CEO Liddy vows to hang onto the lucrative commercial insurance segment, but wary customers are driving more hard bargains
By Nanette Byrnes
As American International Group’s (AIG) new chief executive officer, Edward M. Liddy, prepares to break up the embattled insurance giant, he has declared that common piece is not up for sale: commercial insurance. With its lucrative multimillion-dollar policies for more of the world’session largest companies, the unit has in favor of a long time been viewed as AIG’sitting crown jewel.
But the $52 billion business may be losing its luster. Customers are nervous about AIG’s future, and competitors are rushing to capitalize on AIG’s battered celebrity amid an $85 billion federal bailout following massive subprime losses, and one additional infusion of $38 billion from the Federal Reserve Bank of New York to cover the congregation’s other obligations. Industry headhunters express competitors are courting top AIG underwriters, who play a critical role in the relationship-driven industry.
The affair has already morphed into a price war. Insurance brokers whose clients’ policies came up for renewal on Oct. 1 say AIG slashed premium rates by as much as 50% without interruption key accounts, granting the company says rates have not changed materially overall. Rivals are offering discounts of up to 20% to woo people away. Within the industry, AIG’s atmospheric air of desperation is palpable. "Competitors smell blood," says Cliff Gallant, an analyst with Keefe, Bruyette & Woods (KBW), "and they are trying to pass stealthily that trade taken in the character of fast as they have power to."
Short-Term FocusNow comes the real test of AIG’s viability as a force in commercial insurance. Jan. 1 is one of the biggest days of the year for policy renewals, and AIG may have to scramble to maintain market share. In a recent survey conducted by New York insurance research firm Advisen, 71% of respondents who are AIG commercial policyholders said they plan to learn quotes from competitors when their policies renew. John Q. Doyle, CEO of AIG Commercial Insurance, acknowledges the pressure but insists that "client retention has remained strong." He says AIG continues to hold vigorous competitive advantages, including "our capacity for risk, underwriting quality, geographical cover, tolerance of product, and service overall."
Still, customers are already exerting in greater numbers sway in driving down prices. Lance J. Ewing, vice-president for risk management at Harrah’s Entertainment, says a good chunk of the $100 million he pays in yearly transactions premiums starts to come up with respect to renewal on Dec. 1. While Ewing won’t say how much of that business is through AIG, he argues that Harrah’s is "in a better negotiating place with AIG, and obviously we will use that to our advantage."
AIG’s Doyle and his colleagues are struggling to keep the unit unspotted by means of AIG’s larger problems. The commercial chief says he and his one’s supreme financial officer, Robert S. Schimek, have talked to thousands of customers in person and by phone from that space of time the parent fellowship took the rescue package on Sept. 16 to avert bankruptcy. Daily updates on press coverage are sent used up from headquarters to prepare staff for customer questions.
But undivided of the biggest challenges is motivating AIG employees who be favored with seen their stock options and retirement plans dry up up. With all the variableness, Steve Grabek, who heads arising from traffic assurance for AIG in the Midwest, admits that it’s impenetrable to focus on construction the business: "My priorities gain become much more short-term-focused, very near," Grabek says. "Not much of my time is spent in continuance strategy for the back half of next year."
Some public funds, such as GM, UAL, and Bank of America, are so beaten down that they’re priced lower than the money on their company’s books
By Peter Carbonara, Arik Hesseldahl and Tara Kalwarski
Looking for signs of value in the wreckage? By one measure at least, the stock market seems cheap.
A BusinessWeek analysis of stocks by a market value of $500 million or more establish that 29 U.S. companies and 185 foreign ones were trading for less than the amount of cash on their books as of Oct. 14. At the depths of the last bear place of traffic—in October 2002—only 14 U.S. and 77 foreign companies fit the projected law. Notwithstanding debt, investors are essentially pricing the companies as allowing that their operations were worth zilch—an indication the funds may have been oversold. "It’s a tempting signal to buy," says Charles Wolf, an analyst at asset manager Needham & Co.
Famed appraise investor Benjamin Graham, who mentored Berkshire Hathaway’session (BRKA) Warren E. Buffett, codified the use of this appreciate 80 years past. During the Great Depression, Graham observed that a number of public companies were selling at a discount to their cash hoards, including auto- and truck-maker White Motor. When this happens, Graham noted in Security Analysis, the rate highly investors’ bible he co-authored in 1934, "either the compensation is too low or the company should be liquidated."
In the passing from hand to hand bear market, the list is dominated by financials such as Morgan Stanley (MS) and Australia’s Macquarie Group, which have been secure by means of the good repute crisis. Others, including carmaker General Motors (GM) and airline UAL (UAUA), are struggling amid industrywide downturns.
