U.S. fund manager, to sell about $4 billion of the investment bank's U.K. residential mortgage holdings, according to today's statement. Lehman said the transaction would help reduce the firm's stake in home mortgages by 47 percent to $13.2 billion.
Lehman had about $65 billion in mortgage-related assets at the end of the second quarter. Most of the portfolio, about $40 billion, was tied to commercial real estate.
The firm said it plans to spin off $25 billion to $30 billion of commercial real estate investments into a separate publicly traded company, to be called Real Estate Investments Global, in the first quarter in 2009. Lehman also said it will cut its dividend to 5 cents per common share from 68 cents.
``It's still this incrementalism that I think ultimately Wall Street's not going to be very satisfied with,'' Chuck Carlson, a portfolio manager at Horizon Investment Services in Hammond, Indiana, said in a Bloomberg Television interview. ``Lehman is trying to cling to the fact that they came come out of this independent and I'm not so sure that that's going to be the case.''
KKR, Bain
The Wall Street investment bank has been in talks with Kohlberg Kravis Roberts & Co., Bain Capital LLC and other private-equity firms interested in buying its asset-management unit.
Fuld blundered by not getting out of mortgage securities fast enough after the U.S. housing market began to crumble last year, said Richard Bove, an analyst at Ladenburg Thalmann & Co. Fuld also moved too slowly to bring in a capital infusion from outside investors, Bove said.
``The opportunity has been there, but the lack of willingness to deal on Fuld's part has been huge,'' Bove said.
Once the biggest U.S. underwriter of mortgage-backed securities, Lehman was stuck with the assets after two Bear Stearns hedge funds that invested in the instruments collapsed in July 2007, causing the market to freeze.
Job Cuts
The ensuing credit contraction ultimately led to the takeover of Bear Stearns, once the fifth-biggest U.S. securities firm, by JPMorgan for $10 a share in a deal backed by the U.S. Federal Reserve. Banks and brokerages, trying to reduce costs as revenue dried up, have cut more than 110,000 jobs.
Standard & Poor's said yesterday it may lower its A1 long- term rating on Lehman because the ``precipitous decline'' in the share price creates uncertainty about the firm's ability to raise additional capital. S&P said Lehman's liquidity is ``sound,'' noting the firm has the ability to borrow from the Federal Reserve.
Bear Stearns, which was the fifth-largest U.S. securities firm, was forced to sell itself or face bankruptcy as clients pulled their funds and other firms refused to trade with it. Bear Stearns was the largest underwriter of mortgage-backed assets for three years before 2007, when Lehman displaced it in the rankings. The Fed agreed to take on $32 billion of mortgage assets from Bear Stearns's books to enable the sale of the firm to JPMorgan.
CEO Casualties
The credit crisis has claimed the jobs of at least 10 CEOs so far, including James ``Jimmy'' Cayne, who had led Bear Stearns since 1983 and Charles O. ``Chuck'' Prince, Citigroup Inc.'s CEO since 2003.
Founded in 1850 by three Jewish immigrants from Germany, Lehman has managed to avert previous potential disasters and is now among the handful of U.S. financial firms that have endured for more than a century.
Lehman has been on the verge of collapse at least four times: in 1929, when the stock market crashed; in 1973, when the firm lost $6.7 million betting on interest rates; in 1984, when internal dissension led to a takeover by American Express Co.; and in 1994, when newly independent Lehman faced a capital shortage.
Lehman's second-quarter loss of $2.8 billion was its first as a publicly traded company.
Management Shuffle
``I hope Lehman doesn't succumb this time either because we're running out of investment banks,'' said Sean Egan, president of Egan-Jones Ratings Co. ``And it takes 100 years to create a good one.''
Fuld, who joined Lehman in 1969, attempted to shore up the firm's finances last quarter by raising $14 billion of capital, selling $147 billion of assets, increasing cash holdings and reducing its reliance on short-term funding to create a buffer against a possible bank run. He replaced his second-in-command, Joseph Gregory, with Bart McDade, a 49-year-old known within the firm for his cautious approach to risk taking.
