World Economic Forum: China Looms Large

There couldn't have been a more interesting time to hold the World Economic Forum Summer Davos 2008, which ran Sept. 26-28 in the eastern coastal port city of Tianjin, China. Just like at Davos, the organization's main event held every winter in the eponymous Swiss ski resort, the forum brought together a mix of business leaders, pundits, and policymakers, including Citigroup (C) Vice-Chairman William Rhodes, Ernst & Young CEO James Turley, and Lenovo Chairman Yang Yuanqing. Also attending were China Mobile (CHL) chief Wang Jianzhou, TCL CEO Li Dongsheng, Alibaba founder Jack Ma, and European Union Trade Commissioner Peter Mandelson.

And, as at Davos, there were the innumerable panel discussions, closed-door sessions, and networking as delegates, speakers, and journalists met throughout the sprawling convention center and at a scattering of hotel bars. But what made the second annual Summer Davos in China different, of course (last year's was held in the northeastern coastal city of Dalian), was the backdrop: first, a grimy, largely industrial port city—a far cry from the snow-clad Alps of Davos; much more importantly, the unprecedented turmoil in the world's financial system that dominated discussion for the 2,000 attendees. "Confidence is more important than the gold and currency at the moment," said Chinese Premier Wen Jiabao during the keynote address on Sept. 27.

So rather than just high-level pontificating (the WEF motto is "committed to improving the state of the world"), the three days in Tianjin were more serious business—in short, what comes next for a world economy facing tremendous challenges and uncertainty. Indeed, the Tianjin forum was much more about raising questions than answering them, many revolving around China. In particular, to what degree will the mainland, the world's most important rising economy, continue to drive global growth? And what leadership role might China play going forward?

U.S. Consumers Are "Toast"

First, the economic question: As the world economy reels, will China be able to move more decisively toward its long-term goal of building a more domestically focused, consumption-driven economy? And will China help cushion the impact of the likely dramatic slowdown in the more developed economies? Over the last 30 years, China's gross domestic product has grown from just 1% of the world's total, to more than 5% last year, Premier Wen pointed out in his keynote address. China's share of global trade has grown from less than 1% in 1978, the year the nation first opened its economy to the world, to about 8%.

Ivy Asset Strategy Rakes in Cash, Stays

The German Hybrids Are Coming

Stuttgart - With a price tag topping $100,000, the new Mercedes-Benz S-Class hybrid isn't aimed at folks who can't afford $4-a-gallon gas. Rather, the car is the first in a series of new German models that let well-heeled customers appear green without giving up land-yacht amenities such as twin-powered sunroofs, vast leather seats, and a top speed of 150 miles per hour. "If we want to preserve the American way of driving, there's no alternative," says Klaus Meier, director of sales and marketing for Mercedes.

The new S-Class, unveiled on Sept. 11 and due in the U.S. a year from now, is the first of a wave of high-end German hybrids. BMW, Porsche, and Audi (VLKAY) are also promising gas-electric models, mostly SUVs, in the next two years. Why now, a decade after Toyota (TM) started selling the Prius? Concern about global warming has finally reached wealthy U.S. buyers. Sales of luxury cars have plummeted in the past year, with unit sales of the gasoline-powered S-Class in the U.S. dropping 27%, according to Autodata. The only top-end luxury models to register growth were Toyota's Lexus hybrids. "All of a sudden, premium buyers are asking, 'Is the car socially acceptable? Is it environmentally friendly?' " says Gregor Matthies, a partner at consultant Bain & Co. in Munich.

Can a hybrid Mercedes reverse the trend? Mercedes says the vehicle gets an impressive 30 mpg—30% better than a gasoline version of the same model, making it the most fuel-efficient big luxury car on the market. But, because of different methodologies, American regulators tend to assign lower mileage ratings than the Europeans. And at some point, U.S. buyers, like their European counterparts, may realize that modern diesel cars offer hybrid-like fuel economy—often for less money. Mercedes already sells a 30 mpg diesel S-Class in Europe that runs about $100,000. A diesel version of BMW's redesigned 7 series, being unveiled in late September, will get better mileage than the S-Class hybrid.

SPACE-SAVING BATTERY

Moreover, in the U.S., Mercedes faces the well-entrenched Lexus. The brand launched its first hybrid three years ago and can draw on Toyota's years of expertise. Unlike the S-Class, which uses battery power only to boost the gasoline engine, Lexus models can run solely on electricity. "To us, hybrid is not something we are adding on to the lineup—this is really who we are," says Karl Schlicht, who oversees Europe for Lexus.

Mercedes sales reps have their talking points, too. Their hybrid's biggest innovation is a compact battery that fits into the existing engine compartment rather than crimping trunk space as in Lexus models—possibly a selling point for uncompromising luxury buyers. And Mercedes tried to make the driving experience as much like a conventional S-Class as possible. At highway speeds, the two-ton car is eerily quiet, and shifting by the seven-speed automatic transmission is almost imperceptible. For drivers, the only obvious indication that they're behind the wheel of a hybrid is a light on the dashboard.

The number of S-Class buyers—28,000 worldwide in the first half of 2008, or less than 10% of Mercedes' total—is too small for the hybrid version to contribute much to a healthier planet. But even some skeptics say it's a start for Mercedes and the German auto industry. "The hybrid S-Class won't rescue the world," says Tomi Engel, an electric car expert at the Agency for Renewable Energy, a German trade group. "But we desperately need these [hybrid] technologies in Germany."

A Mercedes Hybrid at Last

Marcial: Alcoa Might Regain Its Luster

Commodities—and shares of companies that produce them—have turned cold after a sizzling runup in prices this year.

And so have the shares of Alcoa (AA), the world's largest integrated aluminum producer. It's no big surprise: Commodity prices are under pressure mainly because of the economic downturn, and the housing and auto industries—two major users of aluminum—remain embattled. So shares of Alcoa have tumbled, to 24 on Sept. 26, down from their 52-week high of 44.32 on May 19.

But this could be an opportune time, say some investment pros, to buy Alcoa's battered stock to capture what they expect will be robust gains over the long term.

Takeover Target?

Here's why: It's unlikely that commodity prices will keep going down. Once the economy starts showing signs of recovery, commodities will start snapping back. If Alcoa's stock continues to weaken, however, some bulls say it's more than likely the company will end up being gobbled up by a larger mining concern.

"Undoubtedly, the industry is actively in consolidation, and Alcoa is definitely one of those vulnerable to being taken over," says David Katz, chief investment officer at Matrix Asset Advisors, which has accumulated shares. For months now, he notes, the world's largest mining company, BHP Billiton (BHP) of Australia, and Britain's Rio Tinto (RTP), the world's second-largest aluminum producer, have been trying to acquire each other, with no success. And about 18 months ago rumors swirled that BHP and Rio Tinto were separately preparing to launch a bid for Alcoa. To avoid such a fate, Alcoa submitted an offer to buy Alcan, another major mining company. But Rio Tinto frustrated Alcoa by buying Alcan. Now, analysts say the prospects for more consolidation are strong.

Katz figures that based on fundamentals, the value of Alcoa is in the high 30s. But he puts the company's value in a buyout in the low to mid-40s, based on the projected increase in aluminum prices over the long term and the company's shift to lower-cost plants.

Less Volatility Ahead

Standard & Poor's analyst Leo Larkin, who rates Alcoa a buy, expects earnings will increase over the long term because of the industry's consolidation, generally rising prices, and reduced production costs. Larkin says aluminum prices hit bottom in 2002 and should move higher through 2009. So Alcoa's stock, at its current price, is "attractively valued," says Larkin.

He forecasts Alcoa will earn $2.53 a share in 2008 and $3.22 in 2009, vs. 2007's $2.96. The lower earnings in 2008, he says, are due to the weakness in residential construction and a decline in auto sales. But Larkin says the anticipated consolidation in the industry should result in a more disciplined pricing environment and less volatility in sales and profits over the course of the economic cycle. His 12-month price target for Alcoa shares is 42, based on his earnings forecasts. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

Brian MacArthur, an analyst at UBS (UBS) (which has done banking for Alcoa), also rates Alcoa a buy but with a higher 12-month price target of 46, based on his earnings projections of $2.93 a share on sales of $30.5 billion for 2008, $4.36 a share on $32.6 billion in sales in 2009, and $6.86 per share on $37.9 billion in sales in 2010.

Diversified Product Mix

"Alcoa is one of the most effectively managed mining companies in the world," says MacArthur, pointing to its highly competitive position in the industry, a diversified production mix, and "compelling processing technology potential." He notes that Alcoa's aluminum products are used in a wide variety of applications, including aircraft, automobiles, buildings, and packaging.

Right now, Wall Street is preoccupied with the credit crisis and the jarring shakeout in the financial sector, and little attention is being focused on the M&A front. But when the dust settles and Wall Street gets back on its feet, the search for deals will be under way again, and Alcoa, buttressed by its strong assets, should get fresh attention.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial: Two Thumbs Up for RIM

Why Maple Syrup Costs So Much

It's hard to swallow: Since May, Mark Menning has watched the price of maple syrup soar to $6 a pound—up from $2 a pound a year ago. That's a problem for Menning, since the maple syrup is a key ingredient in the cookies his San Francisco-based Lotus Bakery supplies to some Whole Foods Market (WFMI) outlets and Bay Area specialty grocery stores.

