Finance & Business World

A long-awaited renovation of mortgage companies Fannie Mae and Freddie Mac could start to take shape this year, Treasury Secretary Tim Geithner told Congress Tuesday.

The Obama administration hopes to propose legislation to fix the nation’s housing finance system within months, Geithner told the House Financial Services Committee. The government currently finances almost all home mortgages, thanks to its 2008 takeover of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).

Geithner acknowledged that devising a new system to finance U.S. house purchases would be a "complicated, consequential" process. He emphasized that he hasn’t "seen an ideal model" to replace the current arrangement, which is widely viewed as undesirable because of its role in inflating the housing bubble and the conflict between Fannie and Freddie’s profit-seeking and public policy missions.

But with the Senate moving ahead on reform of bank regulation, "we’re at a point to begin" the process of shaping housing-finance legislation, Geithner said. "I don’t see why it should take years."

Republicans in Congress have accused the administration of dragging its feet on reforming the housing finance system. Fannie and Freddie have taken $127 billion in Treasury aid since their collapse in September 2008, and Geithner said Tuesday the government will eventually recognize "substantial losses" from running the companies no fax cash advance.

At the same time, Geithner said it would take time to create a plan that keeps mortgage credit widely available, protects consumers and ensures the financial system remains stable.

Fannie and Freddie have emerged as central to the administration’s support for the nation’s troubled housing markets. The Treasury’s funding for the companies and the Federal Reserve’s purchases of their debt have kept U.S. mortgage rates at historically low levels, making houses more affordable and offering some support to tattered bank balance sheets.

While some Republican plans would eventually remove the government from the mortgage business altogether, Geithner said he believes there is "a quite strong economic and public policy case" for federal mortgage guarantees of some sort. He cited the need for "a stable housing finance market."

Geithner said the administration will solicit comments starting next month from "a wide variety of constituents, market participants, academic experts, and consumer and community organizations." 

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Alan Greenspan acknowledged Thursday that U.S. regulators had failed to grasp the magnitude of the financial crisis, but the former Federal Reserve chairman argued that low interest rates were not to blame for inflating the housing bubble.

In a paper he is due to deliver at the Brookings Institution on Friday, Greenspan, who was Fed chairman from 1987 to 2006, examines the factors that caused the global financial crisis and plunged the U.S. economy into one of the worst recessions on record.

Greenspan said the relatively minimal fallout from the bursting of the dot.com bubble in 2000 led regulators to believe that future asset bubbles would pose a limited risk to the economy.

He also blamed financial firms for relying too heavily on the recomendations of ratings agencies and their own risk management offices during the boom years, when investment banks leveraged billions of dollars worth of assets, including mortgage backed securities, that later proved to be worthless.

"In the growing state of high euphoria, risk managers, the Federal Reserve, and other regulators failed to fully comprehend the underlying size, length, and impact of the negative tail of the distribution of risk outcomes," Greenspan wrote.

"For decades, with little to no data, most analysts, in my experience, had conjectured a far more limited tail risk," he continued. "This is arguably the major source of the critical risk management system failures."

But the former Fed chief was clear that the low interest rate policy the central bank maintained during his tenure did not inflate the housing bubble that ultimately precipitated the crisis, as many critics have argued.

"To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble," he said. "The global house price bubble was a consequence of lower interest rates, but it was long term interest rates that galvanized home asset prices, not the overnight rates of central banks."

To explain the decline in long-term interest rates, Greenspan argues that the explosive growth of developing economies, particularly in Asia, in the aftermath of the Cold War led to global imbalances and a surplus of liquidity instant payday loan.

Despite his admission that regulators failed to adequately comprehend the crisis, Greenspan offered a word of caution when it comes to imposing new regulations aimed at preventing future crises.

"Inhibiting irrational behavior when it can be identified, through regulation, as recent history has demonstrated, could be stabilizing," he said. "But, there is an inevitable cost of regulation in terms of economic growth and standards of living when it imposes restraints beyond containing unproductive behavior."

The most important reforms that regulators could make, according to Greenspan, would be to limit the amount of risk financial institutions are allowed to take and increase banks’ capital requirements.

Greenspan also pointed to the risks posed by large, interconnected financial institutions to the overall economy. AIG, the giant insurance company, is perhaps the most famous of these "too-big-to-fail" institutions to have been bailed out by regulators because the company’s collapse could have caused major damage to an already fragile economy.

However, the Maestro, as Greenspan is known, had this to say about the too big to fail problem: "Systemically threatening institutions is among the major regulatory problems for which there are no good solutions."

"The notion that risks can be identified in a sufficiently timely manner to enable the liquidation of a large failing bank with minimum loss, has proved untenable during this crisis and I suspect in future crises as well," he said.