Lehman Plans
Sept. 10 (Bloomberg) -- Lehman Brothers Holdings Inc., reporting the biggest loss in its 158-year history, said it will sell a majority stake in its asset-management unit, spin off commercial real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence.
Lehman rose in New York trading after posting a $3.9 billion third-quarter loss on $5.6 billion of writedowns, worse than the $2.2 billion loss analysts had predicted. The company said it's auctioning off about 55 percent of the asset- management group, including fund-manager Neuberger Berman, and didn't name potential bidders. The real-estate spinoff is expected to be completed in the first fiscal quarter of 2009, according to a statement today.
``They are saying `we are fine now,' and that's buying them time to negotiate for that additional capital,'' Brad Hintz, an analyst at Sanford C. Bernstein in New York and former Lehman finance chief, said in a Bloomberg Television interview. ``They will need capital as part of the spinoff.''
Pressure on Lehman's Richard Fuld, the longest-serving chief executive officer on Wall Street, mounted yesterday after talks with Korea Development Bank ended, sending the shares tumbling 45 percent. Fuld is striving to convince investors that the fourth-largest U.S. securities firm will stem losses as housing prices decline. He and his management team also must keep clients and employees from leaving the company.
``This is an extraordinary time for our industry and one of the toughest periods in the firm's history,'' Fuld, 62, said in the statement.
Default Protection
Lehman gained 31 cents, or 4 percent, to $8.10 at 9:45 a.m. in New York Stock Exchange composite trading, as the cost to protect against a default by Lehman rose to a record. Credit- default swaps on Lehman jumped 75 basis points to 550 basis points as of 9:12 a.m., according to broker Phoenix Partners Group. That surpassed a previous peak of 580 basis points in March after the collapse and emergency sale of Bear Stearns Cos. to JPMorgan Chase & Co.
The global credit-market meltdown has led to more than $500 billion of writedowns and credit losses since it began a year ago, sending financial shares around the world swooning. Lehman, the worst performer on the 11-company Amex Securities Broker/Dealer Index this year, has lost 88 percent.
The New York-based securities firm moved its third-quarter earnings announcement up a week after a person familiar with the matter said yesterday that talks with state-owned Korea Development had ended, causing the stock to sink.
BlackRock Deal
Lehman is ``formally engaged with'' with BlackRock Inc., the biggest publicly traded U.S. fund manager, to sell about $4 billion of the investment bank's U.K. residential mortgage holdings, according to today's statement. Lehman said the transaction would help reduce the firm's stake in home mortgages by 47 percent to $13.2 billion.
Lehman had about $65 billion in mortgage-related assets at the end of the second quarter. Most of the portfolio, about $40 billion, was tied to commercial real estate.
The firm said it plans to spin off $25 billion to $30 billion of commercial real estate investments into a separate publicly traded company, to be called Real Estate Investments Global, in the first quarter in 2009. Lehman also said it will cut its dividend to 5 cents per common share from 68 cents.
``It's still this incrementalism that I think ultimately Wall Street's not going to be very satisfied with,'' Chuck Carlson, a portfolio manager at Horizon Investment Services in Hammond, Indiana, said in a Bloomberg Television interview. ``Lehman is trying to cling to the fact that they came come out of this independent and I'm not so sure that that's going to be the case.''
KKR, Bain
The Wall Street investment bank has been in talks with Kohlberg Kravis Roberts & Co., Bain Capital LLC and other private-equity firms interested in buying its asset-management unit.
Fuld blundered by not getting out of mortgage securities fast enough after the U.S. housing market began to crumble last year, said Richard Bove, an analyst at Ladenburg Thalmann & Co. Fuld also moved too slowly to bring in a capital infusion from outside investors, Bove said.
``The opportunity has been there, but the lack of willingness to deal on Fuld's part has been huge,'' Bove said.
Once the biggest U.S. underwriter of mortgage-backed securities, Lehman was stuck with the assets after two Bear Stearns hedge funds that invested in the instruments collapsed in July 2007, causing the market to freeze.