Add in rising costs for everything from oil to flour, and you've got a recipe for disaster. Says Menning: "These price increases can make or break you."

What's going on? Is there a shadowy syrup cartel manipulating prices? Has someone figured out how to turn maple sap into fuel? Not quite. Unfavorable weather in Quebec—the source of 80% of the world's maple syrup—have depressed output to a 10-year low. At the same time, demand for maple syrup, which is slightly lower calorie than cane sugar and corn syrup, has been growing in recent years, as more Americans seek alternatives to processed and artificial sweeteners.

A Scarcity of Sap

Blame it on global warming, perhaps. But for the past three years, Quebec has seen cold winters turn very quickly into warm springs, which played havoc with sap collection. (Under ideal conditions, temperatures rise during the day and then dip back below freezing at night. This pattern encourages sugar maples to release their sap). That has cut sap production season in half, to two to three weeks. This year, Quebec's output slipped to 58.7 million tons this year, down from 61.7 million in 2007 and 86.4 million tons in 2004.

All of this comes at a time of growing appetite for the sweet, sticky stuff—not just in North America but also in Asia. Anne-Marie Granger Godbout, joint secretary of the Federation of Quebec Maple Syrup Producers, an industry group in Longueuil, Que., credits a global marketing campaign the group launched in 2004. Since then the value of exports to Japan has doubled, to $20.5 million last year.

In the U.S., meanwhile, maple syrup is not just a topping for pancakes and waffles anymore. With growing numbers of Americans willing to pay a premium for foods with more natural ingredients, maple syrup is now cropping up in everything from yoghurt to cereals to sausages. Menning's operation, for instance, specializes in cookies that appeal to health-conscious people. He switched to maple syrup from honey a couple of years ago when he heard that the bees were disappearing in large numbers.

When Menning saw the price of Canadian maple syrup going through the roof, he found a U.S. supplier that sells him the product at about $4 a pound. Unlike their Quebec peers, New England syrup operations had a banner year, with output up 30% from 2007, thanks to favorable weather. But Tom McCrum, owner of South Face Farm in Ashfield, Mass., warns that U.S. supplies will just about run out by the end of 2008. "Another bad year [for the Canadians] and there will be major shortages, and prices here will go through the roof," he warns.

Behind Rising Health-Care Costs

Google's Android Nips at iPhone's Heels

In the 15 months since it introduced the first iPhone, Apple (AAPL) has radically changed our expectations for mobile phones. But the rest of the industry isn't standing still. We're likely to see a fresh round of innovation as T-Mobile (DT) rolls out the first handset based on Google's (GOOG) Android operating system. And Research In Motion (RIMM) is fiercely defending its mobile e-mail turf with very good new products. Of the two, outsider Google faces the tougher challenge. But based on a preliminary look at the T-Mobile G1, announced on Sept. 23, launching in the U.S. and Europe in late October, I'd say it has a shot.

Apple set this whole competition in motion by building a single, excellent phone within an ecosystem that it controls totally, including the right to approve all third-party software. In contrast, Google is pushing an open platform, meaning any handset manufacturer can design hardware that runs Android. The closest relative to Android is Windows Mobile, which remains awkward to use after a decade of tweaking by Microsoft (MSFT).

I spent only about an hour with the G1 ($180 with two-year contract; unlimited data plans start at $25), which is co-branded by Google and handset maker HTC. Disappointingly, the phone is a bit thick and heavy. The screen slides up to reveal a keyboard, but the way the keys are recessed between raised areas on either side makes for slightly uncomfortable typing. And while the big touchscreen is nice, you can't resize objects simply by pinching or stretching them with your fingers. Once you get used to this trick on the iPhone, you expect it on every handset.

The Android software is far more interesting than the G1 hardware, in part because the developers tried to tear down the walls that divide applications. Other mobile-phone operating systems get you only some of the way to this goal. On a Windows Mobile handset or an iPhone, if you click on a Web address in an e-mail message, the phone opens a Web page in a browser. Click on a phone number in a Web page, and the phone usually dials it. But a task as simple as copying text from a Web page and pasting it into an e-mail is difficult to impossible on handsets.

Android tries to fix this by organizing activities in terms of users' needs and desires rather than predetermined programs. In a sense you are always in a browser, even when it doesn't look like it. Not surprisingly for a product designed by Google, search is central: If you start typing while browsing the Web or looking at a picture, Android will search the phone contents and the Web based on the text. This instant search could prove to be either extremely helpful or really annoying. I will explore it in a more detailed review of the G1 closer to its launch. One problem with the initial Android release is its Google-centricity. The search, of course, is Google search, and e-mail is optimized for Google's Gmail. The phone pulls contacts from Google Contacts, so you'll need to jump through hoops to keep the phone's contact list in sync with Outlook or the Mac Address Book.

Another problem: The G1 is a data-hungry phone that will mostly be stuck on slow networks. T-Mobile is just starting up its 3G data service, and it will be available in only 21 cities.

If Android is a work in progress, BlackBerry is a mature product that knows what it wants to be and keeps getting better. RIM has expanded its growing consumer line with the T-Mobile Pearl Flip and will soon announce its first touchscreen product, the Storm, with Verizon (VZ). And it has strengthened its appeal to the BlackBerry's core corporate market with the Bold.

For reasons that are unclear, AT&T (T) is holding the Bold off the U.S. market, but I was able to test an unlocked Canadian version ($759) courtesy of PureMobile, on the AT&T network. It is quite simply the best BlackBerry ever. It's bigger than a Curve and feels a bit bulky after the mini-phones I have been using, but it exploits its scale to great advantage, with an excellent keyboard, a big, sharp display, and plenty of battery power to get through a long day.

RIM has redesigned the user interface to take advantage of the big screen, but not so drastically that it will feel alien to BlackBerry users. With an improved Web browser, the phone moves seamlessly between AT&T's 3G service and Wi-Fi. It's expected to cost around $400 with a contract, and I hope AT&T offers it soon. If e-mail is your thing, this BlackBerry is worth waiting for.

The turmoil created by the iPhone is leading to major innovations such as Android and solid evolutionary products like the Bold. Consumers are reaping the benefits.

The iPhone’s Impact on Rivals

BlackBerry vs. iPhone: RIM Takes It Up a Notch

World's Fastest Production Car to Go Electric

Last week saw the one year anniversary of SSC's Ulimate Aero becoming the fastest production car in the world at 256.18 mph, pushing past marks set by Koenigsegg's CCR and Bugatti's Veyron. It's the first time the top speed record has stood for a whole year since McLaren's F1 held it for seven years with 386.4 kmh (240.1mph). Now comes news that an Ultimate Aero EV (Electric Vehicle) is in development. A 500 bhp EV is planned for late 2009 and a 1000 bhp 4WD EV is also under consideration. Now here's the kicker—the press statement reads: "The drive train under development will feature a revolutionary power source allowing for extended time between charging intervals with the possibility of several years between charging."

The anniversary date was September 13 to be exact, but it's the prospect of the first 100% Green Supercar that is interesting. Engineering details are yet undisclosed but SSC expects to roll out its first prototype in February 2009. As for the revolutionary drive train, well, we have no idea what is planned and…we'll suspend disbelief in respect of the company's proven ability to do exactly what it has said it will do in the past. A track record as good as SSC's gives this otherwise ridiculous claim some credibility, though it'll need to be pretty special to run a few years between charges—maybe it's a micro-nuclear powerplant.

"I think we can do it faster, leaner and cleaner than any other manufacturer" says Jerod Shelby, SSC Founder.

Consistent with its company philosophy of being the benchmark, SSC plans next to break the record for the fastest electric car in the world.

Bill Clinton on the Banking Crisis, McCain, and Hillary

There is no shortage of blame for the financial debacle rocking America and scaring the world. And among the names popping up in the pathology of this vicious malaise are former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin, former Texas Senator Phil Gramm, and former President Bill Clinton. It was on their watch that the banking strictures of the 1933 Glass-Steagall Act were dismantled. Some critics say tearing down the barriers between commercial and investment banks contributed to the current crisis because it allowed commercial banks such as Citigroup (C) to trade mortgage-backed securities. In fact, former Citi CEO Sandy Weill led the fight for deregulation. President Clinton was in New York this week for the annual meeting of his philanthropy, the Clinton Global Initiative, and I asked him about the banking crisis.

MARIA BARTIROMO

Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision?

FORMER PRESIDENT BILL CLINTON

No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.

Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?
Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.

Obama, McCain, and the Stock Market

Wall Street Crashes the 2008 Election

Main Street's Rage at the Financial Crisis

Allentown, Pa., is in some ways a profoundly ordinary place. Like cities and towns all over America, it has been shaken by economic changes seemingly beyond its control: the churning of industries, the dislocation of workers. Many residents just sigh at the mention of Billy Joel's anthem to the gritty, struggling Allentown of the 1980s, when the once-great Bethlehem Steel mill went into a death spiral: "Every child had a pretty good shot to get at least as far as their old man got. But something happened on the way to that place."

