At Goldman, Trading Is King

Once again, Goldman Sachs demonstrates why the world is so keenly interested in trading activities at the biggest U.S. banks. Three-fourths of its $45 billion in 2009 revenues come from its trading and principal investment group, and most of that from bond, commodity, and other fixed income trading.

Trading pushed Goldman to $13 billion in profits for the year and $5 billion for the fourth quarter, far surpassing expectations and even the showings of far larger rivals. The report comes on the same day the Obama Administration will unveil new proposals to limit the trading activities of big banks as a way of reining in risk-taking and preventing another financial crisis. For Goldman, however, trading enabled it to rebound from the depths of the crisis. In the fourth quarter of 2008, which ended in November of that year, it reported a $2 billion loss.

During that period, Goldman won approval to convert to a bank holding company, agreeing to tighter regulation by the Federal Reserve as a way of weathering the crisis. Its risk-taking allowed it to set itself apart from peers like JPMorgan Chase and Morgan Stanley, but also brought it a heap of criticism. In a Congressional hearing earlier this month, Lloyd Blankfein, Goldman's chief executive, was unable to convince a skeptical Financial Crisis Inquiry Commission that Goldman's proprietary trading was not unfairly benefiting the firm at the expense of clients.

For the year, trading netted $34 billion, and of that $23 billion came from fixed income, currency and commodities. Trading helped Goldman carry the quarter, too, bringing in $6 billion of revenues, the bulk of the firm's overall $9.6 billion in fourth quarter revenues. Investment banking and asset management pale by comparison. Revenues for advisory and underwriting activities came in at $4.7 billion for the year and $1.6 billion for the quarter. Asset management brought in $6 billion for the year and $1.6 billion for the quarter.

http://blogs.forbes.com/streettalk/2010/01/21/at-goldman-trading-is-king/

Bernanke and the Beast

IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple.

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David G. Klein

Let’s start with first principles. One basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods.

A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.

Those two lessons go a long way toward explaining history’s hyperinflations, like those experienced by Germany in the 1920s or by Zimbabwe recently. Is the United States about to go down this route?

To be sure, we have large budget deficits and ample money growth. The federal government’s budget deficit was $390 billion in the first quarter of fiscal 2010, or about 11 percent of gross domestic product. Such a large deficit was unimaginable just a few years ago.

The Federal Reserve has also been rapidly creating money. The monetary base — meaning currency plus bank reserves — is the money-supply measure that the Fed controls most directly. That figure has more than doubled over the last two years.

Yet, despite having the two classic ingredients for high inflation, the United States has experienced only benign price increases. Over the last year, the core Consumer Price Index, excluding food and energy, has risen by less than 2 percent. And long-term interest rates remain relatively low, suggesting that the bond market isn’t terribly worried about inflation. What gives?

Part of the answer is that while we have large budget deficits and rapid money growth, one isn’t causing the other. Ben S. Bernanke, the Fed chairman, has been printing money not to finance President Obama’s spending but to rescue the financial system and prop up a weak economy.

Moreover, banks have been happy to hold much of that new money as excess reserves. In normal times when the Fed expands the monetary base, banks lend that money, and other money-supply measures grow in parallel. But these are not normal times. With banks content holding idle cash, the broad measure called M2 (including currency and deposits in checking and savings accounts) has grown in the last two years at an annual rate of only 6 percent.

As the economy recovers, banks may start lending out some of their hoards of reserves. That could lead to faster growth in broader money-supply measures and, eventually, to substantial inflation. But the Fed has the tools it needs to prevent that outcome.

For one, it can sell the large portfolio of mortgage-backed securities and other assets it has accumulated over the last couple of years. When the private purchasers of those assets paid up, they would drain reserves from the banking system.

And as a result of legislative changes in October 2008, the Fed has a new tool: it can pay interest on reserves. With short-term interest rates currently near zero, this tool has been largely irrelevant. But as the economy recovers and interest rates rise, the Fed can increase the interest rate it pays banks to hold reserves as well. Higher interest on reserves would discourage bank lending and prevent the huge expansion in the monetary base from becoming inflationary.

But will Mr. Bernanke and his colleagues make enough use of these instruments when needed? Most likely they will, but there are still several reasons for doubt.

First, a little bit of inflation might not be so bad. Mr. Bernanke and company could decide that letting prices rise and thereby reducing the real cost of borrowing might help stimulate a moribund economy. The trick is getting enough inflation to help the economy recover without losing control of the process. Fine-tuning is hard to do.

