Stocks rallied early Wednesday, bouncing after the previous session's steep decline, as a positive earnings report and forecast from IBM helped temper ongoing worries about the auto and banking sectors.
The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all gained in the early going.
Stocks tumbled to two-month lows Tuesday as investors weighed President Obama's historic inauguration with the ongoing recession.
Robert Brusca, chief economist at Fact and Opinion Economics, said the markets were see-sawing from Tuesday's surprise sell-off.
"You would have thought that a new president, one that is greatly heralded and was very active even before he took office, would have heralded something more than that," said Brusca. "Maybe the markets were saying good-bye to (former President George W.) Bush."
"Today's market is best viewed as an unwind of yesterday's inexplicable sell-off," he said.
Earnings: Automaker General Motors (GM, Fortune 500) said that global sales fell 10.8% in 2008 - causing GM to fall behind Toyota as the world's leading seller for the first time. Nonetheless, shares gained almost 2%.
But tech bellwether IBM (IBM, Fortune 500) offered some good news. The company reported better-than-expected quarterly earnings after U.S. markets closed Tuesday and issued a 2009 profit outlook that topped Wall Street's expectations. Shares gained 7%.
On Wednesday, Abbott Labs (ABT, Fortune 500) matched earnings expectations for the fourth quarter, with profit of $1.06 per share, and slightly beat sales projections, with revenue of nearly $8 billion. The drugmaker's stock gained 2%.
Job cuts: The world's largest mining company, BHP Hilton (BHP), said that 6,000 workers would be laid off as a result of production cuts. Around 550 cuts will come from the United States. Shares inched higher.
The Swedish telecom giant Ericsson (ERIC) said it would cut 5,000 jobs in the attempt to save $1.2 billion in costs in 2009. About 1,000 of the job cuts will be in Sweden, where the company is headquartered. This was in spite of a strong fourth quarter for the company, with a 23% surge in sales. Ericsson shares jumped 14%.
Geithner hearing: Tim Geithner, President Obama's choice as Treasury secretary, will appear before the Senate Finance Committee for his confirmation hearing.
Geithner has spent six years as president of the Federal Reserve Bank of New York, but tax problems have clouded his nomination. (Full story)
World markets: Economic fears pressured stocks in Asia and Europe. Japan's Nikkei lost 2%. European indexes were mixed in afternoon trading.
Oil and the dollar: Light crude oil for March delivery rose 36 cents a barrel to $41.20. The dollar was lower versus the euro but rose against the yen and the British pound.
Wednesday, January 21, 2009
Geithner calls for tougher bailout terms
Treasury Secretary-designate Tim Geithner called for bold action to blunt the economic downturn and promised to tighten the terms for companies getting federal financial help.
In prepared remarks to be delivered Wednesday morning before the Senate Finance Committee, Geithner called on senators to support the Obama administration's $825 billion stimulus plan. The comments come as the Senate panel prepares to consider whether to confirm Geithner as the nation's top financial officer.
"Senators, the ultimate costs of this crisis will be greater, if we do not act with sufficient strength now," Geithner's testimony read. "In a crisis of this magnitude, the most prudent course is the most forceful course."
In his testimony, Geithner -- who is currently the president of the Federal Reserve Bank of New York -- also advocated "aggressive action to address the housing crisis and to get credit flowing again," though he offered no specifics.
The comments come a day after President Obama took office, only to confront the worst-ever Inauguration Day selloff in the stock market.
The Dow Jones industrial average dropped 4% Tuesday, led by another free fall in bank stocks. The KBW Bank index plunged 20% to its lowest level since 1994, amid worries that big financial institutions such as Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) will require additional federal aid that could wipe out shareholders.
Geithner said that if confirmed as Treasury secretary, he would work to reform the government's most visible response to the financial sector crisis -- the $700 billion financial bailout plan enacted by Congress last fall after September brought the collapse or takeover of six major financial institutions.
The Bush administration's approach to the Troubled Asset Relief Program, or TARP, has become deeply unpopular with legislators and the public.
Many skeptics complain that there was no plan in place to make sure the first $350 billion in government funds were used to boost lending to consumers and businesses.
Geithner said a revised TARP plan will contain "tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering."
The comments echo those made recently by another top Obama economic aide, National Economic Council chief-designate Larry Summers.
Addressing another prominent concern, Geithner promised to develop a plan to unwind the government support for financial markets and institutions as soon as possible, and to develop a plan to put the nation on sounder footing fiscally.
The budget deficit is expected to exceed $1 trillion in coming years as tax receipts plunge and federal spending expands to fill the shrinking private sector.
"We need to demonstrate with clear and compelling commitments now, that when we have effectively resolved the crisis and recovery is firmly established, that as a nation, we will return to living within our means," Geithner said.
The hearing -- starting with testimony by Geithner and statements by the leaders of the Senate Finance Committee, Max Baucus, D-Mont., and Chuck Grassley, R-Iowa -- is expected to focus on these points as well as a discussion of Geithner's tax status.
The hearing was originally set for last week, but it was pushed back after it came to light that Geithner -- who as Treasury secretary would oversee the IRS -- had failed to pay in timely fashion some $34,023 in self-employment taxes between 2001 and 2004.
Obama's team dismissed the tax problems as a "common mistake," and Geithner has since paid the required taxes and interest. Obama's chief of staff said Sunday the president "absolutely" supports the nominee.
Though as head of the Treasury Geithner would oversee the IRS, many observers have dismissed the tax questions as paling in comparison to the need to address the crisis in the economy and financial markets.
"I'm interested in hearing his explanation for the tax stuff, but that's minor next to the other issues," said New York University finance professor Roy Smith. "What I want to know is what he's learned from the first half of the TARP."
In prepared remarks to be delivered Wednesday morning before the Senate Finance Committee, Geithner called on senators to support the Obama administration's $825 billion stimulus plan. The comments come as the Senate panel prepares to consider whether to confirm Geithner as the nation's top financial officer.
"Senators, the ultimate costs of this crisis will be greater, if we do not act with sufficient strength now," Geithner's testimony read. "In a crisis of this magnitude, the most prudent course is the most forceful course."
In his testimony, Geithner -- who is currently the president of the Federal Reserve Bank of New York -- also advocated "aggressive action to address the housing crisis and to get credit flowing again," though he offered no specifics.
The comments come a day after President Obama took office, only to confront the worst-ever Inauguration Day selloff in the stock market.
The Dow Jones industrial average dropped 4% Tuesday, led by another free fall in bank stocks. The KBW Bank index plunged 20% to its lowest level since 1994, amid worries that big financial institutions such as Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) will require additional federal aid that could wipe out shareholders.
Geithner said that if confirmed as Treasury secretary, he would work to reform the government's most visible response to the financial sector crisis -- the $700 billion financial bailout plan enacted by Congress last fall after September brought the collapse or takeover of six major financial institutions.
The Bush administration's approach to the Troubled Asset Relief Program, or TARP, has become deeply unpopular with legislators and the public.
Many skeptics complain that there was no plan in place to make sure the first $350 billion in government funds were used to boost lending to consumers and businesses.
Geithner said a revised TARP plan will contain "tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering."
The comments echo those made recently by another top Obama economic aide, National Economic Council chief-designate Larry Summers.
Addressing another prominent concern, Geithner promised to develop a plan to unwind the government support for financial markets and institutions as soon as possible, and to develop a plan to put the nation on sounder footing fiscally.
The budget deficit is expected to exceed $1 trillion in coming years as tax receipts plunge and federal spending expands to fill the shrinking private sector.
