Venture Capitalists Still Cautious

Things are finally brightening up on the depressed high-tech IPO scene. Two deals--language-software company Rosetta Stone and online college Bridgepoint Education--hit the market this week, and both rose on their first day of trading. Rosetta Stone's shares soared nearly 40%, while Bridgepoint's edged up 6%.

So Silicon Valley venture capitalists, who back tech and biotech start-ups, should be turning cartwheels, right?

Not exactly.

Though Bridgepoint is backed by private-equity firm Warburg Pincus, which does some smaller VC deals, the company is much larger than a typical venture-backed start-up: Revenues last year were $218 million. Ditto for Rosetta Stone, which was not backed by the VC crowd. The company had sales last year of $209 million--and, like Bridgepoint, has been consistently profitable.

Bridgepoint's deal also priced below its expected range. That indicated investors were less than thrilled with the company--though obviously enthusiastic enough to bring it to market. That in itself is a small victory in today's still-choppy markets.

It all makes these deals nice, but not exactly a harbinger of more VC-backed stock offerings. New Internet companies, start-up drugmakers or medical-device companies are still viewed as riskier for investors to buy and for bankers to take public. And right now, Wall Street just doesn't have much appetite for that kind of gamble.

The two IPOs this week "make me feel incrementally more positive," says Stephen Harrick, a partner with institutional Venture Partners. But investment banks are still hanging back when it comes to taking venture-backed companies public, he says.

The market for VC-backed deals has also been buffeted by more systemic factors, like the decline of small-stock research at investment banks and the switch to trading stocks in penny increments. That has shrunk profits at investment banks and cut back on the money available for research. Without good research, mutual funds and other big investors won't buy a stock.

The continuing lack of exits for VCs--who make money when the start-ups they back go public or are acquired by other companies--is trickling down to dampen enthusiasm for funding new companies. (If they can't make you money, why invest in them in the first place?) On Friday, the National Venture Capital Association and Thomson Financial said U.S. VCs put just $596 million into first-time financings, down 48% from the fourth quarter of last year.

Overall venture financing in the U.S. plummeted as well. VCs invested just $3 billion in 549 deals in the first quarter, the lowest investment level in 12 years. Even the once-hot "clean technology" sector took a hit: Clean-tech VC dollars, funding efforts like solar-panel manufacturing and biofuels, plunged 84% from the fourth quarter, despite all the hype over green energy from the Obama administration.

Building solar-panel factories and cellulosic-ethanol plants is a lot more expensive than sticking up a new social-networking Web site--hence even tougher for VCs to stomach in the current, risk-averse environment. VCs also probably funded too many of these companies, says Noubar Afeyan of Flagship Ventures, which created a crowded field from which even good companies had trouble standing out.

This week's IPOs for Rosetta Stone and Bridgepoint are, let's face it, good news. The fact that "people even opened their checkbooks at all has got to provide at least a glimmer of hope," says former VC and current hedge-fund manager Bill Burnham. But people shouldn't hold their breath waiting for a flood of VC-backed deals, Burnham says. The market will have to pick up appreciably before the gates truly open.

Bay Area home buyers bidding up 'bargain' properties

Bolstered by sales of discounted foreclosures, Bay Area sales were up 29.1% last month from March 2008, MDA DataQuick reported, while the median home and condo price was down 45.9% to $290,000. The area price peak was $665,000 in June and July of 2007.

The March statistic overstates the price decline as sales in higher-end communities have been slower, according to DataQuick analysis. For example, Santa Clara County, home to the majority of Silicon Valley communities, saw only a 16.6% increase in sales for the same period and a median price drop of 37.1%.

L.A. Land checked in with real estate agent Cherie Colon of Windermere SVP, San Jose, for a take on the homes sales action.

"Banks have been returning foreclosed homes to the marketplace and pricing them 5% to 10% under the competition," she said, in some cases creating a bidding frenzy "way over the listing price. We're back to multiple offers."

Area agents are expecting another wave of foreclosures to hit the market soon, Colon added.

What they haven't seen are "banks willing to work with short sales," she said. Still, the "lower end of the market is extremely active" with prices that haven't been seen in 10 to 12 years in some areas.

Delta Airlines stops using India call centers

Delta Air Lines Inc has stopped using India-based call centers to handle sales and reservations, the Wall Street Journal reported on Saturday.

The move makes the airline the latest U.S. company to decide the cost benefits of directing calls offshore are outweighed by backlash from costumers, the newspaper said in a story on its website.

Delta said it stopped routing calls to India-based call centers over the first three months of the year. Customers had complained they had trouble communicating with Indian agents, the newspaper said.

"The customer acceptance of call centers in foreign countries is low," Richard Anderson, Delta's chief executive, said in a recorded message to employees, according to the newspaper. "Our customers are not shy about letting us have that feedback."