Still, Greenspan said banks with the potential to become too big to fail should be required to issue bonds that could be converted into equity stakes if capital levels fall below a certain threshold.

But if that fails to reign in excessive growth, "we should allow large institutions to fail," he said. If regulators determine that an institution is to big to liquidate quickly, it should be taken in to "a special bankruptcy facility" where it will be broken into smaller entities, Greenspan said.  

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Suspended Miami Commissioner Michelle Spence-Jones was not in circuit court Thursday for her arraignment. Instead, her attorney asked the judge to dismiss criminal charges against her.

Attorney Peter Raben told the court that the Miami-Dade state attorney’s office did not provide enough information in its indictment to allow his client to enter a plea.

Spence-Jones was indicted March 3 on a bribery charge for allegedly soliciting $25,000 from Miami developer Armando Codina. In 2006, Codina asked the city commission to extend Brickell Avenue to downtown Miami’s core. Codina’s company was managing office leasing for a mixed-use project in downtown Miami that would have benefited from the name change.

“The indictment doesn’t say who was solicited,” Raben told the Business Journal Thursday afternoon. “In the media advisory, it says it was [Armando] Codina. But, Codina said, ‘It wasn’t me.’ So give me some help here.”

Raben said Spence-Jones ultimately will plead not guilty

Some former prosecutors and defense attorneys say prosecutors will have a hard time making the bribery charge stick because Codina has denied he bribed Spence-Jones bad credit personal loan lenders. The former commissioner also has denied any wrongdoing.

Another March 3 indictment in a separate case alleges Spence-Jones misappropriated $50,000 in grant money meant for a private business. She also denied any wrongdoing in that case.

The state attorney’s office did not have time to prepare for Spence-Jones’ motion Thursday, so Circuit Court Judge Yvonne Colodny told both parties to come back and make their case on March 30.

Spence-Jones was suspended after winning re-election in November and again after a special election that followed to fill the seat she vacated as a result of the suspension. She is still fighting the suspension in circuit court.

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Exxon Mobil outlined plans Thursday that rely heavily on oil from tough to reach places, extracting it from the depths of the ocean, the frozen Arctic and the tar sands in Canada’s frozen tundra.

But oil pumped in these places tends to be much more expensive than oil from more conventional sources.

In a presentation to analysts at the New York Stock Exchange, executives from the world’s largest publicly traded oil company highlighted eight projects that started up in 2009. Three of them are what most would consider unconventional: A liquefied natural gas terminal off the Italian coast, a liquefied natural gas terminal off the English coast, and a shale natural gas facility in Colorado.

Of the eight major projects the company plans to start up in the near future, six were unconventional. They include two liquefied natural gas facilities, in Qatar and Texas, an Arctic oil production facility in Sakhalin Island off Russia’s far east coast, two deep water projects off Angola, and an oil sands project in Alberta, Canada.

In fact, some three-quarters of the company’s oil reserves are in these more expensive production areas.

What is unconventional?

Exxon boss Rex Tillerson said what’s considered conventional and unconventional is a matter of opinion, and that the company only considers 10% of its reserves to be truly unconventional. But Tillerson said the move to more unconventional sources is happening.

"We anticipate it will grow in the future, and we hope it will grow with the positions we’ve taken," he said.

But Exxon isn’t alone. Easily accessible oil is becoming harder to find, and nations that have it are demanding a bigger cut of the profits. The entire industry is confronted with drilling for more expensive oil. It’s one of the main reasons why most analysts don’t expect oil prices to return to the $20-range of the late 1990s.

Liquefied natural gas is harder to bring to market than regular gas. First the gas must be converted to liquid to transport it from its source in remote areas to where it can be used, generally close to major population centers. Then it must be converted back into a gas for usage.

Oil sands are a heavy, tar-like substance that requires lots of processing to turn into a usable oil. Shale gas lies in rock that must be cracked with chemicals and water to bring it to the surface. Projects in deep water or the Arctic require expensive infrastructure to reach the oil.

This all raises the cost. It’s thought that oil in Saudi Arabia, which is relatively easy to produce, can be pumped for as little as $5 a barrel. Costs vary greatly for unconventional projects, but can be $40 a barrel or higher.

What about gasoline prices?

When it comes to gasoline prices, Tillerson said he doesn’t expect to see much of an increase this summer, mainly due to lack of demand.

"Given the state of the economy, my guess is people aren’t feeling a whole lot better about this year’s vacation than they were last year," he said. "If there is any uptick, I’d expect it to be very modest."

On Iraq, he said the security situation seems to be improving and was hopeful Exxon can fulfill its commitment to develop a key Iraqi oil field in the coming years.