"We need to demonstrate with clear and compelling commitments now, that when we have effectively resolved the crisis and recovery is firmly established, that as a nation, we will return to living within our means," Geithner said.
The hearing -- starting with testimony by Geithner and statements by the leaders of the Senate Finance Committee, Max Baucus, D-Mont., and Chuck Grassley, R-Iowa -- is expected to focus on these points as well as a discussion of Geithner's tax status.
The hearing was originally set for last week, but it was pushed back after it came to light that Geithner -- who as Treasury secretary would oversee the IRS -- had failed to pay in timely fashion some $34,023 in self-employment taxes between 2001 and 2004.
Obama's team dismissed the tax problems as a "common mistake," and Geithner has since paid the required taxes and interest. Obama's chief of staff said Sunday the president "absolutely" supports the nominee.
Though as head of the Treasury Geithner would oversee the IRS, many observers have dismissed the tax questions as paling in comparison to the need to address the crisis in the economy and financial markets.
"I'm interested in hearing his explanation for the tax stuff, but that's minor next to the other issues," said New York University finance professor Roy Smith. "What I want to know is what he's learned from the first half of the TARP."
Monday, January 19, 2009
Madoff does Minneapolis
Tucked into the rolling hills of Hopkins, a suburb west of Minneapolis, the recently refurbished Oak Ridge Country Club looks much like a middle school: beige paneling, a limestone base, and energy-efficient windows. Along the main road to the club is a modest apartment complex with four signs advertising units for rent. Beyond Oak Ridge's modest doors, however, is a well-appointed interior that provides a gathering place for some of the wealthier families in the Twin Cities.
In Minnesota's warm summers the club's golf course, tennis courts, and playground bustle with prosperity, but this winter, with the grounds buried in snow, the conversation at Oak Ridge has turned as grim as the weather. Typically at such clubs, members swap tips and ideas. People you golf with, after all, are usually people you trust. And for more than 20 years some of the members have enthusiastically shared one notable financial strategy: investing with Bernard L. Madoff.
The predominantly Jewish country club, which dates back to 1921, is the hub of the scandal in the Cities. While fraud victims in Manhattan, Palm Beach, Hollywood, and European cities have grabbed the headlines, Madoff's alleged $50 billion Ponzi scheme reached other towns as well. He had a particularly painful impact on the Cities, where his method of preying on Jewish families and foundations was highly effective in this close-knit and long-established community.
While some regional reports put the losses at $300 million, a local attorney working with victims believes $600 million is a more accurate number. He knows of two families who lost a total of more than $130 million. Dozens of other families lost smaller amounts, representing everything from children's college savings to retirement accounts, while local Jewish-funded philanthropies find themselves scrambling to pay for basic core missions for the poor.
As a native of St. Paul, I returned to find my hometown stunned to be a victim of this kind of crime. I know it as a place of quiet money and conservative investors, where the banks rarely need bailouts and the great fortunes created by the likes of Pillsbury, General Mills, and Cargill keep a low profile. But financial scandal has rocked the Twin Cities twice in one season. By a strange coincidence, just two months before the Madoff case broke open, the celebrated local tycoon Tom Petters was arrested and charged with 20 felony counts for his own alleged Ponzi scheme in which he took $3.5 billion from investors. His tactics, in part, were similar to Madoff's, prosecutors allege: He preyed on a religious community, in this case members of his own evangelical Christian faith.
Madoff, operating remotely from Manhattan, developed a network of local feeders to steer business his way, and in the Twin Cities he had a good one: Mike Engler, an unassuming stockbroker. Engler, as part of Engler & Budd securities, backed small, local stocks that traded on the more obscure edges of the financial markets, making him as different from the posh and powerful Madoff as Minneapolis is from Manhattan. Engler began his work in the 1980s, steering families into the machine with promises of sterling but not spectacular investment performance - usually returns of around 12% per year.
The Oak Ridge Country Club, whose online history says it was founded for everyone in town "who knew the difference between a golf ball and a matzo ball," was fertile ground for Engler. Madoff investors became like a club within a club. "The illusion was created that Bernard had to pick you to be in there," Minneapolis asset manager John Pohlad told the St. Paul Pioneer Press. "Madoff was one of the most difficult to compete against because he had so much momentum and mystique about him."
Even after Engler's death in 1994, the money kept flowing to Madoff as estate lawyers and financial advisors kept up the tradition and families extended their participation, adding new generations to the mill. Besides soaking members of the Oak Ridge Country Club, Madoff worked the other side of the Mississippi river too, attracting a smaller following at Hillcrest Country Club, a predominantly Jewish golf course in St. Paul.
'A safe and conservative investment'
Bruce Graybow, president of Graybow Communications in the Minneapolis suburb of Golden Valley, became familiar with Madoff through Graybow's late father, Marvin, who had regarded Engler as an "honorable" and "trusted" family friend, Graybow told Fortune. After his father sold the family's plumbing and heating business, the family poured that money into Madoff's firm. Bruce built his own business, which provides corporate audio-visual systems, and eventually sold a chunk of it in 2007. As his father and friends had done, he placed most of the proceeds with Madoff.
"I saw this as a safe and conservative investment, a good place to put my discretionary savings," says Graybow. "When I found out what happened, I was shocked and in absolute disbelief." He also felt physically ill and went into a cold sweat. "I put on my coat, and I walked to my friend's house down the street to gather my thoughts and sort things out."
The losses have affected people of much smaller means. One woman had kept her ties to Madoff secret for more than a decade. She was a mistress of a rich and powerful man in the Twin Cities. After a chance meeting in a park, they began a relationship that lasted nearly 20 years and included a promise that he would always take care of her. Once every quarter, a check from a Swiss bank account that included the name of Madoff's securities firm arrived in her mailbox.
She moved into a new apartment, got a nice car, and like many associated with Madoff, gave away some of the money to charities and favored causes. She had a habit of reading the New York Times to keep track of the world she had intersected with in secret. Even after the man's death a few years ago, the checks continued to arrive on schedule. "Then one morning I pick up the Times, and there's Bernie," she recalls. "What's he doing in the paper? I read the article and realized that my life was over." Now she is struggling to find a way to survive, relying heavily on the generosity of friends. The check scheduled for the first week of January didn't arrive, as she expected, and her car has been repossessed.
Just as the Madoff scandal devastated charities on the coasts, including foundations associated with Elie Wiesel and Stephen Spielberg, it hit hard in the Twin Cities, which are notably proud of their philanthropy. The impact of Madoff's machinations can be seen down to the street level. "As difficult as this tragedy is for some families, it's the loss to the poor and to the charitable programs in the Cities that is even worse," said Andy Parker, an attorney who represents some Madoff victims.
Human-rights activism, a Minnesota passion that ranges from voting-rights efforts to campaigns aimed at shutting down the military prison at Guantánamo Bay, has been set back by the scandal. "A lot of money has just disappeared. It's beyond shocking, the widespread damage that has resulted from this behavior," said Barbara Frey, director of the human rights program at the University of Minnesota. "Local charities played a strong role in funding this work, and a lot of them are all of a sudden out of cash."
Many of their supporters find themselves in the position of Violet Werner, a member of the Oak Ridge Country Club whose late husband owned a trucking company and set up a small foundation to support local arts and cultural groups. The foundation had $1.6 million in assets, much of it invested with Madoff. "The whole thing is just the most horrible scam I've ever heard of," she told the Minneapolis Star Tribune. "This money went to help people in need, and to people who do wonderful work. I'm so sad I can hardly speak."