Earlier this month, SLM Corp the student loan company commonly known as Sallie Mae, said it plans to move its overseas operations back to the United States, pulling jobs from India, Mexico and the Philippines.

Delta isn't pulling back from the use of all foreign call centers. It will keep some Jamaica and South Africa centers, which haven't generated such vociferous complaints, the newspaper said.

A Delta spokesman could not be reached for comment on the story.

MGM Mirage and Dubai World

MGM Mirage and Dubai World are close to an agreement on a proposal that would ensure the completion of their CityCenter project in Las Vegas, people with knowledge of the talks said on Friday.

While MGM Mirage and Dubai World have settled many of the issues between them, they must still reach an accord with the banks financing CityCenter, a sprawling residential and casino development, one of these people said. The talks are aimed at amending the terms of a $1.8 billion loan needed to complete the project.

The goal of any agreement would be to ensure that CityCenter received the financing to be completed, these people said. It would also seek to protect the development should MGM Mirage, its developer, default on its own debt, which would set off a cross-default on the CityCenter loan.

Under the existing terms of that loan, MGM Mirage and Dubai World must make about $800 million in additional payments to access the financing. The two partners would like to gain access to the financing before those payments are made.

The bank group is led by Bank of America, which is serving as the administrative agent.

Representatives for MGM Mirage and Dubai World declined to comment.

In a statement announcing that MGM Mirage had made a $70 million payment to CityCenter’s banks — a payment that also covered $35 million that was to be paid by Dubai World — James J. Murren, the casino operator’s chief executive, reiterated his company’s support for the development.

“MGM is determined to make CityCenter a success and we continue to review with our partners all options to keep CityCenter fully funded,” Mr. Murren said. “We are continuing to engage in constructive discussions with our senior lenders and the CityCenter lending group and we appreciate the support of the involved parties.”

Financier J. Ezra Merkin Talked to U.S., SEC, Cuomo

Financier J. Ezra Merkin provided testimony to state and federal regulators and prosecutors investigating the $65 billion fraud by Bernard Madoff, according to court records unsealed in a Madoff-related lawsuit.

Merkin’s cooperation with investigators was revealed in statements he made under oath in response to a lawsuit by New York University accusing him of investing university funds with Madoff without permission. Madoff pleaded guilty March 12 to running the largest Ponzi scheme in history.

Court papers released today also show that a former manager of one of Merkin’s funds told NYU lawyers that he voiced concerns about Madoff to Merkin in the early 1990s. Victor Teicher, who managed Merkin’s Ariel Fund Ltd., recalled that he “was negatively inclined” when Merkin first suggested using Madoff as a fund investment manager, according to a transcript.

Merkin gave sworn statements in connection with the university’s lawsuit on April 9, and was asked by Beth Kaswan, a lawyer for NYU, if he’d been questioned under oath in the last five years, according to court documents.

‘The Madoff Swindle’

“I have been deposed relatively lately in issues concerning, broadly speaking, the Madoff swindle,” Merkin said, according to a transcript released today.

“In what matter were you deposed?” Kaswan asked.

“By the Securities and Exchange Commission, testimony was taken by the U.S. Attorney’s Office and testimony was taken by the New York State Attorney General’s Office,” Merkin replied.

Merkin said he was questioned by prosecutors from the U.S. Attorney’s Office in Manhattan who were investigating Madoff, records show. He also said he didn’t know if it was pursuant to a federal subpoena. Asked if he testified before a federal grand jury, Merkin replied, “I don’t know enough to know but I -- I don’t know, I think the answer is no.”

Andrew Levander, Merkin’s lawyer, didn’t immediately return a voice-mail message left at his office seeking comment.

State Supreme Court Justice Richard Lowe in Manhattan said in an April 14 decision that Merkin’s deposition in the lawsuit brought by NYU could be disclosed. Lowe said releasing Merkin’s statements wouldn’t hinder Madoff-related probes.

NYU, the largest private university in the U.S. by enrollment, said in its Dec. 23 complaint it lost at least $24 million invested with Madoff by Merkin and his funds.

Media Requests

Lowe’s ruling stems from media requests to unseal the testimony of Merkin and Teicher. The university said it first learned of the Madoff-related investments on Dec. 12, a day after federal prosecutors charged the former investment manager with operating a Ponzi scheme.

E-mails that Teicher sent to Merkin after Madoff was arrested were also unsealed today, as was as copy of Teicher’s deposition taken by NYU lawyers on Feb. 9.

Teicher wrote to Merkin on the evening of Dec. 11, the day that federal prosecutors charged Madoff with securities fraud, saying: “The Madoff news is hilarious; hope you negotiate out of this mess as well as possible; I’m yours to help in any way I can; unfortunately, you’ve paid a big price for a lesson on the cost of being greedy.”

