White House Searches for Ways to Help Small Businesses

The Obama administration is discussing ways to expand assistance to struggling small businesses, but there is some disagreement among top officials over the best approach, according to people familiar with the matter.

One idea floated by the Treasury would make more capital available to small businesses by having the government essentially underwrite loans used to fund their businesses. That idea was challenged by National Economic Council Chairman Lawrence Summers, who said such a move would expose the government and taxpayers to too much risk, these people said.

The Treasury and White House are considering other ideas, including using more money from the $700 billion financial-industry bailout to unlock credit for small business. That sector has been particularly hard hit by the financial crisis, because banks, worried about their own capital needs, have pulled credit lines and declined to make small-business loans. Unlike some other industries, small businesses look to banks for their primary source of funding.

"The economic team is very united in the understanding that we have to be constantly looking at creating a favorable job creation environment for small business in these very challenging economic times," said Gene Sperling, an adviser to Treasury Secretary Timothy Geithner. "The hard part is as always figuring out what will be most effective and most efficient."

The administration has already taken steps to aid small businesses, including committing $730 million in stimulus funds and devoting more money towards lending guarantees for Small Business Administration loans.

But a long-awaited $15 billion program to buy SBA-backed loans, funded by the Troubled Asset Relief Program, has struggled to get off the ground. The providers of SBA-backed loans initially resisted involvement over concerns about TARP-related executive-compensation restrictions and other rules they thought onerous. The program is expected to begin purchasing loans later this month.

The Treasury and the White House remain concerned about the health of the sector, which is credited with creating as much as 80% of new jobs, according to the SBA. At a time of rising unemployment, the administration is under pressure to create new jobs or at least prevent as many layoffs as possible.

The jobless rate, which hit 9.5% last month, has become a heated topic in recent days, with Republicans criticizing the Obama administration's $787 billion economic-stimulus plan as ineffective. With little political appetite for another stimulus, the administration is looking for other ways to bolster the economy.

Government officials say there are still many businesses that are struggling to fund their daily operations.

"We still have good businesses whose credit lines have been cut and need liquidity," said SBA Administrator Karen Mills. "We're engaged in discussions all the time about how to make sure there is capital for small businesses. I think there will be continuous discussions until we're out of this whole liquidity and bank crisis, because small businesses are going to be the engine that takes us out of this recession."

Mr. Geithner has tapped a small group to think about ways to aid that sector, people familiar with the matter said. Mr. Geithner is concerned about the risks that small businesses pose to the broader economy and wants to find a way to unlock credit.

Mr. Geithner hasn't settled on a particular approach, these people say, and had not signed off on the proposal that Mr. Summers challenged.

Feeder fund assets frozen in Petters Ponzi case

A federal judge froze the assets of a hedge fund manager accused of acting as a $2 billion feeder fund for a multibillion-dollar Ponzi scheme operated by Minnesota businessman Thomas Petters, federal regulators said on Friday.

The Securities and Exchange Commission said it obtained the court order in a lawsuit accusing Gregory Bell and his Lancelot Management LLC of fraud.

The lawsuit also accused Petters of fraud for a Ponzi scheme involving the sale of notes related to consumer electronics. When Petters' scheme began to unravel, the SEC said, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes.

Bell and Lancelot Management have never been registered with the SEC or any other regulatory agency, the SEC said in a statement. Bell could not be immediately reached for comment.

"Bell lied to investors to induce them to hand over their money, and then hung them out to dry while millions of dollars in fees continued to flow into his own pockets," said Merri Jo Gillette, head of the SEC's regional office in Chicago.

Judge Ann Montgomery in federal district court in Minneapolis issued an order freezing all assets of Bell, his wife, and Lancelot Management, and requiring them to repatriate all overseas assets.

Petters, who was initially charged by the U.S. Justice Department last October, is in custody and awaiting trial.

Petters Group Worldwide, which has investments in Fingerhut, Polaroid Corp and Sun Country Airlines, filed for Chapter 11 bankruptcy protection last year.

The SEC's securities lawsuit against Petters accuses him of running a Ponzi scheme from 1995 through last September. In the scheme, Petters allegedly promised investors that proceeds from the notes they were sold would finance the purchase of consumer electronics by vendors, who then re-sold the merchandise to big retailers such as Wal-Mart Stores Inc and Costco Wholesale Corp.

Instead, the SEC said Petters' business "was a complete sham" and cheated investors of their money.

Unresolved Questions After Hearing With Geithner

The issues were arcane and technical, but the hearing drew an extraordinary turnout: 110 members of Congress, many of whom waited three hours to ask questions for five minutes.

All eyes were on Timothy F. Geithner, the Treasury secretary, who testified Friday about the Obama administration’s proposal to regulate the multitrillion-dollar market for financial derivatives, the hedging instruments that bankrupted the American International Group in September.

But after three hours, many of the hardest questions remained unanswered.

Mr. Geithner vowed that the administration would impose tougher regulations on the freewheeling market for derivatives like credit-default swaps, which insure investors from losses on bond defaults.