Second, the Fed could easily overestimate the economy’s potential growth. In light of the large fiscal imbalance over which Mr. Obama is presiding, it’s a good bet he will end up raising taxes for most Americans in coming years. Higher tax rates mean reduced work incentives and lower potential output. If the Fed fails to account for this change, it could try to promote more growth than the economy can sustain, causing inflation to rise.

Finally, even if the Fed is committed to low inflation and recognizes the challenges ahead, politics could constrain its policy choices. Raising interest rates to deal with impending inflationary pressures is never popular, and after the recent financial crisis, Mr. Bernanke cannot draw on a boundless reservoir of good will. As the economy recovers, responding quickly and fully to inflation threats may prove hard in the face of public opposition.

Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.

http://www.nytimes.com/2010/01/17/business/economy/17view.html

Buffett's Big Task: Bringing Berkshire Back Up to Speed

By Ben Steverman

updated 7:00 p.m. ET Jan. 10, 2010

At a time when Warren Buffett has never been more famous, his future -- and that of Berkshire Hathaway (BRK/A:US), the company he heads -- has never been more uncertain.

Buffett's fame multiplied after the central role he played in the financial crisis, which included lending a helping hand to Goldman Sachs (GS) and General Electric (GE) and reassuring the investing public he was buying stocks after 2008's market crash.

Talk to close watchers of Buffett and you find that all the publicity of the past year failed to fully answer key questions: Where is this renowned value investor going to find bargains after stock prices have advanced 67% in nine months? Why is Buffett making the biggest acquisition of his career, railroad Burlington Northern (BNI), at a price even he admits isn't cheap?

And, perhaps most important, what will Berkshire look like after Buffett? Though still apparently in good health, Buffett, the company's chairman and chief executive, turns 80 on Aug. 30, 2010.

The questions might not vex investors so much if Berkshire Hathaway hadn't lost some stock market respect in recent years. For 15 of the last 22 years, Berkshire stock has beaten the broad Standard & Poor's 500-stock index.

But in 2008, shares tumbled 32%. They failed to rise more than 2.7% in 2009 -- 20 percentage points behind the S&P 500 last year. Worsening any recent feelings of lost prestige, Moody's Investors Service took away Berkshire's prized AAA credit rating in April 2009, and debt from the Burlington Northern deal could threaten the AAA credit rating from Standard & Poor's.

The Most Trusted Investor

The $26 billion Burlington Northern acquisition, announced in November, adds to Berkshire's empire, which ranges from insurance to retail, utilities, and manufacturing. As part of the deal, Buffett is ending a Berkshire idiosyncrasy: Each share of its "B" class of stock (BRK/B:US), the so-called Baby Berkshires now priced at $3,320 per share, will be split into 50 shares -- consequently offered at a lower, more market-friendly price -- if shareholders approve the plan Jan. 20.

But by far the most notable thing about Berkshire Hathaway is not its sky-high share prices, but Buffett himself, who remains firmly in control of the company he built from a troubled textile manufacturer into a giant conglomerate. Buffett did not respond to requests for comment for this story.

Whitney Tilson, managing director of Tilson Capital Partners, expects Buffett to remain on the job for at least five years. "He loves what he does and he's playing it at the highest level he's ever played," says Tilson, who owns Berkshire shares. "He gets better with age."

"No one can invest like Warren Buffett," says Gabriel Wisdom, managing director of American Money Management.

It's not just Buffett's abilities as a manager and stockpicker that have earned impressive returns. It's also his role as the most famous, and most trusted, investor in the world -- the man who got countless calls for help and advice from politicians and Wall Street executives during the financial crisis. "He has a celebrity and marquee [name) that opens doors for him," says Wisdom, who owns Berkshire shares.

Whenever Buffett steps down, Berkshire loses that public face.

"Warren Buffett Premium"

Some worry there is a big "Warren Buffett premium" built into Berkshire's stock price, which could be deflated when he leaves.

"The stock will not do well when he steps down or passes away," says Douglas Famigletti, portfolio manager at Griffin Asset Management, though he believes Berkshire's well-managed businesses could continue to prosper. Famigletti's funds own Berkshire shares.

Others, like Robert Cheney, founder and chief executive of Westridge Wealth Strategies, don't see signs of a Buffett premium. He says the stock seems to trade at a reasonable valuation compared to the company's book value.