‘Fooled Yourself’

Teicher sent Merkin an e-mail at 3:03 a.m. on Dec. 13, saying, “I guess you did such a good job in fooling a lot of people that you ultimately fooled yourself. While the attached article details many of the obvious clues suggested fraud; more simply, a man’s name tells you who he is: Madoff made off.”

Merkin told NYU lawyers that Madoff started providing services to Merkin’s Ariel Fund “in the late 1980s, maybe 1990.”

He visited Madoff in the early 1990s at his offices, where Madoff told him about a new investment strategy. Merkin said that, before this meeting, Madoff provided Ariel “a form of option arbitrage,” according to a transcript.

Kaswan, the NYU lawyer, asked Merkin why he never mentioned Madoff in his fund reports. He replied, “Because Madoff was basically the strategy that we were using to provide liquidity for the portfolio. It was the liquidity adjusted return that I was interested in as much as it was the absolute return.”

Merkin was also asked if he ever questioned, in light of the market’s volatility, the steady returns which Madoff claimed.

“I have done, had done, lots of due diligence on Mr. Madoff’s trading strategy and on the returns and on the levels of volatility,” Merkin said. He added later, “We looked at Mr. Madoff’s returns and reached the conclusion that Mr. Madoff’s returns were achievable.”

‘Criminalize the Case’

Merkin said he and Teicher discussed hiring a lawyer after Madoff was arrested, according to the court documents.

“He suggested that while it was clear to him that I had nothing to do with the swindle itself,” Merkin said, “a prosecutor who wished to perhaps make a name for his or herself could possibly criminalize the case.”

Teicher was questioned by one of NYU’s lawyers, Joseph Gugliemo, about what he meant in his e-mail message to Merkin saying “you’ve paid a big price for a lesson on the cost of being greedy.”

“I meant that investing with Bernie Madoff was very, very easy in some sense; that it was -- the consistency of returns was such that it made it very appealing,” Teicher said, according to the transcript. “And that Ezra was able to raise a lot of money by virtue of investing with Madoff.”

Teicher Voiced Concerns

Teicher said voiced concerns about Madoff in 1992 or 1993, when Merkin first suggested investing with Bernard L. Madoff Investment Securities LLC and Madoff’s new “split-strike” strategy. Teicher said Merkin didn’t respond to his comments.

“I felt that that was just not possible,” Teicher said. “Because I’ve never seen anyone -- I mean, have such consistent returns. It’s possible to do 50 percent a year. In some years you do more and some years you do less, but just the nature of the business, you just can’t year in and year out have such low volatility in the returns.”

Merkin and lawyers for the funds sought to keep the testimony in the NYU case secret. Some of the testimony covered Ariel’s investment strategy and holdings, employees and advisers of the fund and personal information about Teicher and the government’s investigations into Madoff’s scheme, Lowe said. The judge kept under seal “names of investors in the fund and the investment strategy contemplated for those investors.”

Merkin Denied Wrongdoing

Merkin has denied any wrongdoing in the NYU case.

Merkin’s Gabriel Capital LP, once a $1.5 billion hedge fund, is now being liquidated after incurring losses on investments with Madoff.

New York Attorney General Andrew Cuomo sued Merkin and Gabriel Capital on April 6. In the complaint, Cuomo accused Merkin of secretly placing $2.4 billion of client funds with Madoff in exchange for $470 million in fees.

The case is New York University v. Ariel Fund Ltd., 603803/2008, New York State Supreme Court (Manhattan).

General Motors "GM" Chief Concedes Bankruptcy Is Possible

General Motors chief executive Fritz Henderson said a bankruptcy filing is "more probable" than before given the concessions the company must achieve before the end of May, although it is working to avoid that outcome.

GM, which has received $13.4 billion in government loans, is working on parallel strategies: one that would restructure the automaker outside of bankruptcy court and another that would reorganize it inside.

"We are on a two-track plan," Henderson told reporters yesterday. "We have contingency planning underway."

In a push to be more transparent, yesterday's GM conference call was the first of a series of updates on the auto giant's decisions and actions aimed at remaking itself, which must be completed by June 1.

GM will need a $4.6 billion cash infusion in the second quarter to keep the company running, in keeping with a previous plan submitted to the Treasury Department.

"It would be premature to say there has been an approval for further funding, but the size that has been discussed has been consistent with what we have laid out in our plan on February 17th," Henderson said.

GM has not yet made a request for the funds, and last month the company announced it would forego its urgent request for $2 billion in federal loans because it was making progress reducing costs.

"We are working closely with GM to monitor those near-term working capital needs, and will provide resources as needed," an administration official said.

President Obama has pledged that his administration would provide the money necessary to keep GM operating as it revises its restructuring plans.

Henderson, who was appointed last month to replace G. Richard Wagoner Jr. as chief executive, reiterated that the company's revised plan will "go deeper and faster," while trying to skirt bankruptcy.

