To the Editor:

Paul Krugman’s Dec. 9 column, “All the G.O.P.’s Gekkos,” casts private equity firms as job destroyers, but we believe that the research tells a different story.

Private equity firms typically buy companies that are underperforming or mismanaged, with the goal of improving operations to make them stronger, more competitive and more valuable. This often requires the private equity sponsor to chart a new course for the company — one that creates growth opportunities and, in many cases, long-term success.

It’s hard work, the kind that publicly traded companies cannot always undertake. And in most cases it’s the right approach, delivering benefits to the company, its employees and investors.

This pattern — of recreating companies — is borne out in recent research, which finds that initial job losses as a result of private equity transactions are followed by higher than average greenfield job gains (when new plants are built, for example), and that the net effect of worker turnover — both hiring and layoffs — is less than 1 percent.

Private equity firms also make late-stage investments in companies that are distressed or even facing bankruptcy. The jobs that are saved in these situations are often overlooked by our critics.

STEVE JUDGE
Interim President and Chief Executive
Private Equity Growth Capital Council
Washington, Dec. 9, 2011

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Given how volatile markets have become, predicting how traders will react to the congressional debt committee next week is a dicey undertaking.

Two themes emerged in conversations with stock and bond strategists. First, Wall Street never expected much from the committee, thanks to the disastrous debt ceiling debate. Second, markets don’t expect lawmakers to make meaningful decisions on fiscal reform until after the 2012 election.

But that doesn’t mean the super committee can’t move traders to fears … or cheers.

The committee, by law, is supposed to vote on a plan by next Wednesday.

If the panel simply approves $1.2 trillion in debt reduction — its minimum target to stave off automatic cuts in 2013 — the market reaction will be “a great big yawn,” said Adrian Conje, chief investment officer of Balentine, an investment advisory firm.

That deal, in other words, has been factored into stock traders’ considerations.

A $1.2 trillion plan is considered small relative to what’s needed but it could give markets a lift if it seems to demonstrate the start of real compromise between Democrats and Republicans on revenue increases and entitlement cuts, said John Toohey, vice president of equity investments at USAA.

Conversely, Toohey noted, a failure by the committee to agree on a deal at all could hurt stocks.

Another potential negative for stocks: A deal that would reduce debt by $1.2 trillion but take no short-term measures to boost the economy, such as extending temporary payroll tax relief or providing another temporary extension of federal emergency jobless benefits for the long-term unemployed.

Of course, Congress can still decide to extend those measures separately before the end of the year, but a super committee proposal had been considered a possible vehicle.

“If that all goes away, that could mean a 1.5% to 2% drag on GDP growth next year,” Toohey said.

It’s even less clear how bonds might respond.

Traders may be disappointed if the super committee can’t come to a deal or can only come to a deal worth less than $1.2 trillion. But their disappointment is likely to be offset by concerns elsewhere in the world. The same holds should a super committee failure trigger another downgrade or negative ratings action.

“Global and U.S. investors will continue to be disappointed in U.S. fiscal policy but will look at Europe and Japan and not see governments with unassailable credit ratings in the future,” said Steve Van Order, fixed income strategist at Calvert Investments

There is, of course, one super committee action that would make both stock and bond markets cheer: Agreement on a true “grand bargain” — the kind of proposal that reduces debt by at least $3 trillion to $4 trillion over the next decade but is mindful of not undermining the economic recovery in the short-term.

The Holy Grail for traders? More certainty about long-term fiscal policies and the balance lawmakers will strike between spending and revenue in the future.

“Markets want less ideology and more problem-solving,” Conje said. “They want clarity. They want to know the rules of the road.”

Given that the two sides have yet to produce a single plan that they can at least agree to vote on, markets may have to wait a little longer.

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Investors ran for the hills Wednesday, shaken to the core by fears that Italy, Europe’s fourth-largest economy, was headed deeper into crisis mode.

U.S. stocks sold off sharply right from the open after Italy’s 10-year bond yield spiked above 7% – its highest since the euro was launched in 1999.

The 7% figure is a psychological trigger for investors since it was the level that heightened worries about Greece, Ireland and Portugal. All three eventually needed some type of bailout.

The selling intensified in the afternoon amid reports that European Union officials said they have no plans to rescue Italy.

