Financial News

WASHINGTON–The Bush administration and Congress anxiously revived negotiations yesterday on a $700 billion (U.S.) financial bailout, one day after the largest bank collapse in U.S. history provided a brutal reminder of the risks of failure.

"I’m convinced that by Sunday we will have an agreement that people can understand on this bill," predicted Massachusetts Rep. Barney Frank, a key Democrat in eight days of up-and-down talks designed to stave off an economic crisis.

House Speaker Nancy Pelosi added that "progress is being made," although neither she nor Frank divulged details at a late-afternoon news conference in the Capitol.

They spoke a few hours after President George W. Bush prodded lawmakers to "rise to the occasion" – and quickly.

The talks took place as reports said Wachovia Corp. has begun early merger talks with several suitors including Citigroup Inc., Banco Santander SA and Wells Fargo & Co, all of which spurned Washington Mutual Inc. prior to that lender’s seizure by the U.S. government.

Meanwhile, in one small sign of progress on the bailout front, House Republicans dispatched their second-ranking leader, Rep. Roy Blunt of Missouri, to join the talks after their objections to an emerging compromise had brought negotiations to a standstill the day before.

They also demanded "serious consideration" for a plan of their own, involving less government intrusion and lower cost to the taxpayers than the $700 billion Treasury Secretary Henry Paulson has been seeking.

The legislation the administration is promoting would allow the government to buy bad mortgages and other sour assets held by investors, most of them financial companies. That should make those firms more inclined to lend and lift a weight off an already-sputtering economy. But a significant number of lawmakers, including many House conservatives, say they’re against such heavy federal intervention.

Under their plan, pushed at a White House meeting on Thursday by House Minority leader John Boehner, instead of the government buying the distressed securities, it would insure them.

Presidential politics weighed heavily and unpredictably on the election-season effort to stave off a full-blown economic crisis.

And there were fresh signs of urgency at both the White House and the Capitol, one day after an unusually tempestuous White House meeting and the collapse of Washington Mutual, the largest failure in U.S cash advance in one hour. banking history.

Bush made his brief remarks in hopes of projecting calm for the financial markets.

"We’re going to get this done, and stay in session as long as it takes to get it done," Senate Majority Leader Harry Reid, a Nevada Democrat, said after Bush’s statement.

Republican Sen. Judd Gregg added, "I think anybody who got up this morning and looked at the markets, especially the credit market, had to take a deep breath and say, `this is serious, we better do something.’"

In days of negotiations, the administration has accepted lawmakers’ demands to give Congress considerable authority to oversee the bailout. Additionally, Paulson relented to requests to limit severance packages corporate executives can receive from firms benefiting from the government bailout.

Also, rather than provide $700 billion upfront, Congress would approve $250 billion, with the president able to certify the need for an additional $100 billion on his own authority. The final $350 billion would become available with a second presidential certification, although this time Congress would have authority to block it. Any compromise is expected to require the government to obtain partial ownership of any company it invests in.

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Former union leader Buzz Hargrove is moving behind the bench to help the National Hockey League Players’ Association.

Hargrove, who retired as president of the Canadian Auto Workers union earlier this month, confirmed yesterday he has agreed to join a special group of the NHLPA that would advise the association on key issues.

"The association wanted to set up an advisory group some time ago to offer assistance on various issues that affect them," Hargrove said in an interview.

"It’s a non-paying position. We would meet a few times a year or more, depending on the situation. I won’t be doing any collective bargaining."

The group’s formation comes after the most tumultuous period in the union’s history.

It included the dismissal of executive director Ted Saskin for allegedly hacking into player email accounts last year and the contract dispute and lockout that wiped out the 2004-05 season.

An NHLPA spokesperson would not disclose any details of the advisory group or provide the telephone numbers of executive director Paul Kelly and general counsel Ian Penny.

"We’ll be putting out a news release on the group," said Jonathan Weatherdon, the association’s director of communications.

But sources say the union has appointed at least two retired players to the eight-member group and one of them is Steve Larmer.

Larmer, a former star with the Chicago Blackhawks and the New York Rangers, abruptly quit as association head of player relations in 2005, primarily because of Saskin’s hiring.

The sources added that veteran labour lawyer Ron Pink, of Halifax, will chair the advisory group low rates payday advance.

Pink, who has practised labour, employee benefits, employment and pension law for more than three decades, received the Queen’s Golden Jubilee Medal for community service in 2002.

