Reuters Breakingviews
Reform bill could make “incoherent” SEC irrelevant
By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — At least one U.S. lawmaker seems to want the “incoherent” Securities and Exchange Commission to become irrelevant. The regulator has had its problems. But a Republican bid to reshape it seems designed to hinder, not help. There’s room for improvement, but with its duties growing, the self-funding watchdog needs more staff, more money and a buffer against Congress.
Many of the SEC’s wounds are self-inflicted. It missed several chances to nab Ponzi-schemer Madoff, missed the subprime mortgage time-bomb along with everyone else, caught staff members viewing pornography on office computers and had to back out of a wasteful $557 million office lease. But a Boston Consulting Group study found that the agency was also about 400 employees short and hampered by onerous union rules.
Increased responsibilities may aggravate the problems. The SEC just announced further delays in drafting rules implementing last year’s Dodd-Frank financial reform bill, which expands the regulator’s remit. And a federal court recently ordered the agency to do even more analysis of the costs and benefits of such regulations.
Plunging markets reflect ugly political paralysis
By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
Thursday’s market plunge reflects, as much as anything, an ugly political paralysis. This phenomenon, rather than any particular headline, seems to have freaked out investors, sending U.S. stocks down around 4 percent at one point, Treasury yields below 2.5 percent, oil under $90 a barrel and even gold off 0.5 percent. Politicians’ brinksmanship in Europe and the United States makes for great theater, but it has done little to resolve what most troubles the global economy: too much debt and no clear plan to pay it off.
Take Uncle Sam. Some lawmakers seemed willing to risk a self-inflicted catastrophic default. Yet the last minute agreement did nothing to address the long-term healthcare and Social Security burden — by far the biggest danger to the nation’s finances longer-term. The $2.4 trillion in hoped-for but nebulous spending cuts falls short of the $4 trillion needed to stabilize the U.S. debt-to-GDP ratio. And the deal ensures that the clearly slowing pace of economic growth can’t be tackled with fiscal stimulus.
Europe, meanwhile, still looks lost in the weeds of its much more real and immediate debt crisis. The region has been trying to set things right for nearly two years since Greece’s oversized debt load first appeared in the market’s crosshairs. A series of EU-wide rescue packages may have been political achievements of sorts, but their failure to address the problem fully has left peripheral nations vulnerable to bond market sharks, with Italy the latest to feel their bite. Calls for a bigger European rescue fund and the European Central Bank’s decision to intervene in markets again show the political classes floundering.
Logical Kraft slim-down aims to fatten world
By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
With America now sufficiently obese, Kraft Foods’ aim is to fatten the world. At least that’s one facetious way to explain the Oreos-to-Cheez Whiz conglomerate’s plan to split into a growth-challenged American grocery business with $16 bln of sales and an oddly named “global snacking platform” that’s twice as large. Though the deal partly contradicts the scale argument for last year’s takeover of Cadbury, it’s a sensible move.
Still, the volte-face on the part of Irene Rosenfeld, the Kraft chief executive, is surprising so soon after paying $20 billion for Cadbury over the objections of her biggest shareholder, Warren Buffett. That’s especially true given that Kraft’s stock market performance since then has arguably vindicated that deal, clinched in January 2010. Before Thursday’s breakup announcement, Kraft shares had gained 15 percent since then, besting primary rivals Pepsi, General Mills and ConAgra.
But the stock market offers other clues as to why splitting Kraft up makes sense. Two peers whose stocks have gained more are Sara Lee and Hershey — both are up nearly 60 percent in the past 18 months. Sara Lee investors have welcomed the company’s breakup, while Hershey is narrowly focused on confectionery. Rosenfeld is looking for both kinds of appreciation from the market.
Debt deal suggests ideal successor for Geithner
By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — The U.S. Congress has reached a deal to temporarily avoid default. That gives Treasury Secretary Tim Geithner an opportunity should he wish to step down, as has long been rumored. What’s more, the debt deal’s contours suggest an ideal successor in the job: Erskine Bowles.
That’s not a name to warm the hearts of the liberal establishment. After all, Bowles was the co-chair, with former Republican Senator Alan Simpson, of the commission set up by President Barack Obama that last year called for painful cuts in discretionary spending and even reforms to entitlements like Social Security to help right America’s fiscal position.
But if the politics could be overcome, Bowles is a near-perfect candidate to take Geithner’s job. The borrowing and cost-cutting deal signed into law by the president on Tuesday forces legislators to return to the drawing board in just a few months to consider ways to reduce America’s debt and close its fiscal deficit. They needn’t look much further than the recommendations Bowles put his name to last December.
Corzine covenant smacks more of PR than protection
By Antony Currie and Agnes T. Crane The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
NEW YORK — Jon Corzine makes no secret of the fact that politics is his passion. Now buyers of debt in MF Global, the firm he runs, are set to get a boost if the former Democratic politico and Goldman Sachs CEO should leave the broker-dealer to decamp to Washington. They’ll get an extra one percentage point of interest on the firm’s $300 million bond deal. That might sound encouraging. After all, bondholder activism is a good thing. But this key-man clause seems to benefit Corzine’s image more than creditors.
Sure, Corzine abandoning his new post would be a setback for the firm. His name has lent credence to the drive to turn MF Global — a business spun off from the scandal-hit Refco — into a broader trading and even investment bank. His predecessor, Bernie Dan, was, like the firm itself, a dyed-in-the-wool futures specialist.