Allentown has reimagined itself since then. The city's biggest employer, Lehigh Valley Hospital & Health Network, is thriving. Officials have enticed companies to the area with tax breaks. A small group of businesspeople is trying to make the city center more vital: Allentown Brew Works, opened a year ago in the old Harold's Furniture building, seats 400 on four floors.

Lately, though, a familiar economic anxiety has been creeping into people's lives. Some retail businesses are starting to cut back on employees' hours. And Mack Trucks announced in August that it is moving its century-old headquarters from Allentown to Greensboro, N.C.

The latest details of the government's proposed $700 billion rescue plan was not the main story in the local paper, The Morning Call, on Sept. 23 (an article about the end of a teachers' strike was). But it is on people's minds. For many of Allentown's residents, the rescue is an occasion for anger, even if that feeling is at times blunted by fatigue and resignation. They dislike what goes on in Washington, but those ill feelings are nothing compared with their view of Wall Street. "People see that the chief executives of these finance companies are making millions on the backs of taxpayers," says Ed Pawlowski, the Democratic Mayor of Allentown. They are worried about how the next generation will fare in an America that many feel has mixed up its priorities.

At Wal-Mart (WMT) SuperCenter Store #2641, Brett Slack, one of the owners of Lehigh Valley Paintball, was picking up groceries with his two-year-old daughter while his wife was at her part-time job as a cashier at Giant Food. He, like most others here, believes that the government has no choice but to intervene, since the consequences of inaction appear to be far worse. So fine: He can live with his tax money helping to prop up America's financial system. But he wants the chief executives of those companies (unnamed by anyone in Allentown) to pay, too. "The government should go after the CEOs," he said. "I own a business, and if I went under, the bank would come after me. They made bad decisions and figured the government would bail them out. If the CEOs end up sleeping in cardboard boxes, that would be O.K. with me. They don't deserve to be multimillionaires."

Slack, who is 32, has had to lay off 20 of his 35 employees in the past year as rising gas prices slowed business. He and his two partners took pay cuts, too. "That's what CEOs and owners should do," he says. He put all his savings into the company when he started it four years ago. "If I have money to invest one day, I'll just start another business. I won't invest in the stock market," he says.

Seven Days That Shook Wall Street

Which Assets Will AIG Sell?

Since taking over as chief executive of ailing insurance giant American International Group (AIG) on Sept. 18, Edward M. Liddy has given few details of his plan for reviving the company. But one thing is clear: He's moving fast. Despite AIG's size and complexity, with dozens of divisions in 130 countries, Liddy has said he will restructure in a matter of weeks, not months. What's driving him is not just the onerous interest rate AIG has to pay on its $85 billion line of credit from the Federal Reserve Bank of New York. With each passing day, AIG's best assets, its insurance businesses, are eroding in value as competitors lure away AIG customers and key employees polish their rsums. "Uncertainty is very bad for AIG's insurance units," says David W. Steuber, a Los Angeles partner at law firm Howrey and an adviser to many AIG customers.

Liddy has said he hopes to keep as much of the insurance business within AIG as possible. But faced with the need for capital to cover its disastrous mortgage bets, AIG may have to put many of its corporate gems on the block quickly. And in a new survey by Insurance Journal, more than 60% of the 1,000 brokers who responded expect to do less business with AIG in the future.

In a report published on Sept. 23, Credit Suisse Group (CS) put an aftertax value on AIG's assets at anywhere from $94 billion to $122 billion. The final tally will depend on how big a "distressed discount" it will face. Even now, the noninsurance businesses are beaten down, with AIG's aircraft leasing operation expected to fetch roughly $2.2 billion after taxes (a Citigroup (C) analysis puts the unit's book value at $7 billion). Tough times will drive down all prices. AIG's profitable foreign life insurance business, with its strong position in Japan, is expected to fetch around $24 billion—much less than its estimated value a year ago.

One argument for selling some insurance holdings now is that buyers are already circling. Even before AIG's woes, the weak U.S. dollar had sparked interest from foreign insurers hunting for market share. And unlike banks, these insurers have more than enough assets to cover potential policy losses and are looking to put some of that surplus capital to use. Industry experts have Germany's Allianz (AZ), Italy's Assicurazioni Generali, and France's AXA (AXA) (none of which would comment) on the short list. Japan's Tokio Marine Holdings (TKOMY), which recently bought insurer Philadelphia Consolidated Holding (PHLY) for $4.7 billion, is also on the list; it did not respond to calls. Bermuda-based companies, which often underwrite such risks as terrorist strikes, may want AIG's "surplus lines" business.

Meanwhile, a group of AIG equity investors is looking for ways to pay off the government loan. Thirty-five of them met on Sept. 22 in the New York offices of law firm Mayer Brown, where partner Mickey Kantor, a former Commerce Secretary, coordinated the discussion. Among those at the table: former AIG Chief Executive Maurice R. "Hank" Greenberg, SunAmerica founder Eli Broad, and representatives of the $154 billion New York State Common Retirement Fund. "We believe it's possible, but daunting, to find in a reasonable amount of time the private capital to re-privatize AIG," says Kantor—a stance he maintained a day later, when AIG signed a definitive agreement with the New York Fed.

SKITTISH CUSTOMERS

One worry for potential buyers is bad investments lurking inside any units up for sale. Another is the long-term health of the brand as AIG tries to hold on to its customers and employees. Industry sources say ACE (ACE), Ironshore, and C.V. Starr have contacted brokers for AIG customers to grab business. ACE and Ironshore acknowledge contacting brokers to help customers. C.V. Starr, once an AIG affiliate, did not return calls. On Sept. 19, ACE ramped up capacity for certain commercial insurance to woo clients. CEO John Lupica noted that the situation "underscores the importance of partnering with a financially strong insurer." Andrew Colannino, an analyst at insurance rating agency A.M. Best, asserts that "some erosion of franchise value and customers will happen."

Most of AIG's operating companies are well financed, and insurance regulators from dozens of states have made statements backing their health. Even so, AIG executives face constant questioning. At its U.S. commercial insurance business, which posted $5 billion in earnings over the past 12 months, CEO John Q. Doyle and his finance chief, Robert S. Schimek, say they've held conference calls since AIG's bailout with as many as 10,000 clients on the line at a time. The No. 1 question: Will the parent company's woes suck money out of the stellar insurance business?

Doyle says he hasn't been losing customers. But John Phelps, director of business risk at Blue Cross & Blue Shield of Florida, says he's discussing options with his broker and his underwriter at AIG. He's sticking with the company for now, but "when we get closer to our [policy] expiration date," Phelps says, "we may ask to look at alternatives, just in case."

Wall Street’s Big Sell-Off

Where AIG Went Wrong

Where AIG Went Wrong

Oracle Dives Headlong into Hardware

Larry Ellison kicked off his annual speech to Oracle (ORCL) customers by comparing the engineering behind his new America's Cup racing yacht to Oracle's products. "Like a lot of families, I'm holding down two jobs," he quipped.

Oracle's billionaire CEO Ellison isn't personally feeling the sting of a weak economy, and he used his Sept. 24 speech at Oracle's OpenWorld conference in San Francisco to outline how he hopes to shield his company from it, too.

Oracle unveiled its first-ever hardware products, a pair of servers built by Hewlett-Packard (HPQ) that run Oracle software and is designed to speed the performance of Oracle databases running on them. A storage server lets data flow more quickly from disk drives into the company's database. And the companies' co-branded "Database Machine," which towered over Ellison on stage, is meant to deliver big performance boosts to companies that run an Oracle database on it. "Oracle's going into the hardware business, but we're not going alone," he said.

Safe Haven for Investors

Sales of database software are powering financial results at Oracle, even as sales of its business applications have faltered. The company has spent $34 billion to buy about 50 software companies since the beginning of 2005, it said this week. That's propelled Oracle into the market for applications that run payrolls, billing systems, and sales departments. But though application sales fell 12% in the most recent quarter, sales of databases and application-connecting middleware rose 27%, giving succor to investors worrying how well Oracle and other tech companies are weathering the U.S. economic storm.

Oracle's stock has served as a relative safe haven for investors this year, outperforming the Nasdaq composite index and the Standards & Poor's 500-stock index. Operating profit margins topped 40% (BusinessWeek.com, 9/19/08) during the first quarter of Oracle's fiscal 2009, helped by a big dose of highly profitable technical support revenues.

Those margins make the company's shares "a very nice place to hide" from the market turmoil, even though revenue growth is slowing, says Pat Walravens, a senior software analyst at JMP Securities (JMP), who rates Oracle stock market outperform. "You have a balancing act between operating margin expansion and decelerating growth," says Walravens. "In this particular quarter, operating margin expansion came out ahead."