Daniel O’Neill, former chief executive of Molson Inc., which at one time owned the Montreal Canadiens hockey club, will be a member of the advisory group, according to sources.

Hargrove, who never played organized hockey, said the NHLPA approached him a few months ago. Penny and Glenn Healy, association director of player affairs, interviewed him before confirming Hargrove’s appointment to him about two weeks ago.

Hargrove led the CAW for 16 years, as a skilled contract negotiator, strategist and communicator.

Despite some public perceptions that Hargrove was a strike-happy militant union leader, he encountered only one major walkout at the Big Three domestic automakers. when General Motors refused to match a pattern contract in major bargaining in 1996.

At the start of the NHL lockout in the summer of 2004, Hargrove spoke out publicly in support of a mediator to resolve the dispute because the sides were so entrenched in their bargaining positions. The players’ association can opt out of its league contract next summer, two years before its expiry date.

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It was a cheese Guy Rubino will never forget. Rubino – founder, with his brother Michael, of Rain – recalls a busy night when a friend of his walked through the door. It was Fatos Pristine, owner of The Cheese Boutique, a premium foods supplier.

Pristine had brought a gift. It was a ball of mozzarella di bufala – made only in Campania from fresh water buffalo milk – and it was still warm. "They had just returned from Italy and they had driven straight to Rain without even stopping at their own store; they knew that that kind of cheese only lasts 24 hours, then it’s no good," Rubino said. "I hadn’t ordered it or asked for it, I wasn’t even aware they had it. But when they asked if I wanted it, there was no question."

It was kind, but didn’t make much financial sense. "That cheese probably cost me about $5,000 in total," Pristine said. "I sold it to him at a fair price … $60 a kilo."

He laughed as he told the story. "That’s just how we do business – backwards of the way we’re supposed to," he said. "We just never think about that thing we’re supposed to … what’s it called?"

"Return on investment," his son Agimanswered.

"That’s it!" Fatos bellowed . "We never think about return on investment – actually, we never think about business at all, we think about food."

It’s a unique, contrarian approach that has rewarded the family well. The Pristines have owned The Cheese Boutique for more than 30 years and business has gotten consistently better despite the fact that they have broken every rule in the book.

They should limit stock, but they have 67 kinds of mustard. They should buy ready-made products, but they actually spend endless hours working on their cheeses. They should keep their system simple so they can hire just about anyone, but they make sure their staff is as knowledgeable and as driven as the family. They should have a loading dock and a forklift, but lift and lug everything by hand.

"We always give truck drivers a sandwich before telling them we don’t have a loading dock," Fatos said. "It just makes things easier." Fatos is in his 60s, but looks like a linebacker.

The most important rule they have flouted is that old dogma about location, location, location. For decades, The Cheese Boutique was in Bloor West Village. It was a great spot with loads of foot traffic. Everybody in the neighbourhood knew them. It was a perfect spot. So they moved. To the retail equivalent of nowhere. They found an old sausage factory at 45 Ripley Ave., on an isolated little road off the South Kingsway full of aging industrial buildings and at least a 15-minute walk from anywhere.

Fatos recalled what happened when he hired a well-respected retail designer to help. "When I showed it to her," he said. "She threw her arms up and quit – she told me she didn’t want to be involved with what she called a `suicide.’ " She was wrong. The Cheese Boutique has become more successful since the move, expanding to include prepared foods.

It’s been a long, strange journey http://payday-nofax.com. Fatos’ father, Hysen, was a politician in Albania and knew that when the Nazis invaded in 1940, he’d probably be executed, so he fled to Turkey. Fatos grew up there, and left after high school, winding up in Belgium before earning a degree in political science at the University of Naples. It was there that he met his wife, Modesta.

He came to Canada with no money, no French or English skills but a strong work ethic and a will to succeed. He got a job on Shopsy’s loading dock. "I was the first, I was like an icebreaker," he said. "After that, everyone came."

One of the followers was his father, who managed a Becker’s store in what’s now the Bloor West Village. They eventually bought their own store – Bloor West Jug Milk. "It was said to be a bad investment," Fatos said. "Three businesses had failed there that year; the landlord gave us $2,000 to take over the lease."

"My father wanted it to be just like his Becker’s, selling milk and cigarettes," Fatos said. "But I knew there was no future in cigarettes, so I started bringing in other things."

He was the first person to bring brie to Toronto, the first to import truffles. Acrimony with his landlord led Fatos to decide to leave the neighbourhood. "We advertised it for a few weeks," he said. "Then we made an event of it; we made it a parade from the old store to the new one with all kinds of entertainment – Afrim rolled a giant cheese the whole way on a red carpet."