"I felt several weeks ago that it would be more probable that we would need to go through a bankruptcy process," he said. "I certainly feel that way. That continues today. But I wouldn't be able to hazard a guess as to what the probabilities would be."

GM is working on getting a "stable, sustainable" cash flow, as well as a "clean and healthy" balance sheet. It has also been talking to the ad hoc committee of bondholders, which is leading negotiations to swap debt for equity, and the United Auto Workers, which must reduce GM's large cash obligation toward retiree health care benefits.

But because Chrysler must make the same deep cuts by the end of this month, the union has been focusing its efforts on GM's rival.

"While our dialogue is open, I would expect that we would be able to pick up the pace a bit more here in the next several weeks," Henderson said.

He emphasized GM's goal of maintaining "four core brands" -- GMC, Buick, Cadillac and Chevrolet -- squashing speculation that the automaker wants to discard GMC and Buick, both very profitable.

The company also has decided not to sell ACDelco, a parts division, despite having potential buyers.

"We just concluded recently that we're not able to achieve the kind of price we would need for this business to justify it," Henderson said. "We are going to keep this business and run it and grow it."

GM is expecting three final bids for Hummer next week and is aiming to make a decision before the end of the month.

A group, led by private-equity firm Black Oak Partners, has approached GM about buying Saturn. GM is committed to running Saturn through 2011, the end of its model life cycle.

More than six potential buyers are interested in a stake in Germany's Opel unit, and Henderson said he expects a deal to materialize in two to three weeks. A number of parties are interested in Saab.

GM intends to close more manufacturing plants than its original target of 15 by 2014, and will accelerate the closing of dealerships.

California unemployment

Unemployment in California shot to 11.2% in March, the highest level since the state began keeping records. What's more, the number of people out of work for almost a year rose by 9.4%, and has now doubled in the last 12 months.

Carpenter Luiz Vasquez knows the frustration all too well. In the last year, he said, he worked only two weeks.

"I go through town, and I do not hear the sound of work," said Vasquez, 40, who is seeking help through a Chrysalis job center in Santa Monica. "I do not hear a single hammer strike."

The state's economy has been particularly hard on construction workers like Vasquez. The downturn started in housing and has spread to retailing, international trade, finance and nearly every other sector.

An average of 211,000 Californians have been unemployed for more than 47 weeks over the last year, the state reported. These people now account for about 14% of California's approximately 1.5 million jobless.

The plight of the long-term unemployed such as Vasquez is characteristic of the deepening recession that has gripped the global economy and the Golden State since at least December 2007.

"This recession has features of a depression," said Nelson Lichtenstein, a labor historian at UC Santa Barbara. "We get these very long-time people being out of work. They sort of disappear to a never-never land."

California lost 62,100 jobs in March, state officials reported Friday. In all, 637,400 jobs have disappeared in the last year and a total of 727,700 since the economy peaked in July 2007.

Despite the gloom, last month's loss was much smaller than the 114,000 posted in February, said Howard Roth, chief economist at the California Department of Finance.

"We're losing jobs at a slower rate. That's sort of the first step" toward recovery, he said.

The state has been scrambling to assist the unemployed with mixed success. The California unemployment insurance fund is insolvent and being bailed out with billions of dollars in federal money. The Employment Development Department's obsolete computer system and telephone call centers are swamped with hundreds of thousands of claims.

On Friday, Gov. Arnold Schwarzenegger issued an emergency proclamation designed to speed the hiring of 150 staffers to help ease the logjam.

California's unemployment rate remains stubbornly above the nationwide rate of 8.5% for March. Unemployment in much of Southern California is even higher. Los Angeles County reported 11.4%, Riverside 13.2%, San Bernardino 12.5% and Ventura 9.6%. Even Orange County, which historically has low unemployment, reached 8.5% in March.

Economists expect unemployment rates to continue rising at least through the summer even if the state and national economies begin to turn around as a result of President Obama's stimulus program.

The aid from Washington includes more than $3 billion to provide the long-term unemployed with as much as 53 extra weeks of benefits or a total of up to 79 weeks of assistance. The federal funds also will pay for computer and phone upgrades and the hiring of new claims handlers.

The money threw an immediate lifeline to 76,000 jobless, whose benefits were scheduled to run out this month. By the end of the year, an estimated 394,000 would be eligible for the extra help.

But even with benefits, months and months of fruitlessly searching for a job takes its toll on a worker's sense of self worth and productivity, said Alex Gerwer, 53, of San Diego. The former strategic business planner said he had a worldwide network of contacts to tap in searching for a position like the one he lost in March 2008.

"My clinical and technical background should be very important, but it's almost like I can't give it away," he said. "That has been very frustrating."

Gerwer said he had "sent out well over 1,000 copies of my resume in a targeted and personalized fashion."

