Obama Stimulus Money to Flow as Jobless Await Results

By Matthew Benjamin and Alison Fitzgerald

July 13 (Bloomberg) — David Oneglia was looking at the likelihood of layoffs at his construction company. Then he landed a contract funded by the federal stimulus program to repair roads and bridges on Connecticut’s Merritt Parkway.

The $67 million job and the 80 workers it employs has allowed Oneglia to maintain his current payroll. It doesn’t permit him to expand it.

“The work we’re getting is just keeping the people we have on our workforce day-to-day going,” said Oneglia, 57, president of Torrington, Connecticut-based O&G Industries Inc. “It won’t add anything.”

Even as money begins flowing to projects across the U.S. from the stimulus President Barack Obama signed in February, some lawmakers are questioning its value.

Bigger-than-forecast job losses pushed the June unemployment rate to a 26-year high of 9.5 percent after Obama promised to create or save 3.5 million jobs over two years. Republicans say that is proof the $787 billion measure isn’t working, while Democrats debate whether a second shot of spending is needed to pull out of a recession.

The rising unemployment rate has triggered concerns of a slower-than-anticipated recovery and driven stock prices and bond yields lower.

The Standard & Poor’s 500 dropped 1.9 percent last week to 879.13, the lowest level since May 1. The measure has now retreated 7.1 percent since June 12.

Bond Yields Fall

Yields on 10-year Treasury notes touched the lowest level in seven weeks as concern about a slow recovery drove investors toward the safety of U.S. debt. The benchmark 10-year note yield fell 20 basis points on the week, or 0.20 percentage point, to 3.30 percent, according to BGCantor Market Data. It was at 3.261 on July 10, the lowest since May 21.

Economists say it isn’t realistic to expect stimulus spending and tax cuts to revive the labor market and restore economic good times in just five months.

“Everyone always expects fiscal stimulus to immediately help out, but it never does,” said Allen Sinai, chief economist at New York’s Decision Economics Inc. “The bulk of the effects will come in 2010.”

So far, about $60 billion in spending and $43 billion in tax relief has hit the streets, accounting for 13 percent of the plan’s total. An additional $175 billion has been committed to specific uses.

Every state met the administration’s June 29 target for obligating at least half its highway money, said Elizabeth Oxhorn, a spokeswoman for Vice President Joe Biden. A report last week by the Government Accountability Office, Congress’s investigative arm, said the government is ahead of schedule in distributing stimulus money to the states.

Other Benefits

While attention focuses on infrastructure jobs, other stimulus steps, such as increased unemployment benefits, are pumping money into the economy. Food-stamp use jumped by $725 million to a record $4.5 billion in April, fueled by a $20 billion, five-year funding increase.

By design, much stimulus spending won’t happen for six to nine months, with many road and bridge projects expected to begin late this year or next. The Congressional Budget Office said 70 percent of the money will be spent by September 2010.

“The stimulus was backloaded, so there are a number of features that won’t kick in until next year,” said Richard Berner, co-head of global economics at Morgan Stanley in New York.

‘Bit Too Small’

With unemployment rising, calls are starting for another spurt of stimulus spending. Obama, who says the jobless rate will exceed 10 percent before turning for the better, has neither endorsed nor ruled out additional action.

Laura Tyson, an outside economic adviser to the White House, said last week an additional stimulus should be considered because the first one was “a bit too small.” Billionaire investor Warren Buffett told ABC News in a July 9 interview that more stimulus “may well be called for.”

Biden defended the program on July 9 in Ohio, expressing frustration with criticism that progress has been too slow.

“Remember, we’re only 140 days into this deal — it’s supposed to take 18 months,” Biden said. The stimulus is saving thousands of jobs each day, he said.

Still, Biden said on July 5 that the administration “misread the economy” in initial forecasts that underestimated the depth of the recession and overestimated the stimulus package’s impact.

It would be hard to move more quickly, said former House and Senate budget analyst Stan Collender.

‘Throwing $100 Bills’

“Short of standing on top of the Empire State Building throwing $100 bills out, I don’t know what they could do to get money out there faster than what they’re doing,” said Collender, managing director of Qorvis Communications in Washington.

The stimulus should be judged by how much money has been committed to projects because economic benefits start to appear as work begins, House Transportation Committee Chairman James Oberstar, a Minnesota Democrat, said on June 25.