Job Cuts
The ensuing credit contraction ultimately led to the takeover of Bear Stearns, once the fifth-biggest U.S. securities firm, by JPMorgan for $10 a share in a deal backed by the U.S. Federal Reserve. Banks and brokerages, trying to reduce costs as revenue dried up, have cut more than 110,000 jobs.
Standard & Poor's said yesterday it may lower its A1 long- term rating on Lehman because the ``precipitous decline'' in the share price creates uncertainty about the firm's ability to raise additional capital. S&P said Lehman's liquidity is ``sound,'' noting the firm has the ability to borrow from the Federal Reserve.
Bear Stearns, which was the fifth-largest U.S. securities firm, was forced to sell itself or face bankruptcy as clients pulled their funds and other firms refused to trade with it. Bear Stearns was the largest underwriter of mortgage-backed assets for three years before 2007, when Lehman displaced it in the rankings. The Fed agreed to take on $32 billion of mortgage assets from Bear Stearns's books to enable the sale of the firm to JPMorgan.
CEO Casualties
The credit crisis has claimed the jobs of at least 10 CEOs so far, including James ``Jimmy'' Cayne, who had led Bear Stearns since 1983 and Charles O. ``Chuck'' Prince, Citigroup Inc.'s CEO since 2003.
Founded in 1850 by three Jewish immigrants from Germany, Lehman has managed to avert previous potential disasters and is now among the handful of U.S. financial firms that have endured for more than a century.
Lehman has been on the verge of collapse at least four times: in 1929, when the stock market crashed; in 1973, when the firm lost $6.7 million betting on interest rates; in 1984, when internal dissension led to a takeover by American Express Co.; and in 1994, when newly independent Lehman faced a capital shortage.
Lehman's second-quarter loss of $2.8 billion was its first as a publicly traded company.
Management Shuffle
``I hope Lehman doesn't succumb this time either because we're running out of investment banks,'' said Sean Egan, president of Egan-Jones Ratings Co. ``And it takes 100 years to create a good one.''
Fuld, who joined Lehman in 1969, attempted to shore up the firm's finances last quarter by raising $14 billion of capital, selling $147 billion of assets, increasing cash holdings and reducing its reliance on short-term funding to create a buffer against a possible bank run. He replaced his second-in-command, Joseph Gregory, with Bart McDade, a 49-year-old known within the firm for his cautious approach to risk taking.
Sept. 10 (Bloomberg) -- U.S. stocks advanced after Lehman Brothers Holdings Inc. said it will shore up capital by selling assets, FedEx Corp. beat profit estimates and energy shares rallied with oil.
Lehman advanced 2.5 percent, rebounding from yesterday's record plunge, on plans to sell a majority stake in its asset- management unit, spin off commercial real estate and slash its annual dividend 93 percent. FedEx climbed 2.9 percent as the largest air-parcel shipper said lower fuel costs drove quarterly earnings above projections. Exxon Mobil Corp. climbed 2 percent, leading energy stocks to the biggest advance among 10 Standard & Poor's 500 Index industries, as crude increased.
The S&P 500 advanced 7.32, or 0.6 percent, to 1,231.83 at 10:32 a.m. in New York. The Dow Jones Industrial Average added 58.22 to 11,288.95, and the Nasdaq Composite Index climbed 16.82 to 2,226.63. Five stocks rose for every two that dropped on the New York Stock Exchange.
``The market should take strong reassurance from Lehman's announcement today and that they're objective on what they have to do and they have a plan to do it,'' said Bruce Bent, who manages about $130 billion in assets as chairman of The Reserve Funds in New York. ``The best way to keep it together is to be as candid and conservative as you can possibly be.''
$500 Billion in Losses
The S&P 500 is down 16 percent this year as slowing economic growth and more than $500 billion in credit losses and asset writedowns at the world's largest banks damped the outlook for earnings. Analysts expect profits at companies in the measure to fall 1.7 percent on average in the third quarter and slip 2.1 percent in 2008, according to estimates compiled by Bloomberg.
