Wednesday, October 31, 2007

What's Merrill's Next Move?

By Mark DeCambre Senior Writer

The much-anticipated ouster of embattled CEO Stan O'Neal may have left Merrill Lynch's (ML - Cramer's Take - Stockpickr) investors with more questions than answers.

Not least of these questions is what sort of firm Merrill will be after it has identified who will lead the high-profile U.S. securities firm.

The firm's rapid firing of O'Neal Tuesday morning came a week after the firm announced huge losses in collateralized debt obligations and other shaky paper, to the tune of nearly $8 billion. The firm announced a loss of $2.2 billion, or $2.85 a share, for the quarter -- nearly six times the size of the loss O'Neal had projected earlier in the month.

O'Neal will be nothing if not well compensated for his failure. He will walk off with about $90 million in stock, $40 million in options and another $30 million in pension and other goodies.

But even more resounding than the losses and the loot was the feeling that O'Neal had badly tainted the collegial culture at Merrill by overseeing mass firings and rooting out friends and foes alike in the executive suite.

"Everybody was appalled at how he threw the culture away and how he rewrote history," Win Smith Jr., former chairman of Merrill Lynch International, told "I think we're happy that this chapter is over."

How the next chapter will look for Merrill is anyone's guess. Richard Bove, analyst at Punk Ziegel, and other banking analysts predict that more billion-dollar writedowns could be in the offing for the securities firm. The firm will certainly need to do some housecleaning to right the ship in the post-O'Neal era.

Since scuttlebutt about O'Neal's ouster emerged late last week, Wall Street has speculated on possible candidates, including Bob McCann, head of Merrill's wealth management group, Gregory Fleming, co-president and COO at Merrill, Larry Fink, CEO of Merrill's 49%-owned affiliate BlackRock (BLK), and NYSE Euronext (NYX) chief John Thain.

Merrill has pledged to search for a full-time successor to O'Neal. The firm named Brera Capital managing partner Alberto Cribiore as its interim nonexecutive chairman. Directors have not, however, named a timetable for finding a new CEO.

Smith, whose father was one of the founding partners at Merrill, hopes that the board of directors will seek some guidance from alums in selecting a new CEO.

"I hope they will reach out to a few people that have great credibility," says Smith, who is now CEO of the firm that owns Sugarbush Resort in Warren, Vt. "Nobody here is looking for a job. ... We're here to see the firm do well."

Some issues beyond the firm's leadership remain in play. Analyst Michael Mayo at Deutsche Bank says that ousting O'Neal has created a period of limbo. Any number of things could happen -- including the perhaps improbable scenario of Merrill being acquired. That may seem unlikely given the possibility of billions more in mortgage-security related writedowns. Nevertheless, Middle Eastern firms and foreign entities may be emboldened by the opportunity to bag at least a stake in the broker.

Mayo estimates that Merrill could be valued at between $100 and $120 a share -- well above the stock's recent trading in the mid-60s.

Bruce Foerster, president of South Beach Capital and a former Lehman Brothers banker, says Merrill will need to restore investor confidence and make yeoman's effort to improve risk management. The new CEO "is going to have to have a come-to-Jesus meeting with all his senior management," he comments.

"The most effective CEO has to be able to accept news that they don't want to hear and the top people reporting to him have to be able to deliver news that they don't want to deliver," he adds.

Despite the shaky outlook, Smith foresees better times ahead for Merrill. "My take is it's an extraordinarily strong franchise with very good brand," Smith says. "What it requires now is the right leader."

One of the main things the board should consider -- whether it picks the consensus favorite Fink or the internal favorite McCann, or someone else -- is the history of the firm, which was founded in 1914.

Smith says the board "did not have a good knowledge of the history of the firm," he comments. "They need to understand the history of a successful firm before they became custodians."

Thursday, October 25, 2007

US slaps broad new sanctions on Iran (AP)

By MATTHEW LEE, Associated Press Writer

WASHINGTON - The Bush administration imposed sweeping new sanctions against Iran Thursday — the harshest in nearly three decades — cutting off key Iranian military and banking institutions from the American financial system for Tehran's alleged support for terrorism and nuclear weapons ambitions.