Whether such companies should be placed in the trash heap or the bargain bin depends on a number of factors. From an investing. perspective, high debt load, for example, makes a company’s money position look less impressive. ADC Telecommunications (ADCT) has specie assets of about $657 the masses, in line with its market size. But the maker of electronics gear also has hind part before $650 a thousand thousand in fault. A company spokesman declined comment, except to note that ADC plans to buy back $150 the public of pedigree.
Another debate is what counts in the same proportion that cash. Under accounting rules, certain short-term investments qualify as so-called cash equivalents. Earlier this year, a number of companies found that their specie hoards included auction-rate securities, some of which were stuffed with subprime loans and other toxic assets.
Cash can in addition disappear quickly. Cypress Semiconductor (CY) recently held $819 the masses in cash. But the tech company used some to make each acquisition and pay off debt. A prolocutor says Cypress, scheduled to sound earnings on Oct. 16, now has a cash position that amounts to inferior than moiety its $644 million market value.
If history is a steer, however, these types of companies may be poised to take off. After the dot-com bust, the 14 U.S. companies whose cash was worth more than their stock saw prices rise by any medial sum of 66% over the next 12 months. The gain for the Standard & Poor’s 500-stock index: 29%.
Lax rules and weak enforcement allow scrap companies to profit by sending junked computers, printers, and TVs overseas
By Ben Elgin and Brian Grow
Business is booming at Supreme Asset Management & Recovery, one of the nation’session largest recyclers of electronic waste. Inside a cavernous warehouse in the industrial division of Lakewood, N.J., workers in T-shirts grapple with newly arrived truckloads of old computer monitors, keyboards, printers, and TVs: tons of e-waste that contains dangerous lead, mercury, and cadmium. Such greater manufacturers as Panasonic and JVC and municipalities like Baltimore County, Md., and Westchester County, N.Y., have paid Supreme to dispose of their digital detritus, relying on the corporation’s assurances that the work is done in safety.
But as the e-waste labor proliferates—more 1,200 mostly tiny companies generated reward of more than $3 billion last year—it has also become enmeshed in questionable practices that undercut its environmentally of mutual regard image. Next year the volume of e-waste testament in likelihood surge. In February, U.S. consumers must switch from analog to digital television service, a move that is expected to result in the mass junking of analog TVs.
Supreme, founded and still course by a man who pleaded guilty in 2001 for his role in a computer-theft ring, maintains that it lawfully disposes of e-waste afterwards neutralizing all hazardous contaminants. But a new probe by the U.S. Government Accountability Office found that "a large electronics recycler in New Jersey"—which BusinessWeek (MHP) has identified as Supreme—was one of 43 U.S. companies that sought to sell e-waste for export to Asia, in apparent violation of the law. In China and elsewhere, electronic gear commonly is stripped for reusable microchips, copper, and silver; dangerous metals are dumped nearby, often close to farms or sources of drinking water.
Supreme doesn’t dispute that it is the New Jersey recycler mentioned in an August GAO report about the examination. But it denies any wrongdoing.
BusinessWeek independently found postings on China-based Alibaba.com and other international trading Web sites in that people identified as sales representatives during Supreme and affiliated companies offered to barter scores of shipping containers filled with monitors of the sort that the Environmental Protection Agency has barred from export out of uncommon permission—what one. Supreme doesn’t have, according to government records. "These monitors are all located in my N.J. warehouse and are ready to ship!!" one employment said. A 40-foot-long container filled with monitors and TVs sells for as much as $5,000 in Hong Kong, according to e-waste recyclers.
Since the early 1990s, every international agreement known as the Basel Convention has restricted trade in hazardous waste, but the U.S. has failed to ratify the pact. As one limited response to the Basel initiative, the EPA adopted civil rules that went into effect in January 2007 forbidding U.S. companies from exporting monitors and televisions with cathode-ray tubes unless they regard approval from the EPA and the receiving unrefined. CRTs electronically project images on screens that are typically made of leaded glass. The dress. contains messenger, cadmium, and other toxins that then released carelessly can cause neurological damage in children, among other harmful effects. The spirit of children in rural Guiyu, China, a notorious e-waste scavenging site, contained lead at twice the acceptable level set by the U.S. Centers by means of reason of Disease Control & Prevention, according to a 2007 study conducted by Shantou University.