And people kept coming. While they clearly have the best cheeses in town, it’s not like they just open packages and dole it out by the pound. The real work of aging and preparing cheeses comes after the delivery.

Last year, Afrim was inducted into the Confr?rie des chevaliers du Taste Fromage de France – the French government literally knighted him for his work in cheese. He’s humble about it, preferring to let his cheese do the talking.

Fatos, however, doesn’t mind showing his pride in his boys. "Afrim – he’s my pretty boy – he knows his cheese," he said. "But Agim, he’s my businessman, he runs the place."

It’s a big job, because cheese now makes up less than 40 per cent of The Cheese Boutique’s overall business. He ages and prepares meats with the same determination and skill his brother does cheese. And Agim runs the store in a way that is unconventional, but keeps bringing customers back. A visit to The Cheese Boutique is the opposite of shopping at No Frills.

"It’s a family environment there because it’s their family – the father, the mother and the boys are always there and it’s usually full of in-laws and nieces and nephews," said Rubino.

"It’s great to shop there," said Rubino. "Even if you don’t need anything, it’s fun to go in and spend 45 minutes or so just feeling the vibe."

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Credit rating agencies, criticized for moving too slowly in cutting ratings on Wall Street firms and the complex instruments they devised, are now accused of acting too quickly.

As the credit crisis enters a new phase, the pendulum has swung too far back, critics argue. The agencies are still missing the mark, only now they are too aggressive, adding to market volatility, or changing their views within days or weeks.

Case in point: AIG.

On Friday, September 12, Standard & Poor’s warned that if insurance giant American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) didn’t demonstrate adequate access to capital in the short term, the rating company could cut its ratings by as much as three notches.

Late on the following Monday, S&P, Moody’s Investors Service and Fitch Rating had struck a triple blow to AIG’s investment-grade rating and warned more downgrades could follow.

Within 24 hours, the U.S. government had rescued AIG with an $85 billion loan, and the rating companies scrambled once again to revise their outlooks.

“AIG was a signal they are being more aggressive in today’s environment,” said Joseph Mason, a finance professor at Louisiana State University pay day loan. “They’ve had their backs against the wall, and they are being forced to cut.”

Credit market turmoil changed the face of Wall Street last week with the government loan for AIG, once the world’s largest insurer based on market value; the bankruptcy filing of Lehman Brothers Holdings Inc(LEH.N: Quote, Profile, Research, Stock Buzz)LEHMQ.PK, spelling the demise of a 158-year-old trading company that was the parent of a major U.S. investment bank, and the hasty sale of Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), the largest U.S. retail brokerage whose advertising symbol is the bull, to Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz). 

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The dates and other details differ. But the sense of gloom and the mounting losses this week are reminiscent of October 1987 or September 2001 – or any other market crisis that you’d care to recall.

In other words it’s not the first time, even in the fairly recent past, that plunging stocks have sparked fear among investment professionals and ordinary investors alike.

And you can safely bet your retirement nest egg that it won’t be the last.

There’s no getting around the fact that if you want to win as an investor, you need to tolerate losing. What you need to ask yourself is this: How much am I willing to lose over a short period, and how long am I willing to wait to recover my market losses?

These are timeless questions. But they resonate with investors during this year of credit crises that have rocked the financial industry, wildly fluctuating commodity prices and stalled economic growth.

Some guidance on market volatility was served up this month by Fidelity Investments Canada, which created several Web-based educational tools. They’re available at www.fidelity.ca/volatility.

The website offers historical examples of how long it can take for a stock market to recover from a crisis. Using the online tool, you can pick either the Canadian, global or U.S. stock market and one of several market crises.

For example, it took 21 months for the Canadian market to return to its pre-crash level in October 1987, while the U.S. and global equity markets each needed 23 months. After the September 2001 terrorist attacks, the U.S. market rebounded in only 20 days.

These examples aside, the recovery could take much longer than a couple of years, let alone a few weeks. In Canadian-dollar terms, the Tokyo stock market took more than four years to recover from the Japanese market crash of 1989. Worse still was the great market collapse that began in 1929 and worsened in the 1930s; it wasn’t until 1954 that the Dow Jones industrial average recovered to pre-1929 levels.

Fidelity’s website also shows the negative impact of missing the best 10, 20, 30 or 40 days during the period between August 2002 – when markets were starting to recover – and the end of March of this year online payday loan. Naturally, returns are much lower if they exclude the best days.