In the broadest U.S. unilateral penalties on Iran since the takeover of the U.S. Embassy in 1979, the administration slapped sanctions on Iran's Revolutionary Guard Corps, a main unit of its defense ministry, three of its largest banks and eight people that it said are engaged in missile trade and back extremist groups throughout the Middle East.

Secretary of State Condoleezza Rice and Treasury Secretary Henry Paulson said the moves would further isolate the Islamic republic's government by further distancing it from the international economy and discouraging its trading partners from continuing to do business with it.

At the same time, they stressed that offers for negotiations with Iran over its nuclear program remain on the table and that the sacnctions are not a sign of imminent military action. The U.S. officials insist — over Iranian denials — that the nuclear program is a cover for atomic weapons development.

"Unfortunately, the Iranian government continues to spurn our offer of open negotiations, instead threatening peace and security," through its nuclear program, production and export of ballistic missiles and backing for Shia insurgents in Iraq, the Taliban in Afghanistan, Hezbollah in Lebanon and Hamas in Gaza, Rice said.

The United States has long labeled Iran a state supporter of terrorism and has been working for years to gain support for tougher sanctions from the international community aimed at keeping the country from developing nuclear weapons. It has won two U.N. Security Council sanctions resolutions but a third has been held up by Chinese and Russian opposition.

Rice, who also noted Iran's hardline anti-Israel stance, said the moves were part of "a comprehensive policy to confront the threatening behavior of the Iranians" but that Washington remains committed to "a diplomatic solution."

Other officials echoed that sentiment, maintaining the announcement is not a prelude to armed conflict with Iran despite concerns from some allies that the administration is building a case for war.

"In no way, shape of form does it anticipate the use of force," said Nicholas Burns, the State Department's No. 3 diplomat.

Instead, officials said they hope the measures will increase pressure on Iran to take a deal offered last year that would give the oil-rich country economic and other incentives in exchange for dropping nuclear activities that could produce a bomb.

In Tehran, the Guards' chief, General Mohammad Ali Jafari, shrugged off increased U.S. pressure on the force.

"Today, enemy has concentrated sharp point of its attacks on the Guards," Jafari told a military ceremony in Mashhad, east of Tehran, according to the state news agency IRNA. "They have applied all their efforts to reduce the efficiency of this revolutionary body. Now as always, the corps is ready to defend the ideals of the revolution more than ever before."

Israel, on the other hand, said it was pleased with the sanctions.

"Israel welcomes the U.S. government's decision," Foreign Ministry spokesman Mark Regev said in Jerusalem. "We see this as an important contribution to the international effort to intensify pressure on Iran to abandon its nuclear program."

Iran has ignored previous, smaller attempts to apply international and financial sanctions, and says the conditions Washington has set for talks are unacceptable. Iran is continuing work on its nuclear program, which it says is peaceful.

The sanctions target 25 Iranian entities, including individuals and companies owned or controlled by the Revolutionary Guard that play a major role in Iran's domestic economy and international trade. The are the first of their type taken by the United States specifically against the armed forces of another government.

In addition to freezing any assets they may have in U.S. jurisdictions, something officials acknowledged would be of minimal effect, the sanctions also bar Americans from doing business with them.

But of far greater impact, officials said, they will subject foreign firms to U.S. sanctions if they engage with the designated entities.

Paulson called on "responsible banks and companies around the world" to end relationships with the three banks and companies and affiliates of the IRGC and noted that because of the IRGC's reach into business and other spheres, "it is increasingly likely that if you are doing business with Iran you are doing business with the IRGC."

State-owned banks Bank Melli, Bank Mellat and Bank Saderat were named supporters of global terrorist groups for their activities in Afghanistan, Iraq and the Middle East. Along with Bank Sepah, which was already under U.S. and U.N. sanctions, the institutions account for more than 50 percent of Iran's banking sector, Treasury officials said.

"As awareness of Iran's deceptive behavior has grown, many banks around the world have decided as a matter of prudence and integrity that Iran's business is simply not worth the risk," Paulson said. "It is plain and simple: Reputable institutions do not want to be the bankers for this dangerous regime."

The Revolutionary Guard Corps and its Ministry of Defense and Armed Forces Logistics were designated proliferators of ballistic missile technology. The Corps, also known as the IRCG, is the largest component of Iran's military. The defense ministry entity is the parent organization for Iran's aerospace and ballistic missile operations.