The dearth of jobs in all sectors of the economy, from Gerwer's high-tech consulting to Vasquez's low-tech drywall hanging is more severe in California than in most of the country because of the state's "greater exposure to the housing downturn and related job losses in construction and finance," said Stephen Levy, chief economist at the Center for the Continuing Study of the California Economy in Palo Alto.

In addition, California's population continues to grow, and that often worsens the job picture, he said. Many of these new Californians arrive in search of jobs and become "instantly unemployed" when they can't find work because employers are shedding jobs, not creating them, Levy said.

Writer Lawrence Kootinkoff, of West Los Angeles, who has been without a job since 2005,said he still looks for work nearly every day, when he's not caring for two young children.

"I wanted a job in news, but everyone I talked to was either laying people off or not hiring," said the 47-year-old former foreign correspondent. "I was over-qualified. I had too much experience. I was too expensive. If I was 20 years younger, I might have had a better shot."

Bank Regulators Clash Over U.S. Stress-Tests Endgame

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.”

The banks haven’t been consulted on how the information will be released and have raised the issue with the Treasury, three industry officials said on condition of anonymity.

Two-Year Horizon

The 19 firms include Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc., GMAC LLC and MetLife Inc. and other commercial, trust and regional banks. The Federal Reserve, OCC, Federal Deposit Insurance Corp. and Office of Thrift Supervision are using the tests to determine whether the 19 have enough capital to cover losses over the next two years should the economic downturn worsen.

Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. The central bank has been leery of inserting politics into the examination process, two people familiar with the matter said.

A statement on the methods is scheduled for release April 24. The Fed, the nation’s primary regulator of bank holding companies, is leading the tests. The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said.

Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they will be effective, the two people said.

Six Minutes

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets. He and Fed Chairman Ben S. Bernanke have also noted that most of the 19 banks are currently well capitalized and that not all of them would need new capital.

The economy has worsened since the Treasury announced the tests in February, raising questions about whether the scenarios regulators are applying to bank portfolios are rigorous enough. Officials are considering taking a tougher stance in judging the tests’ results given the job market’s deterioration, the Financial Times reported today without citing anyone.

Unemployment Scenario

Under the assessments’ “more adverse” scenario, the unemployment rate is seen rising to 10.3 percent in 2010. When officials designed that scenario, the most-recent jobless rate was 7.6 percent. It has already soared to 8.5 percent since then.

There have been signs this year of some recovery in the banking industry. Goldman Sachs said April 13 its earnings for the first quarter were $1.81 billion, or $3.39 a share, after a surge in trading revenue. The results were better than analysts’ expectations of $1.64 and the New York-based firm sold $5 billion in stock to help repay government capital injections.

Earlier this month, Wells Fargo & Co. said it would report net income of $3 billion, 50 percent more than the previous year’s period. The San Francisco-based bank said it closed $100 billion of mortgages in the quarter with an equal amount waiting to be finished, a signal that business is picking up.

Bank Earnings

JPMorgan reported profit that beat analysts’ estimates on April 16, with first-quarter earnings of $2.14 billion, or 40 cents a share. Chief Executive Officer Jamie Dimon labeled the TARP program a “scarlet letter” and said the firm could repay the government “tomorrow.”

Still, not all banks are expected to be healthy enough to forgo the Treasury’s assistance, which along with additional capital injections could include converting previous government investments from preferred shares to common equity.

How the market handles the results is a chief worry of banks and regulators, said Scott Talbott, chief lobbyist for the Financial Services Roundtable in Washington.

“The problem is you pick winners and losers,” Talbott said.

Banking lawyers and industry officials said that the Treasury needs to be very clear with the public about the reviews, which by their design test events that may not happen. Because of the intense interest from the media and investors, the government needs to “explain early and often” the purpose of the program, said the ABA’s Abernathy.

“It’s very possible that we are seeing the turning of the corner for the banking industry,” he said. “Our biggest fear is that it becomes a confidence-eroding episode at just the wrong time.”

Fed's Lockhart:Commercial Real Estate Trouble Risk To Economy

The latest big threat to economic recovery in the U.S., the commercial property market, could be the next target of an expanded special lending program from the central bank, Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said Saturday.

"On our watch list this year as a risk to the [economic] outlook is continuing worsening in the commercial real estate sector," Lockhart said.

The central banker was speaking at a conference on financial policy hosted by Vanderbilt University's Owen Graduate School of Management to honor former Fed Governor Dewey Daane.

Fed policymakers are still considering whether to include sponsorship for commercial property loans under its Term Asset-Backed Securities Loan Facility, or TALF, Lockhart said, adding that there's been no official decision.

"The details haven't been fully worked out," he said.

Lockhart is currently a voting member on the Fed committee that deliberates the bank's policy actions. At the last meeting, March 18, the committee announced a new plan to buy $300 billion in longer-term Treasurys and expand by $750 billion the size of lending programs aimed at reducing mortgage rates. The TALF program, which can accommodate around $1 trillion of support for the asset-backed markets that support consumer and business lending, has only just gotten underway, to a tepid reception from investors.