But the lack of a Buffett premium raises another question, Cheney says: If the stock market already recognizes Buffett is leaving sooner or later, "why hasn't a succession plan been [made) more concrete?"

Several Buffett-watchers say they're expecting more details about Buffett's successors in 2010, if only to ease uncertainty plaguing Berkshire's stock.

Bloomberg BusinessWeek asked Buffett experts what else Buffett might have on his "to do" list in 2010:

Not much, says Wisdom. Burlington Northern "will be the last big acquisition of his career," he says. "He's clearly playing it conservatively because he's already wealthy."

Commercial Real Estate Move?

Digesting the Burlington Northern deal could take some time, says James Potkul, portfolio manager of the Bread & Butter Fund (BABFX), which owns Berkshire shares. For value investors looking for cheap stocks, there are fewer available in today's "fairly valued" market, Potkul says. "It's going to be a very quiet year for [Buffett]."

Berkshire's huge size makes it tough to deploy capital, because it forces him to focus only on large deals that can make a big impact, Tilson says. Instead of reaching for other big deals in 2010, he expects Buffett to focus on rebuilding his cash holdings after the Burlington Northern deal, in an effort to win back Berkshire's top credit rating.

Yet, as the financial crisis showed, Buffett often jumps on opportunities if they come his way. One frequently mentioned area where Buffett can find deals in 2010 could be commercial real estate.

"There is a lot of opportunity out there because rents are down and vacancies are up," says Timothy Parker, president of Hudson Capital Management. With holders of real estate facing a tough year, "I can see [Buffett) going on a bit of a spree and buying up real estate assets."

One possible vehicle for Buffett's move into commercial real estate could be Berkadia Commercial Mortgage, a joint venture of Berkshire and Leucadia National (LUK), Potkul says.

Buying Stocks Mid-Crisis

According to SEC filings from Berkshire, during the market decline of late 2008 and early 2009, Buffett was indeed buying stocks -- as he said in a New York Times op-ed at the height of the financial crisis. He opened up positions in ExxonMobil (XOM) and Nestle (NSRGY), and added to holdings in Wells Fargo (WFC) and Wal-Mart (WMT).

Still, some were surprised he didn't buy more common equity shares -- and get more of a pop from the market's explosive rally that began in March. "He didn't go out and just buy a lot of stocks," Wisdom says. Instead, Buffett had cash left over for the railroad acquisition in November.

Buffett is careful not to tip his hand when it comes to his next stock market moves, but Buffett experts look at the past year's buys for clues to 2010.

Berkshire is already heavily tilted toward the financial sector, through its insurance business and through holdings in American Express (AXP), Wells Fargo, Goldman, and others.

As a result, he may be looking elsewhere. "I wouldn't be surprised if he continues to increase his exposure to health care," Famigletti says. "I see a lot of value there," where stocks are relatively cheap but continue to generate cash and significant dividends, he says. Berkshire already owns 1.3% of Johnson & Johnson (JNJ), and has smaller holdings in Unitedhealth Group (UNH), Becton, Dickinson & Co. (BDX), Sanofi-Aventis (SNY) and GlaxoSmithKline (GSK).

Long-Term Prosperity

It's hard to predict what Buffett will do from year to year, because he rarely reacts to the crisis or strategy of the moment.

To many, the purchase of Burlington Northern seemed like an odd move given other, arguably cheaper opportunities in the market. But, Tilson says, "He is buying Burlington Northern to own it forever. He's looking out 50 or 100 years."

For Buffett, the most important task in 2010 won't be reviving Berkshire's stock price or negotiating lucrative but relatively small deals like his Goldman investment. Rather, Buffett has more monumental concerns: In what are probably his last several years at the helm, he is trying to build Berkshire Hathaway into a company that will prosper long after he is gone.

http://www.msnbc.msn.com/id/34767324/ns/business-businessweekcom/

E-Readers Everywhere: The Inevitable Shakeout

Samsung, Plastic Logic, enTourage Systems, Hearst, and Spring Design launched e-readers at CES against Sony, Amazon, and even Apple's rumored tablet

By Douglas MacMillan

updated 7:00 p.m. ET Jan. 12, 2010

Johnny Makkar is intent on buying a digital book reader. Yet he won't consider any of the more than two dozen new devices introduced in recent months, many of them at the just-completed Consumer Electronics Show in Las Vegas. For Makkar, a resident of Fairlawn, N.J., with a background in marketing, only two manufacturers will do, and one has yet to unveil a reader. "I want the e-book buying process to be as effortless as possible," says Makkar, 26. "Only Apple (AAPL) or Amazon (AMZN) are going to be able to provide that."