The Quds Force, a part of the Guard Corps that Washington accuses of providing weapons, including powerful bombs blamed for the deaths of U.S. soldiers in Iraq, was named a supporter of designated terrorist organizations.

The Revolutionary Guards organization, formed to safeguard Iran's 1979 Islamic revolution, has pushed well beyond its military roots, and now owns car factories and construction firms and operates newspaper groups and oil fields.

Current and former members now hold a growing role across the country's government and economy, sometimes openly and other times in shadows.

The guards have gained a particularly big role in the country's oil and gas industry in recent years, as the national oil company has signed several contracts with a guards-operated construction company. Some have been announced publicly, including a $2 billion deal in 2006 to develop part of the important Pars gas field.

Now numbering about 125,000 members, they report directly to the supreme leader and officially handle internal security. The small Quds Force wing is thought to operate overseas, having helped to create the militant Hezbollah group in 1982 in Lebanon and to arm Bosnian Muslims during the Balkan wars.


AP Diplomatic Correspondent Anne Gearan and Associated Press Writer Jeannine Aversa contributed to this story.

BP to pay $373 million in federal probe

By LARA JAKES JORDAN, Associated Press Writer

WASHINGTON - Oil and gas giant BP PLC agreed Thursday to pay $373 million in fines and restitution to end investigations into whether it manipulated energy markets and violated environmental laws, the Justice Department said.

Additionally, four former BP employees were indicted by a federal grand jury in Chicago on 20 counts of mail and wire fraud charges connected to the price-fixing scheme.

BP, Europe's second-largest energy company, will pay an estimated $50 million as part of an agreement to plead guilty for violating the Clean Air Act as a result of a 2005 explosion at its Texas City refinery that killed 15 employees and injured more than 170 others.

Additionally, it will pay $20 million in criminal fines and restitution to the state of Alaska and the National Fish and Wildlife Foundation for pipeline leaks of crude oil that polluted tundra and a frozen lake in Alaska.

The rest of the fines aim to punish BP for conspiring to manipulate propane prices.

Federal investigators have been looking at whether BP traders tried to pump up profits by cornering the propane market, driving spot prices in February 2004 as high as 94 cents a gallon in places like New York, Pennsylvania and Illinois.

Investigators alleged that traders at BP Products North America Inc. bought massive quantities of propane to be delivered over a pipeline that starts in Texas and then withheld supplies, forcing other buyers in the wholesale market to pay an unnaturally high premium.

The over-the-counter market includes trades conducted on the phone or electronically in products not listed on exchanges. In the end, BP did not profit because the financial benefits of the scheme were outweighed by the unexpectedly huge costs associated with carrying it out.

BP also is grappling with fallout of earlier problems, such as the Alaskan oil spill and the refinery blast that have resulted in ongoing higher maintenance costs.

BP told The Associated Press the company has cooperated with authorities and will continue to do so. It declined further comment.

Tuesday, October 16, 2007

Dissension Arises Over Chrysler Contract

Published: October 16, 2007

DETROIT, Oct. 15 — There are signs of dissent within the United Automobile Workers union over a tentative agreement with Chrysler. Union leaders at Chrysler plants approved the contract Monday, clearing the way for a vote by the company’s 45,000 workers in the United States.

But the contract did not receive unanimous approval, unlike the deal between the U.A.W. and General Motors. And it turns out that the contract, reached last Wednesday after a six-hour strike, caused a split among the union’s bargaining committee as well.

Bill Parker, the president of U.A.W. Local 1700 in suburban Detroit, who was chairman of the bargaining committee, tried unsuccessfully to persuade other union leaders to reject the pact and send bargainers back to negotiations.

Specifically, Mr. Parker and other leaders were concerned that the contract did not provide enough assurances of future work at Chrysler, which was acquired in August by the private equity firm Cerberus Capital Management.

Highlights of the contract, distributed at the meeting Monday at Cobo Center, showed that the future of Chrysler’s minivan plant outside St. Louis appears to be in doubt.

The plant survived Chrysler’s most recent plant closing announcements in February, but the union said the future of the plant was “tied to volume,” meaning minivan sales. The union will “continue to advocate for new product.” Chrysler also builds minivans in Windsor, Ontario.

Elsewhere, the highlights showed that the union had agreed that four Chrysler plants could be converted to a new lower wage and benefit standard.