Among the Minnesotans absorbing the news were workaday people who most likely had never heard of Madoff. One company, Upsher-Smith Laboratories in suburban Maple Grove, a generic-drug company with 650 employees, placed some of its profit-sharing programs for its employees with Madoff. These Upsher-Smith accounts, which reportedly had built up to more than $100,000 for some workers, were frozen when the Madoff scandal came to light. A representative of Upsher-Smith declined to comment.
Even the state government is concerned about Madoff's impact. Because of the allegedly fraudulent nature of returns associated with Madoff, many investors will have the right to reclaim taxes paid on phantom gains at the state and federal level. Given the parlous state of the economy, governments are already scrambling for tax revenue. For a state like Minnesota, the highly localized impact of the losses and the potential for refunds on taxes paid by investors in both the Madoff and Petters cases could have significant consequences.
How is it that the Twin Cities found themselves sharing headline space with Palm Beach and Hollywood? While one seldom sees a Rolls-Royce or other public displays of wealth, the Cities have no small number of rich families. Older money associated with James J. Hill's Great Northern Railroad and the Weyerhaeuser timber fortune clustered around St. Paul. In Minneapolis descendants of the early grain millers and grain traders held sway. This money moved quietly in the shadows, seldom drawing much attention to itself. The wealthy who came later, including the Jewish community, also embraced the understated approach to money.
Since the Twin Cities aren't particularly large, some families preferred to invest with money managers in New York or Chicago. "That made it less likely that you'd run into someone at a dinner party or other social function who knew exactly how rich you might be," said an attorney representing local victims.
Under the radar
For Jewish Minnesotans, conforming to the quiet-money standards of the Twin Cities had another benefit: It kept latent anti-Semitism at bay. The Jewish population, despite its relatively small size of about 50,000, or 1% of the total, has had a large impact on philanthropy and politics in Minnesota. Al Franken and Norm Coleman, the two candidates in November's senate race, are both Jewish. Despite this public-sector success, fear of a backlash has always lingered, especially since the Twin Cities were not a welcoming place for Jews as recently as the postwar era. In 1946 progressive author Carey McWilliams called Minneapolis the "capital of anti-Semitism in the United states." Indeed, many Jewish families have expressed alarm that the Madoff scandal will evoke darker thoughts.
"There's always some anti-Semitism, and [the scandal] becomes fodder for those gristmills," says Harlan Jacobs, who runs a small-company investment incubator in the Twin Cities and is past president of the local Jewish Community Relations Council. "People who hate will hate, and this unfortunately will give them more excuses to do so."
Members of Oak Ridge, meanwhile, have worried that the scandal might threaten the future of their 88-year-old club. Speculation reached such a pitch that club president Rom Zamansky, a Minneapolis attorney, sent a note to members saying that the club would pull through fine. In that letter he extolled the charitable work of Oak Ridge members and admonished members not to talk to the media about Madoff.
Most Jewish houses of worship are already struggling financially amid the economic downturn, and the Madoff situation could make things tougher in the near term. But some rabbis have sought to turn the Madoff scandal into a teaching moment. Not far from Oak Ridge, at the Beth El Synagogue in the Minneapolis suburb of St. Louis Park, Rabbi Alexander Davis maintains an optimistic mien. He acknowledges that people are shocked and that some feel the scandal has brought shame to the Jewish community. At the same time, he feels this is a chance to get a spiritual message across. "It's definitely an opportunity, whether we wanted it or not, to rethink our values," says Davis. "We need to examine the cultural norms that allowed us to get into this situation. There's an opportunity to reorganize our thinking so that it better reflects our priorities."
In a letter to his members during Hanukkah in December, he decried Madoff as one who would steal from his own people. "This year the lights of may seem dimmer, the gifts may be fewer," he wrote. "But the message of Hanukkah continues to shine forth brightly. We will not allow Madoff - the Grinch who stole Hanukkah - to dampen the message of Hanukkah. For the light of Hanukkah is not the sparkle of gelt but the spirit of god."
What about the laws of men - can they provide for any recourse to the alleged Madoff sins? Alas, attorneys representing victims are finding it hard to unlock the Madoff puzzle. Some prominent class-action attorneys see no real path to recover lost investments. "He cut a fairly large swath through here, and it's a terrible, awful tragedy," said Karl Cambronne, an attorney in Minneapolis at Chestnut & Brooks. "But as we look at the details, we just can't see anything we can do to help."
One reason that locals are so reticent is that not a small number, like the mistress who spoke to Fortune, received funds throughout the alleged scam. Foundations regularly drew down from their endowments invested with Madoff. The potential for "clawbacks," or litigation to wrest money from those who got cash out of Madoff before the scandal surfaced, remains high. Local attorneys are still scrambling to find some angle to recoup losses. The hunt includes a search for potential fiduciaries, those who might have offered enough advice to bear some responsibility for the failed investments. But many lawyers are skeptical about finding a successful legal strategy beyond the standard bankruptcy path and possible recovery of some assets via the Securities Investor Protection Corp.
Graybow, the communications entrepreneur and victim, is particularly incensed that the government failed to spot Madoff's mischief despite repeated warnings and several investigations into the firm. "It is shameful that after numerous inquiries from the investment community," Graybow says, "the regulators didn't thoroughly research and investigate the truth and uncover the underlying mechanics of the Madoff operations."
He believes a government fund for victims is an appropriate solution, citing the failure of regulators to catch Madoff. At a time when everyone from auto companies to investment banks to state governments is holding a hand out to the government, Graybow's notion might have a chance, at least in theory. But in reality, the line at the government till is already very long and is likely to grow longer. For some members of the Oak Ridge club, the only solace may be springtime, which will come not a moment too soon.
In Minnesota's warm summers the club's golf course, tennis courts, and playground bustle with prosperity, but this winter, with the grounds buried in snow, the conversation at Oak Ridge has turned as grim as the weather. Typically at such clubs, members swap tips and ideas. People you golf with, after all, are usually people you trust. And for more than 20 years some of the members have enthusiastically shared one notable financial strategy: investing with Bernard L. Madoff.
The predominantly Jewish country club, which dates back to 1921, is the hub of the scandal in the Cities. While fraud victims in Manhattan, Palm Beach, Hollywood, and European cities have grabbed the headlines, Madoff's alleged $50 billion Ponzi scheme reached other towns as well. He had a particularly painful impact on the Cities, where his method of preying on Jewish families and foundations was highly effective in this close-knit and long-established community.
While some regional reports put the losses at $300 million, a local attorney working with victims believes $600 million is a more accurate number. He knows of two families who lost a total of more than $130 million. Dozens of other families lost smaller amounts, representing everything from children's college savings to retirement accounts, while local Jewish-funded philanthropies find themselves scrambling to pay for basic core missions for the poor.
As a native of St. Paul, I returned to find my hometown stunned to be a victim of this kind of crime. I know it as a place of quiet money and conservative investors, where the banks rarely need bailouts and the great fortunes created by the likes of Pillsbury, General Mills, and Cargill keep a low profile. But financial scandal has rocked the Twin Cities twice in one season. By a strange coincidence, just two months before the Madoff case broke open, the celebrated local tycoon Tom Petters was arrested and charged with 20 felony counts for his own alleged Ponzi scheme in which he took $3.5 billion from investors. His tactics, in part, were similar to Madoff's, prosecutors allege: He preyed on a religious community, in this case members of his own evangelical Christian faith.