Exxon was one of several companies to recently win oil contracts in Iraq. The government there hopes the country can eventually produce as much oil as Saudi Arabia.

"They’ve been more enthusiastic about our joint work than we anticipated," said Tillerson, referring to the Exxon’s partnership with Iraq’s national oil company. "We feel reasonably positive about moving forward."

While Exxon (XOM, Fortune 500) is bullish about using natural gas to make electricity, Tillerson did not hold out much hope for using the fuel to power cars and trucks, as some in Congress, along with oilman T. Bone Pickens, have suggested.

He said natural gas is not a dense enough fuel to use in most cars and trucks, would require significant investments in infrastructure to distribute, and that it would take more time to fill up each vehicle.

"I can’t make the math work on why anybody would do that," he said. 

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Want to be the first one on your block with a 3-D television? It will cost you about $3,000.

Samsung and Panasonic will start selling 3-D TVs in U.S. stores this week, inaugurating what manufacturers hope is the era of 3-D viewing in the living room. But because the sets require glasses, and there is for now little to watch in the enhanced format, it will take at least a few years for the technology to become mainstream, if it happens at all.

Samsung Electronics Co. announced Tuesday that for $3,000, buyers get a 46-inch set, two pairs of glasses and a 3-D Blu-ray player. Panasonic Corp. will start selling sets Wednesday.

The sales debut comes as moviegoers have shown considerable enthusiasm for the latest wave of 3-D titles in the theater totally free credit score.

Although it’s clear that 3-D sets for the home will appeal to technology and home-theater enthusiasts, it remains to be seen whether other consumers will be enticed to spend at least $500 above the price of a comparably sized standard TV and Blu-ray player.

TV makers hope so, because sets with the last big technological improvement — high definition — have come way down in price, below $500.

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The debate over gun control is heating up at Starbucks.

Gun owners bearing arms have been gathering at various Starbucks locations in states where it’s legal to do so in public. That’s sparked protests from gun-control advocates and kudos from pro-gun groups.

The coffee chain says that its stores simply abide by state laws, and it is legal to carry weapons in 43 states. But businesses have the right to prohibit customers from carrying guns in their establishments despite state laws, and that’s the crux of this particular dust-up.

"While we deeply respect the views of all of our customers, Starbucks’ long-standing approach to this issue remains unchanged," the company said in a statement. "We comply with local laws and statutes in all the communities we serve."

Starbucks (SBUX, Fortune 500) said the gun-toting gatherings first began at its stores in Northern California after two other chains, San Francisco-based Peet’s Coffee & Tea and California Pizza Kitchen, put policies in place to prevent gun owners from carrying firearms in their stores.

The Brady Campaign to Prevent Gun Violence then wrote a letter to Starbucks CEO Howard Schultz, urging Starbucks to enforce a similar policy. On its Web site, the Brady Campaign is soliciting supporters through an online petition that urges Starbucks to offer "espresso shots, not gunshots" and reverse its corporate policy.

On the other side of the debate, gun rights advocates are pleased with Starbucks’ decision. Forum members of OpenCarry.org, a pro-gun Internet community with nearly 28,000 members, are posting that they are "impressed" with Starbucks’ stance and will regularly buy the company’s coffee to show support.

Starbucks said if it were to adopt a policy prohibiting customers from carrying guns in states where it is legal to bear firearms, that would require its employees to ask law abiding customers to leave stores, putting them in an unfair and potentially unsafe position.

The company also said the gun-control debate belongs in the legislatures and courts, not at its stores.

"Advocacy groups from both sides of this issue have chosen to use Starbucks as a way to draw attention to their positions," the company said. "As the public debate continues, we are asking all interested parties to refrain from putting Starbucks or our partners in the middle of this divisive issue."  

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Revamped pizza and a frank advertising campaign helped Domino’s Pizza Inc. more than double its fourth-quarter profit as curious customers tried out its new recipe, the chain said Tuesday.

Executives have said the chain decided to start overhauling its recipes more than 18 months ago after mounting criticism from focus groups and on social media sites.

And it boldly admitted in a series of documentary-style spots that under its old recipe, customers complained its crust tasted like cardboard and its sauce was reminiscent of ketchup.

The company began promoting its new pizza in December. That helped profit climb to $23.6 million, or 41 cents per share, compared with $11 million, or 19 cents, a year earlier.

Removing one-time items, the company’s profit was 30 cents per share — well ahead of forecasts.

Sales improved to $462.9 million from $428.2 million. Analysts expected a profit of 25 cents per share with sales of $437.5 million.

In the U.S., sales at stores open at least a year grew 1.4 percent, while overseas — which comprises nearly half of global retail sales — climbed 3.9 percent. This figure is a key measure of a retailer’s performance since it measures results at existing stores rather than newly opened ones free credit score online.

