Business this week

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Sep 11th 2008
From The Economist print edition



The American government made its biggest intervention yet in the credit crisis by taking control of Fannie Mae and Freddie Mac. The “government-sponsored enterprises” have financed around 80% of all mortgages in America this year. With a large part of their $5 trillion debt and mortgage-backed securities owned by central banks and investors outside the United States, Hank Paulson, the treasury secretary, reiterated that both companies are “so large and so interwoven” in America’s financial system that the failure of either one would cause great turmoil in world markets. See article

The director of the Congressional Budget Office, an advisory agency, said that Fannie and Freddie would be counted as part of the public sector in future analyses of the federal budget. The CBO had just estimated that the deficit for the 2009 fiscal year would soar to $438 billion.

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Missing out on the bonanza
Stockmarkets briefly rallied on the news of Fannie’s and Freddie’s rescue. However, stockbrokers in the City lost millions of pounds in potential commission when the London Stock Exchange suspended trading because of a computer failure.

Russia’s RTS stockmarket index sank to a two-year low as investors fretted that falling commodity prices would hurt the Russian economy. Another factor was the surprise decision by Russia’s antitrust regulator to press ahead with fining Gazprom, the state-controlled gas company, for withholding access to its pipelines from a gas operator in Tartarstan.

A technical glitch was blamed for the reappearance on a newspaper’s website of a six-year-old article describing United Airlines’ bankruptcy. The item was picked up by Google’s news service and UAL’s share price fell by 75% before the airline reassured investors that the story was old news—it left bankruptcy protection in 2006.

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In harm’s way





Lehman Brothers suffered another rocky week. The investment bank predicted another huge quarterly loss and unveiled more measures to boost its capital, including a sale of property assets. Earlier, its share price tanked when Korea Development Bank pulled out of talks about buying a stake. Credit-default swaps on Lehman’s debt leapt to levels higher even than in March, when the markets were in turmoil preceding the bail-out of Bear Stearns. See article

Washington Mutual ousted its chief executive. Kerry Killinger had led the Seattle-based bank since 1990, turning it into one of America’s leading mortgage lenders. However, the removal of Mr Killinger did little to ease fears about WaMu’s prospects. Its share price plunged on news that regulators had put the bank under special supervision.

The Pentagon suspended a controversial competition for a $35 billion contract to build new flying tankers. The air force had awarded the contract to an aircraft made jointly by EADS and Northrop Grumman, but Boeing complained about the procedure for assessing the bids and in July the whole process was reopened. Robert Gates, America’s defence secretary, now thinks a “cooling-off period” is needed.

Altria, the parent company of Philip Morris USA, agreed to buy UST in an $11.7 billion deal. UST makes America’s leading brands of smokeless tobacco, Copenhagen and Skoal. Although there are fewer smokers in America, the number of people chewing tobacco has shot up; it is particularly popular in the South.

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Opaque production targets
OPEC ministers revised their complex yield allocations, which the cartel’s president said amounted to a cut of 520,000 barrels a day in output based on what member countries actually produce. Some OPEC members are keen not to let oil prices fall too far; they have dropped to almost $100 a barrel from a high of more than $145 in July. See article

The Iraqi cabinet approved a preliminary agreement that will create a joint venture between the state-run South Oil Company and Royal Dutch Shell to develop natural-gas resources in the Basra region. It is the first deal between a Western oil company and Iraq since the invasion of 2003 (Iraq recently approved a $3 billion deal with China to develop an oilfield).

It emerged that Carlos Slim, a Mexican telecoms mogul and the world’s second-richest man, holds a 6.4% stake in New York Times Co. Mr Slim denied he was making a strategic move into America’s media market and said the investment was “strictly financial”. Earlier this year the struggling newspaper publisher fought a proxy battle from a hedge fund pushing for big changes at the company. It has laid off staff in the newsroom and taken other cost-cutting measures to offset a decline in advertising revenue.