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David G. Klein
October 17, 2010
Income Inequality: Too Big to Ignore
The New York Times
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A Lender Failed. Did Its Auditor? NYT
13 April 2008
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Too Big to Ignore
October 16, 2010
New York Times
By ROBERT H. FRANK
PEOPLE often remember the past with exaggerated fondness. Sometimes, however,
important aspects of life really were better in the old days.
During the three decades after World War II, for example, incomes in the United
States rose rapidly and at about the same rate — almost 3 percent a year — for
people at all income levels. America had an economically vibrant middle class.
Roads and bridges were well maintained, and impressive new infrastructure was
being built. People were optimistic.
By contrast, during the last three decades the economy has grown much more
slowly, and our infrastructure has fallen into grave disrepair. Most troubling,
all significant income growth has been concentrated at the top of the scale. The
share of total income going to the top 1 percent of earners, which stood at 8.9
percent in 1976, rose to 23.5 percent by 2007, but during the same period, the
average inflation-adjusted hourly wage declined by more than 7 percent.
Yet many economists are reluctant to confront rising income inequality directly,
saying that whether this trend is good or bad requires a value judgment that is
best left to philosophers. But that disclaimer rings hollow. Economics, after
all, was founded by moral philosophers, and links between the disciplines remain
strong. So economists are well positioned to address this question, and the
answer is very clear.
Adam Smith, the father of modern economics, was a professor of moral philosophy
at the University of Glasgow. His first book, “A Theory of Moral Sentiments,”
was published more than 25 years before his celebrated “Wealth of Nations,”
which was itself peppered with trenchant moral analysis.
Some moral philosophers address inequality by invoking principles of justice and
fairness. But because they have been unable to forge broad agreement about what
these abstract principles mean in practice, they’ve made little progress. The
more pragmatic cost-benefit approach favored by Smith has proved more fruitful,
for it turns out that rising inequality has created enormous losses and few
gains, even for its ostensible beneficiaries.
Recent research on psychological well-being has taught us that beyond a certain
point, across-the-board spending increases often do little more than raise the
bar for what is considered enough. A C.E.O. may think he needs a
30,000-square-foot mansion, for example, just because each of his peers has one.
Although they might all be just as happy in more modest dwellings, few would be
willing to downsize on their own.
People do not exist in a social vacuum. Community norms define clear
expectations about what people should spend on interview suits and birthday
parties. Rising inequality has thus spawned a multitude of “expenditure
cascades,” whose first step is increased spending by top earners.
The rich have been spending more simply because they have so much extra money.
Their spending shifts the frame of reference that shapes the demands of those
just below them, who travel in overlapping social circles. So this second group,
too, spends more, which shifts the frame of reference for the group just below
it, and so on, all the way down the income ladder. These cascades have made it
substantially more expensive for middle-class families to achieve basic
In a recent working paper based on census data for the 100 most populous
counties in the United States, Adam Seth Levine (a postdoctoral researcher in
political science at Vanderbilt University), Oege Dijk (an economics Ph.D.
student at the European University Institute) and I found that the counties
where income inequality grew fastest also showed the biggest increases in
symptoms of financial distress.
For example, even after controlling for other factors, these counties had the
largest increases in bankruptcy filings.
Divorce rates are another reliable indicator of financial distress, as marriage
counselors report that a high proportion of couples they see are experiencing
significant financial problems. The counties with the biggest increases in
inequality also reported the largest increases in divorce rates.
Another footprint of financial distress is long commute times, because families
who are short on cash often try to make ends meet by moving to where housing is
cheaper — in many cases, farther from work. The counties where long commute
times had grown the most were again those with the largest increases in
The middle-class squeeze has also reduced voters’ willingness to support even
basic public services. Rich and poor alike endure crumbling roads, weak bridges,
an unreliable rail system, and cargo containers that enter our ports without
scrutiny. And many Americans live in the shadow of poorly maintained dams that
could collapse at any moment.
ECONOMISTS who say we should relegate questions about inequality to
philosophers often advocate policies, like tax cuts for the wealthy, that
increase inequality substantially. That greater inequality causes real harm is
But are there offsetting benefits?
There is no persuasive evidence that greater inequality bolsters economic growth
or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and
host more expensive parties. But this appears to have made them no happier. And
in our winner-take-all economy, one effect of the growing inequality has been to
lure our most talented graduates to the largely unproductive chase for financial
bonanzas on Wall Street.
In short, the economist’s cost-benefit approach — itself long an important arrow
in the moral philosopher’s quiver — has much to say about the effects of rising
inequality. We need not reach agreement on all philosophical principles of
fairness to recognize that it has imposed considerable harm across the income
scale without generating significant offsetting benefits.
No one dares to argue that rising inequality is required in the name of
fairness. So maybe we should just agree that it’s a bad thing — and try to do
something about it.