Madoff, operating remotely from Manhattan, developed a network of local feeders to steer business his way, and in the Twin Cities he had a good one: Mike Engler, an unassuming stockbroker. Engler, as part of Engler & Budd securities, backed small, local stocks that traded on the more obscure edges of the financial markets, making him as different from the posh and powerful Madoff as Minneapolis is from Manhattan. Engler began his work in the 1980s, steering families into the machine with promises of sterling but not spectacular investment performance - usually returns of around 12% per year.
The Oak Ridge Country Club, whose online history says it was founded for everyone in town "who knew the difference between a golf ball and a matzo ball," was fertile ground for Engler. Madoff investors became like a club within a club. "The illusion was created that Bernard had to pick you to be in there," Minneapolis asset manager John Pohlad told the St. Paul Pioneer Press. "Madoff was one of the most difficult to compete against because he had so much momentum and mystique about him."
Even after Engler's death in 1994, the money kept flowing to Madoff as estate lawyers and financial advisors kept up the tradition and families extended their participation, adding new generations to the mill. Besides soaking members of the Oak Ridge Country Club, Madoff worked the other side of the Mississippi river too, attracting a smaller following at Hillcrest Country Club, a predominantly Jewish golf course in St. Paul.
'A safe and conservative investment'
Bruce Graybow, president of Graybow Communications in the Minneapolis suburb of Golden Valley, became familiar with Madoff through Graybow's late father, Marvin, who had regarded Engler as an "honorable" and "trusted" family friend, Graybow told Fortune. After his father sold the family's plumbing and heating business, the family poured that money into Madoff's firm. Bruce built his own business, which provides corporate audio-visual systems, and eventually sold a chunk of it in 2007. As his father and friends had done, he placed most of the proceeds with Madoff.
"I saw this as a safe and conservative investment, a good place to put my discretionary savings," says Graybow. "When I found out what happened, I was shocked and in absolute disbelief." He also felt physically ill and went into a cold sweat. "I put on my coat, and I walked to my friend's house down the street to gather my thoughts and sort things out."
The losses have affected people of much smaller means. One woman had kept her ties to Madoff secret for more than a decade. She was a mistress of a rich and powerful man in the Twin Cities. After a chance meeting in a park, they began a relationship that lasted nearly 20 years and included a promise that he would always take care of her. Once every quarter, a check from a Swiss bank account that included the name of Madoff's securities firm arrived in her mailbox.
She moved into a new apartment, got a nice car, and like many associated with Madoff, gave away some of the money to charities and favored causes. She had a habit of reading the New York Times to keep track of the world she had intersected with in secret. Even after the man's death a few years ago, the checks continued to arrive on schedule. "Then one morning I pick up the Times, and there's Bernie," she recalls. "What's he doing in the paper? I read the article and realized that my life was over." Now she is struggling to find a way to survive, relying heavily on the generosity of friends. The check scheduled for the first week of January didn't arrive, as she expected, and her car has been repossessed.
Just as the Madoff scandal devastated charities on the coasts, including foundations associated with Elie Wiesel and Stephen Spielberg, it hit hard in the Twin Cities, which are notably proud of their philanthropy. The impact of Madoff's machinations can be seen down to the street level. "As difficult as this tragedy is for some families, it's the loss to the poor and to the charitable programs in the Cities that is even worse," said Andy Parker, an attorney who represents some Madoff victims.
Human-rights activism, a Minnesota passion that ranges from voting-rights efforts to campaigns aimed at shutting down the military prison at Guantánamo Bay, has been set back by the scandal. "A lot of money has just disappeared. It's beyond shocking, the widespread damage that has resulted from this behavior," said Barbara Frey, director of the human rights program at the University of Minnesota. "Local charities played a strong role in funding this work, and a lot of them are all of a sudden out of cash."
Many of their supporters find themselves in the position of Violet Werner, a member of the Oak Ridge Country Club whose late husband owned a trucking company and set up a small foundation to support local arts and cultural groups. The foundation had $1.6 million in assets, much of it invested with Madoff. "The whole thing is just the most horrible scam I've ever heard of," she told the Minneapolis Star Tribune. "This money went to help people in need, and to people who do wonderful work. I'm so sad I can hardly speak."
Among the Minnesotans absorbing the news were workaday people who most likely had never heard of Madoff. One company, Upsher-Smith Laboratories in suburban Maple Grove, a generic-drug company with 650 employees, placed some of its profit-sharing programs for its employees with Madoff. These Upsher-Smith accounts, which reportedly had built up to more than $100,000 for some workers, were frozen when the Madoff scandal came to light. A representative of Upsher-Smith declined to comment.
Even the state government is concerned about Madoff's impact. Because of the allegedly fraudulent nature of returns associated with Madoff, many investors will have the right to reclaim taxes paid on phantom gains at the state and federal level. Given the parlous state of the economy, governments are already scrambling for tax revenue. For a state like Minnesota, the highly localized impact of the losses and the potential for refunds on taxes paid by investors in both the Madoff and Petters cases could have significant consequences.
How is it that the Twin Cities found themselves sharing headline space with Palm Beach and Hollywood? While one seldom sees a Rolls-Royce or other public displays of wealth, the Cities have no small number of rich families. Older money associated with James J. Hill's Great Northern Railroad and the Weyerhaeuser timber fortune clustered around St. Paul. In Minneapolis descendants of the early grain millers and grain traders held sway. This money moved quietly in the shadows, seldom drawing much attention to itself. The wealthy who came later, including the Jewish community, also embraced the understated approach to money.
Since the Twin Cities aren't particularly large, some families preferred to invest with money managers in New York or Chicago. "That made it less likely that you'd run into someone at a dinner party or other social function who knew exactly how rich you might be," said an attorney representing local victims.
Under the radar
For Jewish Minnesotans, conforming to the quiet-money standards of the Twin Cities had another benefit: It kept latent anti-Semitism at bay. The Jewish population, despite its relatively small size of about 50,000, or 1% of the total, has had a large impact on philanthropy and politics in Minnesota. Al Franken and Norm Coleman, the two candidates in November's senate race, are both Jewish. Despite this public-sector success, fear of a backlash has always lingered, especially since the Twin Cities were not a welcoming place for Jews as recently as the postwar era. In 1946 progressive author Carey McWilliams called Minneapolis the "capital of anti-Semitism in the United states." Indeed, many Jewish families have expressed alarm that the Madoff scandal will evoke darker thoughts.
"There's always some anti-Semitism, and [the scandal] becomes fodder for those gristmills," says Harlan Jacobs, who runs a small-company investment incubator in the Twin Cities and is past president of the local Jewish Community Relations Council. "People who hate will hate, and this unfortunately will give them more excuses to do so."
Members of Oak Ridge, meanwhile, have worried that the scandal might threaten the future of their 88-year-old club. Speculation reached such a pitch that club president Rom Zamansky, a Minneapolis attorney, sent a note to members saying that the club would pull through fine. In that letter he extolled the charitable work of Oak Ridge members and admonished members not to talk to the media about Madoff.
Most Jewish houses of worship are already struggling financially amid the economic downturn, and the Madoff situation could make things tougher in the near term. But some rabbis have sought to turn the Madoff scandal into a teaching moment. Not far from Oak Ridge, at the Beth El Synagogue in the Minneapolis suburb of St. Louis Park, Rabbi Alexander Davis maintains an optimistic mien. He acknowledges that people are shocked and that some feel the scandal has brought shame to the Jewish community. At the same time, he feels this is a chance to get a spiritual message across. "It's definitely an opportunity, whether we wanted it or not, to rethink our values," says Davis. "We need to examine the cultural norms that allowed us to get into this situation. There's an opportunity to reorganize our thinking so that it better reflects our priorities."