Focusing on Databases

Having built up the applications side of Oracle's business, Ellison's speech made it clear that he's now focusing on databases, the engine of Oracle's sales and profits. The company is the leader in database software, with a 48.6% share of the $17 billion market last year, according to market researcher Gartner (IT). IBM (IBM) controlled 20.7% of the market, slightly less than in 2006. And Microsoft (MSFT) gained a bit of share, to 18.1% of all sales.

Sales of database and middleware licenses, and customers' technical support fees for those products, accounted for two-thirds of Oracle's $4.2 billion in software revenue in the first quarter. And its January acquisition of middleware maker BEA Systems gives the company a new weapon against rivals IBM and SAP (SAP). "Anything you can do to reduce the cost of plumbing is a big win for customers", says Bruce Richardson, chief research officer at industry consultant AMR Research.

Microsoft: What Cost the Vista Fiasco?

Boeing's CEO Beat the Pentagon, But Lost Some, Too

W. James McNerney Jr., who pitched for Yale University nearly 40 years ago, can play hardball. Take the ultimatum the Boeing (BA) chief executive officer delivered to a top defense official in late August. Give Boeing six more months and a legitimate shot to bid on the now infamous $35 billion airborne-refueling tanker plane deal, McNerney said. Otherwise he would quit the competition—leaving a sole bidder and a potentially explosive reaction from Congress. "He put the Secretary of Defense into a real crack," says a congressional staffer familiar with the meeting. "To McNerney's credit, it worked."

Score that one for McNerney, who may prove to be one of the most hard-nosed leaders in Boeing's history. Twenty days after the showdown, the Defense Dept. abruptly canceled the competition, postponing the tanker decision until the next Administration. That stunning turn in a tortuous seven-year fight was McNerney's second triumph in the battle: Earlier this year he mounted a highly unusual protest that caused the Pentagon to reopen the decision to award the contract to a rival alliance of Northrop Grumman (NOC) and European Aeronautic Defence & Space, maker of Airbus planes. "He handled that very deftly," says Boeing director Edward M. Liddy, who has just been named CEO of American International Group (AIG).

McNerney has had a mixed record since being tapped in 2005 to run Boeing after back-to-back scandals. One CEO's tenure ended when a Boeing chief financial officer and a Pentagon official were found guilty of improprieties in the first go-round on a tanker deal in 2002; a second CEO's career was cut short after an affair with another Boeing executive. McNerney cleaned house, paid a $615 million fine, and toughened in-house ethical oversight, impressing Boeing's harshest critic, Senator John McCain. Southwest Airlines (LUV) CEO Gary C. Kelly, a big customer of Boeing's, adds: "I'm glad that Jim McNerney is at the helm."

Internally, the former 3M (MMM) chief and GE (GE) veteran has received fewer accolades. Even as he was winning in Washington, he was losing a battle in Seattle with the International Association of Machinists & Aerospace Workers. The IAM's 27,000 Boeing workers struck on Sept. 6, replaying a late 2005 walkout that hobbled Boeing's commercial plane building operations for 28 days. The new stoppage could stretch deep into the fall.

WORTH THE PAIN?

McNerney, who declined to comment, insists that Boeing needs flexibility in its labor contracts, saying in an in-house memo that it must "protect [its] long-term competitiveness." He's betting that the right to outsource—perhaps to countries that may then buy Boeing planes—is worth the pain of a strike. McNerney "will be judged by what labor relations look like over the next five years," says Noel M. Tichy, a management professor at the University of Michigan's Ross School of Business.

Critics also say McNerney took too long to replace executives in charge of a much delayed new 787 jet. So far, Boeing has announced three postponements totaling more than a year in bringing out the so-called Dreamliner. McNerney & Co. could have "moved more aggressively" to fix the problems, says Cai von Rumohr, an analyst with Cowen & Co. Boeing executives hope for a flight test by yearend—unless the strike forces further lags.

Those delays may be the largest factor weighing down Boeing's stock price. After soaring past 107 last year, shares have fallen to about 62. Since that's a couple of dollars below the price when McNerney became CEO in July 2005, it may be his lowest mark yet.

Join a debate about U.S. military contracts.

How Big Is Boeing’s Big Win?

The Bailout: Public Anger, Private Talks

With public sentiment casting the Bush Administration's plan to resolve the financial crisis as a bailout for the firms that caused it, Senate Banking Committee members took turns grilling Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke at a hearing on Sept. 23. Behind the scenes, however, many expected nuts-and-bolts negotiation to yield a compromise bill, perhaps over the weekend if not by Friday's scheduled adjournment. Agreement was already coalescing to require some restrictions on executive pay at companies that sell toxic assets to the Treasury, one financial industry official said.

The theater playing out on Capitol Hill on Tuesday reflected deeply held positions on the role of government and the economy, but with an eye toward how events would play out politically. Polls failed to give a clear picture of just how much support there is for Congress to act: Support ranged from 25% to 56% in different polls.

Lawmakers worry that failing to back the bailout could hurt them, particularly in light of the Administration's warnings of the dire consequences of inaction and the reality of a tumbling stock market (BusinessWeek.com, 9/23/08). At the same time, fears grew that a protracted debate could undermine support altogether as more questions are raised about the plan's costs and effectiveness.

Some Homeowner Help

Political analysts predicted both sides would give way at least partially on various fronts. Indeed, the Administration has already indicated it would accept at least some provisions aiding homeowners struggling to pay their mortgages, and the Senate omitted from draft legislation a proposal, popular among many Democrats, to allow judges to modify mortgages in bankruptcy court. Congressional aides conceded the measure faced too much opposition from the financial-services industry, which has focused its most intense lobbying efforts on killing the provision.

Senator Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, said he would work with Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to combine draft legislation each chamber had circulated.

Many of the Democrats' demands could ultimately prove to be part of a strategy to "ask for five in the hopes of getting three," says Daniel Clifton, a political analyst for investment adviser Strategas Research. And the political calculus has many twists: Democrats, for example, could suffer if they are seen as impeding a much needed rescue, or might set themselves up for a public-relations victory if the Administration succeeds in blocking executive-pay restrictions (BusinessWeek.com, 9/22/08) or measures to help homeowners that prove popular. It's win-win either way: Six weeks before the election, they can tell the folks back home they won such concessions from the Administration, or they can campaign on the fact that Republicans blocked them.

Dire Warnings from the Administration

During Tuesday's steady-rolling, five-hour hearing, the main battle lines were clear: Bernanke, Paulson, and other Administration officials urged quick passage of a stripped-down bill to let the Treasury use up to $700 billion to buy complex mortgage-related securities from financial institutions. That would push many decisions—about oversight, disclosure, the prices the government would pay to take toxic assets off corporate balance sheets—into the future, leaving most such calls up to the Treasury, in this Presidential Administration and the next.

Bush Administration officials warned of dire consequences should Congress delay or impose too many limits on Treasury's authority. Paulson said he believed the stock market's recovery late last week stemmed from the belief that Congress would act. "I feel great urgency, and I believe it's got to be done this week or before you leave," Paulson said. Stocks opened ahead early Tuesday, but sank as the hearing progressed. The Standard & Poor's 500-stock index closed down 18.87, or 1.56%, to 1,188.22. The Dow Jones industrial average was off 161.52, or 1.47%, to 10,854.17. Including Monday's 370-point drop, the Dow was down 534 points, or 4.69%, so far for the week.

Seven Days That Shook Wall Street

Fannie and Freddie’s Open-Ended Future

A Big Slowdown in Stock Buybacks

While high-profile U.S. companies like Microsoft (MSFT), Hewlett-Packard (HPQ), and Nike (NKE) have boosted their stock buyback plans in recent days amid elevated stock-market volatility, repurchase activity actually slowed considerably in the most recent quarter.

Based on preliminary results of analysis conducted by Standard & Poor's Index Services, stock buyback activity for companies in the large-cap S&P 500 index eased at a significant pace during the second quarter of 2008, posting its lowest level since the third quarter of 2005. The analysis showed that S&P 500 companies are set to post $87.9 billion in stock buybacks during the second quarter, representing a 44.3% decline from the $157.8 billion spent during the second quarter of 2007.

Buybacks entered a different stage during the second quarter, as uncertainty grew and commitment to substantial cash outflows for purchases declined. The dollar level of buybacks, however, remains at historic highs partially because of the need to satisfy stock options.

Standard & Poor's anticipates that the third quarter of 2008 will also show a big decline in stock buybacks because of uncertainty in the market, expecially when comparing it with the record $172 billion spent on repurchases during the third quarter of 2007.

Infotech Repurchases Are Up

Recent market events have spurred several large buyback program announcements, and as a result, S&P expects the amounts that companies have authorized for their repurchase plans to increase. However, the amount that companies actually spend to buy back stock under those authorizations will depend on stock market conditions, but more importantly on their perception of their perception of business conditions in the coming periods.

On a sector basis, S&P notes a continuing shift in buyback participation. Financial companies continued to shy away from stock buybacks during the second quarter of this year, accounting for just 6.58% of the aggregate repurchases. As a matter of fact, many financial firms went in the opposite direction during the quarter, issuing common shares and other securities to shore up their liquidity.