Robert H. Frank is an economics professor
at the Johnson Graduate School of
at Cornell University.
Income Inequality: Too
Big to Ignore,
Set a Record
The New York Times
By CLIFFORD KRAUSS
Exxon Mobil reported the best quarterly profit ever for a corporation on
Thursday, beating its own record, but investors sold off shares as oil and
natural gas prices resumed their recent decline.
Record earnings for Exxon, the world’s largest publicly traded oil company, have
become routine as the surge of oil prices in recent years has filled its
coffers. The company’s income for the second quarter rose 14 percent, to $11.68
billion, compared to the same period a year ago. That beat the previous record
of $11.66 billion set by Exxon in the last three months of 2007.
Exxon’s profits were nearly $90,000 a minute over the quarter, but it was less
than Wall Street had expected. Exxon’s shares fell 4.6 percent, to close at
$80.43. (The company calculates that it pays $274,000 a minute in taxes and
spends $884,000 a minute to run the business.)
The disappointment from investors is bound to put added pressure on Exxon
Mobil’s chairman and chief executive, Rex Tillerson, to search for new fields in
politically precarious areas of Africa and the Middle East.
The sell-off in Exxon stock, as well as other oil company stocks, continued a
trend of recent weeks as oil and natural gas prices have fallen sharply from
record levels. But investor disappointment was also a response to problems that
surfaced in the company’s report, particularly a 10 percent drop in oil
production and a 3 percent decline in natural gas production from the second
quarter of 2007.
The production decrease, the second quarterly drop in a row, was viewed with
concern by energy analysts, especially since the company spent $7 billion to
find and produce from new fields, nearly 40 percent more than in the same
quarter last year.
“It raises the question of whether the company has been underinvesting the last
few years,” said Brian Youngberg, an energy analyst at Edward Jones, an
investment firm. “High commodity prices are driving the record earnings, not
growth in production volumes of oil and gas.”
Crude oil prices in the second quarter averaged more than $124 a barrel, 91
percent higher than the same quarter in 2007, according to a recent report by
Oppenheimer & Company, an investment bank. Natural gas prices averaged $10.80
for every thousand cubic feet, up 43 percent from the quarter a year ago. After
spiking even higher in early July, prices settled on Thursday at $124.08 for oil
and about $9.18 for natural gas.
Despite its production problems, Exxon earned $10 billion in the quarter from
exploration and production, up from $6 billion in the same period a year ago.
But the company’s $1.6 billion in profit from refining was less than half that
in last year’s quarter because of lower worldwide refining margins. Earnings
from its chemical business of $687 million were down $326 million from last
Company officials said they were working hard to increase production with new
projects in Africa, the Middle East and the Gulf of Mexico. The company reported
that it intended to disburse $125 billion in capital spending over the next five
years in an effort to produce more oil and natural gas.
Royal Dutch Shell, Eni and Repsol, three of Europe’s largest oil companies, also
reported strong profits on Thursday, although their production results
disappointed analysts. Shell reported its output had declined by 1.6 percent in
the quarter, and Repsol’s production fell by nearly 20 percent. Eni’s production
was slightly higher.
Nevertheless Shell, Europe’s largest oil company, reported a 33 percent increase
in second-quarter profit, to $11.56 billion, from $8.67 billion in the period a
Oil companies are under pressure to find new reserves as their traditional
fields age and they face increasing competition from state-run oil companies in
Russia and the Middle East. Shell is also looking to make up for production lost
in Nigeria, where militants attacked an offshore production vessel in June, and
in Russia, where it had to sell its share in the Sakhalin Island oil and natural
gas project to the state-controlled energy company Gazprom last year.
Adding together the output of all the major international oil companies,
including Chevron, Conoco, BP, Shell, Total and Exxon, this appears to be the
fourth straight quarter of production declines, according to Barclays Capital
analysts. Barclays said the total decline might exceed 600,000 barrels a day,
reflecting the difficulties the oil companies had in gaining access to new
regions to make up for the decline of mature fields. (Total will report its
results on Friday.)
Exxon’s oil and natural gas production tumbled in the second quarter because of
Venezuela’s expropriation of Exxon’s assets last year, labor and political
strife in Nigeria and declining production in many fields around the world.
Meanwhile, under the terms of Exxon’s contracts, governments in Russia, Angola
and other places where it operates gained a larger share of production from
Exxon and other international companies as crude oil prices rose. With prices
now declining, Exxon may show higher production levels in future quarters even
if profit is not as robust.
Democrats in Congress were quick to criticize Exxon’s profit, hoping that the
resentment felt by many drivers over high gasoline and diesel prices could help
them in an election year.
“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said
Senator Charles E. Schumer, Democrat of New York. “What’s shocking is that Big
Oil is plowing these profits into stock buybacks instead of increasing
production or investing in alternative energy.”