In a letter to his members during Hanukkah in December, he decried Madoff as one who would steal from his own people. "This year the lights of may seem dimmer, the gifts may be fewer," he wrote. "But the message of Hanukkah continues to shine forth brightly. We will not allow Madoff - the Grinch who stole Hanukkah - to dampen the message of Hanukkah. For the light of Hanukkah is not the sparkle of gelt but the spirit of god."
What about the laws of men - can they provide for any recourse to the alleged Madoff sins? Alas, attorneys representing victims are finding it hard to unlock the Madoff puzzle. Some prominent class-action attorneys see no real path to recover lost investments. "He cut a fairly large swath through here, and it's a terrible, awful tragedy," said Karl Cambronne, an attorney in Minneapolis at Chestnut & Brooks. "But as we look at the details, we just can't see anything we can do to help."
One reason that locals are so reticent is that not a small number, like the mistress who spoke to Fortune, received funds throughout the alleged scam. Foundations regularly drew down from their endowments invested with Madoff. The potential for "clawbacks," or litigation to wrest money from those who got cash out of Madoff before the scandal surfaced, remains high. Local attorneys are still scrambling to find some angle to recoup losses. The hunt includes a search for potential fiduciaries, those who might have offered enough advice to bear some responsibility for the failed investments. But many lawyers are skeptical about finding a successful legal strategy beyond the standard bankruptcy path and possible recovery of some assets via the Securities Investor Protection Corp.
Graybow, the communications entrepreneur and victim, is particularly incensed that the government failed to spot Madoff's mischief despite repeated warnings and several investigations into the firm. "It is shameful that after numerous inquiries from the investment community," Graybow says, "the regulators didn't thoroughly research and investigate the truth and uncover the underlying mechanics of the Madoff operations."
He believes a government fund for victims is an appropriate solution, citing the failure of regulators to catch Madoff. At a time when everyone from auto companies to investment banks to state governments is holding a hand out to the government, Graybow's notion might have a chance, at least in theory. But in reality, the line at the government till is already very long and is likely to grow longer. For some members of the Oak Ridge club, the only solace may be springtime, which will come not a moment too soon.
Sunday, January 18, 2009
Stocks: Here come the earnings
Investors not fixated on the inauguration will be bemoaning corporate health as the first big wave of quarterly results are unleashed upon the markets. And it could get ugly.
"Analysts still haven't ratcheted down their earnings expectations enough, so we'll probably see a lot more negative surprises than positive ones," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "But offsetting this will be optimism about the new administration."
Some 180 companies are slated to report results this week. Currently, 55 S&P 500 firms, including five Dow components are on tap. Standouts include Johnson & Johnson (JNJ, Fortune 500), IBM (IBM, Fortune 500), United Technologies (UTX, Fortune 500), Apple (AAPL, Fortune 500), eBay (EBAY, Fortune 500), Google (GOOG, Fortune 500), Microsoft (MSFT, Fortune 500), and General Electric (GE, Fortune 500).
A few housing reports are also scheduled, but the week is otherwise light on economic news. Financial markets are closed on Monday for Martin Luther King Jr. Day.
Tuesday's big event is of course Inauguration Day, when Barack Obama will be sworn in as the 44th president. It appears likely that Obama will waste little time making his mark on the economy: Expectations are growing that he will soon announce plans for the second $350 billion set aside to bail out the financial system.
Stocks should get a boost from enthusiasm about the inauguration, but any big earnings disappointments could dampen that, said Ghriskey.
Stocks have had a rough go in the new year. A two-session advance at the end of last week took the edge off a decline that saw the Dow falling back to within range of the bear market lows it hit last November.
The financial sector has been especially battered, with the KBW Bank (BKX) sector index losing 28% year-to-date versus the S&P 500's loss of nearly 6%.
Bracing for weak earnings: Fourth-quarter earnings are expected to have slumped 20.2% from a year ago, according to earnings tracker Thomson Reuters. That would make it the sixth consecutive quarter of shrinking growth for the S&P 500 index.
"What's different this time is that the weakness is spreading," said John Butters, Thomson Reuters' senior research analyst.
He said that in previous quarters, most of the weakness was coming from the financial sector and the consumer discretionary sector, which includes automakers and homebuilders. During those quarters, select sectors were actually posting small gains, while others were close to unchanged.
The financial sector is still expected to be the worst performer in the fourth quarter, with analysts forecasting a decline of 98% from a year ago. But this time, the financials are far from an anomaly, Butters said.
Seven of the 10 economic sectors are expected to post declines, Butters said, as companies across a broad range of industries suffer amid the more than one-year old recession. Healthcare, utilities and consumer staples are the only ones expected to see any growth, and all in the low single digits.
Earnings
Tuesday: Dow component Johnson & Johnson is expected to report earnings of 92 cents per share Tuesday morning, versus a profit of 88 cents per share a year ago, according to analysts surveyed by Thomson Reuters.
After the market close, Dow component IBM is expected to report earnings of $3.03 per share, versus $2.80 per share a year ago.
Wednesday: United Technologies, another Dow component, is expected to have earned $1.22 per share, up from $1.08 a share a year ago.
Apple reports quarterly earnings after the market close. The tech leader is expected to have earned $1.38 a share versus a profit of $1.76 per share a year ago.
Also reporting after the close is eBay. The online auctioneer is expected to have earned 40 cents a share versus 45 cents a share a year ago.
Thursday: Google is expected to report a profit of $4.96 per share Thursday evening, up from $4.43 a share a year ago.
Microsoft also reports results after the bell. The software giant is expected to have earned 50 cents per share, unchanged from the same period last year.
Friday: General Electric, a Dow component, reports quarterly results Friday morning. GE is expected to have earned 37 cents per share versus 68 cents a share a year ago.
Economy
Wednesday: Treasury Secretary nominee Timothy Geithner's confirmation hearing in the Senate is due to begin around 10 a.m. ET.
Geithner was considered a shoo-in but has faced questions lately about his initial failure to pay certain taxes earlier this decade, as well as the immigration status of a housekeeper.
Thursday: December housing starts are expected to have fallen to a 610,000 unit annual rate from a 625,000 unit rate in November, according to Briefing.com forecasts. Building permits, a measure of builder confidence, are expected to have fallen to a 615,000 unit annual rate from a 616,000 unit rate in November.
"Analysts still haven't ratcheted down their earnings expectations enough, so we'll probably see a lot more negative surprises than positive ones," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "But offsetting this will be optimism about the new administration."
Some 180 companies are slated to report results this week. Currently, 55 S&P 500 firms, including five Dow components are on tap. Standouts include Johnson & Johnson (JNJ, Fortune 500), IBM (IBM, Fortune 500), United Technologies (UTX, Fortune 500), Apple (AAPL, Fortune 500), eBay (EBAY, Fortune 500), Google (GOOG, Fortune 500), Microsoft (MSFT, Fortune 500), and General Electric (GE, Fortune 500).
A few housing reports are also scheduled, but the week is otherwise light on economic news. Financial markets are closed on Monday for Martin Luther King Jr. Day.
Tuesday's big event is of course Inauguration Day, when Barack Obama will be sworn in as the 44th president. It appears likely that Obama will waste little time making his mark on the economy: Expectations are growing that he will soon announce plans for the second $350 billion set aside to bail out the financial system.
Stocks should get a boost from enthusiasm about the inauguration, but any big earnings disappointments could dampen that, said Ghriskey.