So shareholders would be distressed to see Corzine depart. But it would not constitute a major credit event. There might be some wobbles: a few senior bankers could leave, earnings might fall for a quarter or two. But it’s hard to see how one executive’s departure for another, non-competitive job would undermine a firm’s creditworthiness.
UK should tax the rich more intelligently
By Ian Campbell. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Britain’s wealthy need to share the country’s pain — and be seen to do so. That’s why renewed calls for the UK’s 50 percent top tax rate to be abolished are a non-starter. It would be political suicide to hand a tax break to the rich while the overall tax burden is going up. But when the mood allows, punitive marginal rates for the wealthy could be replaced with something more intelligent.
The 50 percent rate was never going to be a huge money-spinner. Some 308,000 UK taxpayers will be caught in the band in 2011-12, which will provide some 30 billion pounds of their expected total 47 billion pound tax contribution. If taxed at 40 percent (the previous top rate) their collective bill would be 6 billion pounds lower. But the plain arithmetic ignores many complexities. The Treasury itself puts the likely gain at just 2.4 billion pounds in 2012-13. The Institute for Fiscal Studies says there might be none at all. Workers may work less, rather than be taxed more, and could even flee the country.
But ditching the 50 percent rate would not, as some have argued, spur a quicker UK recovery. The rich are unlikely to spend all or even most of their additional income. The poor on the other hand tend to spend what they get. A more stimulatory tax break would be a broad-based tax cut — as advocated by the International Monetary Fund — perhaps by raising the personal tax threshold. The 50 percent band may be more symbolic than useful but now is not the moment to ditch the symbol.
Debt deal suggests ideal successor for Geithner
By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The U.S. Congress has reached a deal to temporarily avoid default. That gives Treasury Secretary Tim Geithner an opportunity should he wish to step down, as has long been rumored. What’s more, the debt deal’s contours suggest an ideal successor in the job: Erskine Bowles.
That’s not a name to warm the hearts of the liberal establishment. After all, Bowles was the co-chair, with former Republican Senator Alan Simpson, of the commission set up by President Barack Obama that last year called for painful cuts in discretionary spending and even reforms to entitlements like Social Security to help right America’s fiscal position.
But if the politics could be overcome, Bowles is a near-perfect candidate to take Geithner’s job. The borrowing and cost-cutting deal signed into law by the president on Tuesday forces legislators to return to the drawing board in just a few months to consider ways to reduce America’s debt and close its fiscal deficit. They needn’t look much further than the recommendations Bowles put his name to last December.
Slim pickings for Slim in $6.5 bln Telmex tender
By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — Talk about slim pickings. Mexican billionaire Carlos Slim’s $6.5 billion tender offer for Telmex offers little for shareholders in his America Movil to be happy about. The cellphone carrier is buying out the remainder of the country’s shrinking fixed-line carrier at a premium valuation relative to its own. That looks like a bad exchange. Without a solid explanation, it’s easy to see why investors sliced $4 billion off Movil’s value.
As a fixed-line operator, Telmex’s best days lie behind it. Customers are going mobile, disconnecting lines and making fewer calls. Data services are growing, but not fast enough to offset declines elsewhere. Revenue at Telmex peaked in 2007 and has fallen steadily since. By contrast, Movil is growing steadily, even if Latin America isn’t the virgin market it once was. Revenue was up 8 percent last year.
Yet Movil’s offer for the 40 percent in Telmex it doesn’t own comes at an 11 percent premium to where the stock has traded over the past 30 days. That’s equal to about 12 times estimated 2012 earnings. Movil, on the other hand, trades at 11 times.
Kirin pays high price for being late to the party
By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK — It’s not easy being a Japanese company. Your home market isn’t just economically stagnant, it’s actually shrinking by a million consumers a year for the next two decades. So, the logic goes, Japanese corporations must expand abroad. But as Kirin’s latest takeover of an overseas asset attests, that’s a bum story for shareholders.
Kirin is paying 3.95 billion reais (about $2.6 billion) for a 50.45 percent stake in Schincariol, Brazil’s distant number two brewer after InBev. According to the group’s published financial statements, Schincariol made 54 million reais in 2010. Valuing the whole of the Brazilian group’s equity at 7.9 billion reais means Kirin is paying around 146 times earnings. Oh, and these fell 28 percent from the previous year.
Kirin spins a slightly different case using more flattering accounting. It gives a valuation of around 16 times earnings before interest, tax, depreciation and amortization. But even that looks like an extravagance. It’s not only about a third more expensive than the average beer deal; it’s also about double the multiple that Kirin fetches for its own earnings.
Loss of bankruptcy card would weaken cities’ hands
By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Taking away the bankruptcy card would weaken the hand of U.S. cities and counties. In high-stakes negotiations with unions and bondholders, the threat to file for protection from creditors in federal court gives local officials leverage. But states are blocking that option, fearing it spooks credit markets. For teetering local governments, that leaves as alternatives costly defaults or even bailouts.
Tiny Central Falls, Rhode Island, on Monday became the latest city to declare bankruptcy. And bigger failures loom. Jefferson County, Alabama — home to Birmingham — wobbles under $3.14 billion of sewer debt. Only a last-minute offer by creditors last week defused what would have been the largest municipal filing in American history. Officials have until Thursday to accept the proposal.
Only 24 states authorize bankruptcy for a city or county, and several of those are moving to block it. In June, Pennsylvania barred its capital, Harrisburg, and certain other towns from going bust for at least a year. In May, Michigan trumped cities’ bankruptcy options with a state scheme. California is on the verge of passing a similar measure.