The fear factor wasn’t confined to U.S. stocks. European markets also sold off and the euro slumped more than 2% against the U.S. dollar. The market’s fear gauge, the VIX (VIX), spiked 32% to 36.26. Any reading above 30 signals investor worry.

Italy: Definitely too big to fail, maybe too big to bail

The Dow Jones industrial average (INDU) tumbled 389 points, or 3.2%, with all 30 of the blue chip index’s components firmly in the red. The S&P 500 (SPX) sank 47 points, or 3.7%. Best Buy (BBY, Fortune 500) was the only member of the benchmark index to post gains. The tech-heavy Nasdaq composite (COMP) lost 106 points, or 3.9%.

They day’s losses pushed the S&P 500 and Nasdaq into the red for 2011, while the Dow is barely hanging on to a 1.8% gain for the year.

Bank stocks were among the big losers, with Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS,Fortune 500) falling more than 8%. JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC,Fortune 500) shares dropped more than 5%.

Rattled investors flocked to the safety of U.S. Treasuries, with the 10-year yield sliding below 2%.

While Italy’s bond rates are triggering intense market anxiety, experts say the problem is a lack of investor confidence, rather than solvency, which is plaguing debt-laden eurozone neighbors like Greece.

“This is a crisis of confidence, not of fundamentals,” said Mark McCormick, currency strategist at Brown Brothers Harriman. “Italy’s debt level is sustainable, but it needs to implement policies that will support economic growth.”

If Italy works to solve its problems, the European Central Bank or International Monetary Fund will likely have the leverage that they need to step in with an emergency policy response to help reduce nervousness, said McCormick.

Read the full article here

Matthew Roszak

Thank you!

Federal Reserve Chairman Ben Bernanke defended the central bank’s record on keeping inflation low, in the face of criticism that the central bank’s weak-dollar policies have driven up consumer prices.

Speaking at a post-Fed meeting news conference, Bernanke rejected claims that the Fed’s various moves to keep interest rates low and monetary policy accommodative will lead to high levels of inflation.

“I would simply point to the record. For the last five years inflation, although it’s been volatile because of commodity price fluctuations, has averaged about 2 percent, which is close to a reasonable definition of price stability, whereas the area that we have fallen short obviously is on the unemployment side.

“So I think criticisms based on the concern about inflation have so far at least not proved to be very valid,” he added.

Bernanke addressed reporters just after the central bank’s Open Market Committee agreed to keep its funds rate target near zero, though it did not approve additional easing measures.

Congressional Republicans and GOP presidential candidates have frequently targeted Bernanke for failing to control inflation, with some, such as Texas Rep. Ron Paul, calling for the Federal Reserve to be abolished.

Bernanke refused to get too far into the politics but said the committee is comfortable with the current level of inflation, which is around 2 percent excluding volatile food and energy prices but 3.9 percent including gasoline, groceries and similar items.

He said earlier price spikes were due to the Japan tsunami and earthquake and other such “transitory” matters.

“Inflation appears to have moderated as those transitory influences have waned and as low levels of resource utilization constrained rises in prices and wages,” Bernanke said. “Furthermore, survey measures and market indicators imply that longer-term inflation expectations have remained stable.”

Bernanke said the committee expects inflation to amp up slightly to 2.7 to 2.9 percent this year, but then to dissipate to 1.4 to 2.0 percent in 2012.

But the Fed’s forecasts have been inaccurate over the past year, with the predictions overstating the ability of the economy to rebound and understating damage caused particularly in housing and the European debt crisis.

He attributed the problems with the growth forecasts in part to “some elements of bad luck.”

“I think it’s clear that in retrospect that the severity of the financial crisis and a number of other problems including the dysfunction in the housing market have been more severe and more persistent than we initially believed,” Bernanke said.

Addressing other issues, Bernanke said he understands the Occupy Wall Street protest movement though he said the Fed shouldn’t be blamed for trying to save the financial system.

“We now have a more unequal society than we’ve had in the past. I fully sympathize with the notion that the economy is not performing the way we would like it to be,” he said. “What we were doing is trying to protect the financial system in order to prevent a serious collapse of both the financial system and the American economy. We needed to take those steps and if we hadn’t taken them the consequences would have been dire. Not everybody understands that.”

Yet he acknowledged that the Fed’s policies have not been as successful in trying to revive the moribund housing market.