Stocks have had a rough go in the new year. A two-session advance at the end of last week took the edge off a decline that saw the Dow falling back to within range of the bear market lows it hit last November.
The financial sector has been especially battered, with the KBW Bank (BKX) sector index losing 28% year-to-date versus the S&P 500's loss of nearly 6%.
Bracing for weak earnings: Fourth-quarter earnings are expected to have slumped 20.2% from a year ago, according to earnings tracker Thomson Reuters. That would make it the sixth consecutive quarter of shrinking growth for the S&P 500 index.
"What's different this time is that the weakness is spreading," said John Butters, Thomson Reuters' senior research analyst.
He said that in previous quarters, most of the weakness was coming from the financial sector and the consumer discretionary sector, which includes automakers and homebuilders. During those quarters, select sectors were actually posting small gains, while others were close to unchanged.
The financial sector is still expected to be the worst performer in the fourth quarter, with analysts forecasting a decline of 98% from a year ago. But this time, the financials are far from an anomaly, Butters said.
Seven of the 10 economic sectors are expected to post declines, Butters said, as companies across a broad range of industries suffer amid the more than one-year old recession. Healthcare, utilities and consumer staples are the only ones expected to see any growth, and all in the low single digits.
Earnings
Tuesday: Dow component Johnson & Johnson is expected to report earnings of 92 cents per share Tuesday morning, versus a profit of 88 cents per share a year ago, according to analysts surveyed by Thomson Reuters.
After the market close, Dow component IBM is expected to report earnings of $3.03 per share, versus $2.80 per share a year ago.
Wednesday: United Technologies, another Dow component, is expected to have earned $1.22 per share, up from $1.08 a share a year ago.
Apple reports quarterly earnings after the market close. The tech leader is expected to have earned $1.38 a share versus a profit of $1.76 per share a year ago.
Also reporting after the close is eBay. The online auctioneer is expected to have earned 40 cents a share versus 45 cents a share a year ago.
Thursday: Google is expected to report a profit of $4.96 per share Thursday evening, up from $4.43 a share a year ago.
Microsoft also reports results after the bell. The software giant is expected to have earned 50 cents per share, unchanged from the same period last year.
Friday: General Electric, a Dow component, reports quarterly results Friday morning. GE is expected to have earned 37 cents per share versus 68 cents a share a year ago.
Economy
Wednesday: Treasury Secretary nominee Timothy Geithner's confirmation hearing in the Senate is due to begin around 10 a.m. ET.
Geithner was considered a shoo-in but has faced questions lately about his initial failure to pay certain taxes earlier this decade, as well as the immigration status of a housekeeper.
Thursday: December housing starts are expected to have fallen to a 610,000 unit annual rate from a 625,000 unit rate in November, according to Briefing.com forecasts. Building permits, a measure of builder confidence, are expected to have fallen to a 615,000 unit annual rate from a 616,000 unit rate in November.
Friday, January 16, 2009
Benefits on the chopping block
As the recession deepens, companies are looking for ways to cut costs without cutting staff -- and that could mean scaling back on benefits.
Many businesses have already reduced retirement contributions, or eliminated them altogether. Saks Fifth Avenue (SKS), Motorola, FedEx and Ford (F, Fortune 500) are just a few of the companies that announced they would no longer be offering employer matches to 401(k) plans.
But the buck doesn't stop there. Now more companies are considering cutting back costly health coverage and other benefits during tough economic times.
"It's definitely a trend that we're seeing," said Laurie Bienstock, national director of strategic rewards for benefits consulting firm Watson Wyatt. "As there are continued challenges, the numbers are growing."
Benefits for employees cost employers, on average, $8.74 per hour worked, according to a report by the Bureau of Labor Statistics, a bulk of which is credited to health insurance coverage. That's $2.27 per employee, per hour, according to BLS.
To bring that expense down, 20% of businesses have already raised the employee contribution to health care premiums and another 17% plan to in the next 12 months, according to a recent survey by Watson Wyatt.
Bob Eubank, executive director of the Northeast Human Resources Association, said that companies are not looking to eliminate benefits altogether but make them more cost effective -- and that means more expensive for employees.
The average employee contribution to company-provided health insurance has already increased 117 percent since 1999, according the Kaiser Family Foundation.
When companies cut back on healthcare plans, workers will likely see less coverage, in addition to higher deductibles and heftier co-pays.
Twelve percent of the businesses surveyed said they have also reduced or eliminated other employee programs, such as tuition assistance and company subsidized dining, as a way of cutting costs and another 12% plan to do that in the coming year.
Paving the way, Procter & Gamble (PG, Fortune 500) already scaled back its charitable match, Weyerhaeuser (WY, Fortune 500) trimmed retiree healthcare benefits, Google (GOOG, Fortune 500) reduced the number of free meals for its employees and General Motors (GM, Fortune 500) suspended tuition reimbursement.
While there may not be much you can do about losing out on perks like matching charitable contributions or tuition assistance, employees may find that there are cost effective alternatives to expensive health plans that could save the employer, and themselves, some dough, experts say.
"Most companies offer multiple plans and often times people will pick a plan without much thought," said Frank Boucher, of Boucher Financial Planning Services in Reston, Va. "Now is the time to pay attention."
For example, Tim Maurer, director of financial planning at the Financial Consulate, recommends looking into a less expensive High Deductible Health Plan (HDHP) coupled with a Health Savings Account, or HSA.
High Deductible Health Plans have lower premiums than traditional health plans and higher deductibles (the minimum deductible for HDHPs is $1,150 for individuals and $2,300 for family coverage).
Meanwhile, workers can put the excess dollars that would have been going into a more expensive plan into an HSA, Maurer says, which has its own advantages.
Health Savings Accounts let you stash cash for qualified medical and health expenses, like filling prescriptions or even getting massages, on a tax-free basis.
Individual employees can contribute up to $3,000 a year (or $5,950 for families) and take a tax deduction on their contribution.
"It's better off for the company and the employee," Maurer said, it's kind of cool."
Many businesses have already reduced retirement contributions, or eliminated them altogether. Saks Fifth Avenue (SKS), Motorola, FedEx and Ford (F, Fortune 500) are just a few of the companies that announced they would no longer be offering employer matches to 401(k) plans.
But the buck doesn't stop there. Now more companies are considering cutting back costly health coverage and other benefits during tough economic times.
"It's definitely a trend that we're seeing," said Laurie Bienstock, national director of strategic rewards for benefits consulting firm Watson Wyatt. "As there are continued challenges, the numbers are growing."
Benefits for employees cost employers, on average, $8.74 per hour worked, according to a report by the Bureau of Labor Statistics, a bulk of which is credited to health insurance coverage. That's $2.27 per employee, per hour, according to BLS.
To bring that expense down, 20% of businesses have already raised the employee contribution to health care premiums and another 17% plan to in the next 12 months, according to a recent survey by Watson Wyatt.
Bob Eubank, executive director of the Northeast Human Resources Association, said that companies are not looking to eliminate benefits altogether but make them more cost effective -- and that means more expensive for employees.
The average employee contribution to company-provided health insurance has already increased 117 percent since 1999, according the Kaiser Family Foundation.
When companies cut back on healthcare plans, workers will likely see less coverage, in addition to higher deductibles and heftier co-pays.
Twelve percent of the businesses surveyed said they have also reduced or eliminated other employee programs, such as tuition assistance and company subsidized dining, as a way of cutting costs and another 12% plan to do that in the coming year.