He told lawmakers that the plan would require that all “standardized” instruments be traded on a regulated exchange or through a central clearinghouse. Participants would have to disclose more information about their transactions, and they would have to meet strict new capital requirements.

The instruments that caused the greatest disruption last year, credit-default swaps tied to mortgage-backed securities, were traded “over the counter” rather than on exchanges and were almost entirely unregulated. Part of the problem was that many bond insurers, including A.I.G., sold credit-default swaps as a form of insurance with inadequate capital to cover their obligations.

Mr. Geithner said the government would demand higher capital requirements for all the participants. It would allow customized, one-of-a-kind derivatives, but those would be subject to reporting requirements and higher capital requirements than exchange-traded instruments.

But the Treasury secretary shed no new light on how the government would define “standardized” instruments. Supporters of over-the-counter derivatives say they come in infinite variations, because they are often meant to help companies hedge against specific risks.

Mr. Geithner vowed to devise a “broad definition” of standardized instruments, adding that regulators would be required to carefully police any attempts at “spurious customization.”

The Treasury secretary said he wanted to leave many of the details to the actual regulators, rather than spell them out in legislation, warning that an overly specific law could give market participants opportunities to evade the rules.

Mr. Geithner said he opposed banning all credit-default swaps, as proposed by Representative Maxine Waters, Democrat of California. He said such products “provide an important economic function in helping companies and businesses across the country better hedge against risk.”

Similarly, Mr. Geithner said he opposed a ban on holding “naked derivatives,” the practice of buying a derivative without owning the underlying securities. But he said the practices needed comprehensive oversight.

Mr. Geithner did not come close to answering the question at the top of many lawmakers’ minds: jurisdiction. At issue is which agency would oversee the new regulation, and which committees in Congress would draft the legislation.

Until those questions are settled, lawmakers said they could not even begin to write a bill.

The huge turnout reflected the battle over jurisdiction. The hearing was held by both the House Financial Services Committee, which writes legislation for banks and oversees the Securities and Exchange Commission; and the House Agriculture Committee, which has jurisdiction over commodity futures trading and oversees the Commodity Futures Trading Commission.

Lawmakers are pushing the Treasury Department to decide how to divide responsibilities. Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, has asked Mr. Geithner to come up with specific answers by the end of July, but the administration is not expected to produce a detailed proposal until September.

Mr. Geithner alluded to the subterranean wrestling match, describing the choices in Solomonic terms.

“We have been working with the S.E.C. and the C.F.T.C. over the past few months to develop a sensible allocation of duties,” Mr. Geithner told lawmakers. “We are striving to utilize each agency’s expertise.”

AIG bonuses: $235 million to go

Bailed-out insurer AIG again found itself in the crosshairs of bonus rage on Friday over its plans to pay $2.4 million in executive bonuses next week.

But the larger issue is how AIG will deal with its obligation to pay roughly $235 million still owed to employees of its crippled financial products division.

The contentious issue of the bonuses resurfaced late Thursday after TheWashington Post reported that AIG was seeking the government's consent to make a scheduled performance bonus payment of $2.4 million to 43 of its top-ranking executives.

But there's still the $235 million in retention bonuses owed to about 400 employees of AIG's Financial Products (FP) division that the company has to deal with. Public furor erupted in March when it was revealed that AIG had paid out $165 million of retention bonuses to those employees.

AIG put the issue before Kenneth Feinberg, the Obama administration's pay czar. Feinberg is tasked with reviewing bonuses and retirement packages for the 100 highest-paid executives at AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), General Motors, GMAC, Chrysler and the now defunct Chrysler Financial.

A source close to the matter said Feinberg will be reviewing both the $2.4 million, as well as the much more controversial $235 million that is scheduled to be paid out to AIG-FP employees next year.

AIG-FP is the division that wrote insurance contracts on shaky derivatives that were at the root of the company's near-collapse. In September, the government bailed out AIG with funds now worth up to $182 billion.

The $165 million of bonus payments in March was the second installment of a larger, $454 million retention plan for the FP employees. The first -- $50 million -- was made in 2008, before the company was bailed out by the government.

After the uproar in March, FP employees returned about a third of their bonuses, and a dozen workers resigned. The reaction from the public and Congress consumed AIG, Treasury and Federal Reserve officials, and called into question what to do with the last payment that is scheduled to go out in 2010.

Feinberg only has to review payments that were contracted beginning in 2009, so the $235 million in FP payments -- contracted in 2008 -- do not officially fall under his purview. Still, a source close to the matter said that AIG wants Feinberg to take a look at those bonuses to make sure the government is completely comfortable with the company's compensation plan.

Feinberg was also asked to review the $2.4 million in performance bonuses set to be paid out to 43 of AIG's top executives. That is part of a larger bonus pool of $121 million, the vast majority of which was paid out in March to the company's most senior executives.

