Actual finance blog

The Federal Reserve’s Board of Governors will hold a closed meeting on Wednesday to discuss paying interest on bank reserves, one of a number of options officials have been mulling to address liquidity problems in financial markets in case measures taken to date fail to gain traction.

The Fed announced meeting on its website on Monday.

The meeting does not necessarily mean the U.S. central bank is poised to take that step, which would require congressional action. But Fed officials have identified that measure as among a menu of options the central bank is considering as it copes with persistent problems in credit markets that are weighing on U.S. economic growth.

Congress in 2006 granted the Fed authority beginning in 2011 to pay interest on bank reserves. At the time, the central bank assigned staff to study the implications such a move could have on its operations.

The staff report is now ready and will be presented to the Fed during the regularly scheduled meeting of its interest-rate setting panel, a Fed official added, declining to comment further on whether the presentation is pegged to any imminent steps to boost liquidity.

The information is timely because it comes as Fed officials seek to thaw frozen credit markets with a series of liquidity offerings to banks and financial institutions. Despite offering more than $400 billion in funding through cash and Treasury securities, banks and financial institutions continue to be wary about lending to one another.

Fed officials have been concerned recently that credit markets remain clogged in spite of extensive liquidity measures.

Paying interest on reserves would allow the Fed to separate interest rate policy from liquidity and financial stability policy, JPMorgan economist Michael Feroli said. 

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Advanced Micro Devices Inc (AMD.N: Quote, Profile, Research) on Sunday unveiled its first computer brand, aimed at small and medium-sized businesses, with design and sales help from its major chip customers such as Dell Inc.

AMD Business Class desktop personal computers will be followed by notebook PCs in the second half of this year.

AMD customers who plan to sell the computers include Acer (2353.TW: Quote, Profile, Research), Dell, Fujitsu-Siemens, Hewlett-Packard Co (HPQ.N: Quote, Profile, Research), and Lenovo (0992.HK: Quote, Profile, Research), said Hal Speed, a marketing architect for AMD based in Austin.

“It’s not like retail,” he said. “People are buying this for work and we really tried to identify the nuggets (of technology for business desktop PCs) that weren’t being looked at.”

The new product line is part of AMD’s efforts to regain its competitive edge against Intel Corp (INTC.O: Quote, Profile, Research) after a disastrous 2007. AMD has reported six consecutive quarters of net losses as Intel has regained much of the market share that it lost to AMD in 2005 and the first part of 2006.

AMD is also seeking to use the leverage it built with the success of its Opteron microprocessors, which have made inroads into the server market over the last few years against Intel, a larger company.

“AMD has tackled the consumer market, they’ve made significant inroads into the mobile PC market, and they’ve made some inroads into the business market,” said Dean McCarron, an analyst at market research firm In-Stat. “This is an important program for them.”

AMD said Business Class is initially aimed at the small- and medium-size business market, but is also designed to scale up to the biggest corporate clients as well. The desktops include AMD Phenom X3 triple-core and AMD Phenom X4 quad-core processors as well as AMD Athlon X2 dual-core processors. 

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The U.S. Midwest has enjoyed nearly 20 years without a major drought but forecasters worry the corn belt’s luck could dry up this year, further squeezing tight global supplies amid soaring food prices.

With its last major drought in 1988, the Midwest has reached its average span of 18.6 years between droughts.

Considering that statistic and current weather conditions, Iowa State University extension climatologist Elwynn Taylor said the corn belt has a one in three chance of drought this year.

“We do have to be prepared,” Taylor said. “A 33 percent chance is high, that’s a risk.”

The Midwest’s chances of drought are exacerbated by La Nina, an unusual cooling of Pacific Ocean surface temperatures that can trigger widespread changes in global weather patterns. If La Nina has not dissipated by July, Taylor saw a 70 percent chance for U.S. corn yields below the 30-year trend of 150.6 bushels per acre.

“We don’t have any reason to think La Nina causes drought, but it certainly does aggravate it,” Taylor said.

Drought is not a foregone conclusion for the Midwest, where excessive wetness has held up spring corn plantings. Crops may benefit from that extra soil moisture during a dry summer, said Brad Rippey, a U.S. Department of Agriculture meteorologist.

“It’s way too soon to have any great alarm,” Rippey said. 

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Consumer products maker Newell Rubbermaid is reporting a 15% increase in first-quarter profit on a modest increase in sales.

The results reported Thursday, when one-time items are excluded, were in line with Wall Street expectations.

The Atlanta-based maker of Sharpie pens, Rubbermaid trash cans and Graco car seats says it earned $56.9 million, or 20 cents a share, in the January-March quarter, compared to a profit of $49.3 million, or 18 cents a share, in the same period a year ago.

Excluding charges, the company earned $74 million, or 27 cents a share, in the quarter. That met the forecast of analysts surveyed by Thomson Financial.

Revenue increased 3.6% to $1.43 billion from $1.38 billion recorded a year earlier.