The commercial real estate market has suffered on a variety of fronts, from rising unemployment in the corporate sector to a drop in business travel that's depriving hotels of guests. As a result, Lockhart said, there's a real risk of a spike in delinquencies and failure to refinance the roughly $400 billion of commercial real estate loans coming due this year.

General Growth’s Bankruptcy May Let Rivals Buy Malls

When General Growth Properties Inc. bought Rouse Co. for $11.3 billion in 2004, then-Chief Executive Officer John Bucksbaum said the deal amounted to “five years worth of acquisitions in one fell swoop.” Now the challenge will be keeping those assets.

Purchasing Rouse gave General Growth malls including Boston’s Faneuil Hall, New York’s South Street Seaport and the Woodlands in Houston. It also added almost $10 billion in debt to its balance sheet and led the second-largest U.S. mall owner to file for Chapter 11 bankruptcy protection yesterday.

“Paying the highest price was not the fatal flaw,” said Jim Sullivan, head of retail real estate investment trust research at Green Street Advisors, a Newport Beach, California- based property research company. “The fatal flaw was financing this giant purchase exclusively with debt.”

Mall owners Simon Property Group Inc., Macerich Co., Vornado Realty Trust and Taubman Centers Inc. rallied yesterday on speculation the biggest real estate bankruptcy in the U.S. will allow competitors to buy General Growth’s assets at a discount.

Hedge fund manager William Ackman, whose firm owns about 25 percent of General Growth, said he doesn’t think the real estate investment trust will have to resort to a fire sale.

“The probability of Simon or the other mall REITs buying any of General Growth Properties on the cheap is zero,” Ackman said in a telephone interview. “They’re not going to be forced to do anything because they’re in bankruptcy.”

Credit Crunch

The Rouse acquisition gave General Growth, the owner or manager of about 200 properties in 44 states, premier malls with strong occupancy rates and tenants. The company already has tried to sell South Street Seaport as well as Las Vegas assets such as Fashion Show Mall and The Shoppes at the Palazzo.

“Now that it’s gone Chapter 11, the playbook starts from scratch,” said Jonathan Miniman, senior analyst at ING Clarion Real Estate Securities, which manages $10.8 billion. “This could be a huge opportunity for the Simons or Vornados of the world to buy some trophy assets at some pretty good prices.”

Indianapolis-based Simon, the largest U.S. shopping mall owner, has stakes in 386 properties. Vornado Realty Trust, one of the country’s biggest office landlords, also owns or manages more than 31 million square feet of retail properties in the U.S. and Puerto Rico. ING Clarion is Simon’s seventh-largest shareholder, with 9 million shares, or 3.7 percent, on Dec. 31.

High Debt

“The Rouse portfolio for the most part was a really high- quality portfolio,” said James S. Corl, managing director for distressed real estate investments at private-equity firm Siguler Guff & Co. in New York. Still, with “the price General Growth paid, there was a reason why they were the winning bidder. They weren’t disciplined on the acquisition front, and certainly not on the financing front.”

The Chicago-based company was blocked by the global credit freeze from refinancing some of the $27.3 billion of debt it amassed over the years. General Growth’s debt-to-asset ratio was 92 percent at the time it sought protection, according to the filing.

The bankruptcy may remake the nation’s mall business and allow Simon to strengthen its position as the No. 1 mall owner, said Dan Fasulo, managing director at real estate research firm Real Capital Analytics.

‘Distress’ Cycle

General Growth’s filing is the “beginning of the distress cycle,” Fasulo said, and may lead other companies to fail.

General Growth’s competitors may not have an easy or immediate way to capitalize on its woes. The company said it wants to stay intact. Its success may depend on convincing the bankruptcy judge to consolidate its debts until credit markets recover.

General Growth on March 23 said that a deadline for bondholders to agree to new terms for $2.25 billion in debt expired without the minimum number of holders accepting the agreement. General Growth said on March 30 it was continuing to negotiate with creditors.

“We’re not looking for wholesale sales of assets,” General Growth President Thomas Nolan said yesterday in an interview with Bloomberg Television. “We intend to emerge as a leaner company.”

Ackman, whose Pershing Square Capital Management LP will provide General Growth with $375 million in financing to help run the company during the Chapter 11 process, may join the board after the court approves the interim financing. Pershing is the company’s third-largest shareholder.

Low-Leverage Competition

Financing for acquisitions remains scarce and some of General Growth’s individual assets are debt-laden, making them potentially less attractive to an acquirer.

The nine regional mall owners tracked by Green Street have an average leverage to asset ratio of 75 percent, according to a March report by the firm.