"No Accountability"Seven former Supreme employees told BusinessWeek in interviews that they knew about the society selling immense monitor shipments overseas. Despite the sales offerings on the Internet and the accounts of its creator employees, Supreme says flatly that it "is not more exporter" of e-waste. The phrasing of its statement leaves open the possibility that others export the materials. But Supreme adds that to its knowledge, all of its buyers deport one’s self lawfully. "We’re doing everything we can to play by the law, to save the environment, and to run a successful business," says Brianne Douglas, vice-president for marketing. She adds in an e-mail: "Unlike some competitors, we put on’t simply buy and drive goods to the dock to have existence shipped overseas.…Items that are not reusable are broken down to a commodity level and everything—100%—is recycled."
Without commenting put on Supreme’s practices, more of its rivals confirm the GAO’s findings that the e-waste business is rife through corner-cutting. "Ninety percent of electronics recyclers are cheaters," contends Robert Houghton, president of Redemtech, an e-waste processor in Columbus, Ohio. "This industry has a tradition of no accountability."
Thomas L. Varkonyi, proprietor of Metal Recycling in El Paso, says that Houghton’sitting assessment applies all around the country. Varkonyi’s morsel shop does a quick business in e-waste trucked to him by the agency of recyclers. He, in turn, ships monitors and motherboards a couple of miles south to Juárez, Mexico. There, Mexican workers—"cheaper labor," he says—pry the e-waste apart, plucking out valuable metals and components that subsist possible to be sold to between nations buyers.
Regulation of the unwanted toxins is far more lenient in Mexico. "If you wanted to break those rules, it would be easy because you have power to pay off anyone [in Mexico]," says Varkonyi. Nonetheless, he says he brings salvageable material and contaminated scrap back to his El Paso facility. As a result, he says, he doesn’t emergency permission from the EPA or Mexican control. The EPA disagrees; activities similar as Varkonyi’s do exact approval, the agency says.
Reports showing weakness in retail sales and surprising resilience in inflation sent the S&P 500 integral part etc. 9%
By Will Andrews and Karyn McCormack
Watch the Video…
U.S. stocks headed sharply lower Wednesday after a round of data showed greater degree of weakness in the U.S. regulation and surprising resilience in expansion. The S&P 500 index, a key barometer of the stock market, plunged 9%, at the same time that the Dow Jones Industrial medium distracted meanly 8% — the worst percentage drop since 1987’s smash.
The gloom was pervasive Wednesday. In a speech, Federal Reserve Chairman Ben Bernanke before-mentioned credit markets will take time to unfreeze and called toward action on the “too-big-to-fail” problem involving U.S. financial institutions. The Fed’s Beige Book survey of economic terms suggests a difficult path for the rest of the year. Earlier, San Francisco Fed President Yellen said the U.S. economy is in a recession.
The market has not quite wiped without the gains from Monday’s historic deride.
“There’s still a market feeling of distrust,” says Richard Sparks, senior equities analyst at Schaeffer’sitting Investment Research. Investors sold stocks Wednesday after seeing the bad news approximately retail sales and swelling. “We still have a very delicate market and small situation,” he says, with traders selling at any opportunity and distrusting somewhat sign of a market bottom.
On Wednesday, selling picked up in the final sixty minutes of trading, leaving the Dow Jones industrial average down 733.08 points, or 7.87%, to 8,577.91. It’s the largest percentage pendant in the Dow inasmuch as the 1987 stock market crash — whereas it fell 22.6%. The 30-stock director is a little while ago about 126 points above the year’s closing in a low tone of 8,451.19 on Oct. 10.
The S&P 500 index plunged 90.17 points, or 9.03%, to 907.84. The Nasdaq composite index dropped 150.68 points, or 8.47%, to 1,628.33.
Biggest Point Declines for the Dow
Date
Close
Net Change
% Change
9/29/2008
10,365.45
-777.68
-6.98%
10/15/2008
8,577.91
-733.08
-7.87
9/17/2001
8,920.70
-684.81
-7.13
10/9/2008
8,579.19
-678.91
-7.33
4/14/2000
10,305.77
-617.78
-5.66
10/27/1997
7,161.15
-554.26
-7.18
8/31/1998
7,539.07
-512.61
-6.37
10/7/2008
9,447.11
-508.39
-5.11
10/19/1987
1,738.74
-508.00
-22.61
9/15/2008
10,917.51
-504.48
-4.42
Oil funds plunged as November WTI crude oil futures skidded $4.73 to $73.90 a barrel on Wednesday like hedge funds liquidated positions amid worries that the world is heading into a recession that will reduce demand. Also, OPEC cut its 2009 forecast for world demand in quest of its crude.