Conversely, the Information Technology sector continued to increase its expenditures on repurchases (after slowing for prior periods), and now accounts for 26.23% of all buybacks.

Since the buyback boom began during the fourth quarter of 2004, S&P 500 companies have spent approximately $1.64 trillion on stock buybacks, compared with $1.73 trillion on capital expenditures and $845 billion on dividends.

See the accompanying slide show for a look at the 25 S&P 500 companies that have bought back the largest dollar amount of stock since the fourth quarter of 2004.

Marcial: Regional Banks' Road to Recovery

Buy the banks—the regional banks, that is.

Weeks before the sweeping rescue plan that Treasury Secretary Henry Paulson announced on Sept. 19, regional banks PNC Financial Services Group (PNC), BB&T (BBT), and SunTrust Banks (STI) already emerged as the financial stocks of opportunity, as they had become way undervalued.

They became even more undervalued on Sept. 22, when regional bank stocks declined on concern among some investors that they could be hurt by the Treasury's proposal to shield from losses investors in money-market funds, which compete with the banks' deposits. "I think the risk is overblown," says Jeffrey Kleintop, chief market strategist at LPL Financial. The idea behind the stocks' decline, says Kleintop, is that because many of the banks have their mortgage securities designated as "held for investment," they haven't taken writedowns, and that if they then sell them they have to write them down. But most assets are held near their fair value at the regional banks, says Kleintop.

What is more important is the conversion of Goldman Sachs (GS) and Morgan Stanley (MS) into bank holding companies, he says. It means that if Goldman and Morgan want to develop a large deposit base in order to diversify and lower their cost of funds, they would have to do so by buying regional banks. "This means the biggest regional banks may now attract potential buyout bidders, which might help lift their valuations," says Kleintop.

With the fast-moving events in the federal government's efforts to save the beleaguered financial system, the attractiveness of the regionals' shares has definitely grown. Shares of these banks had been in a free fall until the Treasury and the Federal Reserve Board announced the bailout of Fannie Mae and Freddie Mac on July 15. Before then, things were beyond bleak: The S&P 500 Regional Bank Index had plunged to 45 by that day, from 140 in mid-February of 2007. The index has nearly doubled since then, to 80.31 on Sept. 18.

Look Who's a Haven Now

Some of the regionals hold a lot of the preferred shares in Fannie and Freddie as cash equivalents to support the loans they provide. The preferreds could have wiped out the regionals had the two giant providers of liquidity to the mortgage market collapsed. PNC, for example, had to take a charge of $80 million.

"Once the deal to bail out Fannie and Freddie came together on July 15, the scope of the problem became clear, and it became obvious that the regional banks would benefit from the continuing operations of Fannie and Freddie, even though the sizable dividend of about 7% on the preferreds has been suspended," says Kleintop. The regional banks now have become a " haven of safety," he adds. The banks' shares are already 60% above their 52-week lows and continuing to move upward. "They are now attractive buys and represent good value," says Kleintop. The Regional Bank Index still has a long way to go to regain its old highs, he notes.

Shares of PNC, whose primary markets include Delaware, Florida, Massachusetts, New Jersey, Ohio, and Pennsylvania, have rallied sharply, hitting a new high of 81.21 a share on Sept. 19, up from 49 on July 15. The stock dropped to 75.60 on Sept. 22. But PNC could still post double-digit gains that outpace the overall stock market, says Kleintop. Second-quarter revenues jumped 19% from a year ago, while net interest income, which accounts for some 48% of revenues, climbed 32%.

What the Freddie-Fannie Bailout Means for Asia

What the Freddie-Fannie Bailout Means for Asia

Seven Days That Shook Wall Street

It was the week that shook the financial world to the core. On Friday, Sept. 12, traders left the New York Stock Exchange for the weekend. But key banking officials, facing the impending failure of the venerable Lehman Brothers investment house and a shaky outlook for two other huge financial players—investment firm Merrill Lynch (MER) and insurance giant American International Group (AIG)—began a series of weekend meetings in an effort to prevent a possible collapse of the global financial system.

Over the next seven days, the nation's financial leaders, captained by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, produced a rapid succession of moves that reversed a decades-long trend toward financial deregulation and fundamentally changed the face of the American financial system. Lehman failed and Merrill was sold to Bank of America (BAC). The government took effective control of AIG in an $85 billion bailout. And, in the biggest intervention of all, officials proposed to purchase the troubled mortgage assets of financial firms, a move that could cost hundreds of billions of additional dollars.

Meanwhile, worried investors sent the stock markets into a dizzying ride of huge gains and losses.

Here's how the events unfolded:

Friday, Sept. 12: The trading week ends with the fate of 158-year-old Lehman Brothers in grave doubt. Its stock had fallen sharply due to fears over its financial condition. Paulson, Bernanke, and New York Fed President Tim Geithner begin a series of meetings in Lower Manhattan with top bankers in an effort to engineer a bailout of Lehman, which had bet heavily in the subprime mortgage market. Two possible buyers emerge: Britain's Barclays (BCS) and Bank of America.

Saturday, Sept. 13: Talks on a possible Lehman buyout continue. The would-be rescuers look to the government to take on some of the risk, as it did in the shotgun sale of Bear Stearns to JPMorgan Chase (JPM) in March and the effective nationalization on Sept. 8 of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Government officials hold fast that there will be no federal bailout. Talks are inconclusive.

Sunday, Sept. 14: The negotiators continue meeting, facing a deadline to act before Asian markets open for Monday morning trading. But government officials insist there will be no federal backing of a Lehman rescue. With no help from Washington forthcoming, Barclays—the only possibility left after Bank of America leaves the table—withdraws. Lehman is done for. Meanwhile, Merrill Lynch CEO John Thain, seeing the writing on the wall, arranges the sale of his company to Bank of America for about $50 billion. In one day, the fates of two storied companies are sealed.

Wall Street’s Perfect Storm

Smaller Airlines Get Battered This Time

When the airline industry was deregulated in 1978, it gave rise to a new breed of upstart carriers such as People Express (LUV), Southwest Airlines, and AirTran Airways (AAI). All were able to offer low prices by employing nonunion workers while flying in and out of underused airports. After the 2001 terrorist attacks, traditional carriers including United (UAUA), Delta (DAL), and US Airways (LCC) toppled into bankruptcy, and several analysts predicted the discount carriers would send the dinosaur airlines into permanent retreat.

Instead, it's now the upstart airlines that have hit turbulence. The combination of soaring fuel prices, unforgiving credit markets, and a pullback in leisure travel has pushed carriers such as Frontier Airlines into Chapter 11 and prompted the liquidation of others, including Skybus Airlines, ATA Airlines, and Aloha Airlines. Even survivors AirTran, Spirit Airlines, and JetBlue (JBLU) are shedding routes to cut costs. They're also raising fares up closer to those of the major carriers. "For many, their sales pitch was just price, and that isn't much of an advantage for them anymore," says Ray Neidl, an airline analyst for Calyon Securities (USA).

Why the reversal of fortunes? Clearly, soaring fuel prices have taken their toll, forcing the discounters to raise fares roughly 5% over the past year just to cover costs. While the so-called legacy carriers including Delta Air Lines and Continental Airlines (CAL) have also been hammered by the oil spike, they tend to ferry a higher proportion of business travelers who are more willing to absorb the higher fares. By contrast, executives at the discounters—one of whom boasted that he had stolen customers not from the big airlines but from bus operators like Greyhound (FGP)—have seen demand fall as some of their most cost-conscious clientele head back to the bus.

But the discounters' challenges extend beyond the pump. The wave of bankruptcy filings by major carriers since 2002 has allowed them to narrow the cost advantage enjoyed by discounters. According to Calyon's Neidl, the difference in operating margins between the traditional airlines and the discounters has shrunk since 2004 from 7% to 2%. That has prompted the traditional carriers, who are sitting on larger cash hoards amassed after bankruptcy, to take the offensive against discounters. "For the first time in a while, we're willing to duke it out on routes that the [low-cost carriers] have owned," says an executive for one major airline. "In this cycle we have the better hand, and we're going to leverage it."

For their part, executives at several low-cost carriers remain sanguine about their prospects. For one, they say that the uniformity of their fleets—AirTran and Southwest fly variations of the Boeing (BA) 717 and 737—give them an edge in maintenance and pilot training costs over the mainline carriers, which still juggle a mishmash of aircraft accumulated over the decades. Their workforces also tend to be younger—and cheaper—than their larger brethren. But even the mighty Southwest, which has been insulated by shrewdly timed fuel hedges, admits it needs to boost its revenues up to 30% in the next few years to cover costs as its favorable contracts expire. The options: flying more, fees from booking hotels and rental cars on its Web site, and fare hikes. "I don't think anyone is immune in this environment," says Gary Kelly, chief executive of Dallas-based Southwest.

Even with oil prices easing, the recent wave of bankruptcies may make it tough to woo the investors needed to get the next generation of AirTrans and JetBlues off the tarmac. "If these conditions remain, you're not going to see many new upstarts," says Robert Fornaro, chief executive of Orlando-based AirTran Airways.