In April, almost $61 million from the stimulus was designated to help pay for a $95 million laboratory building at the Energy Department’s Oak Ridge National Laboratory in Tennessee.

That let St. Louis-based McCarthy Building Cos. start work at least six months earlier than anticipated, Oak Ridge spokesman Michael Bradley said. While only $2.4 million has been paid through June, about 150 people are at work on the project, which is scheduled for completion in 2011, he said.

Savings Rate Rose

While stimulus tax cuts began showing up in paychecks across the country in April in the form of reduced withholding, the economic impact may be muted as consumers save more money. The personal savings rate in May rose to 6.9 percent, the highest since December 1993.

If spending eventually picks up, “reductions in withholding normally have a lag of two to four quarters before any of it begins to be spent in any clear way,” Sinai said.

Instead of focusing on unemployment to gauge the stimulus’s initial benefits, Moody’s Economy.com chief economist Mark Zandi said he will watch retail sales and initial unemployment claims, which he expects to improve in the next three months.

The unemployment rate isn’t the best measuring stick because “it significantly lags what’s going on in the economy,” said Zandi, who expects the jobless rate to peak at about 10.5 percent next spring.

Judging Effectiveness

Even some of the critics who say the stimulus was poorly designed, such as Douglas Holtz-Eakin, an adviser in Arizona Senator John McCain’s 2008 Republican presidential campaign, say unemployment isn’t the best way to judge its effectiveness now.

The stimulus’s biggest weakness is that it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” Holtz-Eakin said.

Statements by economists that job growth may be slow to arrive hasn’t lessened public concern — or attacks by Republicans. The stimulus bill passed in February over unanimous opposition by House Republicans and got only three Republican votes in the Senate.

“People want their jobs,” House Republican Leader John Boehner of Ohio said on July 9. “They want to see the economy moving again, and they don’t see anything happening.”

Faster Recovery Sought

That’s the case for John da Silva, 33, an unemployed heavy- equipment operator in Litchfield, Connecticut.

Out of work since December, when he lost his $76,000-a-year job with Blue Bell, Pennsylvania-based Henkels and McCoy Inc., da Silva supports a stay-at-home wife and a daughter with respiratory ailments who requires frequent medical treatment.

“I felt that it would have funneled down a lot quicker than it has,” da Silva said of the recovery funds. “We need stimulus money for new big super-projects that are going to have guys working for a year or two. That’s not happening right now.”

The $150-a-week union check that supplemented da Silva’s unemployment benefits stopped coming on June 1. If not for union medical benefits, he said, “I would have been another statistic, with a foreclosure and a bankruptcy.”

Those benefits end in October. “Instead of getting better,” da Silva said, “it looks like things are getting worse.”

Tepid offers for BofA asset manager

By Julie MacIntosh, Francesco Guerrera and Greg Farrell in New York

Published: July 1 2009 01:27 | Last updated: July 1 2009 01:27

Bank of America’s asset management business is drawing lukewarm bids now that BlackRock, once its likeliest suitor, has opted to pay $13.5bn for Barclays Global Investors, according to people close to the matter.

BofA is hoping to reap at least $3bn from a sale of Columbia Management, those people say, but bids so far have come in closer to $2bn.

To boost those results, BofA could consider dividing Columbia into twoand entertain separate offers for its large money market funds operation, which is less valuable to some bidders.

Many asset managers are shrinking or shutting their money market funds businesses, which operate on low margins and pose new legal and financial risks as a result of the banking crisis. A company with significant scale in money market funds, however, such as Federated Investors, could be willing to pay for those assets separately, allowing other bidders clearer access to the rest.

A decision on whether to split the business has not been made, and with several bidders interested in the entire operation, such a move may not be necessary if the pricing gap narrows.

Citigroup analysts said Columbia could be worth $2.5bn-$3.5bn as a multiple of net income, or about $3bn as a percentage of assets under management.

Bank of America had no comment on the matter.

BlackRock had been a leading candidate to buy the business, but its hands have become full, say people close to the situation. Chief executive Larry Fink said when he announced the $13.5bn BGI purchase two weeks ago he was “not doing any more transactions for the time being”.

Bankers say Columbia could draw interest from other large asset managers, such as Invesco, Oppenheimer or Franklin Templeton, which is considering the purchase of AIG’s asset management business, as well as insurance companies. Private equity investors initially looked at Columbia, but were later told the auction would be limited to strategic bidders.