The Fed’s various easing measures and purchases of mortgage-backed securities have driven lending rates to record lows while housing continues to languish.

“Monetary policy may be somewhat less powerful in the current context than it has been in the past,” he said.

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Gold seems to be regaining its luster. The precious metal has rallied more than $100 in less than a week as investors turn to the precious metal as a safe haven amid concerns about Europe and signs of slow global economic growth.

The biggest move came Tuesday, when gold prices added nearly $50, or 3%, to top $1,700 per ounce for the first time in more than a month. Investors also poured nearly $564 million into the SPDR Gold Trust ETF (GLD), one of the most popular funds for investors seeking exposure to gold.

Prices gained another 1.4% Wednesday to settle at $1,723.50 an ounce, the highest level since Sept. 22. Silver prices have also rallied, surging more than 10% over the past four sessions.

The recent big moves have broken the link between gold and other risky assets, which had been moving almost in lockstep for two months.

“We’re finally seeing gold prices move up in the flight to quality, along with bonds, the dollar and then yen, which is a positive for long-term investors,” said Adam Klopfenstein, senior market strategist with MF Global. “When we weren’t seeing gold rally in the face of economic uncertainty, a lot of investors didn’t see the point of buying it, and moved to the sideline.”

Now that gold has regained its longstanding status as a safe haven investment, Klopfenstein said prices will likely continue to move higher.

In fact, before the year is over, gold prices could reclaim record levels above $1,900 an ounce that were reached in August, said Carlos Sanchez, precious metals analyst at CPM Group.

“It looks like we’re going to be dealing with continued concerns about Europe, because even though leaders seem to be working harder, we aren’t going to get a resolution overnight,” said Sanchez. “And even if the United States can avoid a double-dip, the data is showing that the economy is treading just above recessionary levels.”

Rumblings of another round of bond buying from the Fed — or QE3 – is also likely stoking fears of inflation and helping gold prices, said Keith Springer, president of Springer Financial Advisors.

Fed vice chair Janet Yellen, Fed governor Daniel Tarullo and New York Fed president William Dudley have all recently hinted that another quantitative easing program could be on its way.

Meanwhile, oil and copper prices have been rebound from one-year lows hit earlier this month, as fears of a double-dip fade away.

“Economic growth is going to be slow, but recent data is suggesting that the chance of a double-dip recession is off the table for now,” said Springer. “Oil and copper prices were factoring in the worst possible case, so now we’re seeing a pick-up.”

Oil prices have surged almost 14% in October, while copper prices have climbed more than 8%.

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When told that the U.S. deficit is now $1.3 trillion, the majority of voters enthusiastically embrace the need to cut, cut, cut. But they balk when asked to name specific programs to downsize or lop off.

That’s why U.S. Representative Ron Paul, the libertarian seeking the Republican presidential nomination, performed a valuable public service this week when he unveiled a budget plan that shows exactly what balancing the $3.8 trillion budget through spending cuts would look like.

Paul’s blueprint, released Oct. 17, would balance the books in three years. Admirably, he commits real numbers to paper. He does it in just five pages. And he spares no one: the health- care industry, defense contractors, oil-and-gas companies, federal workers, homeowners, the poor, the middle class and the rich.

In broad terms, Paul (whose chances of making it to the White House are beyond remote) would force Americans to confront their contradictions by slicing $1 trillion from the budget in his first year in office. He would eliminate five Cabinet-level agencies: Commerce, Education, Energy, Housing and Urban Development, and Interior. He would end the Transportation Security Administration. He would pare back most other programs to 2006 spending levels, before the financial crisis and the recession pushed up spending by the trillions.

Block Grants

The congressman wouldn’t stop there. Medicaid would become a block grant to the states, as would food stamps, child nutrition and other income-support programs. He would, of course, zero-out foreign aid. At least he’s egalitarian about it: If elected, Paul would pay himself a salary equivalent to the median personal income of the American worker — $39,336.

President Paul would also starve the revenue side of the ledger. Corporations would see tax rates drop to 15 percent from 35 percent. He would extend all the Bush-era tax cuts, abolish taxes on estates and investment income. He wouldn’t end Social Security, but he would let young people opt out of the retirement program. As for that $1 trillion sitting in the overseas bank accounts of U.S. corporations, Paul would allow the money to come home tax-free.