Rubbermaid (NWL, Fortune 500) says it is raising its full-year sales outlook, but is adjusting its earnings per share outlook due to higher cost inflation. 

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The chairman of the Samsung Group announced his resignation Tuesday, just days after his indictment amid an investigation into allegations of corruption.

"I sincerely apologize and will do my best to take full legal and moral responsibility," said Lee Kun-hee, who was indicted last week on charges of tax evasion and breach of trust. "It grieves me for I still have many things to do."

At least four other executives will leave their jobs at Samsung, which has annual sales of nearly $160 billion and accounts for 18% of South Korea’s economic output.

Samsung also outlined several reforms Tuesday.

Investigators started looking into the conglomerate in January, after a former company lawyer said the company created slush funds worth $200 million. The probe led prosecutors to indict Lee and several other executives, but the prosecutors said an investigation found no evidence to support an allegation that the company bribed government officials and prosecutors.

Samsung’s exports - valued at about $70 billion - account for a fifth of all South Korean exports.

The conglomerate outlined several reforms it plans to implement.

"We do not think that Samsung’s renovation is complete with what we have declared, and known that this is just the beginning," Samsung said in a statement. "If there are any other things we should mend, we positively will." 

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Reliance Bancshares Inc. of Frontenac said its first-quarter profit was down 55 percent to $310,000, or a penny a share. Revenue was up 36 percent, reflecting strong gains in interest and fee income.

Loans were up 9 percent to $81 million. The provision for loan losses nearly tripled to $1.1 million due to loan growth and adverse changes in risk ratings on some credits. However, net charge-offs fell slightly to $336,000. Assets were up 29 percent to $1.2 billion.

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The Federal Reserve should threaten banks to make them raise more capital as a step toward restoring faith in credit markets, central bank policy-makers were urged on Friday.

“I think the most important thing for the Fed to do is not just use moral suasion, but a baseball bat with respect to the banking system,” Paul McCulley, managing director at bond fund manager PIMCO, told a conference in response to a question from Fed Vice Chairman Donald Kohn.

Kohn asked McCulley and other panelists at a credit market symposium hosted by the Richmond Fed whether market strain had persisted and whether the Fed’s actions to relieve strain were working.

“If you are under strain, don’t cut your dividend. Eliminate your dividend. You don’t want to dilute existing shareholders? Well, dilute them,” McCulley urged. “A more forceful move by the Fed beyond moral suasion on capital raising is necessary to fix that problem,” he said.

Bankers and policy-makers spent two days talking about credit strains and systemic risk as financial markets battle to regain their footing from the shock of the collapse of the subprime mortgage market.

Richmond Federal Reserve chief Jeffrey Lacker said he was confident that measures taken by regulators and financial firms to make the system safer would yield results, but were not a silver bullet for current market woes.

“I am confident myself that the result of this (regulatory) response will be broadly beneficial, and will result in improvements in the efficacy of financial arrangements, even if the response doesn’t result in the complete absence of financial market turmoil from now on,” he said.

Darryll Hendricks, managing director and global head of quantitive risk control at Swiss bank UBS, said that the Fed’s emergency liquidity measures had helped to ease strains, but had not removed the fear of a truly damaging upset in markets. 

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Passengers can expect to pay higher ticket fares this summer because of soaring fuel prices. But even that may not be able to save many small airlines from going under.

"Consumers need to realize that fares need to go up," said Jim Corridore, airline equity analyst for Standard & Poor’s. "We’re headed towards a year of marginal profitability for the industry at best and large losses at worst."

In fact, fares have already gone up this year, but the relatively modest increase in ticket prices pales in comparison to the fuel price spike.

Domestic fares edged up 6% in January and February, according to the Air Transport Association.

But the price of jet fuel rocketed up 55% during those two months, according to the Energy Information Administration.

"If fares were keeping pace with fuel, then airlines wouldn’t be going out of business," said John Heimlich, chief economist for the Air Transport Association, an industry trade group. He said that 34% of a ticket’s price goes towards covering the fuel cost, compared to 15% in 2000.

Continental (CAL, Fortune 500), Delta (DAL, Fortune 500) and United (UAUA, Fortune 500) recently raised ticket prices. US Airways (LCC, Fortune 500) said it has considered increases as well.

Northwest (NWA, Fortune 500) and Continental have also boosted fees for services such as extra baggage, phone reservations and food.

But these increases may not stick. And they certainly won’t eclipse rising costs, says Philip Baggaley, the senior airlines credit analyst for S&P.

"We think the airlines will raise fares, but it’s not going to be enough to offset the fuel costs in this soft economy," he said. "Jet fuel last year was a third of airline costs and will clearly be more this year. Therefore, revenues will have to rise by a third just to make up the expense."

But a fare increase of that magnitude is unlikely, analysts say, because passengers won’t support it, especially in the face of a recession - even though the slowdown hasn’t taken a bite out of ticket sales yet.

"We’re in a consumer-led recession," said Heimlich. "That’s the most difficult time to raise fares."