Stocks tumbled yesterday as concern about Lehman's ability to raise capital rattled the banking industry and a drop in oil prices pushed energy companies down by the most in six years.
Lehman added 20 cents to $7.99. The company said it aims to complete the asset-management sale in an auction, without naming potential bidders. The real-estate spinoff is expected to be completed in the first fiscal quarter of 2009, according to a statement today. Its loss of $3.9 billion was 77 percent more than analysts estimated on average.
``Just having the information is helpful for the market, as bad as it is,'' said Walter Todd, portfolio manager at Greenwood Capital, which manages $750 million in Greenwood, South Carolina. Todd worked at Lehman as a real-estate investment banker from 1999 to 2002. ``Absent the news, the market was going to assume the worst.''
FedEx, Texas Instruments
FedEx added $2.42 to $87.16. Earnings were $1.23 a share for the period ended Aug. 31, eclipsing the outlook of 80 cents to $1, FedEx said yesterday. Analysts expected 95 cents, according to the average of 12 estimates compiled by Bloomberg.
Texas Instruments Inc. rose 1.1 percent to $21.95 after the chipmaker maintained its sales projection despite slower mobile- phone demand. Third-quarter revenue will be between $3.33 billion and $3.47 billion, the Dallas-based company said yesterday. The midpoint, $3.4 billion, matched a previous forecast and the average estimate of analysts in a Bloomberg survey.
``There was some decent news with FedEx upping guidance and Texas Instruments looked pretty good,'' said Ed Laux, head of U.S. trading at Cantor Fitzgerald & Co. in New York. ``FedEx is important because it deals with Main Street issues away from the Wall Street issues. It's one data point that if people are shipping more there's good economic activity.''
Output Quotas
Exxon increased $1.32 to $74.58, driving the S&P 500 Energy Index to a 2.5 percent advance. Chevron Corp. added 2.7 percent to $80.94. Crude oil futures gained 66 cents to $103.92 a barrel in New York after OPEC urged its members to comply with output quotas, a move that would reduce supplies by 500,000 barrels a day.
American International Group Inc., the largest U.S. insurer, rose 3.5 percent to $19.02 after falling 19 percent yesterday on concern it will join Lehman in facing obstacles to raising new funds. The company can sell units and scale back insurance underwriting to boost capital, and is ``not similar'' to Lehman, Citigroup Inc. analyst Joshua Shanker wrote in a report.
Not all financial companies joined in the advance as Keefe, Bruyette & Woods downgraded several banks, saying the ``operating environment remains challenging amid slowing economic growth, contraction of credit and constrained capital.''
Huntington Bancshares Inc., Valley National Bancorp, Synovus Financial Corp. and Marshall & Ilsley Corp. retreated more than 3 percent after being downgraded to ``underperform'' at KBW. BB&T Corp. and Bank of America Corp. were also downgraded and slipped less than 1 percent.
The S&P 500 Regional Banks Index slumped 1.6 percent as 11 of its 12 companies retreated.
S&P 500 Additions
Salesforce.com Inc., the biggest seller of Internet-based customer-management software, added 5.9 percent to $55.16. Fastenal Co., the largest U.S. retailer of nuts and bolts, gained 1.3 percent to $52.88. They were picked to replace Fannie Mae and Freddie Mac in the S&P 500.
ImClone Systems Inc. rallied 6.9 percent to $68.01, its biggest gain since July and highest price in four years. The maker of the cancer drug Erbitux received a $70-a-share takeover offer from an unidentified drug company, topping Bristol-Myers Squibb Co.'s unsolicited bid. ImClone Chairman Carl Icahn said a special committee of directors rejected the $60-a-share takeover offer from Bristol-Myers as inadequate.
GFI Group Inc. fell 20 percent to $7.66. Tullett Prebon Plc, the second-biggest broker of transactions between banks, and GFI, the largest interdealer broker of credit derivatives trades, ended merger discussions after failing to reach an agreement on terms.
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