Cut the Bureaucracy

Such radical reductions in revenue would make it hard to run the vast federal bureaucracy. True to his libertarian principles, Paul takes care of that problem by trimming the federal workforce by 10 percent — and giving it far less to do. He would, for example, seek to repeal both the Dodd-Frank financial reform law and President Barack Obama’s Affordable Care Act, along with eliminating many environmental and other federal regulations.

What’s wrong with this? It doesn’t take much work to paint a dystopian picture. Let’s begin with a simple example. Without an Interior Department, there would be no agency to oversee national parks, federal lands and offshore drilling. Land would have to be auctioned off to the highest bidders, most likely oil-and-gas, coal and timber companies. The states would inherit Teddy Roosevelt’s national parks, but imagine how Yosemite would fare if it suddenly became the ward of strapped California.

Or let’s imagine another scene from Mr. Paul’s America. Each state would have to become the regulator of its financial, manufacturing and health-care industries. A patchwork of rules would result. States might soon engage in a dangerous game of regulatory competition: Some would ease rules to attract businesses, forcing those seeking to protect the health and pocketbooks of residents to lower their standards — or lose jobs. Illinois might choose, say, to let manufacturers dump waste in the Mississippi River. What recourse would downstream Missouri, Tennessee or Louisiana have if their drinking water became polluted?

Social Security

Or let’s simply consider what would happen if the under-30 crowd stopped contributing to Social Security: The pay-as-you-go system would dry up, depriving today’s retirees of benefits. About 25 million elderly households now depend entirely on Social Security for income, leaving them unable to buy food or pay heating bills.

Low-income families would be hit the hardest. By converting Medicaid into a block grant, Paul would freeze what is now a $285 billion program at $186 billion from 2013 to 2016. He would do the same for food stamps, now a $58 billion program; it would be downsized to $30 billion four years in a row.

We should be grateful to Paul for painting a clear picture of what so many Americans say they wish for. Our guess is that those who look at this picture will conclude that there are other, more sensible ways to restore fiscal order in the U.S.

Spend More

Why, for instance, is it necessary to balance the budget in three years? Most economists say a sounder approach would involve spending more — yes, more — for the next few years to keep the fragile recovery on track, and focusing on budget cuts in the medium term.

We’ve argued, for example, for a plan to reduce the deficit by $4 trillion over 10 years, much like the one endorsed by the Simpson-Bowles panel last year. Of the $4 trillion, at least $1 trillion should come from tax increases, including higher levies on households making more than $250,000 and the elimination of other Bush-era breaks. An additional $500 billion could be squeezed out of Medicare by requiring, say, pharmaceutical companies to provide rebates on purchases by the federal program, similar to the discounts Medicaid now receives, and by increasing co-payments, deductibles and other forms of cost- sharing by the affluent.

Like the congressman, we’d cut corporate subsidies and farm programs, and phase out deductions for mortgage interest and corporate-sponsored health insurance. We would ask federal workers to pay more toward their pensions.

There’s an egalitarian way for Americans to share in the burden of achieving fiscal responsibility, but there’s no reason for entire Cabinet departments, the social safety net and the economy to be crushed in the process.

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Visa Inc. and Mastercard Inc. (MA), the world’s biggest payment networks, were sued by a trade group representing operators of automated teller machines over claims the card companies fix prices and suppress competition between ATM networks.

The companies, in a lawsuit filed today in federal court in Washington, are accused of “eliminating or severely restricting independent decision-making” among ATM operators by establishing a uniform agreement with almost every card-issuing U.S. bank to “fix” ATM access fees.

The allegations were made by the National ATM Council Inc., a trade group based in Jacksonville, Florida, and 13 operators of ATMs in nine states.

“The ATM restraints prevent ATM operators from offering their customers a discount or benefit for completing a transaction over a network that is less costly to the ATM operator, so consumers cannot be rewarded for using a lower cost and more efficient network,” the lawsuit states.

James Issokson, a spokesman for Mastercard, based in Purchase, New York, declined to comment, saying the company had not been served with the lawsuit. Will Valentine, a spokesman for San Francisco-based Visa, declined to comment on the lawsuit.

The case is National ATM Council v. Visa Inc. (V), 11-1803, U.S. District Court, District of Columbia (Washington).