The company purchased $8 billion of its own shares over the quarter, reducing
shares outstanding by 1.7 percent.
Kenneth Cohen, an Exxon vice president, said oil companies needed the profits to
search for more oil and gas. He also challenged Congress to open up waters in
the Gulf of Mexico and off the Atlantic and Pacific coasts to drilling, as well
as other federal lands where drilling is prohibited.
“Our Congress needs to give us access to those areas that are currently off
limits to the industry,” he said.
Exxon’s income of $2.22 a share compared with $10.26 billion, or $1.83 a share,
in the same quarter a year ago. Revenue rose 40 percent, to $138.1 billion, from
$98.4 billion in the quarter a year ago.
Julia Werdigier contributed reporting from London.
Exxon’s Second-Quarter Earnings Set a Record,
Write-Down Is Planned at Merrill
July 29, 2008
The New York Times
By LOUISE STORY
Only 10 days after stunning Wall Street with a huge quarterly loss, Merrill
Lynch unexpectedly disclosed another multibillion-dollar write-down on Monday
and sought to bolster its finances once again by selling new stock to the public
and to an investment company controlled by Singapore.
Moving to purge itself of the tricky mortgage-linked investments that have
brought the once-proud firm to its knees, Merrill said that it had sold almost
all of the troublesome investments, once valued at nearly $31 billion, at a
fire-sale price of 22 cents on the dollar.
As a result, Merrill expects to record a write-down of $5.7 billion for the
third quarter. Such an outcome could push Merrill into the red for a fifth
consecutive quarter if revenue remains weak and would bring its charges since
the credit crisis erupted last summer to more than $45 billion.
The problems at Merrill, the nation’s largest brokerage, underscore how bankers
and policy makers are struggling to contain the damage to the financial system
and the broader economy caused by the collapse of housing-related debt. The
latest news came on a day when the International Monetary Fund said there was no
end in sight to the housing slump, a forecast that depressed financial shares as
well as the broader market.
To shore up its finances, Merrill said it would raise $8.5 billion in new
capital from common shareholders, including $3.4 billion from the investment arm
of the Singapore government, Temasek Holdings, which, with an 8.85 percent stake
as of June 30, is already Merrill’s largest shareholder. Those shares and a
conversion of preferred securities into common stock will dilute the value of
stock held by current shareholders by about 40 percent.
John A. Thain, who has struggled to turn Merrill around since becoming chief
executive in December, said the sale of the worrisome investments, known as
collateralized debt obligations, or C.D.O.’s, was “a significant milestone in
our risk reduction efforts.”
The C.D.O.’s have plunged in value over the last year, forcing Merrill to take
one write-down after another and sapping investors’ confidence. Merrill’s share
price fell 11.6 percent on Monday, before the news of the write-down and stock
sale were announced after the close of trading. Merrill is trading near its
lowest level in a decade.
But the sale of the C.D.O.’s, to an investment fund based in Dallas, may enable
Merrill to move on, investors said.
“What they sold, from a headline standpoint, is certainly constructive because
they have reduced risk in a very sensitive area,” said Thomas C. Priore, chief
executive of Institutional Credit Partners, a $12 billion hedge fund and C.D.O.
manager in New York.
Merrill had been working on the C.D.O. sale and the effort to raise capital
before its earnings call but did not finalize the actions until recent days.
Merrill’s sales could cause further write-downs at other Wall Street firms with
C.D.O. exposure. If those companies — the likes of Citigroup and Lehman Brothers
— have similar C.D.O.’s valued at prices higher than those at which Merrill
sold, the firms may be forced to take additional charges to reflect the
Merrill recently moved to raise money by selling its 20 percent stake in
Bloomberg L.P., the financial news and data company, for $4.425 billion. Mr.
Thain hinted at the C.D.O. sale in the quarterly earnings call, in response to a
question from Meredith Whitney, an analyst with Oppenheimer & Company.
“Why not, at this point, be the first to purge assets and get it over with? And,
if that means raising capital, raise capital,” Ms. Whitney said.
Mr. Thain responded that Merrill had been selling assets but had not yet sold
“Your question is a very leading one, and that would certainly be something that
we would hope that we could do,” Mr. Thain said.
Merrill sold the investments at a steep loss. The United States super senior
asset backed-security C.D.O.’s that Merrill sold were once valued at $30.6
billion. As of the end of second-quarter, Merrill valued them at $11.1 billion —
or 36 cents on the dollar. And Merrill sold them for $6.7 billion to an
affiliate of Lone Star Funds, the Dallas private equity firm.
Merrill provided 75 percent financing to Lone Star Funds, which means Merrill
lent the private equity fund about $5 billion to complete the sale.
The discounted sales will cause the majority of Merrill’s write-down in the
Merrill also said it had settled a battle with the reinsurance company XL
Capital Assurance, which had insured some of the firm’s C.D.O.’s.
Write-Down Is Planned at
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