Paving the way, Procter & Gamble (PG, Fortune 500) already scaled back its charitable match, Weyerhaeuser (WY, Fortune 500) trimmed retiree healthcare benefits, Google (GOOG, Fortune 500) reduced the number of free meals for its employees and General Motors (GM, Fortune 500) suspended tuition reimbursement.
While there may not be much you can do about losing out on perks like matching charitable contributions or tuition assistance, employees may find that there are cost effective alternatives to expensive health plans that could save the employer, and themselves, some dough, experts say.
"Most companies offer multiple plans and often times people will pick a plan without much thought," said Frank Boucher, of Boucher Financial Planning Services in Reston, Va. "Now is the time to pay attention."
For example, Tim Maurer, director of financial planning at the Financial Consulate, recommends looking into a less expensive High Deductible Health Plan (HDHP) coupled with a Health Savings Account, or HSA.
High Deductible Health Plans have lower premiums than traditional health plans and higher deductibles (the minimum deductible for HDHPs is $1,150 for individuals and $2,300 for family coverage).
Meanwhile, workers can put the excess dollars that would have been going into a more expensive plan into an HSA, Maurer says, which has its own advantages.
Health Savings Accounts let you stash cash for qualified medical and health expenses, like filling prescriptions or even getting massages, on a tax-free basis.
Individual employees can contribute up to $3,000 a year (or $5,950 for families) and take a tax deduction on their contribution.
"It's better off for the company and the employee," Maurer said, it's kind of cool."
Bank Rates
Are you one of those who in the midst of the financial turmoil, was able to save money but don't know what to do with it? If your answer is yes, then I recommend you a site where you can gain a lot of interesting information to help you decide.
Monitor Bank Rates shares the latest financial news, especially on the best certificates of deposit rates also known as CD rates. For newbies, a CD is actually commonly called "time deposit". A CD is somewhat similar to saving accounts but with a twist. Unlike online saving accounts where you are free to withdraw anytime, CD's have fixed terms. The common term is 3 months but some offer up to 5 years. During this times, you can't withdraw your money, but your are guaranteed to earn fixed interest rates. This service is offered by banks, thrift institutions, and credit cards. Your deposit is safe as it is insured by the gov't through FDIC's, at a certain amount. With the stock market going for a wild ride, CD's are a safe bet.
Monitor Bank Rates provides a lot of information on the banks that offer the best cd rates. On one of the post it says "Virtual Bank is offering one of the best CD rates for a 1 month CD, currently the annual percentage rate is 2.40% and the annual percentage yield is 2.43% for their 1 month eCD". How's that for a teaser? Aside from cd rates, you can learn about topics ranging from 0% credit card offers, mortgages and personal finance tips. So what are you waiting for? Visit the site and start putting that savings to good use.
Monitor Bank Rates shares the latest financial news, especially on the best certificates of deposit rates also known as CD rates. For newbies, a CD is actually commonly called "time deposit". A CD is somewhat similar to saving accounts but with a twist. Unlike online saving accounts where you are free to withdraw anytime, CD's have fixed terms. The common term is 3 months but some offer up to 5 years. During this times, you can't withdraw your money, but your are guaranteed to earn fixed interest rates. This service is offered by banks, thrift institutions, and credit cards. Your deposit is safe as it is insured by the gov't through FDIC's, at a certain amount. With the stock market going for a wild ride, CD's are a safe bet.
Monitor Bank Rates provides a lot of information on the banks that offer the best cd rates. On one of the post it says "Virtual Bank is offering one of the best CD rates for a 1 month CD, currently the annual percentage rate is 2.40% and the annual percentage yield is 2.43% for their 1 month eCD". How's that for a teaser? Aside from cd rates, you can learn about topics ranging from 0% credit card offers, mortgages and personal finance tips. So what are you waiting for? Visit the site and start putting that savings to good use.
Thursday, January 8, 2009
Windy City's retail downdraft
Chicago faces the worst slump in retailing growth in at least a decade - and residents of the Windy City and its suburbs are paying the price in the form of lost tax revenue for improvements and services.
And because Chicago, the nation's third-largest metropolitan area, is a bellwether of the retail industry, the downturn is a harbinger for other major metropolitan areas.
"This is a very challenging environment," said Mike Jaffe, a Chicago-area retail developer and president of Jaffe Companies. He added that when new retail growth stalls in a metro area the size of Chicago, "that's really saying something."
One example of the situation can be found 36 miles southwest of The Loop, in the village of New Lenox, where there was plenty of excitement among the 25,000 residents about two new malls on the way.
One of the malls - the 1 million-square-foot Cedar Crossings shopping center - is slated to open later this year.
But the second, a 1.2 million-square-foot center developed by Forest City Enterprises that was expected to open in 2010, has "run into issues," according to New Lenox mayor Tim Balderman.
"The landowner wanted more money. Now we're not moving forward. We're very disappointed," he said. "There's no doubt that this economy has hurt us."
The two centers collectively were projected to generate as much as $10 million in property and sales tax revenue annually.
That money would have gone to building and maintaining surrounding infrastructure.
"Illinois hasn't passed a capital improvement bill in years," Balderman said. "So the burden falls on us to find the money for maintaining our roads."
But not all of the $10 million would go to roads.
"I am most disappointed about the jobs these [retail] projects would have created," he said, adding that he's been proud of the fact that he hasn't - as yet- been forced to lay off any employees.
"These are temporary construction work and permanent store jobs that people really need right now," he said.
According to Balderman and others, the situation in New Lenox is being played out in numerous cities and suburbs across Chicago.
Jaffe said the suburbs of Chicago, especially those with greater exposure to the subprime crisis, have seen a bigger downturn in retailing than the more conservative, upper income neighborhoods.
Still, Jaffe, who co-developed The Arboretum of South Barrington, a 600,000 square foot mixed use retail space in an affluent northwest Chicago suburb, said the "pain" is being felt in every area.
He said the Arboretum is 80% occupied. "Normally retailers will be knocking down the door for the last 20% of available space in this kind of location," he said.
Not this time.
Why Chicago matters
"There's no [retail] growth happening anywhere," said Andy Bulson, vice president with Mid-American Real Estate, a retail brokerage firm based in Oakbrook Terrace, Illinois. "Everyone has hit the brakes."
This is significant because Chicago is the third-largest retailing market in the United States, based on population, after New York and Los Angeles.
Marshal Cohen, chief retail analyst with the NPD Group, explained that Chicago historically has evolved as a major hub of the Midwest.
"In the Midwest you don't have many epicenters for shopping. So Chicago's draw is that it pulls people from surrounding areas," said Cohen.
He explained that Chicago has become a shopping Mecca for conservative Midwesterners and folks who live in the South for whom New York is too expensive and Los Angeles a little too "freespirtited."
Chicago's other allure for merchants and mall developers is its proximity to Canada, Cohen said.
"Chicago attracts a tremendous amount of immigration dollars when the dollar is weak," he said. "Many people travel from Toronto to do their shopping in Chicago."
So if no new shopping centers are being built, that's vital future revenue that's lost for Chicago's economy.
"The slowing of the U.S. economy has finally cooled Chicago's robust shopping center development [growth]," Bulson's firm said in its annual survey.
The report showed that new gross leaseable area (GLA), which refers to the total floor space dedicated for retail usage such as a shopping center, power center or lifestyle mall, fell 50% in 2008 over 2007.
The projection for 2009 for the Chicago area is for another 22% drop in shopping center growth.
What's more, the longer the recession lasts, the greater the likelihood that a similar erosion of new retailing activity will quickly spread to other major cities across the country, warned Bulson.