Given the quixotic allure of the airline industry, though, some entrepreneurs continue to try. After founding Skybus in 1999—and watching it fold earlier this year—John Weikle is trying to raise funds to launch a new carrier, Jet America. "An investment banker told me once, 'Plan an airline during a recession, fly during a recovery,' " says Weikle. That could be good news for customers. But airline investors may be slow to jump on board.

Join a debate about foreign ownership of U.S. airlines.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkZoom and Gloom

Times are tough for discount carriers north of the border, too. Canada's Zoom Airlines suspended operations in late August, leaving passengers stranded around the world. In a CBC report, executives blamed the country's sagging economy and the "horrendous" increases in fuel prices. Halifax Airport officials got permission to seize one of the carrier's grounded planes, pledging to hang on to it until Zoom paid its bills.

To read more, go to http://bx.businessweek.com/airline-industry

Fly the Shrinking Skies

It's Time to Reengineer U.S. Government

In recent weeks we have seen heroic actions by financial regulators. From the Treasury Secretary to the Federal Reserve to the New York State insurance commissioner, public officials have worked tirelessly to control the chaos in the financial marketplace. Once again, it is clear that America has learned very well how to respond to crises.

But is that all we have learned? It's a question we need to ask ourselves and our candidates for President and Congress. Amid the ongoing turmoil, it seems obvious we must reinvent our government and create an efficient system that can anticipate and avoid major crises. Despite many opportunities, however, this is not a lesson we have taken to heart. Whether the task is fixing health care, upgrading K-12 education, bolstering national security, or a host of other missions, the U.S. is better at patching problems than fixing them. Part of the reason is that we have two parties lacking comity and a sense of shared national responsibility. But beyond the partisan divide, I would argue that the processes of government are broken, preventing us from taking responsible actions.

Visit USA.gov and you'll find thousands of directorates, agencies, boards, offices, and services replete with overlapping responsibilities, ancient priorities, and divided accountability. We do not need Departments of Commerce, Labor, and Education; we need a single Department of Skills that will promote an integrated approach to global competitiveness. Our military should be trained and structured around missions, not the elements of air, water, and land. That requires fundamental change, but instead, the Defense Dept. has established an overlay of "commands" to compensate for organizational deficiencies. Does it make sense, in 2008, even to have a Bureau of Alcohol, Tobacco, Firearms & Explosives? If so, why is it part of the Treasury Dept.?

Then there's the financial sector. Behind the debacles at Bear Stearns (BSC), Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers (LEH), and Merrill Lynch (MER) lies a startling failure to modernize our regulatory systems, despite obvious changes in the financial markets. Ben Bernanke and his colleagues at the Federal Reserve have done an extraordinary job in the past 12 months, but the regulatory processes in place are ad hoc and depend on leaders undertaking risky initiatives. Now more than ever, we need a single federal organization to oversee all of our financial institutions.

If our new President and our congressional leaders accept the need to reinvent the federal government, it will take a bipartisan, multiyear effort that draws on the experience of our business community. I would like to see a team of business leaders and experienced government staff led by two co-chairs: one business executive and one former high-level Washington official. This reengineering team would report to the President and four to six congressional leaders, who would meet once a month to review its analyses and recommendations.

If the idea sounds familiar, it's because we tried this approach once before, under President Ronald Reagan. I'm thinking of the 1982 Grace Commission, which was led by 161 top executives from the private sector. The commission concluded that nearly one-third of all taxes collected by the federal government are squandered through inefficiency. And it came up with 2,478 recommendations that, together, might have transformed the basic processes of government while saving hundreds of billions of dollars. Few of the recommendations were ever tried.

Today, the goals of such a commission would be different but the spirit would be the same. Would it succeed? If nothing else, the gravity of the current financial and economic crisis might force new leaders to study the panel's findings and strive to make government more effective. The future of our country may hang in the balance.

Seven Days That Shook Wall Street

U.S. Cybersecurity Is Weak, GAO Says

Where AIG Went Wrong

Amid all the debate about the long-term impact of an $85 billion federal loan to American International Group (AIG), one thing is clear: The world's most sophisticated insurer proved to be far from adept at managing its own risk. Despite $110 billion in annual sales and assets in excess of $1 trillion, AIG stood at the brink of bankruptcy on Sept. 16. As management persuaded New York regulators to waive insurance rules so it could essentially tap subsidiaries for cash and tried in vain to raise $75 billion from Wall Street, AIG's shares fell as low as 1.25 (down from a 52-week high of 70). The taxpayer-funded bailout, which gives Washington warrants for an 80% stake in the company, won't bring back the $184 billion, or 97% of shareholder capital, that has evaporated in less than a year.

How did this happen? One place to start is former Chief Executive Maurice R. "Hank" Greenberg, who built AIG into a global behemoth during his four-decade tenure, in part by expanding into complex lines of business and insuring risk that few would dare to touch. Although forced to step down in 2005 amid an accounting scandal, Greenberg remains AIG's largest individual shareholder and a harsh critic of how AIG was managed under Martin Sullivan and Robert Willumstad, who stepped into the CEO role in June. Under the federal deal, former Allstate chief Edward M. Liddy will replace Willumstad. AIG's board of directors issued a statement saying the federal loan will protect policyholders, address rating agency worries, and "give AIG the time necessary to conduct asset sales on an orderly basis."

Greenberg told BusinessWeek on Sept. 17 that the government went too far: wiping out average shareholders with a bailout when all that was needed was a short-term loan to cover AIG's obligations. And he insists things would have been different had he remained at the helm. "I would not have waited until it got to this point," says Greenberg. "We had very strict risk-management controls. Those were obviously not followed." Hours before the rescue package was announced, he led a group of investors who alerted the Securities & Exchange Commission that they were looking at buying AIG assets or even assuming control. But AIG says its financial woes stem from actions taken in 2005 and earlier, when Greenberg was still in charge. "He took a lot of risk," says David Shiff, editor of Shiff's Insurance Observer and a longtime AIG critic.

BANKING ON ITS GOOD NAME

AIG got into derivatives in 1987. A decade later credit derivative swaps—contracts that transfer and, ideally, insure against credit risk—took off. AIG's superb credit rating helped it become a leading player. It often sold protection on other contracts, using its own sterling rating to essentially insure others' collateralized debt obligations (securities often backed by a pool of loans) against losses. Those promises would later haunt AIG. As Jamie Cawley, CEO of IDX Capital, explains: "They were able to monetize their credit rating [and] rent it."

AIG was exposed to the U.S. housing market on other fronts, too. It had a mortgage insurance business, United Guaranty, that started to rack up big losses in 2007. It also had invested in mortgage-backed securities that led to $12 billion in costs over the past year as their values plunged—money it owed to its insurance companies in order to maintain strictly regulated capital requirements. By early 2008 it was clear that the company's derivatives were eroding at a rapid clip. AIG's audit firm, PricewaterhouseCoopers, forced it to change how it was valuing the products. That caught the attention of Donn Vickrey, an analyst at Gradient Analytics, who began to question AIG's earnings quality. He went back into the company's SEC filings and chronicled the sharp declines in the valuation of its derivatives. The cumulative losses swelled from only $352 million as of Sept. 30, 2007, to $6 billion just two months later. (How big that figure is now, Vickrey says, is "unknown.")

Wall Street’s Perfect Storm

Why American Savers Have Drawn the Short Straw

American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking).

You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12.

Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher.

Indeed, a year ago, a six-month certificate of deposit earned, on average, 3.53%, according to Bankrate.com (RATE). Today, that's down to 2.03%. A one-year CD that earned 3.75% at this point in 2007 was offered for as little as 1.92% in April, before inching up to its present 2.38%. It's hardly a secret that banks are only able to pay out such pittances thanks to depositors' knee-jerk desire for security: "Hey, I might be earning crumbs on my cash, but at least I'm not losing money."

Sure you are. Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill. "Inflation is just deadly to savings," says David Gitlitz, chief economist at TrendMacrolytics, an investment adviser. Gitlitz observes that, taking into account the hit from inflation, rates haven't been this negative since the dreary 1970s. (That, in turn, gave way to an early '80s that saw the worst inflation in U.S. history since the Civil War.) "It steals your purchasing power and sets less and less of an incentive to keep money in the bank."

You're telling me. My trusty Manhattan pizza guy recently hiked the cost of a slice for the second time in the past year, from $2 to $2.50 to $3. "Why you mad?" he blurted, pounding a ball of dough. "Prices are nuts; you can't even buy a glass of milk no more." ("We're paying 128% more for a bag of flour," added his grandson-apprentice, with startling accuracy.) Even my barber justified taking up the cost of a standard trim and buzz by 20%. "Fuel surcharge," he deadpanned in his Uzbeki accent. (As it turns out, he rides the subway.)

In a perfect world, the Fed's rate-cutting campaign would have shored up real estate and the stock market. Instead, investors have been running for inflationary cover in hard assets like crude oil, gold, and even fertilizer. Oil, we all know, went from $70 to more than $140 in one year flat, sending gasoline and utility costs soaring and counteracting the lift from monetary and fiscal stimulus. Still comforted by that 2% savings yield? (Your mattress and piggy bank are in stitches.)