Standing out may prove challenging for many new entrants to the market for e-readers, expected by Forrester Research (FORR) to double to 6 million devices this year. "Half the e-readers that have been announced [at CES] won't be around a year from now," says Forrester analyst James McQuivey.

At CES, some e-reader hopefuls played to niche audiences; Plastic Logic pitched its QUE to business users. Others played up tech breakthroughs; Spring Design introduced a dual-screen device called Alex. All are vying against Sony (SNE), which pioneered e-readers with its first device in 2005, and Amazon, which has been selling versions of its Kindle for just over two years. Forrester expects Kindle sales to reach 3 million and Sony to sell from 1.5 million to 2 million e-book readers in 2010.

Even the established vendors could lose buyers this year. Apple is expected to put out a tablet computing device that many analysts expect to include the ability to read digital books. "We are in a market where consumers no longer believe in one device serving one industry or one function," says Forrester's McQuivey. Single-purpose products such as the Kindle might be ignored by customers who prefer a multipurpose device from Apple.

Plastic Logic's QUE: an "unmet need?"

Upstarts may benefit from focusing on specific kinds of customers. For instance, enTourage Systems said school textbook publishers will custom-format several books for its new device, the eDGe, which was demonstrated at CES. With its QUE proReader, Plastic Logic included a large touchscreen reader and the ability to store and view business documents such as those made with Microsoft (MSFT) Excel and Adobe Systems (ADBE) PDF software. "If I'm starting from scratch, I'd probably go after one of the niches," says Citigroup (C) analyst Mark Mahaney.

Plastic Logic CEO Richard Archuleta says the company doesn't intend to compete with the existing e-reader makers. "Amazon proved that you could build a business out of this," Archuleta says. "Our concept was always to meet this unmet need and create this new category that we didn't think anybody was focused on."

At $649, the QUE may carry too high a price, even for business executives, McQuivey says. "None of them are telling me they're buying it," McQuivey says of his clients.

Some companies say they're unafraid to go after the broader market. Spring Design, started in 2006 by former engineers from Intel (INTC) and Sandisk (SNDK), has contracted with Taiwanese manufacturer Quanta Computer to produce 120,000 units of its Alex e-reader. The device, set to sell for $359 starting in February, combines a 6-inch electronic reading screen that's almost identical to a Kindle screen with a smaller, adjacent one that runs Google's (GOOG) Android operating system. The setup lets readers take a break from a novel to research an author or related topic on the Web and gives them the option of viewing one window at a time, or both at once.

Eric Kmiec, vice-president of sales and marketing for Fremont [Calif.)-based Spring Design, admits that the wide variety of e-readers on the market probably won't last. "I think there's going to be a couple clear winners," he says.

Hearst's Skiff for "the service side"

Hearst is hedging its bets with a service called Skiff, which brings magazine and newspaper content to many different devices. The New York publishing company was in Las Vegas to unveil the first prototype of its elegant Skiff Reader, a device that uses a Marvell (MRVL) processor and an 11.5-inch screen made by LG of South Korea. Skiff President Gil Fuchsberg says Hearst is trying to entice publishers, in part by letting them place ads beside content and share in revenue generated by them.

Fuchsberg predicts that 60 million to 100 million people will be using dedicated reading devices in the next 5 to 10 years, so it's unwise to bet on one or two devices this early. "Nobody has a crystal ball," he says. "However the market evolves on the device front, our focus is on the service side of it."

Samsung, intent on selling hardware, announced two new e-book devices in Las Vegas. Ranging in price from $399 to $699 and shipping sometime in early 2010, the products are aimed at helping the South Korean electronics maker keep up with its Japanese rival, Sony. Samsung may run into the same hurdles as Sony, says Forrester's McQuivey. "Sony's principle challenge in this business is that they're not good at content," he says. Many customers say Amazon's Kindle bookstore makes it easier than Sony to buy books online. "Samsung is not any better at content," McQuivey adds.

Samsung spokesman Jason Redmond says his company stands a good chance of succeeding, even if Apple enters the market. Apple "will be a formidable competitor, but I don't think it will replace or wipe out the e-reader," Redmond says. Apple spokesman Steve Dowling declined to comment on speculation over future products from his company.

