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The Opening Bell

The Audit's new daily column chimes in on new credit problems, Zell's latest moves, bad Chinese drugs, etc.
February 14, 2008

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Editor’s note: Welcome to the formal launch of Opening Bell, a critical review of the morning’s business news written by Ryan Chittum. Youthful yet wizened and crusty, Ryan is a native of Oklahoma, where he is known as the “Oracle of Tulsa.” The Opening Bell is the latest editorial offering from The Audit, the business-press section of the Columbia Journalism Review.

And now: Ding, ding, ding—ba-wooong!”:

The business press goes wide today with its coverage of the latest corner of finance to suffer a meltdown. The market for so-called auction-rate securities has seized up in recent weeks, leading to nasty consequences for public borrowers like the Port Authority of New York and New Jersey and presenting another potential source of tens of billions of dollars in losses. It’s another consequence of the collapse of faith in the so-called monoline bond insurers.

The Wall Street Journal has pieces on A1, C1, C2, and D1.

Auction-rate securities are long-term debt vehicles whose interest rates are reset frequently (the WSJ says every week to thirty five days) at auction, which makes them similar to short-term bonds. These had been considered stable investments because the debt was issued by government entities or institutions like museums and hospitals. But in the last week or so the market has frozen, in part on fears that bond insurers will be downgraded, which would in turn downgrade the bonds they insure.

That has left many of the bonds worth much less than they were just weeks ago and is increasing the cost of financing for such stable entities as the Port Authority, whose interest payments on its auction-rate securities quadrupled Tuesday, according to Bloomberg News.

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“It’s the beginning of the end for the auction-rate market,” said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. “Banks have stopped supporting the market.”

It’s about to get worse. Bloomberg reports that the second-biggest issuer of auction-rate securities, UBS AG (which this morning posted a record $11.3 billion loss in the fourth quarter on bad subprime mortgages), told its brokers yesterday it would not step in to buy those that don’t sell. Bloomberg also cites a report that 80 percent of the securities up for auction on Wednesday didn’t sell.

This comes at a time when governments are already strapped for cash, with real-estate taxes falling and the economy downshifting. The new crunch is making it harder for students to borrow, and could lead to a crisis in education funding in the fall. The banks that arrange the financing can’t step in to smooth out the bumps because their balance sheets have taken too many hits already and most are trying to preserve their capital, says the Financial Times, which describes the market as suffering an “implosion.”

The WSJ leads its front page with news that a Chinese plant makes the active ingredient in a blood thinner called heparin that’s under investigation in the sickening of hundreds of people, at least four of whom have died. The NYT puts it inside, on page 2 of its business section, leading us to conclude that Rupert Murdoch isn’t forcing the Journal to kowtow to the Chinese just yet.

If the Chinese facility is to blame (and both the Journal and the Times are careful to say no one knows if it is), it would be the latest major blow to Chinese manufacturing after months of bad press about its defective (and sometimes poisonous) products. Both papers report that the Food and Drug Administration had never inspected the Chinese plant where the pig-intestine-derived drug’s active ingredient was made for Baxter International, which is not unusual. The FDA has inspected just 7% of overseas drug-making plants.

The WSJ reports, though the NYT does not, that the FDA was supposed to inspect the Chinese plant before it allowed it to make the drug, but due to “human error, and inadequate information technology systems, a pre-approval inspection, which would normally be conducted, was not.”

The Los Angeles Times, NYT, WSJ, and FT all report that New York Attorney General Andrew Cuomo is suing UnitedHealth Group for fraudulently overcharging customers by underpaying out-of-network doctors in a decade-long, “industrywide scheme.” State officials are leading the way—again—on issues that the federal government’s regulators have neglected.

Says the NYT:

The investigation, which raises issues that doctors’ groups and some other critics have brought up, is likely to place greater scrutiny on health insurers. And it comes at a time when the industry is reporting big profits but the rising cost of medical insurance has left an estimated 47 million people uninsured in the United States.

“The larger issue is health plans make an awful lot of money,” said Sheryl R. Skolnick, a health care analyst for CRT Capital Holdings in Stamford, Conn. If insurers are found to have underpaid, she said, they could end up having to make big restitutions to consumers.

The WSJ, FT, and NYT each have prominent stories on News Corporation’s discussion with Yahoo, as the Internet company tries to fend off Microsoft’s unsolicited $41 billion takeover bid. News Corp. would give Yahoo several of its online properties including MySpace plus an unspecified amount of cash for a stake of at least 20% in the company, the Journal says. The Times and the Journal, though, both say it looks increasingly likely that Microsoft will succeed in its bid.

The Journal reports that bankers are, shockingly enough, trying to get the federal government to bail out—ahem—back stop refinancing by subprime borrowers. A Credit Suisse plan proposes that the FHA guarantee refinancing for some 600,000 mortgages worth about $89 billion.

CEO Sam Zell announced up to 500 layoffs at Tribune Company as ad sales continued to plunge. The Chicago Tribune says ad revenue was down more than 10 percent in January, a dire scenario for a company whose debt load is keeping it barely above water. Zell rationalizes that the layoffs will flatten the bureaucracy, making Tribune more agile.

In economic news, Bloomberg reports that the Fed’s slashing of interest rates over the last several weeks has done nothing to lower the cost of borrowing for many companies and consumers.

The Journal says the surprise January retail-sales gain reported Wednesday may not mean much, in part because it reflected higher gas prices. It also reports a consumer-confidence measure plunged to a fourteen-year low:

The Los Angeles Times says existing-home sales in Southern California fell to the lowest level ever recorded by one measure that goes back twenty years. Nearly one in four of those that did sell were ones that had been in foreclosure.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.