Buy-out firms remain interested, however, in First Republic, the private bank and mortgage lender BofA is also attempting to sell. A group led by former bank executive Gerry Ford, which has included Blackstone, Carlyle, Oakhill and TPG, appears to have the highest degree of interest in the business, according to people close to the matter.

First Republic, if sold, could be priced at about its tangible book value, which people close to the business said ranged from $600m to $800m depending on how its assets were marked and the degree to which BofA agreed to share losses.

Interested buyers are hoping BofA will provide similar structured loss-sharing benefits to what the US government has provided in bank rescue deals.
Copyright The Financial Times Limited 2009

Carlyle Raises $1 Billion Asia Fund

Hong Kong – Global private equity firm The Carlyle Group announced today it has successfully closed its fourth Asian growth capital fund, Carlyle Asia Growth Partners IV (CAGP IV), a sector-agnostic growth capital fund which invests in high growth private companies with strong local management and leading market position in China, India, Korea and other key Asian markets. Despite a difficult fund-raising environment, the fund raised $1.04 billion in only 14 months from a broad geographical range of investors.

The closing of CAGP IV reflects improving investor sentiment towards China and India as the two major economies begin to stabilize and show signs of emerging from the downturn. Nearly 40% of CAGP IV’s limited partners are new investors, demonstrating growing demand for exposure to China and India.

“We are delighted with the support we have received from our investors, especially given challenging industry-wide fundraising trends. This is an excellent time for long-term investors to seek value in China and India. Our new fund offers access to high growth opportunities with no leverage, providing attractive risk-adjusted returns. Despite the economic downturn, most of our growth capital portfolio companies have achieved growth rates in the range of 20-50% over the last year,” said Wayne Tsou, Managing Director and Head of Carlyle Asia Growth Partners.

“The Chinese domestic consumption story is developing well. China’s strong economic performance, successful implementation of its stimulus plan and incentive measures for small and medium-size enterprises are attracting international firms and investors to the Chinese market,” added Tsou.

Carlyle also believes that India’s promising demographic fundamentals, mature capital markets and skilled workforce make it well-positioned for further growth.

“The strong entrepreneurial culture in India has created many potential investment opportunities for Carlyle. India’s emerging middle class is fuelling strong domestic consumption, while the outsourcing and re-engineering of various products and services from all over the world to India continues to grow at a lively pace. India’s growth story is sustained by its vibrant capital markets, a resilient banking system and a pro-business stable government,” said Shankar Narayanan, a Carlyle Managing Director responsible for CAGP’s investments in India.

Existing investors have been encouraged by the success of CAGP IV’s predecessor CAGP III, which has made 22 investments in two and half years across more than ten sectors including energy, consumer, technology, business services, education, industrial, healthcare, real estate and media, 80% of which were made in China or India.

David M. Rubenstein, Carlyle Co-founder and Managing Director, said, “The Carlyle Group raised $19.9 billion in new capital last year, and this fund close builds on that momentum. Asia remains a core focus of our global business, and Carlyle continues to devote more resources to China and India. CAGP is one of the largest growth capital platforms in Asia and has consistently provided investors with exposure to the very best of the region’s opportunities.”

Carlyle Asia Growth Partners IV is the fourth fund managed by the Carlyle Asia Growth Capital group, which has an aggregate committed capital of approximately US$2 billion. The group invests through a team of local professionals in six offices – Beijing, Hong Kong, Mumbai, Shanghai, Seoul and Tokyo. CAGP brings significant support and value to portfolio companies through its vast international business network, deep local insight from its native investment team, experience in a broad range of industries, expertise in business management, and strong leverage in global M&A and capital market fundraising. This has allowed CAGP’s portfolio companies to expand capacity and seek acquisition opportunities.

CAGP IV is more than 50% larger than its predecessor CAGP III by capital commitment and has already made its first investment in a leading Chinese high-end women’s fashion company Ellassay.

Arden Asset Management and J.P. Morgan Establish Hedge Fund of Funds Program

NEW YORK – (Business Wire) Arden Asset Management LLC, a leading independent fund of hedge funds manager, and J.P. Morgan (NYSE: JPM) today announced an agreement under which Arden will manage a $1.1 billion proprietary hedge fund of funds portfolio for J.P. Morgan’s investment banking division, effective July 1, 2009. J.P. Morgan’s investment bank has agreed to seed several new Arden funds and invest in one of Arden’s current flagship funds with these assets.