Commodity inflation has also been exacerbated by concurrent weakness in the dollar, which is stuck between a Europe that is loath to cut interest rates and a Washington that is too scared to hike them. Even with its recent rally, the greenback is only worth two-thirds of a euro. You practically have to wheelbarrow dollars to places like Madrid and Berlin.

All of which might be tolerable to the lonely and beleaguered saver if he weren't taunted daily by lopsidedly pro-spending, pro-creditor news stories. Forget about moral hazard. Forget about rewarding profligacy. Washington is hell bent on putting a floor beneath the housing market. And subtlety got vetoed out of the process. Consider some recent news reports:

"President Bush Signs $300 Billion Housing Rescue Bill" (AP)—increasing to $625,500 from $417,000 the size of home loans in high-cost areas that Fannie Mae (FNM) and Freddie Mac (FRE) are allowed to buy.

The number of Chapter 7 filings—designed to give individual debtors a "fresh start" by discharging many of their debts—recently rose by 36% (CNNMoney.com).

"The FDIC may lower mortgage rates for delinquent IndyMac borrowers after suspending foreclosures..." (Bloomberg).

Maybe savers' ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else. Assuming, of course, they didn't stash all their money in one of the many banks that is about to go under; the feds are closely watching 117 of them—and counting. The phone lines have never been so jammed with nervous clients.

Oh, the joys of saving.

Why American Savers Have Drawn the Short Straw

Why American Savers Have Drawn the Short Straw

The 65 mpg Ford the U.S. Can't Have

If ever there was a car made for the times, this would seem to be it: a sporty subcompact that seats five, offers a navigation system, and gets a whopping 65 miles to the gallon. Oh yes, and the car is made by Ford Motor (F), known widely for lumbering gas hogs.

Ford's 2009 Fiesta ECOnetic goes on sale in November. But here's the catch: Despite the car's potential to transform Ford's image and help it compete with Toyota Motor (TM) and Honda Motor (HMC) in its home market, the company will sell the little fuel sipper only in Europe. "We know it's an awesome vehicle," says Ford America President Mark Fields. "But there are business reasons why we can't sell it in the U.S." The main one: The Fiesta ECOnetic runs on diesel.

Automakers such as Volkswagen (VLKAY) and Mercedes-Benz (DAI) have predicted for years that a technology called "clean diesel" would overcome many Americans' antipathy to a fuel still often thought of as the smelly stuff that powers tractor trailers. Diesel vehicles now hitting the market with pollution-fighting technology are as clean or cleaner than gasoline and at least 30% more fuel-efficient.

Yet while half of all cars sold in Europe last year ran on diesel, the U.S. market remains relatively unfriendly to the fuel. Taxes aimed at commercial trucks mean diesel costs anywhere from 40 cents to $1 more per gallon than gasoline. Add to this the success of the Toyota Prius, and you can see why only 3% of cars in the U.S. use diesel. "Americans see hybrids as the darling," says Global Insight auto analyst Philip Gott, "and diesel as old-tech."

None of this is stopping European and Japanese automakers, which are betting they can jump-start the U.S. market with new diesel models. Mercedes-Benz by next year will have three cars it markets as "BlueTec." Even Nissan (NSANY) and Honda, which long opposed building diesel cars in Europe, plan to introduce them in the U.S. in 2010. But Ford, whose Fiesta ECOnetic compares favorably with European diesels, can't make a business case for bringing the car to the U.S.

TOO PRICEY TO IMPORT

First of all, the engines are built in Britain, so labor costs are high. Plus the pound remains stronger than the greenback. At prevailing exchange rates, the Fiesta ECOnetic would sell for about $25,700 in the U.S. By contrast, the Prius typically goes for about $24,000. A $1,300 tax deduction available to buyers of new diesel cars could bring the price of the Fiesta to around $24,400. But Ford doesn't believe it could charge enough to make money on an imported ECOnetic.

Ford plans to make a gas-powered version of the Fiesta in Mexico for the U.S. So why not manufacture diesel engines there, too? Building a plant would cost at least $350 million at a time when Ford has been burning through more than $1 billion a month in cash reserves. Besides, the automaker would have to produce at least 350,000 engines a year to make such a venture profitable. "We just don't think North and South America would buy that many diesel cars," says Fields.

The question, of course, is whether the U.S. ever will embrace diesel fuel and allow automakers to achieve sufficient scale to make money on such vehicles. California certified VW and Mercedes diesel cars earlier this year, after a four-year ban. James N. Hall, of auto researcher 293 Analysts, says that bellwether state and the Northeast remain "hostile to diesel." But the risk to Ford is that the fuel takes off, and the carmaker finds itself playing catch-up—despite having a serious diesel contender in its arsenal.

How Glen and Howard Tullman Became Entrepreneurs

Two of Chicago's leading entrepreneurs happen to be brothers. But it's a good thing they didn't actually grow up together. Howard Tullman, 14 years older, already had left the nest when Glen, the baby of the family, persuaded their mother to let him cut a hole in the roof of the family's New Providence (N.J.) home to test his ideas on solar energy. Mom never said no. But Howard, born bossy, wouldn't have let Glen experiment on his own. "He would have wanted a bigger hole," says Glen. Admits Howard: "I was an overpowering presence."

These days, the brothers communicate regularly, often e-mailing each other in the wee hours, when they're not focused on running their own businesses—Glen at Allscripts Healthcare Solutions (MDRX), an electronic records and medical software outfit, and Howard at Flashpoint, The Academy of Media Arts & Sciences, a for-profit digital arts school in Chicago. The two share more than chief executive titles. They're creative and competitive, and in their off hours both have developed a love of magic.

Anyone who wonders how entrepreneurs come to be should consider the Tullmans. The same ambition that drove Howard to start CCC Information Services in 1980 and later head 11 other companies rubbed off on Glen, who grew up hearing nonstop about Howard's successes at college, law school, and in business, and went on to run three companies himself after working for Howard. "If you've ever played a simple game with either of these guys, you would think it's life and death—and it is for them," says Warren, their brother, who works in Denver as Allscripts senior vice-president for sales. "At a recent Thanksgiving, they were competing on carving the turkey."

Those who've known Howard for years say that actually, he's mellowed. But his hard edge still surfaces, even in his uniform of T-shirt and jeans, and he's known to bark orders to get things done his way. It's his ability to think strategically and make myriad decisions quickly that make him ideally suited to startups. "He is very passionate and decisive. That's what makes him successful," says T. Scott Leisher, executive vice-president at Allscripts, who worked with both Tullmans at CCC.

Glen, who prefers a traditional charcoal gray suit, has a gentler approach. "Glen is a strong decision maker, but the people feel they have a voice and they have an impact on the decisions," Leisher says. "He listens."

Both brothers have prospered. Glen, 48, is merging 1,155-employee Allscripts with Misys, a London multinational. Misys will offer its health-care division plus $330 million in cash for a 54.5% stake in the united company, with Glen at the helm. Howard, 63, who sold CCC for almost $100 million, is CEO of Flashpoint Academy, which opened last September. "The energy is incredible with both of them," says David Mullen, the chief financial officer of Navteq (NVT), who knows them from their CCC days. "Self-confidence is not lacking in them, either."

The Tullmans credit each other. Glen learned strategy from Howard, while inspiring him to work harder on consensus building and empowering employees. Howard is trying to do that at his new school, which will have a staff of more than 40 and enroll 250 to 300 students this fall. That's double last year's figures. Howard is targeting revenue of $8 million to $10 million for the 2008-09 year, up from $2 million to $3 million in its inaugural year.

Neither brother set out to become an entrepreneur. Howard started off as an attorney in a law firm but after ten years didn't think he was learning anything new. But he had made a boatload of money and thought computers could transform auto-insurance claims processing. He rented an 8-by-10-foot office and started writing the system diagrams that got CCC off the ground. "Building your dream and your vision into a reality is an incomparable sensation," he says.

Glen became involved in startups at his brother's urging. Howard invited Glen to Chicago in 1983, ostensibly to hang with family.

Tough Times for eBay Entrepreneurs

Design Tunes Up Altec Lansing

Darrin Caddes has his work cut out for him. In the dimly lit backroom of a ritzy Manhattan hotel, a dozen or so gadget bloggers and technology writers have gathered to meet with Caddes, vice-president for corporate design at headset maker Plantronics (PLT). But instead of the form-fitting ear pieces or business communications gear Caddes is known for, the soft-spoken, 43-year-old designer is surrounded by a range of gleaming iPod speaker systems, their LCD displays glowing blue and orange.

Caddes is charged with hitting the reset button on consumer-electronics manufacturer Altec Lansing, which Plantronics bought for $166 million in 2005. The Milford (Pa.) engineering firm has a long track record of innovation, including pioneering technology that gave voice to the first talking pictures, putting its stamp on everything from professional loud speakers to the audio inside Walt Disney's (DIS) Epcot Center in Orlando, and creating the first speaker system with an integrated iPod dock in 2003.