Tom Littlejohn, president of Local 1268 in Belvidere, Ill., was among the union officials who opposed the contract. “I’m not going to recommend ratification,” he said.

But Bob Vorell, a committeeman at Local 573 in Cleveland, said the agreement “pretty much mirrors the deal at G.M. I don’t think it will have much problem being ratified.”

The union’s president, Ron Gettelfinger, said he was not concerned by the dissent. “We give people an opportunity to express themselves,” he said. “We’re a very democratic union.”

Mr. Gettelfinger said that the union did “the very best that we could in this set of negotiations” and that he was “prepared to go out into the field” to urge workers to vote for the contract. He said the union hoped to complete much of the voting by this weekend.

The developments on the Chrysler contract came as G.M. released details showing that the health care trust created in G.M.’s contract stands to become the company’s biggest shareholder.

The trust would hold about 16 percent of G.M. stock, because of a convertible note that the company is investing in order to establish the trust. That level would make it G.M.’s biggest institutional shareholder, surpassing the State Street Corporation, which has about 13 percent of G.M. stock.

G.M. and the U.A.W. reached agreement on their contract on Sept. 26, after a two-day strike. Workers approved the contract last week.

It established the trust, called a voluntary employee benefit association and known by its acronym VEBA, that would assume G.M.’s liability for health care benefits for G.M. workers, retirees and their families. A similar trust would be established at Chrysler under its new contract.

Today, G.M. said the liability for its U.A.W. members was about $46.7 billion.

G.M. agreed to spend $29.9 billion to finance the trust. The investment includes cash as well as a five-year, $4.37 billion convertible note, which will be placed in the trust on Jan. 1.

The note is equal to 109 million newly issued G.M. shares at $40 a share. G.M. can convert the note after three years, or if G.M.’s share price reaches $48. G.M. stock fell $1.53, to $41.11.

The trust would be run by an independent board that is expected to include union and company advisers, although G.M. said it might not take part if that affects the accounting for its liability.

The chief financial officer of G.M., Frederick A. Henderson, said the VEBA “will be a very large shareholder of General Motors.” He said he would expect trustees to “vote the stock in the same proportion as all shareholders.”

Wednesday, October 10, 2007

MGM Mirage plans massive Atlantic City complex

By William Spain, MarketWatch

CHICAGO (MarketWatch) -- MGM Mirage is taking its building spree on the road, announcing Wednesday that it plans to construct a gambling, hotel and retail complex for $4.5 billion to $5 billion on land it owns in Atlantic City.

Before the start of trading,MGM Mirage said its board approved the project, to be called the MGM Grand Atlantic City. It will located on 72 acres of land it already owns adjacent to the Borgata, the company's 50/50 joint venture with Boyd Gaming.

Plans call for three hotel towers with more than 3,000 rooms, which would make it the largest such facility in the New Jersey resort town. It would also have the largest casino floor in the state, with 5,000 slot machines, 200 table games and a poker room, along with a 1,500-seat theater, restaurants and nightclubs, a spa, a convention center and 500,000 square feet of retail space.
"Our company has carefully considered the possibilities for our landholdings in Atlantic City," said Terry Lanni, chief executive, in the announcement. "We believe the success at Borgata demonstrates the eagerness for further evolution of the nation's second-largest gaming market."
The company added that the resort will be the city's tallest building and "dominate the architectural skyline."
Assuming it gets the go-ahead from state coastal regulators, MGM Mirage intends to break ground on the project next year with an opening slated for 2012. About 60 acres of the site will be used with 12 acres reserved for "future development, which may include a residential component."
Word of the project comes as New Jersey gaming regulators continue to probe the company's Macau joint venture with businesswoman Pansy Ho. She is the daughter of Macau casino tycoon Stanley Ho, who has long been dogged by allegations his gambling halls have been involved with organized crime. If the New Jersey regulators find her an unsuitable partner, MGM Mirage could be forced to either back out of the Macau project -- which is set to open in December -- or dump its holdings in Atlantic City.
Both Nevada and Mississippi have approved the company's relationship with Ho and Lanni has publicly expressed confidence that New Jersey will eventually follow suit.
The project is apt to be nicknamed "City Center East" after the $6 billion complex that MGM Mirage is currently building on the Las Vegas Strip, a development it bills as the largest privately funded construction project in history.