The airlines will have to take other measures, such as purging super-cheap fares, analysts say. Also, experts said they expect airlines to offer fewer flights and charge higher prices for them.

"Reducing capacity is the single most important thing they can do," said James Higgins, analyst for Soleil-Solebury Research. "That means less flights and fewer seats."

Some larger airlines may find some relief in consolidation. Northwest and Delta on Monday announced a plan to merge, which might help them reduce costs if the deal goes through. A Delta-Northwest deal could pave the way for other mergers, such as a rumored United-Continental combination.

But any deal is unlikely to get approved until late this year, if not next year. Plus, it will take some time after completion of a merger for an airline to start realizing savings from a combination.

And several smaller carriers, like ATA, Aloha Airlines and Skybus, have recently filed for bankruptcy as a result of rising fuel prices and said they will cease flying as a result. Frontier Airlines also just filed for bankruptcy but has received approval to continue operations while it reorganizes.

Experts had mixed opinions as to whether more airline bankruptcies and shutdowns will follow suit.

"The weak ones have already fallen," said Bob McAdoo, analyst for Avondale Partners, who is not predicting any more bankruptcies.

But Ray Neidl of Calyon Securities said some smaller airlines were still vulnerable to going under.

And given the rising fuel costs, Heimlich said there will "probably" be more bankruptcies, though he declined to point fingers at specific companies.

"There’s only so much you can do," said Heimlich. "It’s survival of the fittest." 

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A U.S. judge sentenced the “mastermind” behind the collapsed hedge fund Bayou Group to 20 years in prison on Monday, a sentence that reflects the big losses suffered by investors in the $400 million fund.

Samuel Israel III, 48, is the last of three officials at the defunct fund to be sentenced for their role in bilking investors in Connecticut-based Bayou out of millions. The fund’s demise rocked the $1.8 trillion hedge fund industry and led to calls for more oversight.

U.S. District Judge Colleen McMahon rejected requests for leniency by Israel’s lawyer — who cited the Bayou founder’s lengthy list of medical problems, including a bad back, heart problems, and gout. She said he was the “mastermind of this scheme.”

“You were, in every meaning of the sense, a career criminal,” McMahon told Israel, who leaned on the defense table for support and repeatedly wiped sweat from his bald head and neck.

“You ruined lives,” she said, saying investors had lost their retirement funds and money for their children’s and grandchildren’s education. “They want justice,” she said.

“Financial fraud, white-collar crimes are every bit as heinous as every other type of crime and they will be punished severely,” McMahon said.

Israel was also ordered to make $300 million in restitution. In addition, the judge ordered him to forfeit his interests in a Bank of America Corp (BAC.N: Quote, Profile, Research) account that held a little more than $100 million. She ordered Israel to surrender no later than June 9 to begin serving his sentence.

Israel pleaded guilty in September 2005 to charges of conspiracy and fraud in connection with stealing from Bayou investors over an eight-year period. 

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I recently had a disturbing experience when applying for a job. After three phone interviews, I was asked to interview in person. That meeting went well, and I was told that I would be invited back to meet the rest of the team.

On my way out, I was handed two release forms and told to return them within two days. These forms authorized the company to check my credit report, criminal background and driving record, even though driving isn’t part of the job. Although I have nothing to hide, this request seemed inappropriate.

I responded by both phone and e-mail, saying that I would return the forms after receiving a formal offer of employment, contingent upon a satisfactory background check. I also pointed out that unnecessary credit checks could lower my excellent rating.

Within a day, I was informed that my application was no longer active. Can the company do this?
Although regulated by state and federal laws, the general practice of conducting applicant background checks is both acceptable and common. Employers must have your permission, but if you don’t give permission, they don’t have to hire you.

Used appropriately, these investigations help to identify embezzlers, violent offenders and other undesirable hires. But more upstanding candidates may feel their privacy is being invaded. Smart interviewers explain the purpose of the process instead of robotically dispensing release forms.

The real lesson from your story, however, is that job applicants have virtually no leverage before an offer is made. Because this company requires background checks, your refusal to return the forms killed your application.

My boss, who is in charge of payroll records, appears to be making some serious errors. Three of us have access to this data, and we all have noticed major mistakes.

Our company is not doing well, and these inaccuracies are costing thousands of dollars. Fixing this problem would help financially.

When we have pointed out past mistakes, however, our manager has gotten really mad. Also, we don’t want her to think we’re spying. What should we do?

Your first loyalty should be to the business. Your boss may be careless, or she may be dishonest. Either way, management needs to investigate.

Document the errors carefully, then meet with a receptive executive or human resources manager. To increase credibility and minimize risk, all three of you should attend this meeting.

But be sure to choose your audience wisely. Select someone who will share your concerns and look into the problem, not simply alert your boss.

Marie G. McIntyre is a workplace coach. Send questions and get tips at www.yourofficecoach.com.

2008, McClatchy-Tribune Information Services

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