But recently, Altec has seemed anything but fresh. The company had been happy to trundle along with the same playlist even as the $1.1 billion U.S. market for iPod docks became more competitive. Its products—a hodgepodge of out-sourced designs—became indistinguishable in the bazaar of look-alikes made by Asian manufacturers. Unable or unwilling to differentiate itself, Altec began bleeding money.

Bland Design

As a whole, Plantronics saw revenue grow 7%, to $856.3 million, in fiscal 2008, with net income jumping 38%, to $79.4 million, from fiscal '07. But the faltering consumer audio division, which absorbed Altec, dragged down its roaring communications division, which has been boosted by a boom in sales of wireless headsets. The remnants of Altec saw net revenues slide 12%, to $108.4 million, from the year before while operating losses swelled 24%, to $35.8 million. Striking a somber note, the company's annual report pinned the blame squarely on bland design.

Caddes, a former automotive designer who held high-profile positions with the likes of BMW (BMW) and Fiat (FIA.F), was tapped four and a half years ago by Chief Executive Ken Kannapan to help transform Plantronics from a maker of humdrum corporate headsets into a purveyor of well-designed, stylish fashion accessories. (For more on Caddes, click here.) Even as Altec stumbled, overall revenue at the 4,500-employee outfit, has more than doubled since Caddes hired on. Meantime, his design crew, who work from a glitzy new 7,000-sq.-ft. studio in Plantronics' headquarters in Santa Cruz, Calif., swelled from 5 to nearly 25.

Now he's got to do it again: Executives gave him control of the Altec brand two years ago. "We'd been dying to get involved with the Altec brand since the acquisition," admits Caddes. But only when the unit faced serious difficulties would top management commit to building a separate design team dedicated to Altec. "If we're going to do this, we've got to be all in," says Caddes, who has built a more modest team that, for now, consists of two full-time designers dedicated exclusively to Altec products, with a handful of Plantronics designers pitching in.

Fresher Image

His plan is nothing short of a relaunch of the Altec brand, refreshing its image—including Web site, packaging, and point of sale displays—as well as the industrial design of its products.

Bringing Broadband to Rural America

Sandra Thornton is eager to generate new business for the sewing plant she manages just outside Centerville, Tenn. When the machines at Southeastern Pant are running full tilt, the plant's 55 employees can crank out 2,000 pairs a week for police officers, firefighters, and security guards all over the U.S. Nestled among the rolling, ranch-dotted hills of the central part of the Volunteer State, Thornton's plant has managed to stay open when many clothing companies are sending work overseas, by focusing on custom orders. "All the police agencies want their own stripes, their own pocket sizes," she says. "Our equipment is very easy to change over."

There's just one problem. Southeastern's efforts to court new clients and handle other tasks are impeded by a slow Internet connection. Bidding on contracts, including a lucrative deal to supply pants to the U.S. Postal Service, is carried out via e-mail, and the only Web connection in the office is Thornton's dial-up AOL (TWX) account. Using it to check e-mail or do a Google (GOOG) search—say, for the best price on supplies—takes much longer than with other connections, such as a digital subscriber line (DSL). "If I could just get DSL, I could get so much more done," Thornton says. "It's really frustrating."

Thornton could opt for a corporate-grade fiber-optic connection, but the price tag of as much as $1,000 a month for a so-called T1 line would slash Southeastern's already razor-thin margins. And the next-best alternatives, DSL or a cable modem hookup, aren't available in this rural area 60 miles southwest of Nashville.

Rural Areas Shortchanged

Behold America's broadband backwater. For the nation that pioneered the Internet, extending fast connections to small towns and rural areas has proved a daunting challenge. Carriers are loath to build networks where they can't sell service at a profit, and since 2003 more than $1.2 billion in federal loans aimed at helping private carriers serve remote areas has addressed only the most extreme cases. According to a study by the Pew Internet & American Life Project, released in July, only 38% of rural American households have access to high-speed Internet connections. That's an improvement from 15% in 2005, but it pales in comparison with 57% and 60% for city and suburb dwellers, respectively.

The lack of fast Web access is helping create a country of broadband haves and have-nots—a division that not only makes it harder for businesses to get work done, but also impedes workers' efforts to find jobs, puts students at a disadvantage, and generally leaves a wide swath of the country less connected to the growing storehouse of information on the Web—from health sites to news magazines to up-to-date information on Presidential candidates. "Broadband is a distance killer, which can especially help rural Americans," says John Horrigan, a Pew researcher. "Broadband is not just an information source for news and civic matters, but it's also a pathway to participation."

In places like Hickman County, where Centerville is located, a broadband blackout can also hobble economic development. The county was a blue-jean manufacturing hub for Levi Strauss until the plant closed in 1998. The Levi's building now sits almost completely idle, and the county has struggled to lure new employers, says Daryl Phillips, executive director of the Hickman County Economic & Community Development Assn. "Larger companies can pay for a T1 line," he says. "The small companies who look for a place like Hickman County need something they can afford."

Spreading the Broadband Gospel

It's hard to blame carriers for dragging their feet on installing the cables and other gear needed to serve less populated areas. Broadband is readily available in Centerville, the birthplace of comedienne Minnie Pearl, with its population of 3,700. It's the outskirts, where population density is one-third the statewide average, that causes Phillips concern. Comcast (CMCSA) is constantly looking for where to expand, and looks for areas that have at least 25 homes per one-mile stretch, says company spokeswoman Teri Weldon. "We are in business to make a profit," she says.

A host of government bodies, companies, and nonprofit organizations have made it their business to encourage wider broadband availability. Among them is Connected Nation, a Washington (D.C.)-based group that aims to spread the broadband gospel in small towns while convincing companies like Comcast and AT&T (T) of the benefits of rural investment. "We document demand so we can help that community make a case to a provider to extend service," says Bryan Mefford, the 35-year-old Kentucky native who runs Connected Nation.

CEO and Chairman Out at Alcatel-Lucent

Why American Savers Have Drawn the Short Straw

American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking).

You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12.

Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher.

Indeed, a year ago, a six-month certificate of deposit earned, on average, 3.53%, according to Bankrate.com (RATE). Today, that's down to 2.03%. A one-year CD that earned 3.75% at this point in 2007 was offered for as little as 1.92% in April, before inching up to its present 2.38%. It's hardly a secret that banks are only able to pay out such pittances thanks to depositors' knee-jerk desire for security: "Hey, I might be earning crumbs on my cash, but at least I'm not losing money."

Sure you are. Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill. "Inflation is just deadly to savings," says David Gitlitz, chief economist at TrendMacrolytics, an investment adviser. Gitlitz observes that, taking into account the hit from inflation, rates haven't been this negative since the dreary 1970s. (That, in turn, gave way to an early '80s that saw the worst inflation in U.S. history since the Civil War.) "It steals your purchasing power and sets less and less of an incentive to keep money in the bank."

You're telling me. My trusty Manhattan pizza guy recently hiked the cost of a slice for the second time in the past year, from $2 to $2.50 to $3. "Why you mad?" he blurted, pounding a ball of dough. "Prices are nuts; you can't even buy a glass of milk no more." ("We're paying 128% more for a bag of flour," added his grandson-apprentice, with startling accuracy.) Even my barber justified taking up the cost of a standard trim and buzz by 20%. "Fuel surcharge," he deadpanned in his Uzbeki accent. (As it turns out, he rides the subway.)

In a perfect world, the Fed's rate-cutting campaign would have shored up real estate and the stock market. Instead, investors have been running for inflationary cover in hard assets like crude oil, gold, and even fertilizer. Oil, we all know, went from $70 to more than $140 in one year flat, sending gasoline and utility costs soaring and counteracting the lift from monetary and fiscal stimulus. Still comforted by that 2% savings yield? (Your mattress and piggy bank are in stitches.)

Commodity inflation has also been exacerbated by concurrent weakness in the dollar, which is stuck between a Europe that is loath to cut interest rates and a Washington that is too scared to hike them. Even with its recent rally, the greenback is only worth two-thirds of a euro. You practically have to wheelbarrow dollars to places like Madrid and Berlin.

All of which might be tolerable to the lonely and beleaguered saver if he weren't taunted daily by lopsidedly pro-spending, pro-creditor news stories. Forget about moral hazard. Forget about rewarding profligacy. Washington is hell bent on putting a floor beneath the housing market. And subtlety got vetoed out of the process. Consider some recent news reports:

"President Bush Signs $300 Billion Housing Rescue Bill" (AP)—increasing to $625,500 from $417,000 the size of home loans in high-cost areas that Fannie Mae (FNM) and Freddie Mac (FRE) are allowed to buy.

The number of Chapter 7 filings—designed to give individual debtors a "fresh start" by discharging many of their debts—recently rose by 36% (CNNMoney.com).

"The FDIC may lower mortgage rates for delinquent IndyMac borrowers after suspending foreclosures..." (Bloomberg).

Maybe savers' ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else. Assuming, of course, they didn't stash all their money in one of the many banks that is about to go under; the feds are closely watching 117 of them—and counting. The phone lines have never been so jammed with nervous clients.

Oh, the joys of saving.