Amazon won't sit by as rivalry accelerates, Mahaney of Citi says. He expects the price of the Kindle, now at about $260, to drop. Amazon spokeswoman Cinthia Portugal declined to comment on a potential price decrease, but Mahaney suspects the price could fall to as little as $100 this year. That's a number even such would-be Apple customers as Makkar might find hard to resist.

http://www.msnbc.msn.com/id/34823444/ns/business-businessweekcom/

Understanding the bad bank

https://www.mckinseyquarterly.com/Financial_Services/Banking/Understanding_the_bad_bank_2487?gp=1

Business Cards 2.0

Dave Stevens is a consummate networker. As program and events manager for the Chamber of Commerce in Mountain View, Calif., he attends several events a week, collecting stacks of business cards. When he returns to his office, however, he pitches the cards, opting instead to add his new contacts on the corporate social networking site LinkedIn.

"If I'm connected to someone on LinkedIn, I'll always have a way of finding them," says Stevens. "If you rely on a business card and the person moves on, you'll get nothing but a bounced e-mail." The updated information travels with Stevens via a mobile version of LinkedIn that synchs his new connections to the address book on his Palm Pre smart phone.

Stevens isn't the only person tossing business cards into wastebaskets. Frustrated with the limitations of paper, workers around the globe are experimenting with digital ways to exchange contact information. Entrepreneurs, in turn, are racing to develop Web sites and mobile software that ease the process.

In Pictures: Business Cards 2.0

Since card-swapping generally occurs away from desks and computers, most of the proposed solutions are mobile applications. One example is DUB, a service for sharing mobile business cards that is available on BlackBerrys and iPhones, as well as handsets that run Microsoft's ( MSFT - news -people ) Windows Mobile and Google's ( GOOG - news -people ) Android operating systems. DUB's digital cards resemble paper ones, but are interactive, with support for active links to profiles on sites like Facebook, Twitter and LinkedIn.

To connect, DUB users simply press a "locate" button in the application. It uses global positioning technology (GPS) to match users, then stores the cards' contact information in the phone's address book. If a DUB user wants to connect to a non-member, he or she can send a digital invitation.

Manoj Ramnani, founder of DUB's parent, DubMeNow, estimates that 500 people download the application every hour onto BlackBerrys on days it is featured in BlackBerry App World. (It helps that the application is free.) In coming weeks, the 14-month-old company plans to unveil an application forNokia's ( NOK - news -people ) Symbian platform, expand internationally, announce deals with a large group of universities, associations and tradeshows and release more Web-based tools, including desktop widgets and a toolbar for Microsoft Outlook. Within several years, Ramnani hopes DUB will be the mobile address book of choice, with full support from wireless carriers.

The idea isn't far-fetched, says Adam Nash, LinkedIn's vice president of search and platform products. "Business cards are a bad proxy for what people really want [when they network], which is a relationship," notes Nash. "We can do so much better than these static snapshots in time."

LinkedIn is also angling to be the de facto way people exchange contact information on phones. It currently offers iPhone and Palm applications and will introduce one for the BlackBerry soon, according to Nash.

People who don't own smart phones or don't want to deal with downloadable applications can also go digital. Several companies, including a Denver-based startup called Contxts, let people exchange credentials by text message, using usernames and online profiles. "Business cards are so 2007," says Contxts founder Danny Newman. "Our goal is to be the simplest way to exchange contact data." The service, which has close to 100,000 "alpha" users, is still in a test phase but will open to the public by March.

There are also a burgeoning number of scanning applications for people who don't mind collecting business cards, but want to digitally store the data on them. These applications rely on phone cameras and special software to capture names and numbers off paper cards.

Several scanning applications can decipher a type of technology known as 2-D barcodes that encodes images and text in a pictoral barcode format. That can be useful because some companies, such as Nokia, print 2-D barcodes on their business cards.

The most unusual response to the business card conundrum may be token-based business cards. Companies like Switzerland's Poken and Mingle360 in the U.S. sell small, plastic devices that beam data through wireless sensors (RFID and infrared). To transmit information, users point or touch their devices. The tokens generally cost around $20 and can clip to a keychain or work badge.

Eventually, business card data could be infused into various gadgets just as wireless connectivity is being embedded in a range of electronics. Poken founder Stephane Doutriaux plans to apply Poken's technology to other devices, including jewelry and accessories. "Maybe you'll touch your earring to someone's watch or belt buckle," he says. "The ability to connect could be in anything."

http://www.forbes.com/2010/01/13/social-media-digital-technology-cio-network-business-card.html?feed=rss_home