But with pressure mounting from Congress and the Obama administration, AIG restructured its bonus payments for the top 50 executives. The top seven AIG executives opted to forgo their bonuses. The other 43, set to receive $9.6 million in March, took home only half -- $4.8 million -- in March, and are set to receive $2.4 million July 15 and another $2.4 million Sept. 15.

Experts say asking Feinberg to review the bonuses takes the pressure off of AIG and turns Feinberg into a punching bag for criticism. Outgoing AIG Chief Executive Edward Liddy has said on many occasions that the public outrage about the bonuses has limited the company's ability to move forward with its plan to repay the government.

"If you have the government OK the plan, it makes AIG look less like they're flushing taxpayer money down the toilet," said Julie Grandstaff, managing director of insurance consultant StanCorp Investment Advisers. "There's no way the poor guy who is reviewing all of this can win."

A Treasury spokesman would not comment directly on AIG's bonuses, but suggested Feinberg can review those payments and the FP bonuses if he chooses, even though they were contracted in 2008, saying, "Mr. Feinberg has broad authority to make sure that compensation at those [seven] firms strikes an appropriate balance."

"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives," the spokesman added.

AIG declined to comment for this article.

Prof. Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the bailout, told CNNMoney.com that AIG's lack of comment spoke to a larger disconnect between the insurer and the American public.

"If they're not commenting, that makes me very nervous, because what I would like to hear is 'no, that report is a mistake,'" Warren said. "Taxpayers are under enormous stress. There's going to be trouble over this."

Delphi Receives No New Cash Bids for Assets

Delphi Corp. said no companies offered to top the auto-parts supplier's government-orchestrated deal with buyout firm Platinum Equity LLC by Friday's deadline, though lender J.P. Morgan Chase may make a credit bid by next week.

The deadline for credit bidding by J.P. Morgan or another lender is July 17. Friday was the deadline for cash bids.

Bankruptcy Judge Robert Drain, who has been overseeing Delphi's Chapter 11 case for nearly four years, told Delphi last month it needed to hold an auction for its assets in response to concerns from its bankruptcy lenders. They contended the plan to sell Delphi's assets to Platinum and former parent General Motors Corp. was a sweetheart deal that unfairly benefited the buyout firm and auto maker.

Delphi said if J.P. Morgan makes a credit bid, it will hold an auction for its assets July 17 and likely announce the outcome July 20.

Mark Barnhill, principal at Platinum Equity, said the firm is confident its offer will be validated as the best guarantee of Delphi's long-term health. He pointed to Platinum's "deep understanding of Delphi combined with our willingness to provide capital and our track record of success in turning around underperforming companies."

Delphi hopes to emerge from bankruptcy by selling four of its U.S. auto-parts plants and its steering business to GM, which remains Delphi's largest customer. Platinum, a private-equity firm based in Beverly Hills, Calif., and specializing in distressed companies, would pick up most of Delphi's other assets.

The U.S. Department of Treasury is providing Delphi with $250 million in emergency financing and has made that contingent on a sale being completed by July 23. The company is expected to run out of cash by the end of July.

Delphi filed for bankruptcy protection in 2005 and has been struggling to reorganize its business while also securing enough financing to exit the process.

Chrysler changes course, drops plan to sell Viper business

DETROIT -- Chrysler Group will continue making and selling Dodge Vipers after all.

The company, under new ownership, today removed the for-sale sign from its Viper business and will continue making the sports car through 2010 and beyond.

“Chrysler Group is no longer pursuing a sale of the Viper business assets,” the company said in a statement.

Michael Accavitti, CEO of the Dodge brand, said: “We’re extremely proud that the ultimate American-built sports car with its world-class performance will live on as the iconic image leader of the Dodge brand.”

The move to keep Viper marks a sharp departure for Chrysler under a Fiat-led management team. Under former owner Cerberus Capital Management, cash-strapped Chrysler had been trying to sell assets to stave off bankruptcy. The plan failed as Chrysler filed for Chapter 11 on April 30 and emerged June 10.

Chrysler had put the Viper business up for sale in August 2008. The company had sought $10 million for the Conner Avenue (Detroit) plant that produces the Viper, the company said in bankruptcy court filings.

On May 15, while Chrysler was still in bankruptcy, the company had received a $5.5 million offer from a company called Devon Motor Works, according to bankruptcy court documents. Chrysler also got an offer from a Polish group.

The Viper plant was the first to resume production after Chrysler emerged from bankruptcy. The plant produced vehicles during the weeks of June 15 and June 27 before shutting down again.

A Chrysler official who declined to be identified said Chrysler will make 2009 models for the remainder of this year, switching to a 2010 model in January. The plant will produce cars when there is a demand.

Chrysler built 1,545 Vipers in 2008 and has built just 118 so far this year. Conner Avenue, which employs about 100, did not make any cars in January, February, March or May.

The Viper sells for a sticker price of $90,000 or more. Chrysler began producing the Viper in 1992 and has made about 25,000 of the cars since.

The 2009 Viper SRT10 is powered by an 8.4-liter, V-10 engine that cranks out 600 hp. Chrysler claims the Viper can go 0 to 60 mph in fewer than four seconds.