What investors would also be interested in knowing, for the sake of presenting a more balanced picture, is the positive impact of missing the worst days. But the fund company’s online tool doesn’t give us that side of the story.

In other scenarios, Fidelity shows how much your investing experience can vary within a stock market, depending on what stocks you are holding. In what amounts to a pitch for active management, there’s a chart that shows the difference between the returns of the 10 best-performing stocks, the 10 worst-performers and the index average.

Active managers as a group tend to fare poorly versus their market benchmarks, due to the impact of fees and the fact that many of their portfolios aren’t substantially different from index funds. But times like now are when seasoned managers who have outperformed during past bear markets will tend to shine.

If you lack confidence in active fund managers, you are left with the healing powers of the markets themselves. Over periods of 10 years or more, markets tend to revert to their long-term average returns, outperforming inflation and guaranteed deposits. But you should participate only to the extent that you can tolerate the worst thing that can happen over a year, a month or even one or two days.

Rudy Luukko, at rudy.luukko@morningstar.com, is investment funds editor of Morningstar Canada.

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LONDON–PricewaterhouseCoopers, the administrators for Lehman Brothers International (Europe), aims to sell the bank's asset management and corporate finance units within days, PwC said on Friday.

"We are in discussions with potential partners at present and our aim is to complete a deal in the next few days," business services company PwC said in a statement.

But disposal of the group's European real estate interests was likely to take longer, even though the administrators had made good progress in identifying the assets involved, PwC said.

Lehman Brothers International (Europe) is the European unit of Lehman Brothers Holdings Inc, which filed for bankruptcy protection earlier this week.

"As a result of being suspended from all markets Lehman Brothers was unable to trade," PwC said.

"Arrangements have been made to use the brokerage services of other market participants. This has enabled us to begin realising some of the companies' proprietary market positions."

In a separate email PwC said it had identified real estate assets worth $15 billion under the contrnvolved, PwC said.

Lehman Brothers International (Europe) is the European unit of Lehman Brothers Holdings Inc, which filed for bankruptcy protection earlier this week.

"As a result of being suspended from all markets Lehman Brothers was unable to trade," PwC said.

"Arrangements have been made to use the brokerage services of other market participants payday loan. This has enabled us to begin realising some of the companies' proprietary market positions."

In a separate email PwC said it had identified real estate assets worth $15 billion under the control of subsidiary Lehman Brothers UK Real Estate Holdings Limited (LBUKRE), which were spread across 200 subsidiaries and joint ventures.

These buildings and property developments were located mainly in Britain but also in Sweden, France, Finland, Spain, Croatia, and other European countries and were in addition to Lehman's non-performing loan and mortgage portfolios, property company shareholdings, and private equity interests, PwC said.

"Our review of the LBUKRE portfolio will not be completed for several weeks, but we are gathering all expressions of interest so that we can communicate with interested parties as soon as we are ready," it said.

Lehman Brothers bought Coeur Defense, an office complex comprising five buildings in Paris, for 2.11 billion euros ($3.06 billion) at the tail-end of Europe's commercial property boom in March 2007. The deal was Europe's biggest ever direct single commercial property transaction.

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While the financial sector is transfixed by turmoil in global money markets, Canadian Imperial Bank of Commerce continues building its core Canadian retail franchise, announcing the locations of 18 new branches.

CIBC – focusing on everyday banking after massive losses from the World Markets investment banking division and exposure to the U.S. housing-finance debacle – has a five-year plan to build, relocate or expand more than 70 branches across the country by 2011.

The bank, currently with 1,050 full-service branches, said Thursday that between now and early 2010 it will open three new locations in British Columbia, six in Alberta, seven in Ontario and two in Quebec.

"We are looking forward to participating in the growth of some of Canada's fastest-growing communities and offering our clients greater flexibility, access and choice for their banking," stated Sonia Baxendale, senior executive vice-president of CIBC Retail Markets.

The local-banking focus comes as CIBC has booked net losses of $2.5 billion so far in its financial year, after three quarters of writedowns totalling $6.9 billion, largely on structured credit instruments related to the U.S. mortgage collapse.