As part of the agreement, a team led by Shakil Riaz, Chief Investment Officer of J.P. Morgan’s proprietary hedge fund of funds program since inception in 1995, will join Arden. Mr. Riaz will become a member of the Arden Investment Committee and continue his investment leadership role for new funds seeded by the J.P. Morgan assets. The existing Arden funds and customized accounts will continue to be managed by Arden senior investment professionals and Investment Committee members: Averell H. Mortimer, Chairman; Henry P. Davis, Managing Director and Head of US Manager Research; Ian P. McDonald, Managing Director and Head of European and Asian Manager Research; and Matthew Bianco, Managing Director and Head of Risk Management.

“Arden’s high quality institutional infrastructure and well-established investment processes were important in our decision to select the firm to manage these assets,” said Robert Case, head of Principal Investment Management for J.P. Morgan’s investment bank. “Partnering with Arden, which has a proven track record of managing absolute return programs through many market cycles, enables us to continue participation in this attractive asset class, while better managing our overall capital commitments.”

Averell Mortimer, Arden President and Chief Executive Officer, said, “We are pleased to partner with J.P. Morgan on this unique venture, which we believe will create significant value for both Arden investors and J.P. Morgan in the years to come. Importantly, this initiative further strengthens our organization and brings additional specialization and expertise to Arden’s global investment program. We warmly welcome Shakil and his colleagues to Arden and believe investors will benefit from their market experience and long-term investment record as we develop new strategies to meet the expanding needs of our sophisticated institutional clientele.”

Founded in 1993, Arden Asset Management LLC is a leading global fund of funds investment management company with offices in New York, London, Zurich and Bahrain. Arden is registered with the US Securities and Exchange Commission (SEC) and Arden’s affiliate, Arden Asset Management (U.K.), Ltd. is authorized and regulated by the Financial Services Authority (FSA). Arden’s institutional and individual investors include taxable and non-taxable clients from the United States, Canada, South America, the United Kingdom, Europe, Australia, Japan and Asia ex-Japan. As of July 1, 2009, Arden’s assets under management will exceed $8 billion.

J.P. Morgan is the investment banking arm of JPMorgan Chase & Co. (NYSE: JPM), a leading global financial services firm with assets of $2.1 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan, Chase, and Washington Mutual brands. Information about J.P. Morgan is available at http://www.jpmorgan.com.

J.P. Morgan Securities Inc. acted as financial advisor to its affiliates on this transaction.

Credit crunch takes toll on super-rich

By Megan Murphy

The ranks of the world’s super-rich have been shredded by the credit crunch, putting paid to the theory that the wealthy are better at holding on to their money.

The global population of “ultra high net worth individuals” – defined as those with at least $30m to invest – shrank by nearly 25 per cent in 2008, according to the latest World Wealth Report produced by Merrill Lynch and Capgemini.

That leaves just 78,000 left worldwide after a year of bank crises, government bail-outs and stock market routs.

High net worth individuals – worth a mere $1m, excluding their homes – fared poorly as well, seeing around $8,000bn shaved off their bank balances.

The unprecedented declines wiped out two years of robust growth, reducing both the total number of rich people and their wealth to levels last seen in 2005.

Nick Tucker, market leader for UK & Ireland in Merrill’s wealth management arm, said the report showed there were no “safe havens” for investors as markets across the world plummeted.

However, despite 2008’s negative results, overall wealth is expected to top $48,000bn by 2013, as global economies recover.

“Last year was about preservation, not appreciation,” Mr Tucker said. “As markets recover, high net worth individuals will have the flexibility to readjust their strategies and reinvest in new, developing opportunities along the way.”

China, unsurprisingly, is expected to drive much of this expansion.

The world’s fastest-growing major economy surpassed the UK for the first time in the report’s rankings of the total number of rich people by country.

There are now an estimated 364,000 dollar millionaires in China, the fourth largest population in the world.

Hong Kong, by contrast, lost 61 per cent of its millionaires in 2008, with India, Russia and the UK also suffering steep declines.

The economic uncertainty also took a hefty bite out of the luxury good markets. Perhaps the report’s most telling statistic? The number of used private jets available for sale worldwide hit an all-time high last November.

Copyright The Financial Times Limited 2009