CBL & Associates Properties Inc. of Chattanooga, Tennessee, Glimcher Realty Trust of Columbus, Ohio and Philadelphia-based Pennsylvania Real Estate Investment Trust have the highest leverage ratios, at more than 90 percent. Only companies with relatively low debt ratios, such as Sydney-based Westfield at 56 percent, and Simon and Taubman, each at 60 percent, will likely have the financial wherewithal to buy assets from General Growth, said Sullivan.

No Thaw

“There’s very little sign that the real estate capital markets are unfreezing in a huge way,” said Sullivan. “Even for those raising equity, it’s been very expensive.”

Simon on March 20 sold 15 million shares at $31.50 each, raising $472.5 million, and $650 million of 10-year notes. The notes were priced to yield 10.75 percent. By comparison, last May, Simon sold 10-year bonds that were priced to yield 6.14 percent.

“They have some very good assets,” Stephen E. Sterrett, Simon’s chief financial officer, said yesterday in a telephone interview. “Some of them would probably fit very well in our portfolio, but now is probably not the right time to talk about that.”

General Growth in October put three Las Vegas properties up for sale, the Fashion Show Mall, the Grand Canal Shoppes and the Shoppes at the Palazzo. Simon’s Forum Shops at Caesars is next to the Caesars Palace hotel and casino on the Las Vegas Strip.

“The issue with the Vegas assets was they were extremely overleveraged,” said Miniman. “Fashion Show is one of the best assets in the country but you couldn’t refinance it.”

No Sale

General Growth last month received offers of almost $400 million for properties including Faneuil Hall and the South Street Seaport, according to a person familiar with the matter. More than 10 bids were received. It didn’t sell.

“By going the Chapter 11 route, it helps them maximize asset values,” said Miniman. “I think the courts will force them to sell assets to pay down some of the debt and emerge as a smaller, better, re-equitized company.”

After trying for seven months to refinance its debt, General Growth filed for bankruptcy, listing $29.5 billion in assets and debts of about $27.3 billion. General Growth will continue operating. The company previously suspended its cash dividend and cut its workforce by 20 percent.

The Rouse transaction sealed the company’s fate, said Sullivan of Green Street.

General Growth bought Rouse after a bidding contest with Simon, Westfield and others in what was then the largest takeover of a real estate investment trust.

Missed Chance

By the time some of the debt came due, the credit crunch halted bank lending and pushed the U.S. into a recession that cut consumer spending and property values. Commercial real estate prices in the U.S. dropped 15 percent last year, according to Moody’s Investors Service. Retail sales in the U.S. fell in March as job losses forced consumers to pull back.

General Growth had chances to refinance since 2004 and didn’t take advantage of them, said Sullivan. Now it faces the prospect of emerging from bankruptcy a smaller player in an industry that has consolidated to the point where an “oligopoly” of publicly traded REITs own about 80 percent of the country’s malls, he said.

“Bigger is better in the mall business,” said Sullivan. “The more malls you own, the stronger the relationship is with your tenants.”

Citigroup reports 1Q net profit

Citigroup ( C) reported a loss to common shareholders of $966 million after massive loan losses and dividends to preferred stockholders. But before paying those dividends, the bank had net income of $1.6 billion.

Overall, Citigroup's results were better than expected. Last year, Citigroup lost more than $5 billion. Citigroup's revenue doubled in the first quarter from a year ago to $24.8 billion. Its credit costs were high, though, at $10 billion, due to $7.3 billion in loan losses and a $2.7 billion increase in reserves for future loan losses.

Citigroup has been one of the weakest of the large U.S. banks, posting quarterly losses since the fourth quarter of 2007. It was one of the first signals that the banking industry might not be as sick as many believed.

• BB&T ( BBT) posted a 37 percent decline in first-quarter profit, as loans that were overdue or written off as unpaid surged and the regional bank put aside more cash to cover souring credit. For the three months ended March 31, BB&T said net income after paying preferred dividends fell to $271 million from $428 million in the 2008 quarter. BB&T said a settlement with the Internal Revenue Service increased profit in the quarter by $17 million. Net interest income, or income recorded from interest on assets like loans and mortgages, rose 13 percent to $1.15 billion, from $1.02 billion last year.

• General Electric ( GE) reported a 36 percent decline in its first-quarter earnings on sharply lower profits at its troubled finance arm, but the results beat Wall Street forecasts in a glimmer of good news for the struggling company.

After paying preferred dividends, GE's net income totaled $2.74 billion, down from $4.30 billion. Revenue fell 9 percent to $38 billion, with sales down or flat in every division except GE's energy business. The broad recession has hurt many of GE's industrial businesses that make products like jet engines, oil field equipment and household appliances. Sales also declined at GE's entertainment division, which includes the NBC television network.

• Mattel ( MAT), the largest U.S. toymaker, said weak sales overseas and cautious retailer orders led to a wider first-quarter loss.