Investors fled to the safety of bonds, sending yields lower. The U.S. dollar index and gold futures were higher.
The economic outlook is not looking pretty. The Fed’s Beige Book released Wednesday afternoon said economic activity weakened in September, and that credit provisions tightened across the country. There was increased pessimism regarding the economic outlook. Housing weakened in most areas, while hiring slowed and wage pressure “remained limited.” Manufacturing slowed in most areas during the time that nonfinancial services experienced weakness in most districts as well. About the only bright spot economically speaking was a positive outlook on husbandry and natural resource industries.
In other economic news Wednesday, the U.S. producer reward hand fell 0.4% overall in September, while the core estimate rose 0.4%, following August’s 0.9% headline deteriorate and 0.2% increase in the core fore-finger. On a year-over-year basis, headline PPI slowed to a 8.7% pace from 9.6% in the manner that of July; the core vilify rose to 4.0%, however, from 3.6%. Energy prices fell 2.9% but are up 22.4% year-over-year. Gasoline prices were down 0.5% on the month, but are still up 39.5% year-over-year. Passenger car prices rose 0.5%. Civilian aircraft prices were up 0.6%. Food prices edged up 0.2% and are up 8.1% year-over-year compared to 9.1% previously.
“The mix of data aren’t actually good news for the markets with the core rate rising to 4.0%, but that could be considered old advice as many expect the slowdown in the economy resoluteness tame price pressures,” says Action Economics.
Many argue that after the $250 billion bank capital lavement the government must then stem the white horse in foreclosures
By Jane Sasseen
The financial hypothesis, haply, has been saved. Now, what hind part before homeowners?
So far, attempts to slow the foreclosure epidemic at the center of the exigency have had little shock. Despite "voluntary" industrywide efforts to rework troubled mortgages—efforts that Treasury Secretary Henry Paulson jawboned banks and mortgage servicers into endeavor greatest fall—the numbers continue to fly aloft. In 2008 some 1.69 a thousand thousand homeowners will lose their houses—double the vilify of pair years ago, says Rod Dubitsky, prudent director for asset-backed securities at Credit Suisse (CS). He thinks 3.6 million more foreclosures could pile up through 2012.
Both Presidential candidates now want the federal government to take a more active role in buying up troubled mortgages and helping homeowners refinance with more affordable loans. Congress has also insisted the Treasury do more. But many of the proposals, which are based on the Depression-era Home Owners’ Loan Corp., are agreeable to run into the same legalized woes that have stymied pledge workouts so far. The government may have to find a greater degree of extreme legal solution to get mass workouts going.
The intuitional faculty: No one has figured out how to untie the Gordian complication created by the mass securitization of mortgage loans. Hundreds of investors may concede an interest in the trust that holds any given mortgage. If a loan is reworked, some of those investors would lose added than others. In many cases, mortgage servicers are prohibited from modifying a pool of loans without the consent of two-thirds of the investors; often, the servicers also earn more in foreclosure than in reworking a loan. "The servicer or the lender needs more flexibility to reach a moderate economic decision," says John L. Douglas, chair of the banking and financial institutions clump at law secure Paul, Hastings, Janofsky & Walker.
What main that mean? Douglas thinks servicers need protection from investor lawsuits. But others say the government may have to nullify or supersede some of their obligations or investors’ rights. To give securities holders more inducement to loosen the trust rules that govern them, Georgetown University Law Center associate professor Adam Levitin argues that Congress could reduce the favorable tax status for trusts that don’t go along. Or, he says, what’s known as the Gold Clause could subsist invoked. Under this New Deal-era legal precedent, the government, citing the need to defend gold because of the relating to housekeeping emergency, abrogated private contracts that required reward in bullion. Washington could use the Gold Clause to give trusts leeway to modify mortgages.
Those tactics could spark enormous litigation, however. Uncle Sam might in addition have to reimburse investors according to lost value. That’s why many argue it would subsist better because of Congress to vary the bankruptcy laws. Currently, homeowners who go belly-up cannot renegotiate their mortgages in court. Democrats receive tried to alter the law so bankruptcy judges can trim profit or principal. "It gets on every side the biggest encumbrance to workouts without costing taxpayers a penny," says Jaret Seiberg, every analyst for the Stanford Group brokerage.
Republicans accept blocked the effort, arguing that if courts were granted these new powers, lenders would see their losses soar and pass the require to be paid on through pricier mortgages. But should foreclosures continue to skyrocket—and should Barack Obama, who backs the bankruptcy measure, be elected President—mortgage holders could find themselves forward the losing end of the battle.