The new branch locations announced Thursday:

British Columbia(at)

– Vedder Road and Watson Road in Chilliwack in fall 2009

– Jacklin Road and Kelly Road in Langford in fall 2009

– Denman Street and Robson Street in Vancouver in spring 2009

Alberta(at)

– Northmount Drive and 4th Street NW (Thorncliffe) in Calgary in October 2008

– 17th Avenue and 85th Street SW in Calgary in fall 2009

– Sarcee Trail and 112th Avenue NW in Calgary in fall 2009

– Anderson Road and Bonaventure Drive SE (Southcentre) in Calgary in early 2010

– Ellerslie Road and Parsons Road in Edmonton in fall 2009

– Whitemud Drive and 17th Street in Edmonton in fall 2009

Ontario(at)

– Yonge Street and Big Bay Point Road in Barrie in spring 2009

– Woodlawn Road East and Woolwich Street in Guelph in early 2010

– Centre Mall, Barton Street East and Kenilworth Avenue North in Hamilton in early 2009

– Rymal Road and Swayze Road in Hamilton in early 2009

– Meadowlilly Road South and Commissioners Road East in London in early 2010

– Major Mackenzie Drive and Weston Road in Vaughan in early 2010

– Ira Needles Boulevard and University Avenue West in Kitchener in early 2010

Quebec(at)

– Lebourgneuf Boulevard and Gradins Boulevard in Quebec City in early 2009

– Highways 15 and 30 in Candiac (Montreal) in summer 2009

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Teck Cominco Ltd. has announced four high-grade, undersea copper-gold-zinc finds on licences held by exploration partner Nautilus Minerals Inc. off the South Pacific kingdom of Tonga.

Seventeen samples from the four newly discovered massive sulphide systems returned an average grade of 16.4 grams per tonne gold, 8.2 per cent copper, 12.3 per cent zinc and 184 grams per tonne silver.

The systems, located using a small remotely operated submarine, are up to 90 kilometres apart, in water depths of 1,300 to 1,660 metres fast cash advance.

Pieces of rock averaging 3.1 kilograms were collected from the sea floor using a manipulator arm on the 1.7-metre-long Remora remotely operated vehicle.

Nautilus, which explores the ocean floor for metals deposits, is owned 7.2 per cent by Teck Cominco, 5.7 per cent by Anglo American PLC and 22.4 per cent by Metalloinvest of Russia.

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WASHINGTON–Urgently trying to keep cash flowing amid a Wall Street meltdown, the U.S. Federal Reserve on Tuesday pumped $50 billion into the nation's financial system to help ease credit stresses.

The Federal Reserve Bank of New York's action comes in addition to its regular market operations to inject $20 billion into the system slated for the day.

The maneuvre takes place as Federal Reserve Chairman Ben Bernanke and his central bank colleagues prepare to meet to decide their next move on interest rates and conduct a fresh assessment of the country's financial and economic troubles.

Some believe the financial system turmoil raises the odds the Fed will cut rates $1500 payday loan. Others still predict the Fed will hold its key rate steady at 2 per cent.

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NEW YORK–Bank of America began adding another slice to its growing financial services empire, buying Merrill Lynch in a $50 billion (U.S.) deal that would create a bank that offers everything from fixed-income trading to credit card lending.

It will rival Citigroup Inc., the biggest U.S. bank in terms of assets.

Bank of America Corp. said yesterday it would acquire Merrill Lynch in an all-stock transaction that should lift the uncertainty shrouding the investment bank since the start of the credit crisis over a year ago.

Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch & Co. Inc. is the world’s largest and most widely recognized brokerage.

The acquisition of Merrill "creates the premier financial company in the world," Bank of America chair and chief executive Ken Lewis said during a joint news conference with Merrill’s chief executive, John Thain.

"It was an opportunity of a lifetime," Lewis added.

Under terms of the transaction, which came together in less than 48 hours, Bank of America would exchange 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.

The deal values Merrill at $29 a share based on Bank of America’s Friday closing price of $33.74.

That represents a 70 per cent premium over Merrill’s Friday closing price of $17.05, but well below what the brokerage firm was worth at its peak in early 2007, when its shares traded above $98.

Bank of America said its buyout is expected to close in the first quarter of 2009 payday loans.

The deal been approved by directors of both companies and is subject to shareholder votes at both companies and standard regulatory approvals, the bank said.

Under the agreement, three directors of Merrill Lynch will join the Bank of America board of directors.

Strategically, most industry analysts are saying it’s a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill’s retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies – Bank of America does have an investment bank already, but it has never been terribly strong.

Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.

The deal does not come without risks to Bank of America.

Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses, and its stock has been sliding.

Thain and Lewis said on the call that both companies have “nominal" exposure to Lehman Brothers.

Associated Press

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