The toy maker's loss for the quarter ended March 31 totaled $51 million compared with a loss of $46.6 million a year ago.

Revenue fell 15 percent to $785.6 million from $919.3 million last year.

• Newspaper publisher and TV station owner Media General ( MEG) reported a wider first-quarter loss Friday on a deepening slide in advertising revenue.

The company also said it cut its work force by nearly 300 jobs in the week of March 31 and plans to freeze its pension plan at the end of May.

The publisher of the Richmond Times-Dispatch and The Tampa Tribune lost $21.3 million in the January-March period, compared to a loss of $20.3 million a year earlier.

The company said its loss in the most recent quarter included severance costs of $4.5 million. Revenue fell 18 percent to $159 million from $194.5 million a year ago.

Venture funding deals hit 11-year low

The venture capital industry took another big hit in the first quarter of the year, according to new data from Dow Jones VentureSource.

Venture capitalists invested just $3.90 billion in U.S. companies during the quarter, a 50 percent decline from the almost $7.78 billion invested during the same quarter last year, according to VentureSource. In terms of actual venture deals, 477 were completed, well below the 706 completed last year and the lowest quarterly deal total since 1996.

Hit particularly hard was the information technology industry, which saw its lowest level of investment since 1997, with $1.68 billion invested in 231 deals for the first quarter. That's a 52 percent drop from the $3.48 billion invested in 370 such deals during the same quarter last year, according to the report. That's also the lowest deal level for the IT industry--the software sector included--since 1995, the report says.

"Technology companies have long been the primary focus of venture capitalists," VentureSource's Director of Global Research Jessica Canning said in a statement. "But with a nonexistent IPO market and corporations paying less for venture-backed technologies, the incentive for investors to back new or unproven business models is just not there."

The report also documents another plunge for the green tech and clean energy sectors, with $189 million in 15 deals during the first quarter, down 59 percent from the $457 million invested in 24 such deals last year.

The report isn't quite as bleak as one released for the fourth quarter of last year from Thomson Reuters and the National Venture Capital Association, which noted a decline in VC funding of 71 percent from the fourth quarter of 2007.

Also for the first quarter of the year, VentureSource earlier this month reported a 65 percent fall in liquidity for VCs.

Western Hemisphere Leaders Address Economic Crisis

U.S. officials say combating the global economic slump emerges as priority topic at the fifth Summit of the Americas in Trinidad and Tobago.

Meeting behind closed doors, hemispheric leaders discussed ways to revive their economies, preserve trade, and prevent fallout from the worldwide financial crisis from boosting poverty rates. That, according to senior U.S. officials who were present at the summit's first plenary session.

President Obama's top economic advisor, Lawrence Summers, says the gathering is taking place at a critical juncture.

Larry Summers (file)

"Nobody expected a global financial crisis of this magnitude," he said. "The global financial crisis is a kind of economic hurricane."

Summers says all leaders recognize the gravity of the situation and the perils to their societies if the economic downturn continues unabated.

With that in mind, the Obama administration announced a program to boost credit availability for small, or so-called micro businesses in the hemisphere.

In addition, Summers said, President Obama has spoken out in favor of preserving trade in the Americas.

President Barack Obama attends opening session of 5th Summit of the Americas in Port of Spain, Trinidad and Tobago, 17 April 2009

"The president was very emphatic, and this was widely shared [among other leaders], that while global GDP [gross domestic product] this year will probably decline by about 1 percent, global trade may decline by 10 percent or more," he said. "And that it is terribly important that there be no movement to protectionist measures."

At Friday's opening ceremony, several leaders placed blame for the financial crisis squarely on the United States. Summers said, at the plenary sessions, leaders focused more on productive courses of action than venting anger. He said other heads of government said they want the United States to succeed and recover economically, and to take steps to promote prosperity throughout the Americas.

Plenary sessions later in the day addressed energy challenges, environmental concerns, and security threats. The summit concludes Sunday.

The hemispheric gathering has been overshadowed by issues surrounding Cuba - the only nation not invited to the summit - and the decades-old U.S. embargo of the communist-run island.

Cuban President Raul Castro (file)

President Obama recently relaxed restrictions on remittances and travel to Cuba by Cuban Americans. Thursday, Cuban President Raul Castro called for open dialogue between Washington and Havana, and suggested that Cuba may have made a mistake in the past when it ruled out talks on human rights and political prisoners.

White House Press Secretary Robert Gibbs says Mr. Castro's words got President Obama's attention.

"That was most assuredly taken note of and discussed within our administration," he said. "We think that was a change in their rhetoric that we have not seen in quite some time."

President Obama has heard repeated pleas from his summit colleagues to terminate the U.S. embargo of Cuba. Mr. Obama has said that he wants to see a change in long-frozen U.S.-Cuban relations, but that he also wants to see democratic reform on the island.