Meanwhile, Chairman and Chief Executive David Brandon said traffic increased all of last year and has continued to grow in 2010.

The question remains, though, whether Domino’s can keep the momentum going, or whether the novelty of the new recipe will wane.

"When a restaurant company radically changes their menu, usually there’s a curiosity bump involved in the results," said Morningstar analyst R.J. Hottovy.

"But it’s too early to tell if that’s going to be sustainable for a long time."

Full-year profit surged 48 percent to $79.7 million, or $1.38 per share, from $54 million, or 93 cents, a year ago. Adjusted earnings were 87 cents per share. Annual revenue fell 2 percent to $1.4 billion from $1.43 billion.

Domino’s does not give quarterly or full-year profit outlooks, but did provide some long-term same-store sales forecasts. The pizza chain predicts domestic sales at stores open at least a year will rise 1 percent to 3 percent, with international sales at stores open at least a year up 3 percent to 5 percent.

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Harry Markopolos spent nine years fruitlessly trying to convince the Securities & Exchange Commission that Bernard Madoff’s investment operation was a scam.

Markopolos, a former derivatives fund manager turned fraud investigator, became an instant star after Madoff’s fund imploded, emerging as one of the few sympathetic figures of the financial crisis. A self-described quant, Markopolos contends it took him five minutes to realize that Madoff’s vaunted returns were impossible.

These days, Markopolos hunts fraud at major corporations. He looks for whistleblowers at places like trade shows and bars near corporate offices and convinces them to file lawsuits under the False Claim Act. He gets a piece of any settlement.

Markopolos is still waiting for his big payday, but next week marks the debut of his book, "No One Would Listen: A True Financial Thriller," the story of his quest to expose Madoff and his Ponzi scheme.

James Bandler caught up with Markopolos in Boston recently to discuss the book, and how he’s doing with his life as an agent for whistleblowers. Edited excerpts are below:

Since Madoff, I would imagine every whistleblower in America would want to talk to you.

I’ve gotten a lot of interesting evidence mailed to me and some of it has been borderline lunacy, like, who killed Kennedy type of thing. Others have been grounded probably in a good set of facts, but they’re not my cases. The negatives are that my undercover days are over. I can’t be anonymous. I don’t want to be recognized with whistleblowers, because it would be harmful to their careers. I have to wear disguises more.

What do you have, wigs?

I don’t want to go into it, because that would be stupid. That’s operational security.

You were a whistleblower and you work with them now. What is the profile of the whistleblower’s personality?

If you don’t have a strong belief system, you’re not going to be a whistleblower. You have to be crazy-brave. The risks are all weighted to the downside.

Crazy-brave?

Yes. You cannot have self-doubt. You just have to go forward and say I believe in this country. I believe in these core values. I know if I get outed and get caught, I’ve committed economic suicide for myself and my family. I’m going to be on the industry blacklist easy payday loans.

You write that you were afraid that Madoff or shady gangster clients would try to kill you if they fingered you as the whistleblower. You took to checking under your car for bombs and you carried a gun everywhere with you.

I didn’t know if I was going to live through it.

You were so afraid of being identified by Madoff that you wore gloves (in 2002) when you handed a packet of information to an aide of Eliot Spitzer so that your fingerprints would not be on the documents. Were you being overly paranoid?

I had twin boys that were going to be born three months later, and I wanted to make sure that they would have a father. I knew that Spitzer came from a very wealthy family and that it was possible that he was a Madoff investor. (In fact, Spitzer’s family real estate company did lose money in the scandal.)

What would’ve you done differently?

I can think of two things that would’ve influenced the action and hopefully brought this to a successful resolution. One is approach Spitzer in the open. Take the risk. Shake his hand, look him in the eye, say, ‘I’m Harry Markopolos, I’m president of the 4,000-member Boston Security Analysts Society. I’m a derivatives expert and this is what I know about Bernie Madoff. He’s a fraud.’

I wish I had confronted Mr. Spitzer to his face. Or I should have gone to (Massachusetts Secretary of the Commonwealth) Bill Galvin. He’d taken on Wall Street titans like Spitzer had. He was a hometown boy like me.

In your book, you write that when Madoff was interviewed by the SEC inspector general and asked about you, he dismissed you as a "joke in the industry." What would you tell Madoff if you met him?

I wouldn’t want to meet him. I think he’s a pathological liar and a predator. I think he’s mentally twisted, and I know a lot more about him than he knows about me. He hunted at funerals and weddings. He’s the lowest form of scum. I don’t want to meet him or his family. I don’t want anything to do with him. I don’t want to be that close to evil.

Read more of James Bandler’s interview with Markopolos 

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