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By: Reuters

Yahoo shares jumped 10 percent Wednesday amid buzz that Microsoft was considering a bid for the struggling Internet search giant.

Microsoft may seek a partner to go after Yahoo, said a source close to the situation, without identifying any parties.

This, of course, would be Microsoft’s second attempt for Yahoo after a bitter and unsuccessful fight to take over the Internet company in 2008.

But Kara Swisher, co-executive editor of the All Things Digital web site, said it’s not going to happen.

“How can I put this delicately myself? No,” Swisher wrote about a possible Microsoft bid. “According to my sources, throughout this entire process, Microsoft execs have taken pains to make it clear that they are not going to  be among the bidders in any significant manner,” she said.

No decision has been made and a bid might not materialize as there are internal divisions at the software company on whether it should pursue Yahoo again, a high-ranking Microsoft executive told Reuters.

Microsoft is the latest in a string of other companies rumored to be interested in Yahoo, which has a market value of about $18 billion and is readying financial pitch books for potential buyers, the sources said.

Those companies include buyout shops Providence Equity Partners, Hellman & Friedman and Silver Lake Partners, as well as Chinese e-commerce giant Alibaba and Russian technology investment firm DST Global, the sources said.

Microsoft and the other potential buyers declined to comment. Yahoo was unavailable for comment.

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By Ben Rooney

As a proposed overhaul of the European bailout fund inches its way toward approval, investors and economists are already calling for more aggressive measures to contain the eurozone debt crisis.

European leaders agreed in July to expand the powers of the European Financial Stability Facility, which was set up in the wake of the 2008 financial crisis.

The goal is to give the fund more flexibility to stabilize shaky government finances and provide money for banks that need to raise capital.

So far, the plan has been ratified by eight of the 17 nations that use the euro. On Thursday, the German Parliament is expected to narrowly approve the measure, which is politically unpopular in many northern European nations.

Euro area officials said last week that they plan to implement the proposed changes by mid-October, assuming the overhaul is approved by the remaining eurozone nations.

But there is now widespread agreement among economists and investors that the €440 billion fund is not big enough to be effective if some of the larger euro area economies fail.

Some economists have estimated that the fund would need up to €2 trillion to bail out Spain or Italy. Both nations are struggling with unsustainable levels of debt and dim economic prospects.

“Even an enhanced EFSF will have barely €100 billion to throw at the bond market…minus, of course, any new commitments made to Greece” said Carl Weinberg, chief economist at High Frequency Economics, in a note to clients.

More recently, European officials have been discussing ways to increase the fund’s ability to absorb bad sovereign debt by leveraging its assets in some way. However, experts say the fund is unlikely to see an increase in the amount of money it is able to deploy.

José Manual Barroso, president of the European Commission, said Wednesday that the stability fund “must immediately be made both stronger and more flexible.” After the overhaul of the fund is official, he added, “we should make the most efficient use of its financial envelope.”

There is no shortage of theories on how the fund could be used more effectively.

Under one of many scenarios, the EFSF could buy €440 billion worth of bonds issued by distressed euro area governments and use those securities as collateral to borrow from banks in the private sector. The proceeds could then be used to buy even more government bonds.

Greek finance minister promises ‘no default’

Another scheme being debated involves using the fund’s €440 billion to guarantee the first 20% of any losses the private sector may suffer on bonds issued by troubled sovereigns. The goal is to encourage investors to buy newly issued bonds and lower borrowing costs for governments struggling with massive debts.

There has also been talk about using EFSF funds to guarantee purchases of government debt by the European Central Bank, which has been buying up billions of euros worth of bonds issued by Spain and Italy, among others.

The euro will survive (That’s not a typo)

However, the emergency bond buying program has already caused a major rift within the ECB’s management and many analysts say the bank may be reluctant to take on more bad debt.

Overall, many experts say increasing the stability fund’s price tag to €2 trillion is highly unlikely given the political headwinds.

“Emerging details about the recent proposal to supersize the eurozone’s bail-out fund suggest that, at best, the plan is simply to use existing funds more imaginatively,” said Jennifer McKeown, senior European economist at Capital Economics.

In addition, she noted that the proposals seem to have more support outside the eurozone than within it, “suggesting that the region’s policymakers are still a million miles away from resolving the crisis.”

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