And citing New Lenox's example, Bulson said it is the smaller suburban residential towns outlying these larger cities that are less able to withstand the loss of vital retail revenue and new jobs growth.
Bulson said he's familiar with a number of Chicago-area suburbs where developers have "backed out" of deals to construct large malls.
These developers are either not getting interest from retailers - many of whom are shrinking their store base instead of expanding it - or struggling to get financing for these projects in light of the credit market lockdown, he said.
Shopping center slump
In Chicago, Bulson said "a lot" of new projects need to be finalized in the first quarter, or the estimates for decline in new store growth could be even lower.
Macro-level issues facing retailers such as shrinking margins, lower same-store sales and debt and financing problems will lower new store development for every retailer, he said.
He provided a snapshot of chain stores that have already curtailed their expansion plans in the Windy City.
Target (TGT, Fortune 500), the No. 2 discounter after Wal-Mart (WMT, Fortune 500), has "pulled back on multiple deals around metro Chicago," he said.
At the same time, he estimates that Wal-Mart (WMT, Fortune 500), whose sales have been energized in recent months as more consumers trade down in their everyday purchases, could open as many as seven new supercenters around Chicago.
Home improvement chain Home Depot (HD, Fortune 500) closed its regional office in Chicago last year and will "very likely not open a single new store in coming years," he said.
Among department stores, he said Kohl's could open four new Chicago-area stores this year but J.C. Penney's "future plans appear to be unclear at this time."
Regarding shopping centers, he expects to see a "continued decline" this year.
Even with this gloomy scenario surrounding Chicago, NPD's Cohen sees a bright spot.
"I look at all this as a good sign," Cohen said. "The last place where the recession surfaces is in retailing and retail development."
He pointed out that retail sales didn't see a sizeable slump until the fall of 2008, almost a year after the recession was "officially" said to have started in December 2007.
"Finally, retailing has caught up to the rest of the economy and things will start to pick up again in this industry by the second half of 2009," Cohen said.
And because Chicago, the nation's third-largest metropolitan area, is a bellwether of the retail industry, the downturn is a harbinger for other major metropolitan areas.
"This is a very challenging environment," said Mike Jaffe, a Chicago-area retail developer and president of Jaffe Companies. He added that when new retail growth stalls in a metro area the size of Chicago, "that's really saying something."
One example of the situation can be found 36 miles southwest of The Loop, in the village of New Lenox, where there was plenty of excitement among the 25,000 residents about two new malls on the way.
One of the malls - the 1 million-square-foot Cedar Crossings shopping center - is slated to open later this year.
But the second, a 1.2 million-square-foot center developed by Forest City Enterprises that was expected to open in 2010, has "run into issues," according to New Lenox mayor Tim Balderman.
"The landowner wanted more money. Now we're not moving forward. We're very disappointed," he said. "There's no doubt that this economy has hurt us."
The two centers collectively were projected to generate as much as $10 million in property and sales tax revenue annually.
That money would have gone to building and maintaining surrounding infrastructure.
"Illinois hasn't passed a capital improvement bill in years," Balderman said. "So the burden falls on us to find the money for maintaining our roads."
But not all of the $10 million would go to roads.
"I am most disappointed about the jobs these [retail] projects would have created," he said, adding that he's been proud of the fact that he hasn't - as yet- been forced to lay off any employees.
"These are temporary construction work and permanent store jobs that people really need right now," he said.
According to Balderman and others, the situation in New Lenox is being played out in numerous cities and suburbs across Chicago.
Jaffe said the suburbs of Chicago, especially those with greater exposure to the subprime crisis, have seen a bigger downturn in retailing than the more conservative, upper income neighborhoods.
Still, Jaffe, who co-developed The Arboretum of South Barrington, a 600,000 square foot mixed use retail space in an affluent northwest Chicago suburb, said the "pain" is being felt in every area.
He said the Arboretum is 80% occupied. "Normally retailers will be knocking down the door for the last 20% of available space in this kind of location," he said.
Not this time.
Why Chicago matters
"There's no [retail] growth happening anywhere," said Andy Bulson, vice president with Mid-American Real Estate, a retail brokerage firm based in Oakbrook Terrace, Illinois. "Everyone has hit the brakes."
This is significant because Chicago is the third-largest retailing market in the United States, based on population, after New York and Los Angeles.
Marshal Cohen, chief retail analyst with the NPD Group, explained that Chicago historically has evolved as a major hub of the Midwest.
"In the Midwest you don't have many epicenters for shopping. So Chicago's draw is that it pulls people from surrounding areas," said Cohen.
He explained that Chicago has become a shopping Mecca for conservative Midwesterners and folks who live in the South for whom New York is too expensive and Los Angeles a little too "freespirtited."
Chicago's other allure for merchants and mall developers is its proximity to Canada, Cohen said.
"Chicago attracts a tremendous amount of immigration dollars when the dollar is weak," he said. "Many people travel from Toronto to do their shopping in Chicago."
So if no new shopping centers are being built, that's vital future revenue that's lost for Chicago's economy.
"The slowing of the U.S. economy has finally cooled Chicago's robust shopping center development [growth]," Bulson's firm said in its annual survey.
The report showed that new gross leaseable area (GLA), which refers to the total floor space dedicated for retail usage such as a shopping center, power center or lifestyle mall, fell 50% in 2008 over 2007.
The projection for 2009 for the Chicago area is for another 22% drop in shopping center growth.
What's more, the longer the recession lasts, the greater the likelihood that a similar erosion of new retailing activity will quickly spread to other major cities across the country, warned Bulson.
And citing New Lenox's example, Bulson said it is the smaller suburban residential towns outlying these larger cities that are less able to withstand the loss of vital retail revenue and new jobs growth.
Bulson said he's familiar with a number of Chicago-area suburbs where developers have "backed out" of deals to construct large malls.
These developers are either not getting interest from retailers - many of whom are shrinking their store base instead of expanding it - or struggling to get financing for these projects in light of the credit market lockdown, he said.
Shopping center slump
In Chicago, Bulson said "a lot" of new projects need to be finalized in the first quarter, or the estimates for decline in new store growth could be even lower.
Macro-level issues facing retailers such as shrinking margins, lower same-store sales and debt and financing problems will lower new store development for every retailer, he said.
He provided a snapshot of chain stores that have already curtailed their expansion plans in the Windy City.
Target (TGT, Fortune 500), the No. 2 discounter after Wal-Mart (WMT, Fortune 500), has "pulled back on multiple deals around metro Chicago," he said.
At the same time, he estimates that Wal-Mart (WMT, Fortune 500), whose sales have been energized in recent months as more consumers trade down in their everyday purchases, could open as many as seven new supercenters around Chicago.
Home improvement chain Home Depot (HD, Fortune 500) closed its regional office in Chicago last year and will "very likely not open a single new store in coming years," he said.
Among department stores, he said Kohl's could open four new Chicago-area stores this year but J.C. Penney's "future plans appear to be unclear at this time."
Regarding shopping centers, he expects to see a "continued decline" this year.
Even with this gloomy scenario surrounding Chicago, NPD's Cohen sees a bright spot.
"I look at all this as a good sign," Cohen said. "The last place where the recession surfaces is in retailing and retail development."
He pointed out that retail sales didn't see a sizeable slump until the fall of 2008, almost a year after the recession was "officially" said to have started in December 2007.
"Finally, retailing has caught up to the rest of the economy and things will start to pick up again in this industry by the second half of 2009," Cohen said.
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